SENATE BILL NO. 67 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. Co-chair Pearce directed attention to a work draft (8- LS0409\Q, Chenoweth, 3/22/94) CSSB 67 (2d Fin); zero fiscal notes from the Dept. of Law, Dept. of Fish and Game, and the Alaska Court System; correspondence from Cordova United Fishermen United; and the committee report from passage of CSSB 67 (Fin) on May 6, 1993. Senator Rieger MOVED for adoption of CSSB 67 (2d Fin) "Q" version for discussion purposes. No objection having been raised, CSSB 67 (2d Fin) was ADOPTED. Co-chair Pearce advised that the attorney general and commissioner of natural resources would provide an overview of changes incorporated within the bill. No public testimony will be taken at this time. The legislation will then be brought back before committee for further discussion "sometime around the 11th of April . . . ." HARRY NOAH, Commissioner, Dept. of Natural Resources, told members that the attorney general would first review the legal background and the fundamental basis upon which the "Q" version was drafted. The commissioner said that he would then speak to "How we've gotten to where we've gotten on the specifics of the bill." ATTORNEY GENERAL BRUCE BOTELHO came before committee. He explained that he would be speaking from typewritten text in an attempt to build a record for review by both the superior and supreme court. (A copy of the Attorney General's typed remarks is appended to these minutes as Attachment A.) Senator Kerttula referenced comments that the state must return to the trust fair market value equivalents for trust land sold or otherwise disposed of, and asked "as of what time?" The Attorney General responded, "as of 1978, the time that the trust was dissolved." He further noted that the supreme court provided the following directive for reconstituting the trust: 1. Those general grant lands which were once mental health lands will return to former trust status. 2. In the event exchanges of lands have been made, those properties which can be traced to an exchange involving mental health lands will also be included in the trust. 3. To the extent that former mental health lands have been sold since the date of conveyance, the trust must be reimbursed for the fair market value at the time of the sale. 4. In calculating the total amount owed, the trial court should grant a set-off for mental health expenditures made by the state during the same period. 5. In the event that expenditures exceeded the value of land sold, the state need not furnish cash as part of the reconstitution. Mr. Botelho next spoke to three legislative attempts to reconstitute the trust (page 4 of Attachment A). The most recent proposal, Ch. 66, SLA 91, was found to be constitutional, but preliminary approval was denied because: 1. The settlement agreement did not provide security to guarantee the state's performance. 2. Both the state and plaintiffs could terminate the settlement at any time, without court approval. Judge Greene made clear in her ruling that the adequacy of mental health funding and services provided by the legislature were not at issue. All parties to the action have come to the conclusion that the mental health community will remain dependent on annual appropriations by the legislature to pay for most of the state's mental health program. Senator Kerttula asked if the state had a cause of action against those who profited from transfer of mental health lands from the original trust. Mr. Botelho responded that since no illegal activity was involved, there is no cause for action. He attested to the fact that litigation has cast a cloud on resource development of original mental health lands. He further spoke to need to clear title (page 7, Attachment A). In response to questions from Senator Kerttula and Senator Kelly regarding the cloud upon title to former mental health lands now held by private individuals, Mr. Botelho explained that the proposal to return to trust original lands that have not otherwise been disposed of, return of substitute lands, and provision of compensation ($225 million) for the gap between original and substitute lands is intended to immediately lift the lis pendens and clear title to privately held lands. Private land holders are innocent third parties since they purchased the land under the assumption that the state had full authority to make the transfers. Many purchases predate the filing of the lawsuit. Senator Kelly asked if the $225 million payout of $15 million a year for 15 years involves general funds. Mr. Botelho responded affirmatively. Senator Kelly next asked if lands proposed for substitution have been generating revenues. Would the state sustain a loss in general fund revenues from these lands while at the same time paying out the $15 million? Commissioner Noah acknowledged that a portion of the land is generating "some income at this point in time." He said he would provide a specific number. Senator Sharp inquired concerning the reasoning and justification behind the $225 million payout. Commissioner Noah explained that the total was calculated as a result of having "pulled a certain number of properties off the table . . . in terms of . . . the land list." Removed properties include agricultural lands at Point MacKenzie. Some of the lands were previously mental health lands, and some are substitute lands. Commissioner Noah next directed attention to a series of charts (Attachment B). He explained that on December 30, 1993, the judge denied preliminary approval of Ch. 66. However, Ch. 66 remains the basis upon which CSSB 67 (2d Fin) is constructed. There are two means of achieving finalization of the mental health issue. The first is through legislative resolution. That is contained within the above-reference bill. The alternative is true settlement. Settlement means that all parties to the litigation come to the table and agree. The state is presently dealing with different sets of mental health attorneys. Some represent the environmental community, some represent resource companies, some represent municipalities and third-party landowners, and others represent members of the mental health community. Meetings will be ongoing next week in an attempt to reach settlement. That is the best alternative. Absent full settlement, the proposed legislation has been submitted for resolution of the issue. Commissioner Noah stressed that if the legislature takes no action, the status quo will remain. Gridlock will continue, title to lands will remain clouded, and resource development will remain limited. Directing attention to page 2 of his handout (Attachment B), Commissioner Noah advised that the six items set forth thereon constitute the logic behind the present proposal for finalizing mental health trust issues. The Commissioner next referenced pages 3 and 4 of the handout and noted concerns raised by each group and provisions within CSSB 67 (2d Fin) which address those concerns. Senator Kerttula questioned DNR versus trust authority management of trust lands. He noted assertions that the trust authority might obtain considerably more from management of its lands than DNR would generate from the same lands. Commissioner Noah said that the trust would be managed consistent with the mental health enabling act. That means that greater emphasis would be placed on deriving economic value. Senator Kerttula asked if the trust authority would have oversight on leasing. The Commissioner responded affirmatively. Speaking to concerns raised by each group, Commissioner Noah noted that "no one can have everything they want because it's not physically possible to do that." Both Senator Sharp and Co-chair Frank inquired concerning the grounds upon which environmental interests became involved in mental health litigation. Attorney General Botelho responded that lands from the original mental health trust had been transferred into state parks and refuges. The environmental community is concerned that as a consequence of return of park lands or areas such as the Haines eagle reserve to the trust, they might become available for development. Mr. Botelho referenced a U.S. Supreme Court decision which concluded that citizens could defend "trees and spotted owls, and the like in court . . . ." That doctrine lives on. End: SFC-94, #48, Side 1 Begin: SFC-94, #48, Side 2 Senator Kerttula referenced the fourth page of the handout and inquired concerning the meaning of: DNR management with current regulatory scheme used to the extent possible under the Mental Health Enabling Act. Commissioner Noah explained that part of the problem encountered in dealing with the Mental Health Enabling Act relates to the fact that means of dealing with the "public process and that type of thing" are not clear. The state proposes that specific regulations be prepared and adopted to carefully outline the process. The process of setting the regulations will allow everyone to have a say in the issue. Commissioner Noah advised that the state proposal would require some municipalities to reconvey original mental health trust lands back to the trust. They have expressed a willingness to do that but requested an extension of time to select other lands, hence the two-year extension. They also want clear title in order to allow land selections to be completed. The proposed bill will accomplish that. It will also clear title for third-party landholders. Co-chair Frank inquired concerning the basis of resource development group involvement in mental health trust litigation. Attorney General Botelho explained that ongoing development would be directly impacted by return of lands to the trust. Concern arose that the lands might be subject to a different landlord who might impose more onerous royalty or lease payments. These parties have a right to protect their interests and ensure that they are not subjected to potential harm. Commissioner Noah stressed that Judge Greene found that she could approve resolution of the issue without all parties in agreement. That is an important point. Discussion of standing needed to become involved in the litigation followed between Attorney General Botelho and Co- chair Frank. Co-chair Pearce directed that the meeting be recessed for the Senate Floor session and scheduled to reconvene approximately ten minutes after adjournment of the session. RECESS - 9:00 A.M. RECONVENE - 9:32 A.M. The meeting was reconvened with Co-chair Pearce and Senators Kelly, Kerttula, and Rieger in attendance. Senator Mike Miller was also present. HARRY NOAH, Commissioner, Dept. of Natural Resources, commenced a sectional review of CSSB 67 (2d Fin). He first asked that members consider five specific points: 1. Findings 2. Trust Authority Concept 3. Monetary Payments to the Trust 4. Reconstruction of the Trust 5. Management An additional provision of the bill says that if the court action is not dismissed by December 15, 1994, provisions relating to the trust authority and cash payments would be repealed. Speaking to the findings, Commissioner Noah specifically noted language providing the legislature power to remove land from trust status if the trust is compensated for the land. The reason for such findings is to make the record very clear as to the legislature's understanding of what is specifically occurring in the legislation. An additional finding states that the land did not in the past and will not in the future generate enough revenue to fully fund mental health programs. A further finding calls for ratification of lands that have been sold. The full purpose of the findings is to lay out the legislature's understanding of "where we are at this point in this case and the rationale . . . of the underpinnings of this particular bill." Commissioner Noah next spoke to the trust authority concept. He explained that it derives from Ch. 66. The trust authority would be a public corporation of the Dept. of Revenue. The purpose of the authority would be to ensure an integrated, comprehensive mental health program. The trust would be governed by a board of trustees made up of seven members appointed by the governor, based on their financial and land management experience. The authority would be responsible for managing the cash assets of the trust, coordinating state agencies, and providing services to the trust. The authority would have the ability to make budget recommendations to both the governor and legislature as to how "the revenue that's in the trust would be paid." The governor and the legislature would have the ability to modify those recommendations but only based upon specific findings. The trust authority would also be responsible for overseeing DNR administration in terms of "their land management decisions." Commissioner Noah called specific attention to that provision, advising that it is "very important to the mental health community." Provisions relating to the trust authority would be repealed if litigation is not dismissed by midnight, December 15, 1994. Commissioner Noah next addressed specific monetary payments. He explained that the administration has proposed to pay $225 million to the trust. The total would be paid in annual payments of $15 million for 15 years. The state proposes to do that by attaching an overriding royalty to existing leases. Those leases have not yet been specifically identified. For a royalty of $10, the state may attach an overriding $5 royalty to flow to the mental health trust. Co-chair Frank asked if the funding as proposed in the preceding paragraph would incur dedication of funds problems. Attorney General Botelho responded negatively. He explained that the mental health trust is a pre-existing trust established at statehood. The constitutional prohibition against dedicated funds creates a specific exception. In response to a further question from the Co- chair concerning the specific amount, Commission Noah advised, "We were trying to balance this on curing of a breach. So the base of this is the value of work that's been done over the last eighteen months." Speaking to reconstruction of the trust, Commissioner Noah said the administration is proposing that approximately 550,000 acres of original mental health trust lands be redesignated as mental health lands, and that approximately 400,000 acres of substitute lands be considered for redesignation as part of the trust. The proposal here is slightly different from the proposal in Ch. 66 wherein lands would actually have been transferred to the trust. Under that arrangement, lands would have to be surveyed, and costs associated with surveys were estimated at $15 million. It is more fiscally responsible to simply redesignate the land for mental health purposes. The department is completing a specific land list for attachment to CSSB 67 (2d Fin). It would specifically outline each ADL number associated with the mental health trust. The department will submit the proposed list during the week of April 11. Commissioner Noah reiterated that it will be the subject of "some very detailed discussions between a whole group of municipalities, resource companies, the environmental community, and the mental health community. He then voiced his hope that the legislature would consider the bill and list as a package since it will be difficult to break down into individual pieces. Senator Kerttula noted the responsibilities of the three separate branches of government and questioned legislative consideration of a package into which the legislature has had no input. Commissioner Noah acknowledged that the ultimate decision making rests with the legislature. Directing attention to land management aspects of the proposal, Commissioner Noah explained that language within the bill strives to strike a compromise. It suggests that management of the lands be undertaken by DNR, and that statutes under Title 38 be utilized to the extent possible under the mental health enabling act. Because the act itself is "fairly quiet" on this particular issue, the department has proposed that regulations be used as the defining vehicle. Management would be in concert between the Commissioner and trust authority. Senator Kerttula said that he viewed mental health lands as an interesting comparative vehicle to state development of the same type of lands. That comparison is eliminated under proposed management. Commissioner Noah suggested that the marketplace would drive development. Transfer of the land to the mental health trust will not change the marketplace or desire for development of the lands. Attorney General Botelho advised that concerns raised by Senator Kerttula mirror internal debate over land management. The choices were either DNR or the trust authority. The intent was to devise a method that was acceptable to the greatest majority of the litigants. Concerns from many directions were raised over vesting direct management of the lands in the trust authority. Environmental interests feared that the authority would attempt to maximize short-term development without restraint or regard for longer-term stewardship. Resource development interests were concerned they would see development restricted because the trust authority would attempt to maximize the kinds of revenue it might be able to extract from industry by tampering with lease payments or royalty rates. Senator Kerttula countered that such "tampering" is purely business. The Attorney General added that in an attempt to find a vehicle which would most likely lead to final conclusion, DNR management was proposed under a revised set of standards that takes into account trust obligations of the authority. Senator Kerttula suggested that the proposal represents "further lazy law heaped on lazy law." Commissioner Noah advised that he could foresee "a best interest determination" being made so that it would be clear as to what is being done with the lands. Senator Kerttula asked if the trust authority would have veto power over proposed use of lands. Commissioner Noah said that DNR would need authority concurrence. In response to additional comments by Senator Kerttula asking if there would be objection to language absolutely requiring concurrence, the Commissioner voiced concern over creation of a system that would ultimately "bog itself down." Senator Sharp raised concern over DNR management subject to Title 38 public process which has not proven to be effective for development of land. He asked if trust use of the land would be subject to intervention by special interest groups through the court system and suggested that co-management would invite litigation. He remarked that if the trust is going to have the land, it should be able to manage the land the way it wants to. Commissioner Noah stressed the complexity of the issue. He focused specifically upon the taking of public lands and placement of those lands in trust. Interested parties are concerned over that action. The administration has attempted to find middle ground. That is the reason for the current proposal. Co-chair Frank observed that the court appears to have said that the state must reconstitute the trust for the benefit of mental health beneficiaries, but the trust does not have to be managed in a manner consistent with maximum benefit to that group. Co-chair Frank next asked how the $225 million would show on state books. Will it be shown as a liability, contingent liability, etc.? Commissioner Noah said that the administration is presently working on that issue and will provide details the week of April 11. Senator Rieger concurred in concerns raise by Senator Sharp and Co-chair Frank regarding management of lands for maximum benefit. He then asked how the proposed settlement would be ratified by plaintiffs. What power does the court have to provide finality? Attorney General Botelho explained that CSSB 67 (2d Fin) would be incorporated within a settlement presented to the superior court for preliminary approval. If that approval is granted, the next step is to notify all members of the class action litigation and allow them to comment. Once the comment period is closed, the court will determine whether or not to grant final approval. The court does not require concurrence by all or even a majority of the class members to approve the settlement. The judge will decide whether or not the proposal is a fair and reasonable outcome and protects the interests of the class. Once the final decision is rendered, any party to the lawsuit is free to petition the supreme court for review. In response to a further question from Senator Rieger asking if an individual could thereafter bring a second lawsuit and start the process all over again, the Attorney General explained that because the litigation is a class action, a person in the mental health community who is not named as a party is still considered to be represented. It is the duty of the court to look out for the interest of class members whether they are named or not. While the individual has the right of repeal to the supreme court, once the settlement is approved, someone who is not part of the class of individuals involved in the litigation would be barred from challenging the settlement. Individuals could, however, raise issues that have never come up before to attack the trust. Whether or not they would be successful depends on the issue. Courts are very liberal about allowing a person to bring an action or intervene in an action without making a determination of merit. In his concluding remarks the Attorney General cautioned that just because a settlement is in place does not mean that mental health lands will not be the subject of controversy in the future. Senator Rieger noted earlier comments that the current proposal is based on provisions of Ch. 66 and inquired concerning which provisions from earlier law carried forward. TOM KOESTER, Contract Attorney to the State on the Mental Health Case, came before committee. He explained that the proposal takes two approaches: 1. If the parties do not agree to it, it ends the lawsuit and repeals Ch. 66. 2. If plaintiffs agree with the bill, and the case is dismissed by December 15, 1994, then provisions of Ch. 66 which establish the trust authority, appropriation process for trust revenue and income, and improvements to the mental health program all take effect. Senator Rieger asked if general fund percentage schedules within Ch. 66 would remain. Mr. Koester responded negatively, advising of repeal. Co-chair Frank asked if the process starts from the beginning if the settlement does not go forward. Commissioner Noah explained that the trust would be reconstructed as laid out by the supreme court. He stressed that one of the things the state has not brought into play in reconstruction of the trust is the $1.3 billion set-off. The court said that the state could deduct from the fair market value of land, moneys spent since 1978 on mental health programs. That was included in Ch. 66 and must be maintained. It ensures that if litigation continues, the set-off becomes part of the issue that must be considered. End: SFC-94, #48, Side 2 Begin: SFC-94, #50, Side 1 Co-chair Frank voiced his understanding that Judge Greene will decide whether lands put back in the trust and the $1.3 billion off-set satisfies the supreme court directive. The Attorney General concurred and advised of a further feature of the bill which provides that the legislature would appropriate up to $100 million, annually, if the court determines that the $1.3 billion plus reconstitution of original lands and substitute lands is not enough compensation. The legislature would commit, under the proposed bill, to appropriate enough money over time to pay back the remainder. The Dept. of Law feels it is highly unlikely that will be needed, but the feature is included within the bill. The alternative is that if we reach a settlement with all parties, provisions of Ch. 66 come into play. Those provisions include the trust authority and ability to derive a stream of income over which the trust authority will have fairly exclusive control in deciding upon expenditure. Co-chair Pearce announced that Senator Rieger wished to pose a question for which the committee would have to meet in executive session. Prior to going into executive session, Senator Sharp requested copies of maps detailing the location of lands to be returned to trust as well as substitute lands. He further requested an itemization of lands described on page 12, line 31, through page 13, line 3. Commissioner Noah agreed to provide the material. Senator Kerttula also requested the names of individuals holding leases on mental health lands. Commissioner Noah said that 3,700 individuals are involved. Senator Kerttula asked for names of approximately twenty-five individuals holding top value parcels. Commissioner Noah advised that all legislators were provided copies of the February 10 public notice and maps of proposed substitute lands. Senator Sharp said he had looked at the material but did not recall that it highlighted items described in the legislation, specifically: state parks, state forests, state game refuges, state wildlife refuges, state game sanctuaries, state recreational areas, state recreational rivers, state wilderness parks, state marine parks, state special management areas, state public use areas and critical habitat areas, bald eagle preserves, bison ranges, and moose ranges. Commissioner Noah said he would provide the information. Co-chair Pearce announced that the meeting would recess for five minutes to clear the room for the requested executive session. RECESS - 10:20 A.M. RECONVENE - 10:30 A.M. Senator Rieger MOVED that the committee meet in EXECUTIVE SESSION for the purpose of discussion of pending litigation that might affect the finances of the state. No objection having been raised, the committee met in EXECUTIVE SESSION from 10:31 a.m. to approximately 11:20 a.m. EXECUTIVE SESSION - 10:31 A.M. REGULAR SESSION - 11:20 A.M. The regular session of the meeting was reconvened at approximately 11:20 a.m. with Co-chairs Pearce and Frank and Senator Kerttula, Rieger, and Sharp in attendance.