son, will EPA be able to provide federal funding to States to develop state environmental programs. Rather, to avoid-federal liability for state actions, EPA would need to either withdraw authorization and funding of States to implement these laws or subject each State action to intense scrutiny. Since intrusive oversight is likely to be impractical for EPA and unacceptable to State program managers, withdrawal of funding and delegation seems more likely.

Withdrawal of delegation will lead to confusion and complexity in administration of these programs for example, regulated parties will again be subject to the requirements of both federal and State law. Withdrawal of funding may create new "unfunded mandates" for State governments and may cripple developing State environmental programs.

S. 605 also contains a provision that could be read to impose broad restrictions on EPA entry onto private property, seriously undermining EPA's ability to investigate criminal activity and other violations of environmental laws that could endanger the public. One provision (§504) prohibits EPA from entering private property to collect information regarding the property without the consent of the property owner, while another (§505), restricting use, of data obtained on property, applies only to Section 404 of the Clean Water Act. Because Section 504 is not, by its terms, limited to the Clean Water Act, it could be construed to prohibit entry for purposes of implementing any agency regulatory program. Property owners who withhold consent to entry could thus prevent EPA from protecting public health by responding to chemical spills, assessing hazards from air or water pollution, or investigating sources of groundwater contamination, no matter how serious the environmental problem. Moreover, limitations on EPA's entry authority are unnecessary since existing law protects property owners from unwarranted property entry. Further, the requirement under Section 505 to provide owners with access to information collected on their property before using that information to implement Section 404 of the Clean Water Act would further undermine Section 404, particularly where the information at issue is part of a criminal investigation.

4. DISRUPTION OF POSITIVE INNOVATIONS IN ENVIRONMENTAL MANAGEMENT

The bill will create perverse incentives that discourage cooperation between property owners and regulators to find ways of allowing development while protecting the environment. It guarantees compensation for projects that violate regulatory requirements, and creates strong incentives to maximize the impact of regulatory restrictions (to increase compensation claims), while doing nothing to encourage projects that comply with regulations.

Now, when a proposal will lead to environmental problems, the Agency and the property owner often can work to find ways to modify the project so that it proceeds without undue environmental impact. For example, a wetlands development proposal might be, modified by changes that reduce its impact on the wet land or that create wetland values elsewhere to "mitigate" the impact of a particular development. Ideally, this can produce co-operative "win-win" solutions that allow the owner to achieve all or most of the objectives of the project while minimizing harm to the environment. Creating such solutions is a key element of this Administration's efforts to reinvent government.

The bill's perverse incentives would stifle efforts to find such solutions. Owners who, refuse to cooperate are rewarded by being fully compensated for the value their property would have if it were completely unregulated. By contrast, cooperative owners may find themselves worse off for accepting and accommodating themselves to the costs of regulation, particularly if their cooperation causes the impact of regulation to drop below the compensation threshold.

Even more perversely, the bill rewards proposals that are not realistic or feasible. Ordinarily, an owner who proposes to make a particular use of a property must finance the project, risking capital, with the possibility that the project will lose money. Sound projects often succeed, and their developers profit, while imprudent ones likely fail. Under this bill, however, a property owner can avoid financial risk entirely by proposing a project that would violate government regulation and then claiming compensation.

III. Regulatory and Wetlands Reform

Compensation bills are offered as a "solution" to "problems" whose existence is supposedly demonstrated by widely circulated anecdotes off property owners frustrated, by government regulators. These anecdotes almost invariably describe government actions in the past, during previous Administrations. In addition, the anecdotes, which are often incomplete or misleading, are-offered in place of sound data documenting the adverse economic impact of regulation. In fact, the available data

do not support the claim that government regulation is having a widespread, devastating effect on property values. However, the Administration recognizes that regulation could be more efficient and has created difficulties for some small businesses, farmers, and homeowners. We are strongly committed to reducing those difficulties by achieving our nation's health and environmental goals through cheaper, smarter, more flexible, and less intrusive means.

We believe that the best approach to legitimate concerns of property owners is to create meaningful regulatory reform-in this way avoiding excessive and unfair burdens on property owners in the first instance. We at EPA have undertaken important efforts to reduce the burdens on small businesses and other property owners by focusing on ultimate environmental goals and enhancing the flexibility of those who are regulated in achieving those goals and reporting on their activities. Our recent Superfund policies for prospective purchasers concerning contaminated aquifers-issued just last week and designed to tailor EPA's actions to truly liable parties while freeing other property owners to put their land to productive useare perfect examples of this approach.

The hallmark of this Administration has been our efforts to bring together all affected parties to find comprehensive common sense solutions to environmental problems such as with our Common Sense Initiative. Unfortunately, S. 605 and similar legislation threatens to adversarialize the process and accomplish just the opposite by creating perverse incentives for property owners to either use their property in conflict with their communities, or to be compensated for their inability to do so.

On March 16, 1995, President Clinton announced the Administration's program to reinvent environmental regulation. Under this program,,EPA is working on a set of 25 high priority actions designed to address problems with existing regulations and develop innovative alternatives to the current regulatory system. Many of these actions are specifically designed to aid small businesses' and property owners' compliance with environmental regulations.

Among the priority items are policies which will rely on market-based incentives to enhance efficiency in environmental protection-such as air emissions and water discharge trading; reforming basic programs to correspond to good science such as refocusing RCRA and the drinking water program on the highest risks; building partnerships with states, tribal governments and local communities through more flexible funding mechanisms and grants; cutting red tape by reducing paperwork requirements in all programs; encouraging compliance with environmental laws by providing incentives for self-policing and assistance to small businesses and communities; and providing greater public access to EPA information.

EPA is also developing alternative regulatory compliance strategies to help small businesses and property owners. EPA is sponsoring demonstration projects that encourage technological innovation and develop new, more flexible management tools for compliance, such as third-party audits and multi-media permitting.

As for wetlands, I believe our nation's wetlands protections are working for the vast majority of Americans, particularly our nation's 64 million homeowners, nearly 95 percent of whom live on parcels of five acres or less. They are working because they provide critical protections that all property owners need-such as preventing flooding and cleansing pollution-at the same time the vast majority of property owners with wetlands are able to use their property as they see, fit.

The wetlands program is a good model of the economy and environmental protection working hand in hand. Of the estimated 100,000 activities that occur in wetlands areas annually, half are covered by general permits that do not require the property owner to notify,the federal government at all. Of the 48,000 who do apply for permits, most hear back within days, and can do as they desire with their property. Indeed, only 0.7 percent of requested permits were denied.

That is not to say that the wetlands program always works as well as it shouldit has at times frustrated small landowners, farmers, and ranchers. As noted above, the Clinton Administration is reinventing the way it does its regulatory work by ensuring that its actions make good sense and are done fairly and efficiently. As part of this reinvention effort, the Administration has already taken extraordinary steps to reform the wetlands program. Nearly two years ago, the Administration-after intensive consultations with landowners, industry, states, tribes, scientists, environmentalists, and several federal agencies-instituted significant changes to the program. The Administration Wetlands Plan is a common sense, workable set of administrative initiatives designed to better coordinate Federal wetlands policy with State and local efforts, be more flexible for, the landowner, and be more effective in targeting protection at valuable wetlands.

As a reflection of President Clinton's understanding that projects on private property with minor impacts, should not be subject to the same detailed permit review

as more complex proposals that affect larger areas, the Administration has acted to reduce the regulatory burden on small landowners. In particular, two new approaches directly ease the regulatory burden on small landowners attempting to carry out routine projects on their property by eliminating or reducing permit review.

-First, the Corps, in consultation with EPA, will soon issue a new nationwide permit that allows landowners to affect up to one-half acre of non-tidal wetlands for construction of single family homes without applying for an individual permit. This general, permit applies to actions to build or add on to a home, and also covers such features as garages, driveways, and septic tanks.

Second, EPA and the Corps have directed their field staffs to streamline the regulatory process for projects that do require individual permits. The agencies have made clear that those seeking to build or expand homes, farm buildings, or small businesses that affect less than two acres of nontidal wetlands will generally be required to look only on their own property for less damaging alternative sites for small projects; off-site alternatives need not be considered.

Along with these changes, EPA and the Corps have directed their field staff to be more flexible in wetland permitting, emphasizing that all wetlands are not the same, to reduce the regulatory burden on landowners who wish to accomplish projects with minor impacts. Also, the Administration is developing a Section 404 administrative appeals process so that individuals can seek review of jurisdictional determinations, administrative penalties and permit denials without having to go to court. In addition, the Administration's 1995 Farm bill guidance included proposals to use the programs of USDA in support of creating and using mitigation banks in agriculture.

The Administration Plan also endorses the expanded use of mitigation banks for compensatory mitigation under the Section 404 and Swampbuster programs within an environmentally sound management framework. The Clinton Administration is encouraging mitigation banking, especially when developed within the context of a watershed planning effort, because it is an extremely cost-effective tool to reduce permit delays and provide greater certainty to permit applicants, while ensuring more environmentally-effective compensation for adverse project impacts. Draft national guidance was published in the Federal Register several months ago for public review and comment, with final guidance due out shortly.

Another key aspect of the Administration Plan is to reduce the regulatory burden on the nation's farmers. At the heart of this effort is a commitment across all Federal agencies to ensure that the Section 404 and Swampbuster programs, operate consistently and without duplication. The Administration has already taken key steps toward fulfilling this commitment by developing an agreement among EPA, and the Departments of the Army, the Interior, and Agriculture to ensure that the nation's farmers can rely on the USDA Natural Resources Conservation Service's wetlands jurisdictional determinations on agricultural lands for purposes of both programs. Secretary Glickman recently announced that all wetland determinations completed since the 1985 Farm Bill, including those determinations that agricultural lands are not wetlands, will remain valid for purposes of both Section 404 and Swampbuster. The Secretary's announcement also clarified that, until completion of the 1995 Farm Bill, new determinations will only be carried out at the request of the landowner.

In addition, the Administration's 1995 Farm Bill guidance proposed major changes to the Swampbuster provisions of the Food Security Act. These proposals include changing Swampbuster's emphasis from protection of individual wetlands in agriculture to protection of significant wetland functions and values using a set of flexible policies focused on making the program work for farmers.

Also, the Administration issued a final rule that affirms the exclusion of an estimated 53 million acres of prior converted croplands, as defined by the Food Security Act, from Clean Water Act jurisdiction. These are areas that, prior to December 23, 1985, were hydrologically manipulated, and cropped to the extent that they no longer perform the wetlands functions they did in their natural condition. In addition, the Corps is developing a nationwide permit that will allow farmers to convert wetlands on their farms without being subject to regulation under either Section 404 or Swampbuster if the conversion has no more than minimal environmental effects.

The Administration Plan recognizes the critical need to increase state and local roles in wetlands protection. This will move regulatory decisionmaking closer to the people regulated and the resource to be protected, reduce duplication among wetlands protection programs at different levels of government, and streamline the permit decision process. Last year, New Jersey joined Michigan in assuming responsibility for implementing the Section 404 program, and EPA is currently assisting

other states as they work toward program assumption; as I indicated earlier, provisions in S. 605 would effectively discourage approval of state operation of federal programs. The Administration also believes that wetlands management decisions need to be made within a broader watershed context that gives State and local governments more responsibility to anticipate, rather than react to, wetlands issues and to tailor solutions to local conditions.

The Plan also addresses concerns that the Section 404 program is not responsive to the unique circumstances in the State of Maska. EPA and the Corps have responded by adding flexibility to implementation of the program in Maska, for example by instituting a process to issue Section 404 permits for sanitation and wastewater projects in Native communities within 15 days. Over fifteen projects were permitted through this expedited process during the first year it was in place.

IV. Conclusion

I believe the Administration's reforms, if given a chance, will significantly alleviate the concerns of property owners over excessive health and environmental regulation. I also believe our reforms follow the right approach to addressing the needs of property owners identifying specific regulatory problems and developing appropriate ways to fix them.

To the extent Congress believes there are larger problems that cannot be addressed administratively, the solution is to make meaningful reforms to the substantive provisions of the statutes that govern the programs at issue. Such reforms should not take the form of providing automatic compensation-with its own set of severe problems-but of establishing ways to avoid takings concerns in the first place. Our Constitution and our statutory framework for public health and environmental protection have served our nation well, and we should be reluctant to substitute across-the-board simplistic solutions that will elevate rhetoric to unworkable public policy.

I would be pleased to answer any questions the Committee may have.

PREPARED STATEMENT OF ALICE M. RIVLIN; DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET

MR. CHAIRMAN, MEMBERS OF THE COMMITTEE: Thank you for the opportunity to discuss the potential costs of takings legislation.

Congress is considering two major takings compensation bills. H.R. 9 would require payment to landowners for restrictions on real property imposed under the Clean Water Act, Endangered species Act, and water provisions under the reclamation laws and other public land laws. S. 605 would require payment to owners of real or personal property for reductions in the value of their property caused by virtually any governmental action.

Although OMB has not completed the complex task of estimating the Government-wide cost of S. 605, we have developed a preliminary estimate for the compensation title of H.R. 9—the more limited House bill. OMB estimates that H.R. 9 would impose about $28 billion in new costs over 7 years, making it one of the largest mandatory programs created in recent tides. Should S. 605 be enacted with its much broader provisions and scope, it would potentially cost several times the cost of H.R. 9.

To be sure, we believe in property rights and the payment of just compensation. But these bills go far beyond our longstanding constitutional tradition. They go beyond property rights and seek to pay people to obey the law. That is not a proper role for the federal (or state or local) government. We should not pay airlines for the time their planes are grounded to comply with airworthiness directives. We should not pay drug manufacturers when their products are recalled from the market. We should not pay polluters to install emissions ccntrols. However, we can and should make it easier for people to obey the law and have their grievances addressed and answered more quickly. This Administration is working to do just that. As I wrote in a recent letter to the senate, if S. 605 were presented to the president in its current form, I would coin the heads of nine other departments and agencies in recommending that he veto it.

WHAT IS A "TAKING?"

Generally speaking, property can be "taken" in two ways. First, the government can physically "invade" property; this type of taking occurs, for example, when the government constructs a highway that runs through a person's land. Second, prop

erty can sometimes be "taken" as a result of government regulation that restricts how the property may be used.

This second type of taking-a regulatory taking does not occur simply because government regulation has diminished the value of property; as a unanimous Supreme Court stated two years ago, "our cases have long established that mere diminution in the value of property, however serious, is insufficient to demonstrate a taking." (Concrete Pipe & Products of California, Inc. v. Construction Laborers Pension Trust for Southern California.) Ínstead, the Supreme Court has applied a caseby-case analysis to determine whether a regulatory taking has occurred. It considers, along other factors, the activity sought to be regulated, the public purpose of the regulation, the reasonable expectations of the property owner, and the remaining economic uses of the property after the government has taken action.

ADMINISTRATION CONCERNS

We have three generic, interrelated concerns with the compensation bills before Congress:

1. The legislation would create a radical new regime of property entitlements that would encourage claims that have no basis in actual fosses to property owners. 2. These claims could prove hugely expensive; in fact, the bills would create one of the most expensive new spending programs in recent history, costing taxpayers tens of billions of dollars.

3. Because these claims could be so expensive, the government no longer will be able to afford to take needed action to protect the public.

In addition, we have many specific concerns with this legislation. Supreme Court decisions have balanced the loss in a parcel against the value of the rest of the parcel. But under these bills, even if most of a property has risen in value due to a federal action, any small portion that has fallen in value due to this action could be the subject of a compensation claim.

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Furthermore, these bills define "property" and other terms so broadly and vaguely, they encourage landowners to "game the system"-potentially resulting in an enormous number of claims. Under S. 605, the same piece of property could be the subject of multiple compensation claims under essentially the same law. The bill defines "owner" as a "possessor in property rights at the time the taking occurs, cluding when [a] the statute, regulation, rule, order, guideline, policy, or action is passed or promulgated; or [b] the permit, license, authorization, or governmental permission is denied or suspended." Thus, several different people could file claims for compensation: person "A", who owns the property when the law is passed, sells to person "B" who is a possessor at the time the rule is promulgated, who sells to person "C" who applies for a permit.

Because the bills do not require property owners who assert claims to document actual or clearly predictable losses, we would anticipate many unsubstantiated claims. S. 605 says compensation shall include both the fair market value of the property and "business losses." Property owners could stake claims for developments that bay never occur. For example, not all farmers plan to build shopping centers on their wetlands. Nevertheless, this bill would appear to allow all wetland owners to claim they want to build a shopping center and argue the claim should cover any business losses because they cannot do so.

COST ESTIMATES

The compensation title of H.R. 9 would create unprecedented, statutory private property rights and entitlements beyond those guaranteed by the constitution or in current laws. Because the legislation would not require owners to document actual or clearly predictable losses to assert claims, and would allow claims to be filed for alleged impacts on an "affected portion" of a property, taxpayer costs could be enor

mous.

How did we derive our cost estimates? OMB asked the agencies affected by H.R. 9 to develop estimates of claims exposure-the funds needed to satisfy all claims likely to be filed under the legislation. To be sure, due to administrative and judicial determinations, actual expenditures would be less than total claims exposure. On the other hand, the OMB estimates understate total taxpayer costs because they do not include agency administrative costs to process the claims; higher agency costs of managing the property that the Federal Government acquires under the mandated purchase program; interest on any successful claims; and costs to the judiciary when litigation was pursued.

We assumed a time lag between passage of the bill and payments, due to the need for agency action to trigger a claim, the agency's ability to process the claim, agency