SENATE BILL NO. 162 An Act relating to land used for agricultural purposes and to state land classified for agricultural purposes or subject to the restriction of use for agricultural purposes only; and annulling certain program regulations of the Department of Natural Resources that are inconsistent with the amendments made by this Act. Co-chairman Halford directed that SB 162 be brought on for hearing and directed attention to CSSB 162 (Res) and Amendments 1 and 2, proposed by the sponsor. SENATOR LYDA GREEN came before committee. She explained that the bill responds to numerous requests for improvements from owners of agricultural land to make ownership of farm land more attractive. The legislation expands state ability to convey interest in lands classified for agriculture purposes. The state presently conveys agriculture interest only, and the state retains all other interest. Passage of SB 162 would authorize state conveyance of fee simple title, subject to certain restrictive covenants that maintain use of the land for agriculture. This change would allow owners of agricultural parcels to obtain financing from institutions other than the state. Senator Sharp inquired concerning the size of parcels that may be subdivided and sold. Senator Green described the process by which a parcel may be divided "by fours" every four years. Resulting parcels may not be less than 40 acres. Senator Zharoff voiced concern that agricultural land might be used for non-agricultural purposes and asked if the proposed bill would allow for other use. Senator Green stressed that the bill maintains covenants for use for agricultural purposes only. Instead of agricultural designation being a departmental decision, it would become a judicial decision. The reversionary clause that allows the commissioner to decide if land is being used according to plan would no longer remain in place. The landholder would pay the cost of survey, subdivision, and title. Senator Green referenced Amendment No. 2 and noted that the change from agricultural rights to fee simple title would be an applicant-driven process. The department will not go through its files and issue a new deed for every agricultural parcel. Discussion followed regarding whether a 40-acre subdivision would be of productive size and whether subdivision might eventually result in agricultural land being devoted to other use. Senator Green noted that ability to subdivide down to 40 acres is presently in statute. It is not a new provision within CSSB 162 (Res). Co-chairman Halford informed members that under existing law a landholder may separate off a 40-acre parcel, but no improvements may be made to the parcel. The proposed bill would allow for improvements. Senator Green concurred and reiterated that the change from agricultural rights to fee simple title would allow for financing of improvements on the subdivided property through entities other than the existing state agricultural loan program. She explained that some agricultural endeavors do not require large parcels of land. In response to a question from Senator Donley, BRETT HUBER, aide to Senator Green, advised that local property taxes are presently set by boroughs and municipalities. The breakout for agricultural purposes is based on utilization of the land rather than the size of the parcel or improvements. Under the proposed bill, utilization would not change. Co- chairman Halford added that landholders pay property taxes on "the portion of the value that is contained in the agricultural rights." That is much less than the value of the whole land eligible for unlimited subdivision or use. Since the state initially sold only agricultural rights, local governments could only tax those rights. If the ability to subdivide increases the value, it will also increase potential taxation of the property. Discussion followed regarding impact of the legislation on Delta and Point MacKenzie agricultural projects. Senator Green advised that there would be no difference in application in any region of the state aside from parcels involved in mental health trust lands. She stressed that the major impact of the bill would allow those with high interest loans to refinance at a lower rate. There are no private loans on agricultural rights at the present time. Conversion to fee simple title would provide the collateral needed to obtain financing from entities other than the state. Further discussion ensued concerning the Delta project and the size of the parcels as well as the current status of Point MacKenzie farms. JANE ANGVIK, Director, Division of Land, Dept. of Natural Resources, next came before committee. She voiced her understanding that the bill would: 1. Allow individuals with agricultural rights to exchange those rights for fee simple title to enhance ability to secure financing in the private sector. End: SFC-96, #17, Side 2 Begin: SFC-96, #18, Side 1 2. Allow for subdivision down to 40-acre parcels and improvements on subdivided parcels. 3. Allow landholders to secure a lower interest rate on state repayment schedules if they apply for refinancing. Ms. Angvik voiced support for proposed amendments to make the process applicant-driven. Individual landholders would be responsible for appraisal, title search, and other conversion costs. Referencing the second portion of the legislation, Ms. Angvik raised policy questions regarding ability to subdivide. The question is: If by the act of subdividing we have . . . created a substantial increase in the value of the property, should the state be compensated for that increased value? Provisions allow for subdivision into only four parcels, once every four years. Further comments by Ms. Angvik followed regarding testimony before the Senate Resources Committee to the effect that subdivision provisions were designed to allow individuals to convey land to heirs. She said it was not the intention to allow individuals to speculate and increase the value of land obtained at a low price because purchase involved agricultural rights only. Ms. Angvik suggested that policy concerns could be mitigated by either: 1. Appraising the land at subdivision and making the difference in value due to the state. 2. Allowing subdivision every generation (30 years) to convey lands to heirs. If the foregoing issues can be addressed, the administration feels it is in the best interest of the public to provide greater access to financing for farmers. Discussion followed regarding criteria used to obtain refinancing through the state. Ms. Angvik explained that the division has no ability to screen individuals for ability to pay. The division would merely apply statutory interest rate provisions (not to exceed "nine point something") to applications for refinancing. Further discussion of the process ensued. Co-chairman Frank noted that it is unusual for legislation to be worded to imply discretion when discretion is not expected to be utilized. Ms. Angvik voiced her understanding that the legislation would provide impetus to utilize federal moneys for agricultural endeavors. Federal rates are lower than those of the state. The average rate of existing agricultural loans is 11.8 percent. Co-chairman Halford asked if landholders would have to be current in their loan payments to refinance through the state. Ms. Angvik responded affirmatively. Discussion followed regarding an adjustable rather than fixed interest rate for state agricultural loans. Ms. Angvik voiced concern over additional paperwork associated with application of adjustable rates. She further advised of Commissioner Shively's goal that: We basically get out of the banking business. That we do everything that we can possibly do to no longer be the financing source for the purchase of state lands. Ms. Angvik advised that in other legislation containing a rewrite of Title 38, the department is suggesting that the interest rate for sale of all lands be the current prevailing rate plus a percentage. That would then become the statutory methodology rather than a specific number. Interest would then become fixed at the time of contract negotiation rather than revised on an annual basis. It was suggested that CSSB 162 (Res) mirror that approach, but the sponsor chose another route. In response to a question from Senator Sharp concerning the traditional size of an agricultural parcel, Ms. Angvik noted that of the existing 475 parcels, the majority are between 40 and 320 acres with the bulk at 160. Senator Randy Phillips questioned the number of acres that are actually farmed. One of the remaining dairy farmers has indicated that "You can't farm and make it economically feasible on 40 acres." The Senator then suggested that the minimum subdivision be 160 acres. Senator Green stressed that several hundred existing parcels are already smaller. Ms. Angvik advised of over 600,000 acres of agricultural land in private hands. The department assumes that those holding the lands operate within the covenants and use the land only for agricultural purposes. Co-chairman Frank suggested that rather than the legislature dictating what size a farm should be, the market should make that decision. He indicated that farmers may wish to use different 40-acre parcels for different types of farming and improvements and obtain separate financing for each parcel. There may be valid reasons for subdivision, other than conveyance. Ms. Angvik reiterated the policy question associated with whether the state, as the owner of the agricultural land, should be compensated for increased value created by ability to subdivide. Co-chairman Frank suggested that there might be valid public purpose in encouraging development of farm land by providing greater financing opportunities via subdivision. In response to a question from Co-chairman Frank, Senator Green explained that the purpose behind CSSB 162 (Res) "never addressed that right to pass the land on to heirs in subdivision." That was one of the issues raised as the bill was discussed, but it was not a primary goal. The basic purpose is to allow an agricultural landholder fee simple title so the farmer may develop the land and make a living. One cannot necessarily do that with a large parcel in Alaska. There is great demand for smaller parcels. When land is returned to the state, the state has the ability to subdivide and sell 40-acre parcels. The proposed bill would allow landholders to do the same. Senator Donley voiced his understanding that, per constitutional provisions, the state must be compensated for conveyance of a state asset or resource. He then directed attention to enforcement provisions at page 7, line 17, and asked if civil action would be consistent with existing law. Co-chairman Halford voiced his understanding that the language relates to "the old reversionary clause." Speaking to concern that agricultural land might be subdivided by speculators and used for other purposes, Co- chairman Frank suggested that no financial institution would provide financing for such development under existing agricultural covenants. He then voiced his believe that provisions for subdivision contained in CSSB 162 (Res) would not greatly change the market value of the land because of lack of demand for farm land in Alaska. He further noted a valid public purpose associated with making farming more economically viable. Co-chairman Halford directed that the bill be held on the calendar for further discussion. ADJOURNMENT The meeting was adjourned at approximately 11:25 a.m.