TO: Board of Regents
FROM: LeRoy H. Schramm
Chief Legal Counsel
RE: Administrative Assessments on University System Land Grant Income
DATE: July 8-9, 2004
The University System campuses are the exclusive beneficiary of five separate land grants given to Montana by the federal government at the time of statehood. These grants are protected by federal law and by the State Constitution which says that the income from the grants is “inviolate and sacred for the purpose for which they were dedicated” (Article 10, Sec. 10). I have previously provided the Board with a more extended discussion of the creation and legal status of the land grants (see attached memo dated July 11-12, 2002). Beginning in 1963, the state legislature began to divert some land grant income away from the beneficiary campuses and to the Department of State Lands (now the Trust Lands Management Division within the Department of Natural Resources and Conservation). Currently, five different assessments (4 by DNRC and 1 by the State Investment Board) on land grant income are made to fund functions and agencies outside the University System (for history of development of the assessments see memo of July 11-12, 2002).
The Dollar Amounts Involved
Currently, University System land grant income amounts to something in the neighborhood of $4.8 million annually (about $2.8 million from rents, royalties, timber sales, etc., and $2 million from interest on the trust funds). The annual administrative fees typically have been between $400,000 and $500,000 over the last several years. Because DNRC is going to begin assessing MUS timber sales revenue for the first time in FY 2004, the total administrative assessments are certain to rise significantly, probably to around $700,000 annually. This will amount to approximately 25% of the non-interest MUS land grant income (see Appendix for calculations)! Since inception of the fees, over $5,000,000 of University System land grant income has been taken with a present value between $11,000,000 and $12,000,000 (for a more complete accounting and a summary of how these totals were derived see my memo to the Board dated March 16, 2003, attached hereto).
The Legal Status of the Administrative
Assessments and Recent Developments
It has long been my opinion that the assessment of these administrative fees violates federal statute and the State Constitution. I have just learned that the DNRC voluntarily stopped making assessments against the Morrill Act Trust in FY 2003. I know of no statutory provision that exempts Morrill Act Trust income from any of the fees. Rather, this appears to me to be a tacit acknowledgment by DNRC that the Morrill Act Trust assessments are improper. Discontinuing the fee still does not address the over half a million dollars that has been assessed against Morrill Act Trust income in years past. The current value of these prior assessments is easily in excess of a million dollars. While all the assessments are legally questionable, because of specific federal statutory language that applies only to the Morrill Act Trust, it is in a class by itself. In my opinion a suit to recover Morrill Act assessments is almost an open and shut case.
The Assessment System Probably Can’t be Fixed
Suspending the collection of fees against only Morrill Act Trust income also has the somewhat ironic effect of exposing and exacerbating another serious legal problem of the fee assessment system. The problem arises because while the DNRC has stopped making assessments against the Morrill Act income it has not lowered the total amount of its assessments. In other words, all the other trusts assessed by DNRC are paying a bit extra to make up for anything that would otherwise have come from the Morrill Act Trust. As I noted in a July 2002 memo to the Board (reproduced with the agenda materials for this meeting): “The federal case law is unmistakably clear that there can be no mingling of monies between funds and that one fund cannot be used to subsidize another. In Lassen v. Arizona, 385 U.S. 458 (1967), the Court examined the Arizona Enabling Act and struck down state legislation that used the assets of one trust to benefit other trusts. ‘The Act thus specifically forbids the use of money or thing of value directly or indirectly derived from trust lands for any purposes other than those for which that parcel of land was granted. It requires the creation of separate trust accounts for each of the designated beneficiaries, prohibits the transfer of funds among the accounts, and directs with great precision their administration. Words more clearly designed to create definite and specific trusts and to make them in all respects separate and independent of each other could hardly have been chosen.’ See also question 2, section 2 of 1996 Washington Attorney General’s Opinions #11, disapproving of a process of paying joint administrative costs without a trust by trust justification that fees and expenses correspond for each trust. The Montana Supreme Court has cited Lassen and has made clear that the Montana Enabling Act, like that of Arizona, has established a system of separate and distinct land grant trusts. Indeed, even Montana statute imposes this requirement for at least one of the fees in question. ‘Money in the resource development account . . . that is derived from the income from . . . university lands, agricultural college lands, scientific school lands, normal school lands . . . must be expended by the department solely for the purpose of defraying the costs and expenses necessarily incurred in developing public lands of the same trust.’ 77-1-606 MCA.”
It is impractical and maybe impossible to develop a procedure where the costs of administering each individual trust are traced with the precision necessary so that each individual trust pays its share and no more. Therefore, even if the fees were otherwise legal (which I do not believe they are), the requirement that there be no cross-subsidization among the trusts presents a very big impediment to developing an acceptable method of assessing the fees.
The Statute of Limitations Does Not Limit Recovery
I do not think that any statute of limitations bars the Regents’ right to seek recoupment for the current value of all fees taken from the land grant trusts (see July 11-12, 2002 memo noted above). In a recent filing in federal court the Montana Attorney General’s Office asserted the school trusts’ right to compensation from certain utilities that had constructed dams and reservoirs on trust property, beginning as early as 1913. The suit asked for compensation for “past and present use of State lands/school trust lands.” I expect the Attorney General will argue that reimbursement to the trusts is not limited by any statute of limitations in much the same fashion as the Regents could argue should they go to court. State ex. rel. Dolan v. PPL Montana e. al., Cause CV-03-167, U.S. Dist. Ct. for the Dist. of Montana.
The Petesch Opinion
This Board in September 2002 had before it a formal Complaint, drafted at the Board’s request, that could have been used to launch a lawsuit to recoup the lost land grant income. The Board deferred action and in March 2003, on the motion of Regent Mercer, decided to defer litigation and instead request the legislative leadership to solicit their own opinion on the issue from legislative counsel.
Thereafter, Commissioner Crofts forwarded the Board’s request and Senator Keenan agreed to put the question of the legal propriety of the administrative fees to Greg Petesch, Director of Legal Services for the Legislative Service Division. On February, 26, 2004, Mr. Petesch issued his opinion (attached hereto). Although Mr. Petesch prudently declined to announce that the scheme of land grant fee assessments was absolutely legal or illegal, his informed discussion of the issues confirms that the Regents’ arguments against the assessments have substantial merit. I believe his opinion vindicates the position that such assessments are on shaky legal ground.
The Board has a range of options. These include (1) seeking legislation to end the system of administrative assessments, (2) going to Court to bar the assessments and to reimburse the trusts for lost revenue, (3) asking the attorney general for an opinion, or (4) trying to craft some acceptable compromise with the executive branch and the legislature that, for example, ends the assessments and gives the trusts and the University System partial reimbursement in lieu of the right to sue for complete reimbursement.
The only option the Regents don’t have is to do nothing indefinitely. Article III, Section 3 of the Montana Constitution requires public officers to “support, protect and defend” both the federal and state constitutions. The State Constitution says the revenues from the University land grants are “inviolate and sacred to the purpose for which they are dedicated.” While there are always two sides to every legal question, the infirmities of the administrative assessment system are so manifest that the Regents must, one way or another, seek some resolution to these issues.
DNRC Assessments on MUS Land Grant
Assume FY’04 non-interest trust income the same as FY’03 – About $2,800,000
Assume all FY’04 DNRC assessments, except timber sales assessment which was not levied, the same as FY’03 – About $348,000
Add anticipated timber sale assessment – About $350,000
Total anticipated DNRC assessment in FY’04 - $698,000
Total anticipated non-interest income ($2,800,000) compared to anticipated DNRC assessment ($698,000) means that the assessments likely will take 24.9% of MUS non-interest land grant income.
All Assessments on All MUS Land Grant Income
If one uses same assumptions and compares total anticipated ’04 income (interest and non-interest) and all anticipated ‘04 assessments (including those of the State Investment Board) the numbers would be Approximately $4,800,000 (income) and $723,000 (assessments), meaning the assessments likely will take 15% of MUS land grant total income.