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         Federal Guidance on the Use of In-Lieu-Fee Arrangements for
   Compensatory Mitigation under Section 404 of the Clean Water Act and
                     Section 10 of the Rivers and Harbors Act

I.      Purpose

       Compensatory mitigation projects are designed to replace aquatic resource functions and
values that are adversely impacted under the Clean Water Act Section 404 and Rivers and
Harbors Act Section 10 regulatory programs.  These mitigation objectives are stated in
regulation, the 1990 Memorandum of Agreement on mitigation between Environmental
Protection Agency (EPA) and the Department of the Army, the November 28,  1995, Federal
Guidance on the Establishment, Use and Operation of Mitigation Banks ("Banking Guidance"),
and other relevant policy.  The advent of in-lieu-fee approaches to mitigation has highlighted the
importance of several fundamental objectives that the agencies established for determining what
constitutes appropriate compensatory mitigation. The purpose of this memorandum is to clarify
the manner in which in-lieu-fee mitigation may  serve as an effective and useful approach to
satisfy compensatory mitigation requirements and meet the Administration's goal of no overall
net loss of wetlands.  This in-lieu-fee guidance elaborates on the  discussion of in-lieu-fee
mitigation arrangements in the Banking Guidance by outlining the circumstances where
in-lieu-fee mitigation may be used, consistent with existing regulations and policy.

II.     Background

       A.    "In-lieu-fee" mitigation occurs in circumstances where a permittee provides funds
to an in-lieu-fee sponsor instead of either completing project-specific mitigation or purchasing
credits from a mitigation bank approved under the Banking Guidance.

       B.    A fundamental precept of the Section 404(b)(l) Guidelines is that no discharge of
dredged or fill material in waters of the U.S. may be permitted unless appropriate and practicable
steps have been taken to minimize all adverse impacts associated with the discharge. (40 CFR
230.10(d))  Specifically, the  Section 404(b)(l) Guidelines establish a mitigation sequence, under
which compensatory mitigation is required to offset wetland losses after all appropriate and
practicable  steps have been taken to first avoid and then minimize wetland impacts.  Compliance
with these mitigation sequencing requirements is an essential environmental safeguard to ensure

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that CWA objectives for the protection of wetlands are achieved.  The Section 404 permit
program relies on the use of compensatory mitigation to offset unavoidable wetlands impacts by
replacing lost wetland functions and values.

       C.      The agencies further clarified their mitigation policies in a Memorandum of
Agreement (MOA) between the EPA and the Department of the Army Concerning the
Determination of Mitigation under the Clean Water Act Section 404(b)(l) Guidelines (February
6, 1990). That document reiterates that "the Clean Water Act and the Guidelines set forth a goal
of restoring and maintaining existing aquatic resources. The Corps will strive to avoid adverse
impacts and offset unavoidable adverse impacts to existing aquatic resources, and for wetlands,
will strive to achieve a goal of no overall net loss of values and functions." Moreover, the MOA
clarifies that mitigation "should be undertaken, when practicable, in areas adjacent or contiguous
to the discharge site," and that "if on-site compensatory mitigation is not practicable, off-site
compensatory mitigation  should be undertaken in the same geographic area if practicable (i.e., in
close proximity and, to the extent possible, the same watershed)." As outlined in the MOA, the
agencies have also agreed that "generally, in-kind compensatory mitigation is preferable to
out-of-kind." The MOA further states that mitigation banking may be an acceptable form of
compensatory mitigation. The agencies recognize the general preference for restoration over
other forms of mitigation, given the increased chance for ecological  success.

       D.      Pursuant to these standards, project-specific mitigation for authorized impacts has
been used by permittees to offset unavoidable impacts. Project-specific mitigation generally
consists of restoration, creation, or enhancement of aquatic resources that are similar to the
aquatic resources of the impacted area, and is often located on the project site or adjacent to the
impact area. Permittees providing project specific mitigation have a U.S. Army Corps of
Engineers (Corps) approved mitigation plan detailing the site, source of hydrology, types of
aquatic resource to be restored, success criteria, contingency measures, and an annual reporting
requirement.  The mitigation and monitoring plan becomes part of the Section 404 authorization
in the form of a special condition.  The permittee is responsible for complying with all terms and
conditions of the authorization and would be in violation of their authorization if the mitigation
did not comply with the approved plan.

       E.      In 1995, the agencies issued the Banking Guidance. Consistent with that
guidance, permittees may purchase mitigation credits from an approved bank. Mitigation banks
will generally be functioning in advance of project impacts and thereby reduce the temporal
losses of aquatic functions and values and reduce uncertainty over the ecological  success of the
mitigation. Mitigation banking instruments are reviewed and approved by an interagency
Mitigation Banking Review Team (MBRT).  The MBRT ensures that the banking instrument
appropriately addresses the physical  and legal characteristics of the bank and how the bank will
be established and operated (e.g., classes of wetlands and/or other aquatic resources proposed for
inclusion in the bank, geographic service area where credits may be  sold, wetland classes or other
aquatic resource impacts suitable for compensation, methods for determining credits and debits).
The bank sponsor is responsible for the operation and maintenance of the bank during its

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operational life, as well as the long-term management and ecological success of the wetlands
and/or other aquatic resources, and must provide financial assurances.

       F.      The Banking Guidance describes in-lieu-fee mitigation as follows: "...in-lieu-fee,
fee mitigation, or other similar arrangements, wherein funds are paid to a natural resource
management entity for implementation of either specific or general wetland or other aquatic
resource development project, are not considered to meet the definition of mitigation banking
because they do not typically provide compensatory mitigation in advance of project impacts.
Moreover, such arrangements do not typically provide a clear timetable for the initiation of
mitigation efforts.  The Corps, in consultation with the other agencies, may find circumstances
where such arrangements are appropriate so long as they meet the requirements that would
otherwise apply to an offsite, prospective mitigation effort and provides adequate assurances of
success and timely implementation. In such cases, a formal agreement between the sponsor and
the agencies, similar to a banking instrument, is necessary to define the conditions under which
its use is considered appropriate."

III. Use of In-Lieu-fee Mitigation in the Regulatory Program

       In light of the above considerations and in order to ensure that decisions regarding the use
of in-lieu-fee mitigation are made more  consistently with existing provisions  of agency
regulations and permit policies, the following clarification is provided.  It is organized in  a tiered
manner to reflect and incorporate the agencies' broader mitigation policies, and is based on
relative assurances of ecological  success.

       A.     Impacts Authorized Under Individual Permit:  In-lieu-fee agreements may be
used to compensate for impacts authorized by individual permit if the in-lieu-fee arrangement is
developed (or revised, if an existing agreement), reviewed, and approved using the process
established for mitigation banks in the Banking Guidance. MBRTs should review applications
from such in-lieu-fee sponsors to ensure that such agreements are consistent with the Banking
Guidance.

       B.     Impacts Authorized Under General Permit: As a general matter, in-lieu-fee
mitigation should only be used to compensate for impacts to waters of the U.S.  authorized by a
Section 404 general permit, as described below:

              1. Where "On-site" Mitigation Is Available and Practicable: As a general matter,
              compensatory mitigation that is completed on or adjacent to the site of the impacts
              it is designed to offset (i.e., project-specific mitigation done by permittees
              consistent with Corps approved mitigation plans) is  preferable to mitigation
              conducted off-site (i.e., mitigation bank or in-lieu-fee mitigation).  The agencies'
              preference for on-site mitigation, indicated in the 1990 Memorandum of
              Agreement on mitigation between the EPA and the Department of the Army,
              should not preclude the use of a mitigation bank or in-lieu-fee mitigation when

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              there is no practicable opportunity for on-site compensation, or when use of a
              bank or in-lieu-fee mitigation is environmentally preferable to on-site
              compensation, consistent with the provisions in paragraph 2 below.

              2.  Where "On-site" Mitigation Is Not Available or Practicable: Except as noted
              below in  a. or b., where on-site mitigation is not available, practicable, or
              determined to be less environmentally desirable, use of a mitigation bank is
              preferable to in-lieu-fee mitigation where permitted impacts are within the service
              area of a  mitigation bank approved to sell mitigation credits, and those credits are
              available. Use of a mitigation bank is also preferable over in-lieu-fee mitigation
              where both the available in-lieu-fee arrangement and the service area of an
              approved mitigation bank are outside of the watershed of the permitted project
              impacts, unless the mitigation bank is determined on a case  by case basis to not be
              practicable and environmentally desirable.

                    a.      Where Mitigation Bank Does Not Provide "In-kind" Mitigation: In
                    those circumstances where wetlands impacts proposed for general  permit
                    authorization are within the service area of an approved mitigation bank
                    with available credits, but the impacted wetland type is not identified by
                    the Mitigation Banking Instrument for compensation within such bank,
                    then the authorized impact may be compensated through an in-lieu-fee
                    arrangement, subject to the considerations described in Section IV below,
                    if the in-lieu-fee arrangement would provide in-kind restoration as
                    mitigation.

                    b.     Where Mitigation Bank Does Not Provide Restoration. Creation.
                    or Enhancement Mitigation: In those circumstances  where wetlands
                    impacts proposed for general permit authorization are within the service
                    area of an approved mitigation bank, but the only available credits are
                    through preservation, then the authorized impact may be compensated
                    through an in-lieu-fee arrangement subject to the considerations described
                    in Section IV below, if the in-lieu-fee arrangement would provide in kind
                    restoration as mitigation.

IV.    Planning, Establishment, and Use of In-lieu-fee Mitigation Arrangements

       This section describes the basic considerations that should be addressed for any proposed
use of in-lieu-fee mitigation to offset unavoidable impacts associated with  a discharge authorized
under a general permit described in Section III above.

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A. Planning considerations:

       1.      Qualified Organizations: Given the goal to ensure long-term mitigation
       success, the Corps, in consultation with the other Federal agencies, should
       carefully evaluate the demonstrated performance of natural resource management
       organizations (e.g., governmental organizations, land trusts) prior to approving
       them to manage in-lieu-fee arrangements.  In fact, given the unique strengths and
       specialties of such organizations, it may be useful for the Corps, in consultation
       with other Federal resource agencies, to establish formal arrangements with
       several natural resource management organizations to ensure there are sufficient
       options to effectively replace lost functions and values.  In any event, in-lieu-fee
       arrangements and subsequent modifications should be made in consultation with
       the other Federal agencies and only after an opportunity for public notice and
       comment has been afforded.

       2.      Operational Information: Those organizations considered qualified to
       implement formal in-lieu-fee arrangements should work in advance with the
       Corps to  ensure that authorized impacts will be offset fully on a project-by-project
       basis consistent with Section 10/404 permit requirements. As detailed in the
       paragraphs that follow, organizations should supply the Corps with information in
       advance on (1)  potential sites where specific restoration projects or types of
       restoration projects are planned, (2) the schedule for implementation,  (3) the type
       of mitigation that is most ecologically appropriate on a particular parcel, and (4)
       the financial, technical, and legal mechanisms to ensure long-term mitigation
       success.  The Corps should ensure that the formal in-lieu-fee arrangements and
       project authorizations contain distinct provisions that clearly state that the legal
       responsibility for ensuring mitigation terms are satisfied fully rests with the
       organization accepting the in-lieu-fee. In-lieu-fee sponsors should be able to
       demonstrate approval of all necessary State and local permits and authorizations.
       In-lieu-fee sponsors (e.g., State) should notify the Corps and MBRT if the service
       area of any mitigation bank overlaps the jurisdiction in which their in-lieu-fees
       may be spent.

       3.      Watershed Planning: Local watershed planning efforts, as a general
       matter, identify wetlands and other aquatic resources that have been degraded and
       usually have established a prioritization list of restoration needs.  In-lieu-fee
       mitigation projects should be planned and  developed to address the specific
       resource  needs  of a particular watershed.

       4.      Site Selection: The Federal agencies and in-lieu-fee sponsor should give
       careful consideration to the ecological suitability of a site for achieving the goal
       and objectives of compensatory mitigation (e.g., posses the physical, chemical and
       biological characteristics to support the desired aquatic  resources and functions,

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preferably in-kind restoration or creation of impacted aquatic resources).  The
location of the site relative to other ecological features, hydrologic sources, and
compatibility with adjacent land uses and watershed management plans shall be
considered by the Federal agencies during the evaluation process.

5.      Technical Feasibility: In-lieu-fee mitigation should be planned and
designed to be self-sustaining over time to the extent possible. The techniques for
establishing aquatic resources must be carefully selected.  The restoration of
historic or substantially degraded aquatic resources (e.g., prior-converted
cropland, farmed wetlands) utilizing proven techniques increases the likelihood of
success and typically does not result in the loss of other valuable resources. Thus,
restoration should be the first option considered for siting in-lieu-fee mitigation.
This guidance recognizes that in some circumstances aquatic resources must be
actively managed to ensure their sustainability. Furthermore, long-term
maintenance requirements may be necessary  and appropriate in some cases (e.g.,
to maintain fire dependent habitat communities in the absence of natural fire, to
control invasive exotic plant species).  Proposed mitigation techniques should be
well-understood and reliable. When uncertainties surrounding the technical
feasibility of a proposed mitigation technique exist, appropriate arrangements may
be phased-out or reduced once the attainment of prescribed performance standards
is demonstrated. In any event, a plan detailing specific performance  standards
should be submitted to ensure the technical success of the project can be
evaluated.

6.      Role of Preservation: As described in the Banking Guidance, simple
purchase or "preservation" of existing wetlands may be accepted as compensatory
mitigation only in exceptional circumstances. Mitigation credit may be given
when existing wetlands and/or other aquatic resources are preserved  in
conjunction with restoration, creation or enhancement activities,  and when it is
demonstrated that the preservation will augment the functions of the  restored,
created or enhanced aquatic resource.

7.      Collection of Funds: Funds collected under any in-lieu-fee arrangement
should be used for replacing wetlands functions and values and not to finance
non-mitigation programs and priorities (e.g.,  education projects, research).  Funds
collected should be based upon a reasonable cost estimate of all funds needed to
compensate for the impacts to wetlands or other waters that each permit is
authorized to offset. Funds collected should  ensure a minimum of one-for-one
acreage replacement, consistent with existing regulation and permit conditions.
Land acquisition and initial physical and biological improvements should be
completed by the first full growing season following collection of the initial funds.
However, because site improvements associated with in-lieu-fee  mitigation may
take longer to initiate, initial physical and biological improvements may be

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              completed no later than the second full growing season where 1) initiation by the
              first full growing season is not practicable, 2) mitigation ratios are raised to
              account for increased temporal losses of aquatic resource functions and values,
              and 3) the delay is approved in advance by the Corps.

              8.      Monitoring and Management: The in-lieu-fee sponsor is responsible for
              securing adequate funds for the operation and maintenance of the mitigation sites.
              The wetlands and/or other aquatic resources in the mitigation site should be
              protected in perpetuity with appropriate real estate arrangements (e.g.,
              conservation easements, transfer of title to Federal or State resource agency or
              non-profit conservation agency).  Such arrangements should effectively restrict
              harmful activities (e.g., incompatible uses) that might otherwise jeopardize the
              purpose of the compensatory mitigation. In addition, there should be appropriate
              schedules for regular (e.g., annual) monitoring reports to document funds
              received, impacts permitted, how funds were disbursed, types of projects funded,
              and the success of projects conducted under the in-lieu-fee arrangement. The
              Corps, in conjunction with other Federal and State agencies, should evaluate the
              reports and conduct regular reviews to ensure that the arrangement is operating
              effectively and consistent with agency policy and the specific agreement.  The
              Corps will track all uses of in-lieu-fee arrangements and report those figures by
              public notice  on an annual basis.

       B. Establishment of In-Lieu-Fee Agreements:

       A formal in-lieu-fee agreement, consistent with the planning provisions above, should be
established by the sponsor with the Corps, in consultation with the other agencies.  It may be
appropriate to establish an "umbrella" arrangement for the establishment and operation of
multiple sites. In such circumstances, the need for supplemental information (e.g., site specific
plans) should be addressed in specific in-lieu-fee agreements.  The in-lieu-fee agreement should
contain:

              1. a description of the sponsor's experience and qualifications with respect to
              providing compensatory mitigation;
              2. potential site locations, baseline conditions at the sites, and general plans that
              indicate what kind of wetland compensation can be provided (e.g., wetland type,
              restoration or other activity, proposed time line, etc.);
              3. geographic service area;
              4. accounting procedures;
              5. methods  for determining fees and credits;
              6. a schedule for conducting the activities that will provide compensatory
              mitigation or  a requirement that projects will be started within a specified time
              after impacts occur;
              7. performance standards for determining ecological success of mitigation sites;

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              8. reporting protocols and monitoring plans;
              9. financial, technical and legal provisions for remedial actions and
              responsibilities (e.g., contingency fund);
              10. financial, technical and legal provisions for long-term management and
              maintenance (e.g., trust); and
              11. provision that clearly states that the legal responsibility for ensuring mitigation
              terms are fully satisfied rests with the organization accepting the fee.

       In cases where initial establishment of in-lieu-fee compensatory mitigation involves a
discharge into waters of the United States requiring Section 10/404 authorization, submittal of a
Section 10/404 application should be accompanied by the in-lieu-fee agreement.

V.     General

       A.     Effect of Guidance. This guidance does not change the substantive requirements
of the Section 10/404 regulatory program. Rather, it interprets and provides guidance and
procedures for the use of in-lieu fee mitigation consistent with existing regulations.  The policies
set out in this document are not final agency action, but are intended  solely  as guidance.  The
guidance is not intended, nor can it be relied upon, to create any rights enforceable by any party
in litigation with the United States.  This guidance does not establish or affect legal rights or
obligations, establish a binding norm on any party and it  is not finally determinative of the issues
addressed.  Any regulatory decisions made by the agencies in any particular matter addressed by
this guidance will be made by applying the governing law and regulations to the relevant facts.

       B.     Definitions.  Unless otherwise noted, the terms used in this guidance have the
same definitions as those terms  in the Banking Guidance. Note that as part of the
Administration's Clean Water Action Plan, the Federal agencies have proposed a tracking system
to more accurately account for wetland losses and gains that includes definitions of terms such as
restoration used in wetland programs.  Future notice will be given when these definitions will be
applied to Section 10/404 regulatory program.

       C.     Effective Date.  This guidance is  effective immediately on the date of the last
signature below. Therefore, existing in-lieu-fee  arrangements or agreements should be reviewed
and modified as necessary in light of the above.

       D.     Conversion to Banks:  If requested by the in-lieu-fee sponsor, the Corps, in
conjunction with the other Federal agencies, will provide assistance and recommendations on the
steps necessary to convert individual in-lieu-fee  arrangements to mitigation banks, consistent
with the Banking Guidance.

       E.     Future Revisions. The agencies are supporting a comprehensive, independent
evaluation of the effectiveness of compensatory  mitigation by the National Academy of Sciences.
The technical results of this evaluation are expected to be used by the public to improve the

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quality of wetlands and aquatic resource restoration, creation, and enhancement. The agencies
will take note of the results of this evaluation and other relevant information to make any
necessary revisions to guidance on compensatory mitigation, to ensure the greatest opportunity
for ecological success of restored, created, and enhanced wetlands and other aquatic resources.
At a minimum, a review of the use of this guidance will be initiated no later than 12 months after
the effective date.

FOR FURTHER INFORMATION CONTACT: Mr. Jack Chowning (Corps) at (202) 761-1781;
Ms. Lisa Morales (EPA) at (202) 260-6013; Ms. Susan Marie Stedman (NMFS) at (301) 713-
2325; Mr. MarkMatusiak (USFWS) at (703) 358-2183.
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