State Trust Lands in Arizona: A Primer PRESENTATION TO THE ARIZONA LAND TRUST NETWORK JANUARY 21, 2016
Land Ownership in Arizona
State Trust Lands: A Unique Category of Land Ownership Granted to states by Congress upon entrance into the Union Held in a perpetual, intergenerational trust to support a variety of public institutions the primary beneficiary being public schools Managed largely for revenue generation primarily for grazing and agricultural leasing, commercial leasing, real estate development, oil/gas/mineral extraction 23 states still hold state trust lands from their original grant mostly in the interior West totaling approximately 46 million acres
Origin of State Trust Lands Following Revolutionary War, Congress faced three-part challenge Flood of recent immigrants and settlers heading West Jeffersonian vision: a free people must be an educated people Need to secure claims to the frontier from rebellion or European rivals Massive war debts and limited federal revenues Solution: General Land Ordinance (1785) and Northwest Ordinance (1787) Federal government had one resource in abundance: land Organizing settlement through rectangular survey, repaying national debt through sale of lands, providing for education and essential services through trust grants
General Land Ordinance (1785) Established the rectangular survey system 36-square mile townships divided into sections and fractions of sections Basis for legal descriptions of land in most of Western U.S. Provided for first reservation of trust lands for new states, with section 16 of every township reserved for the maintenance of public schools within the said township
Northwest Ordinance (1787) Created a system of territorial governments and process for transitioning territories into new states Article V required that states be admitted on equal footing with the existing states Carried through the vision of cheap land, state equality and public education as critical to the success of western settlements Ohio (in 1803) was the first public domain state admitted to the union which received a land grant in support of schools
State Trust Land Grants New states received the central section of every township as reserved lands (Section 16) to support public education Mathematical vision of community-building Originally reserved to local township, consistent with agrarian vision Later, reserved to the state Grants later expanded to include 2, 32, 36 as well (Western lands not amenable to farming) Arizona one of the states to receive four sections Congress also issued block grants for universities, hospitals, and other essential state functions
Increasing Restrictions on State Trust Land Management Early history of trust lands fraught with extensive land fraud and rapid disposals Several states divest themselves of virtually all trust lands and/or trust funds in ill-considered transactions States and Congress imposed more restrictions on land disposals and management as experience with lands grew Michigan (1837) Constitution included provisions requiring proceeds from sale of state lands go into a permanent fund Soon complemented by increasingly complex restrictions on sale and lease of these lands Minimum sales price, fair market value appraisals Public auctions Long term retention of lands rather than disposal
The Trust Responsibility The trust lands grants in the lower 48 states were brought to a close with the New Mexico-Arizona Enabling Act of 1910 Most extensive land grants of any of the lower 48 states Enabling Act imposed detailed requirements for trust management and stated explicitly that lands were held in trust U.S. Supreme Court found that a legal trust was created by the Enabling Act Since then, all Western states except CA have found that their lands are also held in trust
What is a trust? A trust is a legal relationship in which one party holds property for the benefit of another. Three parties: Settlor or trustor establishes the trust Trustee administers the trust Beneficiary receives the benefits of the trust Identified beneficiary or charitable public purpose for which the property is held in trust. Typical examples: Family trust for education of direct descendants Charitable trust for education of children in the community (state trust doctrine similar to charitable trust) Critical to note: state trust is NOT a private trust it has a public mission and public beneficiaries
Fiduciary Duties in a Trust Relationship Duty to follow the settlor s instructions Manage trust resources for the intended purpose Duty of loyalty Cannot put interests of self or third parties ahead of interests of trust/beneficiaries Duty of prudence Due care, diligence, and skill in management of trust (affirmative and negative conduct) Appropriate expertise, diversification, investigation and assessment, monitoring and reassessment Duty to preserve the trust Protect trust corpus to ensure that trust objectives are met for the long term
Duty to Preserve the Trust Requires the trustee to manage the corpus of the trust in a manner that takes a long term perspective and preserves the trust asset Opportunities for short term gain must ALWAYS be balanced by long-term preservation Ensure trust will satisfy both present and future needs of beneficiaries This duty plays a critical role in the trust responsibility for state trust lands: For a perpetual intergenerational trust, critical to ensure the trust asset will remain undiminished to serve the needs of future beneficiaries in perpetuity Current beneficiary needs do not outweigh future needs Important to recognize that in light of this duty, current trust beneficiaries frequently face a conflict of interest
Trustee s Additional Obligations as a Public Entity Important to understand that state trust managers are NOT private trustees, and trust beneficiaries are NOT private beneficiaries Trust is a public obligation to public beneficiaries It is not the school board association s trust or the teacher s union s trust it is a trust for a broad public purpose Trust land managers have a broader obligation as public agencies Higher standards for environmental analysis of trust activities Consideration of fiscal impacts to communities before approving developments on state trust lands (Colorado & Arizona) Public notice and reporting of trust related decisions Hold public hearings, maintain public records, and accept public comments Subject to legislative appropriations and directives (although legislature is also subject to the trust responsibility)
Arizona s State Trust Land Grant At statehood, Arizona received sections 2, 16, 32, and 36 in every township for the support of the common schools Enabling Act restrictions Requirement that trust lands & natural products of trust lands be sold or leased to the highest and best bidder at public auction Lands must be appraised at their true value and cannot be disposed of for less than their appraised value Standards for conduct of auctions minimum notice, advertising, and locational requirements 1912: 10.2 million acres conveyed as state trust lands Today: 9.2 million acres remain
14 Beneficiaries The Common Schools (K-12) are by far the largest beneficiary 8.1 million acres of the 9.2 million remaining are held for this beneficiary
Arizona State Land Department State trust lands managed by the Arizona State Land Department under the direction of the State Land Commissioner, which is appointed by and serves at the pleasure of the Governor ASLD Mission: To manage State Trust lands and resources to enhance value and optimize economic return for the Trust beneficiaries, consistent with sound stewardship, conservation, and business management principles supporting socioeconomic goals for citizens here today and generations to come. To manage and provide support for resource conservation programs for the well-being of the public and the State s natural environment. Trust Management Activities Surface Uses (grazing leases, commercial leases) Subsurface Uses (mineral sales & leasing) Trust Land Sales & Dispositions
Total Trust Land Holdings in West Compare with Arizona 10,000,000 9,000,000 8,000,000 Trust Acreage 7,000,000 6,000,000 5,000,000 4,000,000 Other Trusts Current Common School Trust 3,000,000 2,000,000 1,000,000 0 AZ CA CO* ID MN* MT NE NV NM ND* OK OR SD TX UT* WA* WI WY States
Majority of Trust Lands Managed for Grazing & Agriculture Revenue Generated through Grazing and Agricultural Leases from State Trust Lands 2003-2004 $14,000,000 $12,000,000 Revenue generated $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 grazing agriculture agriculture and grazing $0 AZ CO ID MT NM OR UT WA WY States
Fossil Fuel Resources on Trust Lands Oil and Gas Revenue from State Trust Lands 2003-2004 $300,000,000 $250,000,000 $200,000,000 Revenue $150,000,000 $100,000,000 $50,000,000 $0 AZ CO ID MT NM OR UT WA WY States
Mining Activities Mineral Revenue from State Trust Land 2003-2004 $8,000,000 $7,000,000 $6,000,000 Revenue $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0 AZ CO ID MT NM OR UT WA WY States
Real Estate Development Land Sales Revenue from State Trust Land 2003-2004 $140,000,000 $120,000,000 $100,000,000 Revenue $80,000,000 $60,000,000 $40,000,000 $20,000,000 $0 AZ CO ID MT NM OR UT WA WY States
Revenue Generation in Arizona Land sales is the largest source of revenues from state trust lands in Arizona (BUT typically only involves 1,000-3,000 acres of land per year on average) Majority of lands (nearly 84%) are held in grazing or agricultural leases which bring in a relatively small slice of revenues
Importance of State Trust Lands for Future of Arizona Trust lands represent a tremendous resource for state education, for conservation, and for future development In Arizona, there are over 1 million acres in or adjacent to urban areas Approximately 50% of future developable lands in Maricopa, Pima & Pinal Counties are state trust lands 70% of North Phoenix developable area 66% of Pinal County developable area Also represent the largest tracts of remaining un-subdivided lands in proximity to urban areas Could generate tens of billions in revenue for education Some positioned such that they could provide landscape-scale preserves accessible to urban areas The manner in which they are developed and conserved will shape the future development patterns and quality of life
Challenges for State Trust Land Management in the New West Changing demographics leads to changing perceptions of traditional land uses New pressures on state trust lands recreation, public desire for open space Changing economy means that many state trust land revenue portfolio s are not always capturing the highest value for the lands
Invoking the Trust Responsibility to Improve Trust Land Management Trust responsibility is frequently misstated to require revenue maximization Ignores the significance of the trust as a perpetual, public trust and the objectives that trust lands were created to serve Sally Fairfax: Maximum financial return is barely tolerated as a controlling notion, and is rarely practiced even on lands privately held by corporations. The trust responsibility ultimately requires a holistic and sustainable approach to the management of land that can be used to improve trust management (and to achieve meaningful conservation) Total asset management, not highest and best use
Institutional Capacity Challenges for Arizona State Land Department ASLD budgets based on legislative appropriations (other states permit departments to keep % of proceeds) Difficulty attracting well-qualified employees, chronic understaffing Brain-drain during funding cycles, difficult to hire outside expertise Inability to participate in ongoing planning activities; narrow, short-term focus on highest-value urban parcels No funding for enforcement, land improvements, or enhanced management Funding disconnected from fiduciary requirements Significant opportunity costs associated with lack of planning, missed opportunities & timing Significant damage occurring to trust lands
Challenges for Conservation of Ecologically Significant Trust Lands Difficult and sometimes impossible to achieve conservation on state trust lands High costs of land Auction requirements Political limits on conservation dispositions Legality of existing mechanisms (API) Failure to manage for conservation values leads to conflict The need and desire to conserve trust lands has been a major driver if not the major driver of many trust reform efforts
Arizona State Trust Land Reform Comprehensive state trust land reform needed to modernize the State Land Department Efforts to pass elements of reform have been attempted frequently over the past 20 years, some successfully, and others not so
Early State Trust Land Measures 1990 s A series of state trust land exchange authority measures all failed 1996 Arizona Preserve Initiative passed by Legislature 1998 Growing Smarter passed by Legislature Prop 303 Funding for API match (passed) 2000 Prop 100 Growing Smarter Plus (failed) Prop 301 Classroom Site Fund (passed)
Comprehensive State Trust Land Reform 2001 - Ed Fox Group commences 3-year stakeholder process to develop a comprehensive reform package Participants included agency representatives, developers, educators, conservationists, ranchers, counties, cities and towns 2004 Ed Fox Group presents package of reforms to Legislature which finds measure too complex (included both a constitutional & statutory measure to act in concert criticized by some as a glittering Christmas tree of multiple provisions affecting trust land management) 2005 Ed Fox Group gives it another go with a simplified version Legislature rejects 2006 - Prop 106 Ed Fox Group launches Conserving Arizona s Future initiative - proposal narrowly defeated Prop 105 Legislative reform measure referred to confuse voters also fails 2008 New, simplified version of Prop 106 initiative disqualified from ballot
Subsequent Reform Efforts After the failure of comprehensive, consensus-driven reform, state trust land issues briefly devolved into a hodgepodge of various stakeholder-driven proposals Conservation lands give-aways to any non-profit Definition of conservation allowing conservation lands to be used for virtually any non-development purpose Special lessee protections on conserved lands, including long-term leases and economic damage payments Sand & gravel provisions Absolute management standards enabling lawsuits against trust managers Military base protections Cancelling trust interests in pre-1969 roadways Changes to state fund investment formulas Preventing use of development impact fees as part of trust land acquisitions, with a finding that use of development fees is against the interests of the trust (demonstrably false) Most of these concepts didn t go anywhere
Moving to a More Modest Approach In 2010, a legislative referenda on the ballot to establish state trust land exchange authority under certain circumstances (military base preservation and conservation) Failed Measure attempted again in 2012, and narrowly passed the first successful measure on state trust lands in over a decade
Exploring Conservation Tools within the Context of the Trust Responsibility Conservation Sales & Leases Contributory Value Conservation Set-Asides as Part of Master Planning Process Ecosystem Services Markets Land Tenure Adjustment (Land Exchanges to Achieve Conservation Outcomes)
Conservation Sales & Leasing Arizona one of the most deliberate in creating a pathway for state trust land purchase for conservation through the Arizona Preserve Initiative (API) State trust land sales account for a significant portion of sale revenue from state trust lands (esp. during recession) But it is an expensive strategy
Arizona Preserve Initiative Established in 1996 to provide a mechanism for purchase of lands with conservation values for preservation State agencies, local governments, businesses, NGOs or other civic groups may nominate lands they believe have significant ecological or open space values (only applies to urban lands) State Land Commissioner has discretion to reclassify those lands as suitable for conservation and eligible for purchase under API Matching grant program to provide funds for purchase of lands under API However, a constitutional challenge in 2004 put the program under a legal cloud but it is still in use
Conservation Leasing Idaho Department of Land Conservation Leasing Program Small portfolio Allows resource protection, viewshed preservation, and wildlife management Colorado State Land Board Stewardship Leasing Program Longer term grazing leases in exchange for enhanced stewardship of lands (invasive weed management; wildlife habitat protection) New Mexico State Land Office Range Stewardship Incentive Program Provides for a 25% reduction in grazing lease costs in exchange for improvements to rangeland condition
Contributory Value Conservation set-asides occurring through the master planning process Similar to density transfer programs (TDRs) Land value premium associated with being adjacent to protected public lands compensates trust for conservation Often difficult to measure or standardize in terms of non-monetary consideration to the trust
Ecosystem Services Markets and State Trust Lands Mitigation & Conservation Banking via Compliance Markets Endangered Species Act U.S. Fish & Wildlife Service 404 of Clean Water Act (wetlands mitigation) U.S. Army Corps of Engineers 2008 rule on compensatory mitigation PWS & PES (Payment for Watershed Services & Payment for Ecosystem Services) Instruments Pre-Compliance Markets & Voluntary Markets Advance Mitigation Carbon Credits
Compliance Markets vs. Pre-Compliance and Voluntary Markets Compliance Markets: Regulatory-driven, correcting for market failures Create demand for ecosystem services Pre-Compliance Markets Market participants expect that a resource will be regulated in the future, therefore invest now Voluntary Markets Ecosystem services purchased without a requirement to do so philanthropic, image, personal value motivators
2008 EPA Rule a Game Changer for Ecosystem Services Compliance Markets 2008 EPA Mitigation Banking Rule 404 no longer a preference for on-site mitigation, but rather mitigation that preserves larger-scale intact systems Reduces piece meal postage stamp approach to conservation efforts by establishing larger reserves that can better preserve intact ecosystem functions and habitat connectivity Trust land managers, including ASLD, are in a position to identify lands suitable for mitigation or conservation banking (as large land owners), and can make them available to the ecosystem services market
U.S. Conservation Banking U.S. Species Banking - Market Snapshot Estimated figures for conservation banking in the U.S. is $200-$300 million per year * Prices range from $3,000 per acre for San Joaquin kit fox to $125,000 for a breeding pair of Least Bell s Vireo * Number of Banks Species Credit Types Habitat Credit Types States with Banks 137 94 Types 53 Types 11 States *Presentation to WSLCA on Land Conservation and Revenue Generation on State Trust Lands. Adam Davis, 2007. Land Area Protected 299,519.31 acres Data source: http://www.ecosystemmarketplace.com/pages/dynamic/marketwatch.landing_page.php
2007 Sonoran Institute Study to Explore Opportunities to do Mitigation/Conservation Banking for ASLD Evaluation of state trust lands within two watersheds of Arizona Agua Fria River Watershed Hassayampa River Watershed Assessment of demand for mitigation or conservation credits Legal constraints and opportunities
Study Area Hassayampa/Agua Fria Watersheds
Growth & Development = Demand for Environmental Mitigation Study results: Impacts from transportation related projects likely to be the most consistent and predictable mitigation driver Demand for credits depends on: Similar resource impacts within a scientifically relevant distance (i.e. watershed) Developers have the option of on-site mitigation or payment of in-lieu fees in some cases In the initial study area, the Hassayampa watershed, demand was not projected to be sufficient to pursue transactions CWA demand would occur, but USACE planned to use in-lieu payments in that area
Demand for Compensatory Mitigation in Arizona Demand for Ecosystem Services Planned average annual highway spending (2011-2015): $1.275 billion Anticipated that of this, $96 million would go to environmental mitigation (7.5% of total highway spending) 38% will go to Pima County 11% to Pinal County U.S. Army Corps of Engineers issued 178 permits from November 2009 to November 2010 officials estimate 90% of these projects will require environmental mitigation
Opportunities in Marketing Mitigation Credits ASLD land holdings may be significantly more valuable for disposition if mitigation for planned development is already an integral part of the auction process Addressing mitigation needs during a master planning process or facilitating turnkey conditions prior to land auction Properties faced with mitigation obligations could be sold with the provision of mitigation opportunities elsewhere on ASLD properties (assuming regulatory agency approval) An advance mitigation strategy that meets overall environmental objectives of governing agencies could be a significant consideration for bidders
Opportunities, cont d. Development of formal banks intended to meet mitigation demands of a range of projects Currently 2 conservation banks in Arizona both for the Pima pineapple cactus Utah SITLA precedent: Utah Prairie Dog conservation bank Immediately upon bank approval, the state sold all of the mitigation credits and property development rights to Iron County but retained surface and mineral ownership The credit price was established by dividing the appraised value of the transferred development rights ($126,000) by the total number of credits available (77), thus credit price set at $1,636 plus $200 endowment fee per credit
Opportunities, cont d. Develop endangered species habitat protection and mitigation as an insurance policy to increase the value of ASLD land for potential developers Endangered species habitat restrictions are a liability for residential/commercial developers Development of conservation banks for mitigation impacts in advance of disposition could increase property value by reducing customer risk A 20 to 30 year time horizon for ASLD property disposition value, mirroring the long term nature of development, along with the risk averse nature of investment capital, indicate that addressing species-related liability could be a real value proposition
Land Tenure Adjustment (Exchanges) Checkerboarded land ownership pattern problematic for management both for conservation, and for the trust land agencies in managing for revenue generation Consolidation of ownership of ecologically sensitive lands, while allowing the trust to retain lands with leasing values is a potential win-win In Arizona, a challenge to land exchange authority under the constitution in the late 1980 s resulted in ASLD no longer being allowed to engage in exchanges
Passage of Prop 119 in 2012 Restored land exchange authority to the Arizona State Land Department for certain purposes, and under certain conditions For the purpose of protecting military facilities or for improved management, protection, and conversion to public use of state trust lands Exchange required to be in the best interests of the trust beneficiaries Required to have at least two independent appraisals Requires independent analyses of fiscal impacts to trust and impact of exchange on local communities Public notice & comment provisions Exchange must be approved by a vote of the public
Pilot Projects to Explore Exchange Opportunities Sonoran Institute s Sun Corridor Legacy Program exploring opportunities to model a successful exchange under the provisions established by Prop 119 However to date, not much movement has been made in pursuing an exchange
School lands [should not] be administered to maximize economic return in the short run some school lands have unique scenic, paleontological, and archeological values it would be unconscionable not to preserve and protect those values. - Utah Supreme Court
Thank You! Susan Culp sculp@nextwestconsulting.com (928) 554-4546 or (602) 402-6669 http://www.lincolninst.edu/pubs/default.aspx?pub_type=3