few are made under existing law-those that are paid would involve small awards. We expect the increase in the number of large claims to be much less significant, because most such claims would probably have been brought anyway and would still require litigation, but the bill could increase the chances of success for those who choose to litigate.

Compensation under Current Law. Under existing law, persons who wish to seek compensation for property that they believe has been taken by a government action usually must do so through litigation-generally in United States Court of Claims. The process is time-consuming and expensive. Property owners who bring suit in the Claims Court typically wait at least two years before their cases are heard. Decisions unfavorable to the government have been rare in the past because of the high loss thresholds required by precedent before the courts will award compensation. Property owners who pursue their cause can expect the government to appeal unfavorable decisions, which often adds years to the process. Because the legal and other costs of waging a protracted court battle are greater than most property owners can afford, relatively few compensation claims are brought against the United States (although there has been a steady increase in the last decade). Those cases that are brought typically involve relatively large claims (more than $100,000, to more than $100 million) brought by corporations or other large property owners. Such claims can require more than a decade to resolve. As a result, the few awards that are paid often include more money for interest and reimbursements of litigation costs than for compensation.

Compensation Under S. 605. CBO expects that the vast majority of new compensation claims resulting from this bill would be brought under the administrative process prescribed by Title V. Although the number of such claims could be quite large at first, we expect that relatively few would result in payment because:

• The bill's effective dates, definitions, and other provisions would probably allow agencies to reject a large portion of early claims (such as those involving pending or pre-enactment agency decisions) by deeming them to be outside the scope of the bill;

• The requirement that compensation payments be made from agency appropriations would cause the agencies to try to resolve as many claims as possible without having to pay any compensation—for example, by reversing or modifying permit decisions or enforcement actions, by processing permit applications more quickly, and by working more closely with landowners to negotiate permit conditions; and

• The 33 percent threshold established by the bill for determining whether a taking has occurred would probably be too high to allow property owners affected by many agency actions to recover. Especially for agency actions that apply to an area generally (such as those taken under the ESA), the overall percentage of value lost on an affected property typically would be small.1

Further, we estimate that any compensation payments eventually made through the administrative process would involve relatively small amounts (often as little as a few thousand dollars), largely because small claims would account for the vast majority of claims likely to be made under this title. Most of the actions that would lead to successful claims under this title (such as decisions on permit applications) involve either very small land parcels or some minor fraction ("affected portion ") of larger tracts.2 Moreover, we believe that property owners with large claims would be very unlikely to seek compensation under Title V. Because disputes involving large claims almost always involve complicated technical and valuation issues, they would be much more difficult to resolve under the simple administrative procedures established by Title V. Also, the administrative and binding arbitration processes prescribed by this title do not specifically allow claimants to receive interest on their awards or be reimbursed for legal and other costs. Consequently, it would be very

1 For example, an individual species listing or habitat determination under the ESA can affect thousands of properties ranging in size from single residential lots to major timber holdings, most of which art likely to experience some overall reduction in market value across the property as a whole. In most cases, however, the average diminution in property value (or business loss, in terms of new compliance costs) would be well below the 33 percent threshold.

2 For example, of the types of section 404 permit decisions that art likely to result in compensation claims, about one-half involve fill sites of less than one acre, and as many as 75 percent involve fewer than five acres. Even if the corps had to treat each such denial as a 100 percent loss of value for the entire fill acreage, most payments would be minimal. Moreover, a significant number of section 404 permit decisions cover fill sites that could be too small either to reduce the value of the owner's total holding by 33 percent or to have any market value independent of the property as a whole.

risky for owners with large claims to proceed under Title V. Such claims (which are often brought by corporations and others who have sufficient resources to sue the federal government) would probably continue to be resolved through litigation.

CBO expects that new claims for compensation also would be brought under the right to judicial relief established by Title II of the bill, although we expect that any budgetary impact resulting from new litigation would take several years to be felt. Title II specifies the events and conditions that constitute a compensable taking of private property and the standards to be used in calculating just compensation. Compensation awarded under this title would include compound interest calculated from the date of the taking until payment and reimbursement for litigation costs, including legal expenses and expert witness fees.

Enactment of Title II probably would increase the number of lawsuits brought against the United States, at least in the short run. CBO expects that the majority of the new suits would involve relatively large claims against agencies that regulate the use of land or water, particularly the U.S. Army Corps of Engineers and the Department of the Interior (DOI). The impetus for most of these claims would be the new statutory conditions for identifying a compensable loss.

Even if the government would ultimately lose more lawsuits as a result of the legislation, additional compensation costs would probably be minimal in the 1996-2000 period because claims would take several years to resolve. Large claims brought under Title II would still involve many of the same factors that prolong litigation under existing law, including a lengthy discovery period, court delays, and valuation disputes. Moreover, in the early years many new claims would likely involve conflicting interpretations of the statute that could take a number of years to resolve through the judicial process.

The effect of Title II on federal compensation costs in later years would depend on the outcome of this process and is very difficult to predict. On the one hand, it is likely that the legislation's 33 percent loss threshold and related provisions would cause property owners to bring and possibly win-more suits than in the past. On the other hand, the requirement that agencies pay all compensation awards, including compound interest and reimbursements of costs, from their operating budgets could have the effect of limiting potential costs under this title. We expect that this requirement would encourage most agencies to avoid actions that would cause property owners to sue, to the greatest extent allowed by applicable law.

Administrative costs

Over the first few years following enactment, the major impact of S. 605 would be on federal administrative costs incurred to implement Title V. This title would direct the Corps of Engineers, the Environmental Protection Agency (EPA), and the U.S. Fish and Wildlife Service (USFWS) to institute administrative appeals procedures to allow property owners to request a review of agency decisions on wetlands and endangered species matters.3 Property owners could also seek compensation administratively, if a final agency action deprives them of 33 percent or more of their property's value or economic use. Under current law, property owners must pursue both types of requests through litigation.

CBO estimates that federal costs to administer the two affected statutes as amended by Title V would be significantly greater than under current law, at least in the first few years following enactment of the legislation. During this initial period, addressing previous harms to property owners would account for the lion's share of new expenses. In order to take advantage of the administrative appeal and compensation provisions of S. 605 (which would apply only to agency actions that take place after enactment), persons affected by past government actions would have to apply or reapply for permits to obtain a new agency decision. As a result, the affected agencies would probably experience a one-time flood of such requests beginning soon after enactment. Processing applications and reapplications would require the agencies to revisit hundreds of old decisions made over the years since the two statutes were enacted. Moreover, once the resubmitted permits have been processed, each unfavorable decision could form the basis of an appeal and/or compensation claim that also would have to be resolved.

The Corps of Engineers would probably incur most of the additional workload because it processed the vast majority of individual permits that would probably be

3 The appeal and compensation provisions of this title would apply to a broad range of regulatory, enforcement, and conservation activities carried out under the two acts, including (1) actions that apply to individuals or groups of property owners, such as permits to fill wetlands under section 404 or incidental take permits issued under the ESA, and (2) general, area-wide actions that affect more than one property owner, such as listings of endangered or threatened species and designations of their critical habitat under the ESA.

As defined by Title V, "property" includes water rights, land, and related interests.

resubmitted as a result of this bill. Moreover, we would expect relatively few landowners affected by previous ESA determinations to take advantage of the appeals and claims provisions of Title V because in order to do so they would probably have to apply for an incidental take permit and obtain an unfavorable decision from the FWS. Incidental take permits, which must be obtained in order to develop land subject to ESA regulations, are very expensive and time-consuming for the average small landowner to pursue.

Depending on how quickly the reapplications arrive and what priority the agencies give them, processing permits and other requests related to these previous actions would add $15 million to $20 million annually to the cost of administering wetlands and endangered species programs in the short run.

In addition to these amounts, federal agencies also would incur new annual expenses to process administrative appeals of decisions made after enactment of the bill. Most of the additional costs of processing appeals would be incurred by the Corps under the section 404 wetlands program because it makes the greatest number of decisions that are likely to result in such requests in any given year. CBO estimates that the agency would spend about $12 million annually to process appeals under Title V, or about twice as much as the $6 million requested for a similar (but more limited) administrative relief system proposed by the President in the fiscal year 1996 budget submission. The cost of the ESA appeal process would probably be much less-about $3 million annually-because the USFWS issues far fewer decisions each year and would be able to consolidate individual appeals of many of its decisions.

Finally, beginning in 1996, both agencies would incur new costs to process compensation requests. CBO believes that the majority of such claims would stem from the creation of an administrative forum, which would provide most property owners with a cost-effective way to seek compensation. Typically, persons affected by wetlands and endangered species regulations are small landowners who often cannot afford to sue the federal government or who would not expect to receive enough compensation to justify the substantial expense of attorneys and experts. Thus, without the administrative claims process prescribed by Title V, most of these people would not be able to take advantage of the 33 percent loss threshold or other standards established by the bill that might increase a landowner's chance of prevailing against the government.

We estimate that annual costs to process compensation claims would be $1 million to $2 million for the first few years after enactment, rising to about $5 million by 2000. About half of these amounts would be spent by each of the two agencies.

7. PAY-AS-YOU-GO CONSIDERATIONS: None.

8. ESTIMATED COST TO STATE AND LOCAL GOVERNMENTS: We have not completed our analysis of the costs to state or local governments.

9. ESTIMATE COMPARISON: None.

10. PREVIOUS CBO ESTIMATE: None.

11. ESTIMATE PREPARED BY: Deborah Reis (226-2860). 12. ESTIMATE APPROVED BY:

PAUL N. VAN DE WATER, Assistant Director for Budget Analysis.

Senator THURMOND. We will begin today's testimony with the distinguished Chairman of the Environment and Public Works Committee. I welcome you, Senator Chafee, and he will be joined by the ranking member on the Agriculture Committee who, of course, also serves with distinction on this Committee, and I welcome you as well, Senator Leahy.

Senator Chafee?

STATEMENT OF THE HON. JOHN H. CHAFEE, A U.S. SENATOR FROM THE STATE OF RHODE ISLAND

Senator CHAFEE. Thank you very much, Mr. Chairman, and Senator Biden and friends all here today. I appreciate this opportunity to appear before your Committee.

As chairman of the Committee on Environment and Public Works, I have grave concerns that property rights bills such as S.

605, if enacted, would undermine severely many of the most important protections provided by our environmental laws.

I think it is worth reminding ourselves, Mr. Chairman, just what is at stake. The accomplishments of Congress over the last 25 years in improving the Nation's environment have been nothing short of remarkable. A marvelous illustration of our success was demonstrated just last week. Just a little bit of background.

During the 1980's, Mr. Chairman, the Committee on Environment and Public Works began a careful and searching examination of the effect of chlorofluorocarbons, CFC's, on the ozone layer. The ozone is a thin layer in the stratosphere that helps to shield us from the sun's harmful ultraviolet radiation. Such radiation can cause deadly skin cancer, cataracts and an assortment of other health and environmental damages.

After a series of hearings under republican and democratic administrations, under republican and democratic committee chairmen, and in the face of considerable skepticism, the committee concluded that CFC's were destroying the ozone layer. We then worked hard, in conjunction with the Reagan administration, to approve international standards providing for the eventual ban of CFC production under the 1987 Montreal protocol.

Later, these amendments were strengthened in 1990, as part of the Clean Air Act. All during this effort, there were those who called the ozone hole and the destructiveness of CFC's mere myths. One week ago today, Mr. Chairman, our actions were vindicated beyond question when the three scientists who first alerted us to the possibility that CFC's were destroying the ozone layer were awarded the Nobel Prize for Chemistry.

I raise this example, Mr. Chairman, to remind all of us that we should be proud of our strong and bipartisan record of environmental legislation which has helped to make this world a better, cleaner, healthier place to live. The environmental statutes we have passed have led to tremendous progress in the way we care for the air we breathe, the water we drink, and the natural wonders we enjoy.

Given that some are suggesting we could do better without such laws, let us remember what environmental conditions were like prior to congressional intervention. It was the ongoing discovery of new examples of environmental degradation that led us to respond with legislation in the first place.

The point, Mr. Chairman, is that environmental laws we have enacted have served us well over the past 25 years. Consequently, we should tread carefully when considering legislation that poses a threat to the many good things those laws helped us to achieve. Let me hasten to add that protection of private property is crucial to our society. I recognize that. It has been a cornerstone of our democracy in this country since the Framers of the Constitution, included the takings clause in the fifth amendment. The issues your committee are addressing, Mr. Chairman, are indeed significant.

I have a good deal of familiarity with them because the Committee on Environment and Public Works also has held hearings on property rights proposals with regret to environmental laws.

Several points came through from those hearings. First, testimony offered during our hearings indicated that today's environmental regulations sometimes can, and do, go too far. Affected landowners voiced concerns about delay, uncertainty, and a general lack of accountability for agencies implementing these regulations. Some environmental regulations and programs have become too rigid, and bureaucratic.

Second, the hearings demonstrated that making improvements in the way we protect private property and the environment is not susceptible to simple, one-size-fits-all solutions. Unfortunately, most of the current property rights proposals reflect just such an approach. In other words, they fit into the one-size-fits-all category. One proposal is especially troubling. It is the provision in S. 605 that would create a brand new statutory right to compensation whenever a regulation diminishes the value of property by 33 percent. Some have tried to characterize this provision as nothing more than a codification of the constitutional takings clause. If that were the case, one might well ask, "What is the need for it?"

In reality, the compensation provision in S. 605 represents a dramatic departure from the careful balance reflected in the takings clause. That balance, crafted by Framers of the Constitution, and fine-tuned for more than 100 years, should not lightly be tossed aside. An example of how the compensation provision deviates from the Supreme Court interpretation of the takings clause is how it would affect diminution in property value.

In reviewing takings claims, the court always has calculated reduction in property value by looking to how the Government regulation affects the entire parcel. Directly contrary to that approach, S. 605 calls for use of the Affected Portion Rule. That rule provides that, in determining whether there has been a 33 percent reduction in value, you consider only the portion of the property directly affected by the regulation. Thus, even if a government action affected only 1 acre of a property owner's 100-acre parcel, the reduction in value would be measured by looking to the impact of the action solely on the one affected acre. It is hard to imagine how the 33percent compensation threshold would ever not be triggered under such a rule. Indeed, the threshold virtually always would be triggered under the affected portion provision S. 605.

S. 605 also ignores the fact that environmental regulations serve to enhance property values. Examples abound. A regulation constraining a industrial plant's toxic emissions obviously serves to increase the value of properties that are downwind.

Similarly, regulations prohibiting the destruction of wetlands in a floodplain improve the property values of owners downstream. Now, do we ask those beneficiaries of environmental regulations to compensate the Government for the value added to the property by the regulation? Of course not.

Another point. Sometimes government action will impose a limitation on the use of property as part of the give-and-take that comes with living under a democracy. As Justice Holmes said in Pennsylvania Coal v. Mahon, "Government hardly could go on if, to some extent, values incident to property could not be diminished without paying for every such change in the general law."