SENATE BILL NO. 6 "An Act relating to the disposal of state land." This was the seventh hearing for this bill in the Senate Finance Committee. At the previous meeting a committee substitute, 1-LS0071\S was adopted as a workdraft. Co-Chair Torgerson reminded the members that there had been some concerns from the Department of Natural Resources about the committee substitute. As a result of meetings his staff had with members of the department, Co-Chair Torgerson said a new committee substitute was drafted. Co-Chair Parnell moved to adopt CS SB 6, 1-LS0071\W as a workdraft. Senator Adams objected to request a brief comparison between the two versions. Co-Chair Torgerson explained the changes in Version "W" as follows. Section 1 Finding and Intent - page 2 line 3 inserted "from the land disposal bank" in reference to the 75,000 acres and also inserted "as soon as practicable after the effective date of this Act" Section 2 - inserted language specifying that the member of the land disposal advisory committee would not be compensated, expect for per diem and travel expenses. Also inserted, was language requiring the committee to submit a report directly to the legislature rather than through the commissioner. Section 8 and Section 9 - allows the department to sell land for a down payment of five percent up to 25 percent Co-Chair Torgerson noted that currently the statutes restricted the program to allow only a five-percent down payment. Section 8 - refers to land sold at auction Section 9 - refers to land sold by lottery Section 10 - allows the department to sell land that has been foreclosed on to the first eligible buyer Section 11 - clean-up measure, similar to Section 10, which will make it easier for the department to resell land Section 12 - relates to the appraisal and surveys and replaces "may" with "shall" Section 8 of Version "S" - contained provisions of statutes that did not apply to the land disposal bank and were deleted Senator Adams asked about the relationship between this bill and SB 287, which appropriates funds for the land disposal program. He noted that in previous discussions, it was thought that future program receipts would be used to operate the program rather than the Constitutional Budget Reserve (CBR). Co-Chair Torgerson explained his intent had always been to fund the program with an appropriation. He stated that he had requested a fiscal note from the department to show how the appropriation would be spent over the next few years in addition to showing projected revenues. He relayed that there was the possibility the program would eventually be funded through program receipts. He stressed that in order to sell land "we have to front-end load the money" for surveys, plotting, public hearings and other expenses that add up to approximately $250 per acre. Co-Chair Torgerson advised that SB 287 would provide for a one-time draw from the CBR to cover the initial costs of the land disposal program. Senator Green referred to discussion from the previous year on SB 6 regarding Section 12, payment of appraisals, etc. She did not think this was typical real estate procedure for the buyer to pay for the appraisal and other costs. Co-Chair Torgerson responded that the discussion took place during the last hearing and that Version "S" contained the word "may", which was changed to "shall" in the proposed committee substitute Version "W". He noted the main reason was to keep the fiscal note cost down. Senator Green agreed with the premise but suggested that "shall" should be considered for removal at a future date. Co-Chair Torgerson remarked that the Committee would hear testimony on this matter later in the meeting. Senator Adams removed his objection qualifying that he still had concerns with Section 2, the land disposal advisory committee, asking about the procedure in the case of a tie vote, and Section 4 that allows the legislature to reclassify of parcels. He suggested this could create micro- management by the legislature. His final concern was with the funding source. He referred to the FY 00 supplemental operating budget appropriation, SB 250 that reported from the Committee the day before. Without objection, Version "W" was adopted as a working draft. SENATOR ROBIN TAYLOR commented there were no changes made in Version "W" that he could not support. Senator Taylor addressed Senator Green's concerns, saying he understood them but because of certain court decisions, there was no way state land could be conveyed without a fair market evaluation. His remarked that he would desire for the legislature to simply set one price per acre and that anything above that amount would be fair market value but he did not think that was possible. Co-Chair Torgerson relayed Senator Adams's concerns about the advisory committee and legislative intervention. Senator Taylor responded that the committee was just an advisory committee and that the commissioner would make the final decision. He noted that the original legislation provided that the committee made those determinations, but that because of a conflict with the some Supreme Court decisions regarding improper delegation of legislative prerogative, the provision had to be changed. Co-Chair Torgerson added that the current language was the same as that for the Minerals Management Commission. Senator Adams clarified for the record that the commissioner had the final say regarding land disposal. Senator Taylor affirmed. Senator Adams spoke to his other concern about micro- management by the legislature. Senator Taylor responded that the legislature never gives up its right to change the classification. By inserting the language into this bill, he said it prevents the legislature from needing to adopt additional legislation later. Senator Adams then asked if the sponsor supported the use of the CBR versus a program receipt concept to fund the program. Senator Taylor understood the budget difficulties and appreciated any funding mechanism to get the program started. He surmised that the program would become self- funded after the first year. BOB LOEFFLER, Director, Division of Mining, Land and Water, Department of Natural Resources testified to the department's major concern with the required minimum of 75,000 acres. Because the funds necessary to sell the land were appropriated separately by the legislature, he classified this bill as an unfunded mandate. Co-Chair Parnell asked that if the appropriation bill, SB 287 passes if SB 6 remains an unfunded mandate. Mr. Loeffler replied that it does and explained that only the first 75,000 acres would be funded by the appropriation, while the bill requires that number of acres offered for sale each year. Co-Chair Parnell countered that as part of a typical operating budget item, the program would be funded annually and become part of the department's "base". Mr. Loeffler did not understand that this program would become part of the base or even a yearly increment. Co-Chair Parnell stated that the department could certainly request funding each year knowing that the statutes were in place. He asked how much money the program would need to get through the next year. Mr. Loeffler explained the time frame involved in getting land sold and the need to spend money in advance of the land sales. In FY 02, he said the department would need another $3.8 million, FY 03 would require $5.3 million, etc. He stated that the program would generate a positive cash flow beginning in FY 04 but that the income would not be enough to pay back the earlier expenses until FY 09. Co-Chair Parnell pointed out that the fiscal note provides enough money to run the program through FY 01. Mr. Loeffler stressed that the $9 million appropriation would pay the costs of the first 75,000 acres. He again explained the time frame as broken into three categories: 50,000 acres of potential reoffers, 20,000 acres of remote sales, and 5,000 acres of subdivisions. Because of the lag time, he warned that the subdivisions would not be salable until FY 03 and the remote sales and reoffers would be split between FY 02 and FY 03. Therefore, he stated that what would be sold in FY 01 would be land that was prepared for sale using funding provided in FY 00. Senator Green asked about the one-year and two-year lifetimes of surveys and appraisals. Mr. Loeffler explained that most of the remote parcels would not require appraisals. However, he stated the title search, land classifications, etc. could not be completed by the summer and therefore surveys would not get done until the next summer. He noted that the summer was the ideal time to sell land because buyers have the ability to examine the land. Senator Green asked why the survey would add an additional year to the sale process instead of only an additional week or month. Mr. Loeffler repeated that the survey would not be completed until next summer. The reason for the delay in the reoffers, he added was because of the time required for a title search. Senator Green asked if those easier parcels could be sold earlier. Mr. Loeffler responded that the department would try. Co-Chair Torgerson asked what would happen to the program if it were not funded. Mr. Loeffler answered that if the program was not funded the land would not be disbursed. Co-Chair Torgerson wanted the department to come before the Committee the next year to defend the budget and to explain the progress before receiving additional funding. He stressed that all but a very few state programs are subject to appropriation. Senator Wilken referred to page three lines 16 and 17 that provided that the land may not be disposed of for less than fair market value, and page four, line 12 that dictated a process for auction or lottery at a 70 percent rate of the fair market value. He asked if there was not a conflict. He questioned the statute that in one section, stated that the land could not be sold below value, yet in another section, stipulated land could be sold up to 30 percent less if the director so chooses. Mr. Loeffler responded that in either case, the land would be sold at auction or lottery. If land was not sold, he explained that the commissioner would then have the authority to lower the price to no less than 70 percent of fair market value. He stated this provision has been in statute for several years. Senator Wilken then addressed page four, line 21, "bidder shall deposit an amount specified by the director, equal to at least five percent" and questioned whether five percent was too low of a down payment. He felt this amount did not indicate a commitment on the part of the purchaser that the land would be purchased and improved. He thought this might instead encourage people to simply buy and hold land. Co-Chair Torgerson commented that he understood that the department was limited to the five-percent amount. However, he wanted to allow some leeway so the remote parcels could be sold. He qualified that he did expect the down payment would be raised up to the maximum amount of 25 percent for some of the more sought after properties. Mr. Loeffler affirmed and allowed that the default rate on the land sales was higher when buyers only had five percent invested in the property, which caused greater expense in the future to the department. He then pointed out the fiscal note's projected income if the required down payment raised significantly above five percent. He expected between five and 25 percent down payments would be required. Co-Chair Torgerson noted that for some more desirable areas, the minimum down payment requirement could be increased, but that in other remote areas, it could be difficult to sell the land even with a down payment as low as five percent. Mr. Loeffler generalized the fiscal note was expensive in requesting $18 million over the next five years in addition to the $9 million for this year. However, he thought it represents a new way of doing business and that the costs of land distribution would be significantly less than in the past. Mr. Loeffler pointed out the detailed financial back up accompanying the fiscal note that gave certain cost assumptions and certain sale assumptions. [Copy on file] He repeated that the revenues will exceed expenditures in FY 04 and the revenues will pay back all previous expenditures in FY 09. Co-Chair Torgerson returned to Senator Wilken's concern about the conflict relating to the fair market value requirement. He relayed earlier conversations with the witness were it was established that fair market value was set during an auction by the bids made. Mr. Loeffler explained the sealed bid process with the department setting a minimum bid at the fair market value. He said the bids often are submitted at a much higher amount. He added that the pricing schemes are established in AS 38.05.055 for auctions and AS 38.050.057 for lotteries. He suggested that the new section on page three lines 16 and 17 in the bill could conflict with the existing statute as Senator Wilken pointed out. Co-Chair Torgerson clarified that the provisions relating to fair market value on page three of the bill only applied to that section. Mr. Loeffler responded that if the assumption that the fair market language only applied to that section were true, then there was no conflict. Mr. Loeffler addressed the idea of offering land not originally sold at auction for sale on the Internet through a sealed bidding process. He stated that if the land was not sold in one auction, chances were low that it would be sold at a second auction with the same minimum bid requirement. He said that if land were not sold, the department would just hold it until a buyer approached the department with an offer. That was permitted under the auction and lottery portion of statute. Co-Chair Torgerson stated that the intent of the sponsor was to make land available over the Internet and to give authority to the department to do so. Mr. Loeffler was not opposed to offering land for sale on the Internet. Co-Chair Torgerson asked if the department was currently required to sell land at fair market value. Mr. Loeffler answered yes. Co-Chair Torgerson then asked if the 70 percent provision was the existing language. Mr. Loeffler explained it was and that it was an exception to the general stipulation that at least fair market value be applied. Senator Wilken asserted that the two provisions needed to comply with each other. DICK MYLIUS, Resource Assessment and Development, Division of Mining, Land and Water, Department of Natural Resources testified via teleconference from Anchorage to clarify that the 70 percent provision was part of existing statute that allows the director to sell at less than fair market value. He continued this provision applies in cases where the director determines that there is a shortage of land, which causes an artificially inflated value. Co-Chair Torgerson asked if the language was important to leave in statute. Mr. Mylius spoke of the pros and cons saying he did not know if the language was in conflict but that he also did not know why it should be retained. Senator Wilken wanted to change either the language on page three or page four. Amendment #3: This is a conceptual amendment to delete the language on page four lines 12 and 13 in Section 8 of the bill that allows the director to sell state land for anything less than the appraised fair market value. The amendment deletes, "no less than 70 percent of" making the sentence read, "The director may accept bids and sell state land under this section at the appraised fair market value of the land." Senator Wilken moved for adoption. Mr. Loeffler suggested amending similar language that applied to the lottery statute. Senator Wilken amended his amendment to also delete, "The purchase price of the land sold by lottery shall be the fair market value of the land as determined by the commissioner. The commissioner may sell land by lottery for less than the fair market value of the land on a determination that scarcity of land for private use in the area of the land to be sold has resulted in unrealistic land values." from page four lines 27 through 34 in Section 9. Senator Green recalled a previous land disposal bill from several years before and was unsure that she wanted to take away the ability to sell "trash land". She suggested revising the language that dictated "lands may not be disposed of under this section for less than the appraised fair market value." She stated that while the intent was not to give the land away, the state should be able to sell the land when possible. She then asked if fair market value was the amount offered by the highest bidder. Co-Chair Torgerson responded it was not and that certain procedures were followed that included an appraisal. Senator Adams agreed with Senator Green's desire to maintain the ability to sell less than desirable land, saying he thought this amendment would hinder land disposal. Co-Chair Torgerson asked if Section 9 only applied to agriculture land. Mr. Mylius responded that neither Section 8 or Section 9, the provisions to allow sales at lower than the fair market value, had been used in the five years he has been working for the department. However, he did not know if they had ever been instituted in the past for auction or lottery offerings. Senator Wilken said the purpose of the bill wasn't only to sell land but to also have something done with the land whether used for recreation, agriculture, etc. He asserted that by lowering the "bar" and allowing land to be purchased for less than fair market value, "what we've really allowed is for people to essentially lock up the land without an investment in the land." He believed that as stewards of the people's land, the legislature should ensure that the people get at least the fair market value of their assets. He suggested that if this restriction become an impediment to selling land for production, the statute could be changed in the future. Co-Chair Torgerson opposed amendment until he could be surer of the calculation of fair market value in relation to the highest bid offered at an auction. He was not convinced that the highest offer was or was not fair market value. Senator P. Kelly did not think a bid made at auction constituted fair market value and noted that the market for these land sales was not broad. He supported the amendment saying it protects the assets of the state. Senator Green spoke to earlier conversations regarding the value and authenticity of every appraisal done. She thought that the bid process was the actuality of the value of the property even if the state wants to think the value is much higher. For this and other reasons, she said she would not support the amendment. Co-Chair Torgerson considered borough foreclosures on property to restitute delinquent taxes noting that these properties were sold for the highest price offered rather than an appraised value. While he understood that minimum prices were often set in these situations, he was unsure how that minimum price was established. Therefore, he saw both sides of the issue. Tape: SFC - 00 #50, Side B 9:50 AM Senator Green stated that the current statute defined fair market value as "the price at which a willing seller and a willing buyer will trade." She did not see any mention of appraisals in the definition section. Co-Chair Torgerson then concluded that the willing price could not be lower than 70 percent of the fair market value. Co-Chair Parnell clarified that the division testified that the 70 percent provision was never used. Mr. Loeffler stated that in the years of his and Mr. Mylius' service, the provision had not been utilized. Senator Taylor asserted that state-owned land has been sitting fallow for 40 years because the department had been "sitting on it, refusing to sell it." He spoke to the advantages of allowing Alaskans to purchase the land, to use it and allow a borough to collect property taxes. He stressed, "anyway you can go about taking the land from these bureaucratic barons at the Department of Natural Resources and providing an opportunity for Alaskans to own it - we ought to be falling all over ourselves to give this land away." He admonished that this legislature could also do nothing just as all other legislatures had done since statehood and then complain because there was no economic diversification. Senator Taylor continued lamenting that he found the department's entire discussion defending the fiscal note offensive. He stated that 50,000 acres of land was already surveyed and appraised and could be sold immediately without costing an additional $90,000. Co-Chair Torgerson A roll call was taken on the motion. IN FAVOR: Senator Wilken, Senator P. Kelly, and Co-Chair Parnell OPPOSED: Senator Leman, Senator Adams, Senator Green, Senator Donley, and Co-Chair Torgerson ABSENT: Senator Phillips The motion FAILED (3-5-1) Senator P. Kelly Amendment #4: This conceptual amendment deletes, "on the Internet" and inserts "within the state" after "advertised" on page 3 line 15. The amended sentence reads as follows. "Land offered for disposal under this section but not disposed of may be advertised within the state and offered at sealed-bid auction in accordance with department regulation." Senator P. Kelly moved for adoption and spoke to his concern about "billions of eyes" looking over the available land for sale in Alaska. He did not want those people to own land, saying they could be an impediment to development. He lamented about environmental organizations purchasing land in other states and the subsequent constituent group whose desire is to stop development and to stop other landowners from enjoying their own land. Co-Chair Torgerson suggested removing the entire sentence unless it was Senator P. Kelly's intent to limit all advertising to within the state. Mr. Loeffler affirmed that although the department already does advertise within the state, it could do a better job. He stated that state-owned land sales are not advertised outside of Alaska. Senator P. Kelly amended his amendment to delete the entire sentence on page 3 lines 14 through 16 that read, "Land offered for disposal under this section but not disposed of may be advertised on the Internet and offered at sealed-bid auction in accordance with department regulation." Senator Green wondered if Internet advertising could be controlled to only reach those potential buyers inside the state. Co-Chair Torgerson understood that any web site could be accessed from any computer anywhere in the world. Mr. Loeffler corrected his earlier statement saying that the department currently does publish its land disposal brochure on the Internet through the Department of Natural Resources web page. He noted that state-owned land is not actually sold via the Internet. Co-Chair Torgerson surmised that was the practice that Senator P. Kelly was attempting to prohibit. Senator P. Kelly affirmed. Senator Taylor stated that three or four years ago the department advertised and offered parcels for sale over the Internet. He said this practice was controversial because parties outside the state were bidding against Alaskans for this land. He told of one situation where interested buyers from Juneau were outbid by a group of doctors from California. As a result, he said the law was changed to require that land sales first be offered to Alaskan residents. This new law stipulated that the land could not be offered Internet or otherwise advertised outside the state until Alaskans were given a chance to bid. He emphasized he wanted Alaskans to have a "first shot" at the land. When asked by Senator Donley if he supported the amendment, Senator Taylor commented that he did not think the amendment would have much of an affect. He thought that the greater number of potential buyers the department could reach the better chance of receiving fair market value for the parcels. So long as Alaskans were given the first opportunity to buy parcels and the did not participate, he thought the Internet was a good marketing tool and should be utilized to sell the state-owned land. Senator P. Kelly thought there would be more land available for sale than could be sold to Alaskans. He did not think the demand was as great as Senator Taylor attested and that Alaskans would only want to purchase a certain amount of land. Senator P. Kelly spoke of other ways Alaskans can buy land such as from Native corporations and organizations, boroughs, and also privately held parcels. He stressed that the state cannot stop Outside purchasers from "locking up" Alaskan land but he but did not want to make it easier for them. Senator Green referred to the five-year plan or schedule for the land disbursal program and asked if this meant there would be a five-year lag before the land is sold or a five- year lag before the parcels could be offered for sale on the Internet. Mr. Loeffler responded that was not correct and that the five-year plan was only to notify the public of what offerings were forthcoming. He stated this was to ensure a stable land disposal process and so the public could anticipate what lands were actually being offered. A roll call was taken on the motion. IN FAVOR: Senator Adams, Senator Wilken, Senator P. Kelly, Senator Donley, Co-Chair Parnell, and Co-Chair Torgerson OPPOSED: Senator Green, Senator Leman, ABSENT: Senator Phillips The motion PASSED (6-2-1) Amendment #5: This conceptual amendment inserts, "70 percent of" on page three line 17 of the bill. The sentence then reads, "Land may not be disposed of under this section for less than 70 percent of the appraised fair market value." Senator Wilken moved for adoption saying he wanted to eliminate the conflict between Sections 4 and 8. Mr. Loeffler stated he thought this change would make the language more consistent. Senator Green reviewed AS 38.04.020, to which this amendment applied, and asked if the land disposal bank referenced was different from the auction sales in AS 38.05.055, or Section 8. Mr. Loeffler explained the land disposal bank is the pool of land from which parcels are offered and that the method used to offer the land was either auction, lottery or in some cases, homestead. He interpreted "land may not be offered from the land disposal bank" does not apply to the method in which the land was disbursed. Senator Green asked if of any of the disposal methods required a full appraisal. Mr. Loeffler replied that all parcels require an appraisal with the exception of the land covered by the 70-percent language or the sweat equity program. He noted that the existing 70-percent language was contained in the statute governing auctions and that the lottery statutes do not include this language. Senator Green told the Committee about discussions held in the legislature four years prior about the unintended consequences of many actions taken with the previous land disposal legislation. She stated that she would not object to the amendment, but that she would not support it either without further review. There was no objection and the amendment was ADOPTED. Senator Adams addressed the fiscal note from the Department of Natural Resources. He surmised that if this bill passed, $15 million would have to be added to the department's budget over the next two years to operate the program. He made a suggestion of setting aside $15,787,000 in the Constitutional Budget Reserve (CBR) fund through the fiscal note to eliminate the concern about this program being an unfunded mandate. He qualified that he did not support this deposit, but felt it should be considered. Co-Chair Torgerson stated that such a deposit into the CBR would not solve the concerns because Mr. Loeffler would then complain that the program was an unfunded mandate for the following years of FY 06, FY 07 and so forth. Co-Chair Torgerson stressed that it was unfair to claim that without designated program receipts, a program was an unfunded mandate. Senator Wilken noted language on page two line eight and expressed concern there was no length of terms for the land disposal advisory committee. He suggested five-year terms of service. Co-Chair Torgerson responded that every time the Speaker of the House of Representatives or the President of the Senate positions changed, they could chose different people to serve in the positions held by appointees of the legislature. The seats that are appointed by the governor would be up for review subject to the turnover of the governor as well, he added. Senator Taylor commented on the fiscal note charging that the department severely overstated the expenditures and that the revenues generated were understated. He referred to the stipulation on page five of the bill that requires the commissioner to recover the appraisal or survey costs. Therefore, he stated that the 50,000 acres of land that was already surveyed or appraised would generate revenue as soon as it was sold because the buyer would be required to reimburse the department. He noted that this legislation directs the department to sell this land, which would recover the entire previous investment made by the state. He admonished the department, who "for the price of $9 million they're willing to take up another 25,000 acres" of land that potential buyers would stake on their own. Senator Adams noted the sponsor statement suggested a zero fiscal note and to have the program operate under the recovered revenue as Senator Taylor stated above. Senator Taylor stated he would prefer that, "but unfortunately, if we don't pay the blackmail that they want, this thing's going to get vetoed. It will probably get vetoed anyhow, but if we don't come up with the right amount of money for these bureaucrats, they will refuse to move any piece of land." He admitted that there would be some additional cost but that it was not nearly what the department was projecting. Mr. Loeffler answered Senator P. Kelly's question saying the department has a backlog of 50,000 acres of potential reoffers because it did not have the funding to sell. He stated that the requested $9 million was not just to sell this land but for 20,000 acres of remote parcels and 5,000 acres of new surveyed lands as well. Senator P. Kelly asked how long the 50,000 had been available for disposal. Loeffler answered since 1980. Senator P. Kelly then asked at any given time how much land was available for purchase. Mr. Loeffler replied that each year the department offered between 100-150 parcels but hoped to offer the entire 50,000 land bank over the next two years through this legislation. Senator P. Kelly wanted to know how much of that land was actually sold. Mr. Loeffler said about half was sold and clarified that those 100-150 parcels were typically the highest-grade parcels. He estimated that approximately 500 of the 5,000 parcels would be sold during this large offering. Senator P. Kelly didn't think the land offering would generate the anticipated demand. He argued that if a person were asked if they wanted some land, the answer would be yes. However, the demand is measured by the number of people who actually but these parcels at fair market value. He noted land is currently on the market from other offerings such as municipalities and private parties. He was concerned what would happen to the marketability of the privately held land in the case of a large offering of state-owned land. Co-Chair Parnell offered a motion to report from Committee, 1-LS0071\W as amended with individual recommendations and a $9,447,000 fiscal note from the Department of Natural Resources. There was no objection and the bill MOVED FROM COMMITTEE.