SENATE RESOURCES COMMITTEE February 3, 1993 3:50 p.m. MEMBERS PRESENT Senator Mike Miller, Chairman Senator Loren Leman, Vice Chairman Senator Steve Frank Senator Drue Pearce Senator Al Adams MEMBERS ABSENT Senator Dave Donley Senator Fred Zharoff COMMITTEE CALENDAR SENATE BILL NO. 46 "An Act authorizing moose farming." 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." PREVIOUS SENATE COMMITTEE ACTION SB 46 - See Resources minutes dated 2/1/93, 2/3/93. SB 67 - No previous action to record. WITNESS REGISTER Senator Duncan State Capital Juneau, Alaska 99811-1182 POSITION STATEMENT: Supported SB 67. Attorney General Charles Cole Department of Law P.O. Box 110300 Juneau, Alaska 99811-0300 POSITION STATEMENT: Opposed SB 67. Tom Koester 229 4th Street Juneau, Alaska 99801 POSITION STATEMENT: Opposed SB 67. Brian Bjorkquist, Assistant Attorney General Department of Law 1031 W. 4th, Suite 200 Anchorage, Alaska 99501-1994 POSITION STATEMENT: Was available to answer questions on SB 67. Charlie Boddy, Vice President Government Relation Usibelli Coal Mine 122 First Avenue #302 Fairbanks, Alaska 99701 POSITION STATEMENT: Supported SB 67. Peter Mawson Marathon UNOCAL Corporation POSITION STATEMENT: Supported SB 67. Tom Waldo Sierra Club Legal Defense Fund 325 4th Street Juneau, Alaska 99801 POSITION STATEMENT: Commented on SB 67. Jeff Jesse Advocacy Services of Alaska 230 South Franklin Juneau, Alaska 99801 POSITION STATEMENT: Commented on the mental health lands issue. Bob Stiles D & R Ventures, Inc. 1227 West 9th, #201 Anchorage, Alaska 99501 POSITION STATEMENT: Supported SB 67. Jim Gottstein 406 G Street, #201 Anchorage, Alaska 99501 POSITION STATEMENT: Commented on the mental health lands issue. David Walker 417 Harris Street Juneau, Alaska 99801 POSITION STATEMENT: Commented on the mental health lands issue. ACTION NARRATIVE TAPE 93 - 5, SIDE A Number 001 SENATOR MILLER called the Resources Committee meeting to order at 3:50 p.m. and announced SB 46 AUTHORIZE MOOSE FARMING to be up for consideration. He said they were on listen only teleconference. SENATOR LEMAN moved to pass SB 46 from committee with individual recommendations. SENATOR ADAMS objected because he didn't think the bill was necessary. They had just finished with a wolf summit that showed there was a shortage of moose and caribou. SENATOR MILLER said he would hold the bill until a later time. Number 25 SENATOR MILLER announced SB 67 MENTAL HEALTH TRUST AMENDMENTS to be up for consideration. SENATOR ADAMS asked the Chairman to get a legal opinion on this legislation, because it has dedicated funds, it binds future legislation, and mixes an appropriation bill with substantive law. Number 70 SENATOR DUNCAN said he came to the meeting with the intent of listening to the Attorney General testify. He thinks it is an important piece of legislation which needs to be given due consideration. He thought this was the single most important development issue facing Alaska. SB 67 sets an annual 6% payment of unrestricted general funds to the mental health trust income account as compensation for lands that aren't returnable to the trust. These are lands that have been transferred to municipalities, sold or conveyed to individuals, or have other encumbrances on them. The precedent for the 6% payment was established in Chapter 210 of Session laws of 1990. This bill includes all the provisions that are in Chapter 66. It establishes a trust authority and the means of administering the trust, transfers all unencumbered lands of the original mental health trust into the trust of the corpus which includes those with encumbrances such as oil and gas, coal lease, timber contracts, mining claims, and right-of-ways - about 500,000 acres. All proceeds from the land returned to the trust go into the corpus account and any earnings in the corpus principal are transferred to the mental health trust account. Title to the LDAs will be pledged as security for the 6% annual payment. It requires the Alaska Mental Health Trust Authority to contract with the Department of Natural Resources to manage the land assets of the trust unless the Authority determines the best interests of the trust beneficiary could better be served by other arrangements. In summary, Senator Duncan said, SB 67 is much less complicated than in Chapter 66. Number 156 SENATOR MILLER announced a short recess. ATTORNEY GENERAL COLE summarized the status of mental health litigation. He thought the settlement they worked on last year was fair and well crafted. The court is now considering the litigation and he thought that should be allowed to run its course. If this present bill is enacted into law, he would recommend that the Governor veto it. Number 225 SENATOR LEMAN asked him to comment on Senator Adams concerns. ATTORNEY GENERAL COLE said he questioned whether it was a dedicated fund. However, he feels the legislature should reserve unto itself the right to determine the appropriations to be given annual to the mental health programs of the state. If this bill is passed, the legislature has lost that power which is a sobering prospect. Number 262 SENATOR LEMAN asked when Judge Green would rule. Attorney General Cole said he didn't have any idea. Number 278 TOM KOESTER said in his opinion SB 67 was probably not in violation of the dedicated fund prohibition, because the legislature does have some discretion under the provisions of Chapter 66. Some questions may have been raised in court that apply to Chapter 66 that also apply to SB 67, for instance, the environmental interveners have challenged Chapter 66 on the grounds that it mixes an appropriation of land with a substantive law in a bill. This bill will do precisely the same thing. This is not a simple solution. It has the potential to radically restructure the current funding of all state programs - education, municipal revenue sharing, public safety, the capital budget. Number 350 BRIAN BJORKQUIST, Assistant Attorney General in Anchorage, said he was available to answer questions. Number 357 CHARLIE BODDY, Vice President of Government Relations with Usibelli Coal Mine, said they were being heavily impacted by the mental health trust lands issue. Every one of their properties except one are state co-leases that are original mental health trust lands. He said the real problem is the substitute land you have to put back into the trust in place of the ones that came out. He said the resource community would help them in any way possible to work on a solution that is more palatable than what they currently have tied up in the courts. Number 445 SENATOR LEMAN said they were concerned about the transfer of the contracts and concern about the new land owner. If ownership changes, he asked, do contracts go with it? MR. BODDY answered the way he understands Chapter 66 is that their leases would transfer into Trust ownership and the trust authority would be bound by the terms of the lease until its first adjustment. Land rental rates and royalties would be adjusted. Number 465 PETER MAWSON, Attorney representing Marathon and Unocal Oil, said they felt their interests as major oil and gas producers were being threatened by the way the settling plaintiffs and state were going about implementing Chapter 66 and the implementation of the hypothecated lands list where hundreds of state oil and gas leases in Cook Inlet were pledged as security to the settling plaintiffs to insure the state would fulfill its obligations in performing the settlement under Chapter 66. It contemplated some sort of foreclosure process by which these leases could be transferred to the trust. The oil and gas lessees were faced with the prospect of having a new landlord some day. A new lessor causes some concern, because they vest a great deal of discretion in the lessor. The settlement agreement, like the hypothecated list, caused the oil companies some concern because the state would oblige itself to disclose confidential information to the settling plaintiffs for any land the plaintiffs nominated as proposed substitute land. It also adopted Departmental Order 135 which instructs employees of the Department of Natural Resources to treat all lands on the hypothecated list as though they had already been transferred to the trust instead of managing them in the general public interest. The producing oil and gas leases in Cook Inlet were nominated as proposed substitute lands, also. Unocal and Marathon think the State does not have the contractual authority under the lease authority to transfer the lease's out of state ownership and out of administration by DNR. They think Departmental Law 135 is unlawful because it should have been promulgated pursuant to the APA, but it wasn't. Mr. Mawson said no one disputes the worthiness of the goal of a sure funding source for mental health programs in Alaska. But the means of achieving that goal conflict with the state's contractual commitments to third parties, like the oil companies, and conflict with statutes and regulations governing the state's relationship with those third parties. The beneficiaries of the trust are going to be left in limbo while those legal conflicts are going to be resolved. Marathon and Unocal do support SB 67. If it passes, all their concerns go away. Number 520 TOM WALDO, Staff Attorney for the Sierra Club Legal Defense Fund representing the public interest interveners, supported probably 95% of what's in Chapter 66. The problem was with the replacement land and the transfer of such a large amount of land from state ownership into the trust authority without any public participation and, once the land was in the hands of the trust, there would be no public process to determine how those lands were to be managed. They have raised 11 claims challenging the legality of Chapter 66. Three claims are brought under Article 8, Section 10 of the Alaska Constitution and the lack of public process. Another claim is brought under Section 6 (i) of the Alaska Statehood Act which prohibits the state from conveying mineral rights by sale or giving them away to any other party. Another claim brought involves the Permanent Fund. Chapter 66 is potentially a major raid on the Permanent Fund. Number 572 SENATOR MILLER announced a short recess and then brought SB 46 before the committee. Number 575 SENATOR LEMAN moved to pass SB 46 with individual recommendations. There were no objections and it was so ordered. Number 580 SENATOR MILLER continued testimony on SB 67. JEFF JESSE, Sr. Attorney with Advocacy Services of Alaska, said as legislators they are all trustees of the mental health trust. He said there are four principal groups of beneficiaries - the traditionally mentally ill, alcoholics with psychosis, elderly people who have problems like dementia, and the developmentally disabled. He is representing the developmentally disabled. TAPE 93-5, SIDE B Number 585 He signed off on Chapter 66, but last December he withdrew his agreement to the settlement. They wanted the replacement lands to have the same income producing potential as the original trust corpus. He agreed with Mr. Koester who said the funds were not dedicated. He thought the mixing of appropriations could be dealt with. Commenting on Attorney General Cole's statement that 6% was too much money, he said the legislature has already done this kind of settlement in Chapter 210. We are currently allocating 6% of unrestricted general funds into the trust. He said the Trust Authority does not have to be seen as an enemy of the state. There are numerous instances where good public policy has been established by a board. The vast majority of lands are not going to be subject to the offset. The claims of a billion dollar offset are far out of scale, Mr. Jesse said. SENATOR LEMAN commented that he felt differently about the offset and would need to discuss the issue in committee. Number 408 BOB STILES said he has 20 years of experience in project promotion development in international marketing. The last 10 years of that experience has been related to a particular reserve located in the Beluga Field on the west side of Cook Inlet. He said he was speaking as a lease holder of original mental health trust lands. Under any possible scenario, they will have a new landlord. Their international business concerns are that in international coal markets you can't pass on increased costs to your customer as in domestic coal markets. Domestic customers for Alaskan coal are almost exclusively electric utilities. The people running the utilities have sources of coal from other countries, so the market is very competitive and right now there is the perception of a land freeze and resource freeze in Alaska. If the mental health trust litigation were solved today, we are at least two or three years behind where we were two or three years ago in terms of marketing, because we have to reestablish credibility in the investment and product markets. The only attorneys they have found in Alaska who think Chapter 66 has a chance are the two settling plaintiffs attorneys and the Attorney General. Every other legal opinion they have gotten says it's a question of when it goes down. Should the validity of their leases be challenged, their only recourse is against the state. The reason they support SB 67 is because they believe it represents an opportunity to settle the litigation quickly, it's fair to the beneficiaries, and it's fair to the state (they don't believe Chapter 66 is fair to the state). If the litigation goes on much longer, there won't be any development interests to apply. Number 290 JIM GOTTSTEIN and DAVID WALKER, attorneys for the settling plaintiffs, joined the committee for discussion. MR. GOTTSTEIN said strict reconstitution of the mental health lands under the Supreme Court's mandate has huge attendant problems that dwarf the problems that people complain about under Chapter 66. Number 248 SENATOR LEMAN said he thought they came to a reasonable settlement with Chapter 66. He wanted his reassurance that it was still a good option and wanted an estimate on the timing. Mr. Gottstein said most of the delay is being caused by the people who are complaining about the delay. It is difficult to predict how long the court process will take, but the parties have proceeded to do the land work necessary to accomplish the exchanges and there is a December 1, 1994 deadline for accomplishing the exchanges. They have every reason to believe they will meet that deadline. They don't see the court time impacting the time frame for the reconstitution. Number 160 DAVID WALKER said they are confident that whatever delays there are, they will be able to see the process through faster than if they had to litigate the case to a conclusion. The options for everyone are settlement. He agreed with Mr. Gottstein regarding development, that there is not a single instance where exploration permits for activity has not been acted upon promptly. The resources are there and will be available to the trust. The opportunity will come again for the resources. MR. GOTTSTEIN said SB 67 is not really that much different than what all of them on the plaintiffs side were strenuously advocating in the 1991 session. They were unable to achieve that sort of resolution, because the administration was dead set against it. The legislature, at that time, and they felt that what they could achieve was quite a bit better than litigation. Number 153 SENATOR MILLER directed staff to get an Attorney General's opinion on the questions Senator Adams raised about dedicated funds and mixing appropriations and said it was his intent to bring it up Friday. MR. BODDY acknowledged the truth of what Mr. Gottstein and Mr. Walker said and again emphasized that nevertheless they are doing business significantly different than they ever have before because of this issue and it is at very large expense, which in turn ends up costing the consumers more money. That may be a fact of life, but that doesn't make it right. Number 120 SENATOR MILLER adjourned the meeting at 5:16 p.m.