July 11-12, 2002

 

DATE:  June 25, 2002

TO:  Board of Regents of Higher Education

FROM:  Rod Sundsted, Associate Commissioner for Fiscal Affairs

SUBJECT:  Revision to Policy # 901.12

I have had a number of conversations with the Department of Natural Resources and Conservation (DNRC) regarding timber sales revenue on MUS trust lands. DNRC has not distributed any MUS trust land timber sale proceeds in FY02 but under current board policy intends to make a distribution at the end of this fiscal year (FY02).

Through the first 11 months of FY02 the timber revenue on MUS trust lands has been $1,305,811. In the past, this entire amount would have been deposited into the permanent trust. The administrative assessment would have been to fund the trust administration account. This assessment would have been approximately 1% of the value of the permanent trust. As a result, this increased revenue to the permanent trusts would have increased our assessment by approximately $13,058. Because under SB511 and policy #901.12 we would now receive this revenue as distributable revenue, DNRC plans to make an assessment for the timber sale account. Based on current timber revenues this assessment would be $502,292 of the total $1,305,811 in revenue leaving distributable revenues of $803,519. In essence, our options are $1,305,811 in the trust or $803,519 in hand. Given these unintended consequences, it is clear that the present value (at 5% and infinite periods) of the income stream from the deposit to the trust far exceeds the present value of taking the distributable revenue ($1,295,364 to $803,519). At the time this policy was initially adopted, DNRC estimated the assessment for the timber sale account at $305,000 based on historical revenues. Our inquiry into this assessment is what led to questions about the legality and constitutionality of these assessments and also led to the discovery that the assessment to fund the timber sale account was a new assessment that had never been made in the past.

Unfortunately, the more I work on this issue the muddier it becomes. DNRC initially indicated to me that if the board amended policy # 901.12 and designated the timber sales revenue as permanent fund revenue, then they would go back to the old trust administration assessment and not apply the timber sale assessment. However, DNRC has subsequently indicated they will be reassessing how they apply their timber assessments and this may or may not be the case. I have subsequently asked DNRC how they would assess the FY02 revenues under each option, distributable revenue and permanent fund revenue. As of today I have not received a response to this question.

The proposed amendments to this policy designate the revenue as non-distributable permanent fund revenue with the intent being to allow the entire FY02 timber revenue to be deposited in the permanent fund. It leaves in place the other provisions of the original policy should DNRC change their assessment or circumstances change.

I am hopeful that by the time of the board meeting in July I will have answers from DNRC that will allow us to make a more informed decision.