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Fire Chronicle #29
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Laura McCarthy, Forest Guild
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Jan 31, 2005 12:55 PST
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FIRE CHRONICLE: Stories of the National Fire Plan
Number 29
January 31, 2005
WORKERS’ COMPENSATION INSURANCE ACCOUNTS FOR MUCH OF FUEL REDUCTION
TREATMENT COSTS
Policymakers, agency personnel and private businesses worry that the
high cost of forest fuel reduction treatments will make community
protection and ecological restoration unattainable in this time of tight
federal budgets. Fuel reduction cost varies by site, but is usually
between $500 and $1,000 per acre in the western U.S. In the most remote
locations and densest forests the costs may rise as high as $1,500 per
acre, or sink as low as $250 per acre in forests that are easy to treat.
A recent meeting in New Mexico shed some light on a principal—and
unexpected—cause behind the high cost of forest thinning: the high cost
of workers’ compensation insurance. For many thinning contractors,
workers’ compensation insurance premiums account for nearly 50% of their
costs to reduce hazardous fuels. Insurance rates vary somewhat among the
western states. For example, the insurance rate for start-up thinning
businesses in Oregon is $40 per $100 of employee payroll. In contrast,
new businesses in New Mexico will pay $79 per $100 of payroll.
Thinning contractors must pass on their workers’ compensation insurance
costs to the entities that buy their services if they hope to be
solvent. In the majority of cases, the purchaser of fuel reduction
services is the federal government. Many contractors find that the high
cost of workers’ compensation insurance makes it impossible to provide
competitive bids. Contracts may even be withdrawn when the offering
agency realizes that even the lowest bids they receive exceed the
available funds.
New and small businesses can be especially hard hit because their
insurance premiums are higher than those of large and established
companies. When new or small businesses pass on their insurance costs in
a bid price, they almost always lose the contract. Moreover,
long-established large national companies often get price breaks on
workers’ compensation insurance because they buy it for many workers at
a time, conferring a distinct advantage over smaller companies that
cannot make bulk purchases.
Some businesses choose to stay so small (fewer than 3 employees) that
they are exempt from laws requiring them to carry workers’ compensation
insurance. Not paying workers' compensation insurance lowers their bid
prices, but makes them unable to compete for contracts that require
hundreds or thousands of acres to be treated in just a few months.
The group of forest workers who convened at the USDA Forest Service’s
Collaborative Forest Restoration Program annual meeting in New Mexico
last week, including small business owners and others who specialize in
forest restoration, questioned the logic of charging businesses that
engage in forest thinning the same workers’ compensation insurance rates
as businesses that employ loggers. The worker classifications are
provided by the National Commission on Compensation Insurance (NCCI).
The NCCI provides state insurance regulators and insurance underwriters
with the Scopes Manual handbook of employment categories. The manual
includes in the logging category “the cutting of young trees 2 to 3
inches in diameter… as well as the felling of huge trees several feet in
diameter.” The classification applies to “the thinning of timberland by
removing small trees” as well as cutting “done by specialty-type
machinery which cuts the tree off at the base and that may convert the
timber into chips.”
Representatives of thinning contractors in several western states,
including Oregon, Alaska, Montana, and New Mexico, have explained to
NCCI that hazardous fuels reduction is a new industry that merits its
own Scopes category. The NCCI has responded by initiating a study of the
actual costs of insurance claims for thinning versus logging. The study
is complicated by the difficulty of separating the contractor pool into
those whose services are “thinning” (i.e. reducing fuels by removing
small diameter trees) from those who are “logging” (i.e. reducing fuels
of all sizes including large trees). NCCI will base their decision about
whether to approve a new classification for thinning, as distinct from
logging, based on the actuarial data, sometime this year.
At the same time, there are many experienced foresters who believe that
an effective distinction between logging and thinning cannot be made at
this point in time. If they are correct, and if the NCCI finds no
economic basis for creating a new classification for thinning with lower
workers’ compensation insurance rates, then other solutions will need to
be found. Three such ideas are described below.
First, it may be possible to draw an enforceable distinction between
logging and thinning with the structure of federal contracts for fuels
reduction work. Currently several forms of contracts are used for
hazardous fuel reduction, including service contracts for the removal of
small trees with no market value, service contracts with embedded timber
sales, and stewardship contracts. If the federal government decides to
use service contracts only for small-diameter tree removal, then workers
who thin trees could be identified as a distinct group. After three
years of such a policy, the NCCI would have new data available to
evaluate the feasibility of a Scopes category for forest thinning. If a
new category was created, with rates that are significantly lower for
work that is limited to small-diameter tree removal, then the per-acre
thinning costs to the government would be lowered as well.
A second idea, should no distinction be made between thinning and
logging, is to change federal procurement policy to create a level field
of play between small local thinning businesses and large national
contractors. The National Fire Plan’s goals as expressed in the annual
appropriations bills include providing local employment and small
business opportunities. Yet small contractors based in rural communities
have found that federal fuels reduction contracts are difficult to
obtain. Local economic benefits from the National Fire Plan have thus
not yet accrued consistently or as expected to local businesses and
workers, prompting the idea of looking at procurement policies to
provide a solution.
Current procurement policy provides a handful of mechanisms to ensure
that small local businesses get a fair share of federal contract work.
These mechanisms include small business set-asides and best value
contracting that consider whether a contractor will provide local
economic benefit. However, the experience of small businesses performing
hazardous fuels reduction on federal lands has shown that the existing
mechanisms are not enough. (Moseley, 2003a and 2003b). Businesses that
are based near the job site are still unable to compete with national
companies. High workers’ compensation insurance rates may be a
predominant cause.
A third line of thinking is that workers’ compensation insurance rates
are necessarily driving up the cost of fuels reduction (because the work
is so dangerous), and that a national workers’ compensation subsidy is
needed to bring the economics of fuel treatment into balance. The
economic dynamics of hazardous fuel reduction treatments differs widely
from conventional logging. Harvesting large trees brings valuable wood
into the market place, and the cost of workers’ insurance is recouped in
the price paid for the product. Manufacturers of the products derived
from wood pass insurance costs on to consumers in the prices charged for
their goods.
The economics of fuel reduction are more complicated because the vast
majority of wood removed in treatments has little or no market value.
Contractors cannot recover the costs of workers’ compensation insurance
through prices because there are no or few markets for the wood they’ve
removed.
Federal and state incentive programs to promote markets for small
diameter wood products have attempted to bring up prices for what is now
unmerchantable wood, yet these programs have been unable to overcome the
barriers created by high workers’ compensation insurance costs. Energy
generation from forest biomass is the latest market-oriented solution
being explored, but this industry too will need to figure out how to
recover the insurance costs incurred in the woods. A federal subsidy
program for workers’ compensation insurance may, in the end, be the only
way to overcome key economic barriers to small diameter wood removal and
utilization.
The high cost of hazardous fuel reduction treatments continues to make
it difficult for federal land management agencies to reduce fire risks
at a large scale. The significant cost of workers’ compensation
insurance must be considered as policies and incentives are developed to
make fuels reduction treatments more economical.
COMMENTS ON THIS ISSUE ARE WELCOME! This issue was researched and
written by Laura McCarthy, Program Director, Forest Guild. Please send
comments to lau-@forestguild.org.
CITATIONS:
Moseley, Cassandra, Nancy Toth, and Abe Cambier. 2003a. The Business and
Employment Effects of the National Fire Plan in Oregon and Washington in
2001, Ecosystem Workforce Program, Institute for a Sustainable
Environment, University of Oregon.
Moseley, Cassandra, Mikhail Balaev, and Adam Lake. 2003b. Long Term
Trends in Contracting and the Impact of the National Fire Plan in
Northern California. Ecosystem Workforce Program Working Paper Number 7.
Institute for a Sustainable Environment, University of Oregon.
FIRE CHRONICLE is edited by the Forest Guild. Funding was provided by
the Ford Foundation, the USDA Forest Service and the USDA Cooperative
State Research, Education, and Extension Service under cooperative
agreement 9936200-8704. Any opinions, findings, conclusions or
recommendations expressed in this issue are those of the author and do
not reflect the views of the U.S. Department of Agriculture. The Forest
Guild welcomes your comments, stories, and observations about how the
national fire plan is being implemented (just send a reply message and
it will go to the list moderator). To subscribe to FIRE CHRONICLE go to
http://www.topica.com/lists/firechronicles/ or send an email message to
lau-@forestguild.org.
PAST ISSUES OF FIRE CHRONICLE can be downloaded from
http://www.forestguild.org/publiclands.html#fire
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7. Permits Regulate Prescribed Burning on Private Land
8. Accountability Remains a Key Issue for National Fire Plan
9. National Partnership Advances Landscape-Scale Forest Restoration
10. Poor Communities Most Threatened By Wildfire
11. A New Model to Fire-Proof Forest Homes
12. Consensus Over Fuel Reduction Treatment Dissolves
13. Wildland Urban Interface Definition Needed for Effective Policy
14. Funding Gaps Prevent Completion of Hazardous Fuel Reduction
15. Agencies Propose to Streamline Environmental Review for Hazardous
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16. National Fire Plan Provides Economic Opportunity for Rural Residents
17. Bark Beetles Heighten Wildfire Concerns
18. Small And Local Businesses Cite Barriers To Reaching National Fire
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19. Federal Report Fuels Public Debate Over Healthy Forests Act
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23. Scientists Tell Agencies: “Salvage of Dead Pinyon Pine may be
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24. Policy Evaluation: The State of the National Fire Plan
25. Agencies Implement Promising New Science-Based Accounting System
26. Report Describes Fuel Treatments For Southwestern Ponderosa Pine
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27. Forest Restoration Theory Tested in the Field
28. Blue Ribbon Panel Offers Bold Strategies to Reduce Fire Suppression
Costs
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