HOUSE BILL NO. 201 "An Act amending provisions of ch. 66, SLA 1991, that relate to reconstitution of the corpus of the mental health trust, the management of trust assets, and to the manner of enforcement of the obligation to compensate the trust; and providing for an effective date." HARRY A. NOAH, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES observed that the intent of the legislation is to: * Allow third party land owners clear title to land purchases; * Reconstruct the land trust and propose a fair compensation package; * Provide the court with direction from the Legislature, in regards to land sold from the Mental Health Land Trust, and * Bring resolution to litigation. Commissioner Noah provided members with a summary of values contained in the compensation package for the Mental Health Trust (Attachment 1). He stressed that the state has focused on making the Trust whole. Original trust land has been returned to the Trust when possible. Land not returnable to the Trust has been replaced with similar state land. A cash compensation to the Trust was included in HB 201. He noted that the state has not used the deduction allocated by the Supreme Court for funding spent on mental health programs since 1978. This deduction is equal to $1.3 billion dollars. He stressed that land values were assessed higher than fair market value. Commissioner Noah reviewed the compensation package as detailed in attachment 1. He observed that lands to be returned to the Trust consist of: * 466,000 acres of surface and subsurface lands; * 22,400 acres of subsurface lands (mineral estate); and * 76,000 acres of subsurface (hydro carbon only) land. The value of Trust lands not returnable to the Trust is $636 2 million dollars. Compensation of lands not returnable to the Trust is $380 million dollars. The proposed cash compensation is $225 million dollars. The total value of land plus cash is $605 million dollars. He noted that a change in the legislation is needed to transfer the $225 million dollar cash payment from the incentive to the compensation package. Commissioner Noah noted that the biggest area of difference is in subsurface values. The plaintiffs value subsurface lands at $540.0 million dollars. The state values subsurface lands at $156.0 million dollars. Much of the disputed land value is located in the Chena recreation area. He emphasized that minerals are only valuable if they can be extracted. Commissioner Noah maintained that the state has made the Trust whole. He asserted that the state is ready to settle the issue. He discussed what is required to bring the case to settlement. He observed that lawyers for the plaintiffs have requested the establishment of a Mental Health Trust Endowment, administered by a Trust Authority. A deposit of $100.0 million dollars would be made from the Trust Income Account into the Endowment. An additional $450 million dollars would be deposited into the Endowment over the next 15 years. The original mental health land and replacement land would also be part of the Endowment. The Trust Authority would have the responsibility of spending earnings, absence legislative appropriation authority. Under the Chapter 66 appropriation process the Trust Authority would make recommendations of the amounts needed to meet the needs of the beneficiaries. If amounts appropriated by the legislature differ from the Trust Authority's recommendations legislative findings would be required to explain the differences. Commissioner Noah observed that there are two major sticking points in negotiations with plaintiff lawyers, control of general fund dollars and the volume of funds to be deposited into the endowment permanent fund. BRUCE BOTELHO, ATTORNEY GENERAL, DEPARTMENT OF LAW provided members with State v. Weiss (attachment 2). He observed that the Court message was that, original mental health lands be restored, the Trust be reimbursed for sold lands at fair market value at the time of the sale, and the state be granted a set off for mental health expenditures made by the state. He pointed out that Judge Greene indicated that adequacy of the funding and service for mental health programs in Alaska is outside of the scope of the case. Judge Greene declared that the Alaska Mental Health Enabling Act (AMHEA) did not guarantee any particular level of 3 funding for mental health services in the state. "The remedy guidelines in the 1985 Weiss decision also did not discuss any guarantee income stream for the Trust. Commissioner Botelho maintained that the legislation represents the quickest and fairest resolution of the Supreme Court's directive. He contrasted the legislation with Chapter 66. In response to a question by Representative Brown, Commissioner Noah discussed the difference of subsurface and surface estate. He noted that oil and gas rights would be transferred with mineral estate. He described the process used to derive values for subsurface and surface lands. Representative Hanley asked, if the legislation passes without resolution, would the state be required to expend 6 percent of the state's unrestricted general fund income for mental health programs and the $225 million dollars contained in the settlement package. Commissioner Noah replied that the state would no longer be under the 6 percent requirement. The $225 million dollars would be compensation to a mental health account and appropriate by the legislature to meet mental health program needs. Representative Navarre clarified that the lands in the Trust would be managed by the Department of Natural Resources. He asked if the state would be liable for breach of trust if the department's management is not adequately funded. Commissioner Botelho stressed that the party administrating the land will always be subject to a challenge about its obligation to manage. Commissioner Noah noted that management by the Department of Natural Resources is important to the environmental and resource communities. Representative Navarre queried the provision for findings if the legislature does not fund mental health programs at the level recommended by the Trust Authority. He asked if the legislature's constitutional appropriation power would be impacted. Commissioner Noah emphasized that the Trust Authority is important to the plaintiffs. Commissioner Botelho stated that the proposal for the Authority to make recommendation for appropriation levels is objectionable to the Administration. JAY HOGAN, CONTRACT EMPLOYEE, HOUSE FINANCE COMMITTEE provided members with a chart detailing the values used to arrive at the set-off amount (Attachment 3). He discussed attachment 3. He stressed that the set-off amount was derived by audits prepared by the Legislative Audit Division 4 in 1985 and 1992 (copies on file). He discussed the audits. He concluded that the amount was carefully researched then brought before the legislature and used for the purpose of making appropriations for mental health programs since FY 91. He noted that estimates range from $1.3 to $1.574 billion dollars. Mr. Hogan discussed the appropriation and trustee authority of the legislature. He provided members with Senate Report No. 2053, May 25, 1956 regarding the Mental Health Enabling Act (copy on file). "The income and proceeds from disposition of these lands must be administered as a public trust, with the expenses of the mental health program having first call on such funds. Amounts not needed for mental health programs can be used for other public purposes as the legislature may determine." He maintained that the state was given discretion over the use of surplus funds. Mr. Hogan noted that Mr. Bartlett, the Alaskan representative to Congress, at the time, argued against the funds being ear-marked exclusively for mental health purposes. Mr. Hogan quoted from a letter from the Department of Interior to the chairman of the Senate Committee. The letter discussed the House version which was amended to provide ear-marking of funds, derived from the land grants, for the sole purpose of hospitalization and care of mentally ill (copy on file). "We are inclined to believe that it would be wiser not to restrict them in this manner." He asserted that there was no intention by Congress to restrict the land proceeds for mental health purposes. (Tape Change, HFC 94-130, Side 2) JIM GOTTSTEIN, LAWYER, MENTAL HEALTH PLAINTIFFS provided members with a letter to Representative MacLean, from David Walker, Attorney, dated April 16, 1994 (copy on file). "The Administrations's proposal presented in Chenoweths's work draft CS for House Bill 201, March 18, 1994, is not a settlement. It purports to buy out the Trust by funding the mental health program. It unfairly characterizes the beneficiaries and is in fact unacceptable to all parties who represent beneficiaries. It is unrealistic to think that the measure would be accepted by the Plaintiffs or approved by the court." Mr. Gottstein asserted that the legislation would eliminate the Trust over time. He acknowledged that the AMEA did not guarantee any particular level of funding. He observed the opposition to Chapter 66 by other affected parties. He briefly discussed Chapter 66. He maintained that the 5 plaintiffs are willing to trade out third party purchasers. Mr. Gottstein discussed desired terms of settlement. He suggested that the compensation package is at 65 percent of the full reconstitution of the Trust. He maintained that additional recompensation through an endowment is needed to achieve full compensation. He noted that if appropriations by the legislature for mental health programs are reduced due to an increase in funding available by the Trust, the Trust would be meaningless. Mr. Gottstein observed that Judge Greene's decision stressed that the state and plaintiffs could back out of the proposal due to defects in the 1991 legislation. The legislation did not include a lands list or AS 38.04 and AS 38.05 exemptions under the exchange provisions. He noted that the state also demanded that the court release the third party purchasers as a prerequisite to signing the settlement agreement. Mr. Gottstein maintained that the court clearly indicated that it would grant preliminary approval of the settlement if these issues were resolved. Mr. Gottstein noted that the Administration proposed amendments to fix the first two issues, but the amendments were not adopted by the legislature. He pointed out that plaintiffs have been willing to trade land to clear the third party purchasers. Representative Martin suggested that the judge arbitrate to take the third party purchasers out of the settlement. Mr. Gottstein agreed that it would be possible to authorize an exchange to take the private third party purchasers out of the litigation in separate legislation. In response to a question by Representative Navarre, Mr. Gottstein clarified that he did not include the state's off- set from appropriations to mental health programs in calculations of the recompensation package's worth. Representative Grussendorf emphasized the need for legislative oversight of general fund appropriations. ROBERT GORE, MEMBER, PIONEER HOMES ADVISORY BOARD testified via the teleconference network from Ketchikan. He urged a prompt resolution of the issue. PAUL BAER, MUNICIPALITY OF ANCHORAGE testified via the teleconference network. He emphasized the importance of the mental health litigation to the entire state. He noted that the Municipality of Anchorage is willing to return or exchange land to the Trust. 6 PAUL HUPPERT, MAT-SU testified via the teleconference network. He urged a settlement to the mental health litigation on behalf of agriculture interests in Mat-Su. He noted the adverse effect on agriculture development on disputed lands. LADD MCBRIDE, FAIRBANKS testified via the teleconference network. He urged prompt resolution. He maintained that the set-off should not be ignored. He questioned the $225 million dollar cash compensation. JEFF JESSE, ATTORNEY, DEVELOPMENTALLY DISABLED MENTAL HEALTH PLAINTIFFS, ADVOCACY OF ALASKA disagreed with the state's assumption that the Trust has been reconstituted under the Weiss decision. He noted that the Weiss decision provides that the original land be returned when possible. He added that the court ruled that the only land that does not have to be returned is land that was sold. He maintained that the state is proposing to the court that land given to municipalities or included as a park or refuge be considered sold. He suggested that this approach will not be accepted by the court. Mr. Jesse discussed the passage of Chapter 210 in 1990. He noted that legislation attempted to recompensate the Trust by taking 6 percent of the unrestricted general fund revenue of the state in perpetuity to pay for mental health programs. The court maintained that the proposal was a unilateral decision. The court ruled that the Weiss decision be followed or a bilateral decision be reached. Mr. Jesse pointed out the difficulty of reaching a settlement. He discussed some of the problems facing negotiators. Mr. Jesse maintained that Congress did not restrict the state's appropriation of mental health land income for fear that oil would be found on the land. He alleged that Congress was concerned that excessive income might be realized on mental health lands due to oil finds. Mr. Jesse estimated that the Trust income would be approximately $15 million dollars. He stressed that the Trust Authority has been requested to assure that the money spent benefits the beneficiaries. He emphasized that if appropriations to the Trust are reappropriated for mental health programs, that there will be no trust corpus to generate money into the future. Mr. Jesse asserted that the legislation will not operate as a true trust. Mr. Jesse maintained that passage of the legislation would 7 slow negotiations. He suggested that legislation be introduced to help the third party purchasers. Co-Chair Larson asked if third party purchasers and mental health plaintiffs would be better off if all the original land was returned to the Trust. Mr. Jesse emphasized that it would be impossible to return all the original land to the Trust. (Tape Change, HFC 94-131, Side 1) Mr. Jesse recommended that the Trust Authority manage the land. He pointed out that if there are management problems that the Trust Authority would not then be able to blame the Department of Natural Resources. Representative Navarre noted that Congress was concerned that there would be either too much or not enough money in the Trust. He proposed that the Trust Authority appropriate the trust income on mental health programs and then request additional general fund money for the remaining mental health needs. The legislature would assess the expenditures made by the Trust Authority and appropriate the remaining funds necessary to cover the beneficiaries' needs. Mr. Jesse emphasized that the plaintiffs are proposing a similar solution. Representative Navarre emphasized the necessity of solving the third party purchasers. He spoke in support of the legislation. JONATHAN HAYWARD, MENTAL HEALTH CONSUMER ADVOCATE testified via the teleconference network from Ketchikan. He spoke in support of mental health consumers. MIKE MEEHAN, PLANNING COMMISSION, ANCHORAGE testified via the teleconference network. He noted that the Anchorage Municipal Assembly passed Resolution 94-72 in recognition of the cloud caused by the mental health trust issue on private and public development. He referred to section 16 of HB 201 regarding the land list. He noted that Anchorage has supported the legislative settlement and has offered comment on lands that could be used to reconstitute the Trust. Representative Brown asked how the Municipality of Anchorage would be effected if all original lands were returned. Mr. Meehan observed that a return of all original land would be detrimental to the Municipality of Anchorage. He noted that trust land is involved in negotiations between the municipality and the Anchorage International Airport. HARVEY BASKIN, POINT MACKENZIE testified via the teleconference network. He stressed the difficulty of third 8 party purchasers. He urged an expedient solution. BECKY GAY, RESOURCE DEVELOPMENT COUNCIL testified via the teleconference network. She spoke in support of HB 201. She asserted that the legislation fairly compensates the Trust and complies with the Supreme Court ruling. She maintained that the legislation removes the cloud of title to municipality land grants and third party purchasers through the ratification of sales. She spoke in support of the proposed land list. BOB STILES, PRESIDENT, ALASKA COAL ASSOCIATION spoke in support of HB 201. He maintained that the legislation is a reasonable solution to the mental health issue. He acknowledged that the legislation will not end litigation. He spoke in support of trust land management by the Department of Natural Resources. CHARLIE BRODY, ALASKA MINER'S ASSOCIATION spoke in favor of HB 201. He noted that the Alaska Miner's Association supports land management by the Department of Natural Resources. He observed that land management by the Trust Authority would require the expense of setting up the management bureaucracy. Mr. Brody maintained that the Department of Natural Resources in concert with the Trust Authority must create a regulatory scheme to embrace the concept of the Alaska Mental Health Enabling Act. MCKIE CAMPBELL, DEPUTY COMMISSIONER, DEPARTMENT OF FISH AND GAME spoke in support of HB 201. He pointed out that it is in the interest of all parties to reach a solution. He referred to the land list. He noted that the Department of Natural Resources has worked closely with the Department of Fish and Game to resolve resource conflicts before they occur. He asserted that the original land grant could not be returned to the Trust without injuring long term litigation. He urged adoption of HB 201 as the best possible action the state can take. In response to a question by Representative Therriault, Mr. Campbell expounded on the difficulties of returning the original trust land. He maintained that the legislation protects critical fish and wildlife habitat while freeing up state land for development. TOM KOESTER, CONTRACT COUNSEL, DEPARTMENT OF LAW clarified that litigation would not occur as a result of a return to trust status. Litigation would result from the attempts to develop the land. He explained that litigation is most likely to occur under federal law such as the Clean Water Act. He maintained that the Trust would experience constant litigation in its attempt to develop trust land. 9 Mr. Koester discussed the sale of legislative designated land. He noted that the Alaska Supreme Court held, in 1981, that it is perfectly permissible to take land granted to the state in trust, for the University, by the federal government and put the land in a park. The court ruled that the remedy is not to invalidate the transfer, but to compensate the Trust for the fair market value of the land. Mr. Koester pointed out that in the Weiss case the court ruled that when the state has a monetary liability that one of the ways the liability can be discharged is to credit it against the amount spent on mental health programs as a set- off. He asserted that there is a direct link between the state's obligation to pay money to the Trust for land put in parks and wildlife refuges and the court's authorization for a credit against that liability for the money the state has spent for mental health programs. Representative Brown asked if there is any indication in the Weiss record that the state's interpretation is what is meant by sold. She suggested that the court's interpretation is more narrow than that given by Mr. Koester. Mr. Koester summarized a footnote not included in materials before the Committee as saying "in light of our disposition of this case we do not need to reach the question of whether third party conveyances and bona fide purchasers are out of this case or not." He concluded that the only reason the court would not need to reach those issues is if there was some reason to say some lands are sold and some are not sold. He inferred that the court intended to reach all the lands that had been conveyed out of state ownership. Mr. Gottstein disagreed with Mr. Koester's interpretation. He pointed out that the Alaska Supreme Court ruled that the compensation remedy is not the appropriate remedy. He stated that the court stated that the appropriate remedy is reconstitution of the land trust. Mr. Gottstein pointed out that footnote 4 characterized by Mr. Koester stated that the court did not need to decide the issue of land ownership "at this time." He observed that Judge Greene has called the state's position "overly simplistic". He concluded that Judge Greene was charged by the Supreme Court to decide which lands are to be returned according to the court's interpretation of what is sold. He maintained that there are technical trust land principles which apply to suggest that even people that entered into land sale contracts are not entitled to keep the land. He 10 asserted that if the state breached the trust in conveyance of land the Trust gets the land back. (Tape Change, HFC 94-131, Side 2) Commissioner Botelho assured the Committee and plaintiffs that the state continues to seek solution. He summarized that the legislature must decide if actions taken fully recompensates the Trust. He concluded that Congress intended the legislature to be the trustee. He observed that the legislature must decide to what extent it wishes to relinquish trustee authority in favor of another body. DON MOORE, MANAGER, MAT-SU BOROUGH testified via the teleconference network in support of HB 201. He observed the importance of resolving ownership by third party purchasers. He noted that the Mat-Su borough has 77,000 acres of mental health trust land in entitlements. RICH JOHANNSEN, ATTORNEY, ANCHORAGE testified via the teleconference network. He maintained that land sold is irrelevant if the fair market value exchange for land removed from the Trust is established. He asserted that the legislature clearly has the power to exchange land as long as the fair market value has been exchanged. STEVE KELLY, FAIRBANKS testified via the teleconference network. He noted that third party purchasers have in good faith paid for land dispersed by the state to municipalities. He added that third party purchasers have been taxed for their property and invested in property in dispute. He expressed concern that resolution will be postponed. CORA ALLEN, SOLDTNA testified via the teleconference network. She alleged that mental health consumers are victims of the state's inadequate management of the Trust and funding of programs. HB 201 was HELD in Committee for further discussion.