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Idaho’s Endowment Land Trust Is it Real or Illusory?

Idaho’s Endowment Land Trust Is it Real or Illusory?. Prepared by Clive J. Strong Idaho Deputy Attorney General For 2011 CWAG Annual Conference. Idaho Admission Bill Granted to Idaho the 16 th and 36 th sections for support of public schools, and

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Idaho’s Endowment Land Trust Is it Real or Illusory?

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  1. Idaho’s Endowment Land Trust Is it Real or Illusory? Prepared by Clive J. Strong Idaho Deputy Attorney General For 2011 CWAG Annual Conference

  2. Idaho Admission Bill • Granted to Idaho the 16th and 36th sections for support of public schools, and • Granted other lands for a land grant university, an agricultural college, a scientific school, state normal schools, a penitentiary, an insane asylum, and for other state, charitable, educational, penal and reformatory institutions. • Article IX, § 8 – Imposes a duty on the Board of Land Commissioners to manage endowment lands “in such a manner as will secure the maximum long term financial return to the institution to which granted . . ..” Statehood Grant

  3. “The grant of lands . . . by the federal government to the state constitutes a trust, and the State Board of Land Commissioners . . . is bound upon principles that are elementary to so administer it as to secure the greatest measure of advantage to the beneficiary of it.” Barber Lumber Co. v. Gifford, 25 Idaho at 666 (1914). Endowment Lands are Held in Trust

  4. 2.4 million acres of land held in trust for nine different beneficiaries. • Estimated total value of $2.5 billion. • Majority of lands are managed for timber harvest and grazing. • Timber harvest accounts for 75% of total annual revenues from endowment lands. Idaho Endowment Land Assets

  5. 1.4 Million Acres $43 Million Avg. Annual Revenue 1 Million Acres $5 Million Avg. Annual Revenue Endowment Land Asset Performance Comparison Timberland Assets All Other Assets $43.00/acre Avg. Annual Revenue per Acre $3.57/acre Avg. Annual Revenue per Acre

  6. Market Failure: • Lessees keep grazing and cottage site lease rates artificially low through rent seeking behavior. • Rent seeking occurs when a small, well organized group is able to obtain benefits from the government through political pressure at the expense of a larger, more diffuse group, in this instance the beneficiaries. • Barriers to Enforcement of Trust: • Political • Legal Why the difference in Return?

  7. Overview ofGrazing Lands 1.4 million acres leased for grazing. 1,200 grazing leases. 258,000 – 262,000 AUMs.

  8. Idaho Watersheds Project v. State Board of Land Commissioners, 918 P.2d 1206 (1996). • Grazing lease awarded to existing grazing lessee even though the only bid for the lease was by a conservation group. • Idaho Supreme Court held that Board did not have “the discretion to grant a lease to an applicant who does not place a bid at an auction, based upon Idaho’s constitutional and statutory mandate that the Board conduct an auction.” Grazing Litigation

  9. Idaho Watersheds Project v. State Board of Land Commissioners, 982 P.2d 367 (1999)(IWP III). • Legislature sought to limit the awarding of grazing leases to grazers by enactment of Idaho Code § 58-310B. • The statute was found unconstitutional because it sought to require the Board to consider factors other than the “maximum long term financial return” to the endowment beneficiaries. Grazing Litigation

  10. Idaho Watersheds Project v. Idaho Board of Land Commissioners, 982 P.2d 358 (1999)(IWP II). • Idaho Legislature sought to remove the constitutional requirement for disposing of leases through conflict auctions. • Proposed amendment was found unconstitutional because it violated the requirement that two or more constitutional amendments be submitted separately for voter approval. Grazing Litigation

  11. Annual Net Income Trend For Grazing

  12. Overview of Cottage Site Lease Program • 522 Cottage Site Leases • Until 1988 rental rates were flat. • Interest in recreational homes led to competition for cottage site leases. • Contract rental rate has remained at 2.5% even though land value has escalated • 1990 legislation required market rent in lieu of conflict auctions.

  13. Market Rent vs. Contract Rent • 1991 and 1998 market rent studies found that rental rate should be between 3.5-8% of appraised value. • In 2010, Attorney General’s consultant recommended a market rental rate of 6%.

  14. Land Board policy required that beneficiaries receive 10% of leasehold value realized at time of transfer of lease. • Leasehold values paid upon assignment of leases confirm that the contract rental rate is significantly below market rent. • “Leasehold value” refers to the “value which accrues to a leasehold estate when the contract rental rate is below the market rent.” • “Contract rent” is the rental rate specified in the contract. Leasehold Value

  15. 79 leases were transferred between 2003 and 2009. The total value of the leasehold interests for the 79 transfers was $23,594,664. Beneficiaries received approximately $2.5 million of the leasehold value. Leaseholders realized approximately $21 million gain on transfer of leases. Leasehold Tranfers

  16. In 2010, the Land Board over the dissent of the Attorney General and State Controller voted to implement a rental structure that resulted in an effective rental rate for 2011 of 1.8%. • Attorney General Wasden filed an action to prohibit implementation of the rental structure, alleging it violated the Board’s fiduciary duty. 2010 Land Board Action

  17. In the Matter of the Verified Petition for Issuance of a Writ of Prohibition, Wasden v. Idaho State Board of Land Commissioners, 249 Idaho P.3d 346(2010). • Board retained outside counsel and opposed Attorney General. • On December 1, 2010, the Idaho Supreme Court denied the petition finding that the Attorney General had a “sufficiently speedy and adequate remedy in the ordinary course of law.” Cottage Site Litigation

  18. Wasden v. State Board of Land Commissioners, (CV OC 1023751). • On December 2, 2010, the Attorney General filed an action challenging the constitutionality of statute exempting cottage site leases from the conflict auction requirement of the Idaho Constitution. • On June 6, 2011, the District Court held that leases are not a disposal of land and therefore are not subject to the “public auction” requirement of the Idaho Constitution. Cottage Site Litigation

  19. On December 20, 2010, District Court enjoins the Land Board from implementing its March 2010 rental structure. • On December 21, 2010, the Land Board adopts a fixed rental rate of 4%. • Cottage site lessees have filed five separate lawsuits challenging the Board’s action. • Lessees assert they have a right to a new lease on the same terms and conditions as the prior lease. • Lessees assert that the 4% rental rate exceeds market rent. Cottage Site Litigation

  20. When there is an open and competitive market for trust assets, the constitutional objective of maximizing the long term financial return for the endowment beneficiaries is achieved. In a noncompetitive market, rent seeking defeats the constitutional objective. In the absence of an effective means for enforcing the trust objective, the objective of the Idaho land endowment trust will remain unfulfilled. CONCLUSION

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