Report 2010-125 Recommendations and Responses in 2012-041

Report 2010-125: State Lands Commission: Because It Has Not Managed Public Lands Effectively, the State Has Lost Millions in Revenue for the General Fund

Department Number of Years Reported As Not Fully Implemented Total Recommendations to Department Not Implemented After One Year Not Implemented as of Most Recent Response
State Lands Commission 1 27 6 6

Recommendation To: Lands Commission, State

When the commission determines that it will pursue delinquent lessees itself, it should use a collection agency or a program such as the Franchise Tax Board's Interagency Intercept Collections Program.

Response

Staff has determined that the Commission would need special legislation to obtain individual lessee social security numbers in order to participate in the Franchise Tax Board Interagency (FTB) Intercept Collections Program. Staff has also determined that the liability risks, legal requirements and obligations to keep such private information safe from disclosure outweigh the potential benefits of obtaining such authority to request that kind of information. The FTB Intercept program is of limited usefulness as it can only be used in instances where the lessee is a person. These leases typically have rents of less than $1,000 a year which makes using the FTB Intercept Program marginally advantageous versus the cost of security. Higher rents are with companies using an Employer or Taxpayer Identification Number (EIN or TIN) and that is not incorporated in the program. Also, there has been an increasing trend by private lessees to enter into lease as a family or living trust, which is identified by the TIN rather than Social Security number. Additionally, staff has learned from the California Office of Privacy Protection that most state agencies are moving away from the use of social security numbers and trying to minimize their use because of the significant responsibilities to restrict access and comply with numerous state and federal privacy requirements. As to the feasibility of using collection agencies, the federal restrictions on the purposes for which a social security number (SSN) is required precludes the Commission from requiring a SSN to lease state land. Furthermore, the expenses involved in obtaining and maintaining this private information would provide little additional opportunity or benefit for the Commission to collect on unpaid rent using collection agencies.

Recommendation To: Lands Commission, State

To ensure that it receives rent from the lessee that reflects the approximate value for the State's property at those times when a lessee disputes a modification to the rental amount after the commission exercises its right to perform a rent review or because the lease expired, the commission should include in its lease agreements a provision that requires lessees to pay the commission's proposed increased rental amount, which would be deposited into an account within the Special Deposit Fund. The increased rental amounts deposited, plus the corresponding interest accrued in the account, should then be liquidated in accordance with the amount agreed to in the final lease agreement.

Response

The aggressive strategies that staff has been implementing should preclude the need for use of a Special Deposit Fund. Rents placed in special deposit funds are not available to the State whereas rent deposited to the General Fund would be. In those rare instances where a rental rate would be reduced, administrative processes are in place to promptly refund the difference from the current revenue stream. Staff sees no advantage to the State in implementing this recommendation as it would likely result in additional costs in staff time that the Commission would have to absorb and would result in no revenues to the General Fund until the dispute is resolved. Depositing the rents as revenues does not diminish the lessee's subsequent appeal rights to the Commission. Failure of the lessee to pay increased rents in a timely manner is also subject to penalty and interest and a breach in the lease which could result in a trespass action.

Recommendation To: Lands Commission, State

To ensure that it does not undervalue certain types of leases, the commission should amend its regulations for establishing pipeline rents on state land as staff recommended in the 2010 survey of methods used by agencies in other states to establish pipeline rents.

Response

Commission staff is finalizing a regulations package to update Sections 1900, 2002 and 2003 of Title 2 of the California Code of Regulations for submission to the Office of Administrative Law (OAL). Staff plans to submit this package in either late October or early November 2012. Once complete, staff will provide BSA with a copy of the regulations package submitted to OAL. Staff anticipates this process taking approximately one year, which is why a November 30, 2013 date is shown in response to Question 6, above. As part of these regulations, Commission staff is recommending increasing the pipeline rents from 2-cents per diameter inch per lineal foot to 5-cents per diameter inch per lineal foot.

Recommendation To: Lands Commission, State

To ensure that it does not undervalue certain types of leases, the commission should implement and follow its plan to regularly update its benchmarks for determining rental amounts.

Response

The Lake Tahoe recreational benchmark was finalized in July 2012. All recreational benchmarks are now up-to-date and will be updated on 5-year cycles. Commission staff is currently evaluating the need for certain residential benchmarks, including the existing Black Point benchmark and new residential benchmarks for Lake Tahoe and the Colorado River. The Black Point benchmark is on hold until Commission staff completes a re-evaluation of its jurisdiction in the area. This re-evaluation involves a survey and significant work by the Commission's Boundary Unit. Because the proposed Lake Tahoe residential benchmark will be a complicated and time consuming process, it is on hold until the Appraisal Unit is fully staffed with two positions (the Commission is currently without any appraisal staff; see the 8/23/12 update to the Audit). Commission staff may also be establishing a Colorado River residential benchmark if it is found that there are sufficient new leases in the area to warrant the current and potential future expenditure of staff time. Staff anticipates full implementation of this recommendation

Recommendation To: Lands Commission, State

The commission should establish a monitoring program to ensure that the funds generated from granted lands are expended in accordance with the public trust.

Response

The specific recommendation was that the “commission should establish a monitoring program to ensure that the funds from granted lands are expended in accordance with the public trust.”

As previously reported, staff requested additional positions to implement the Commission's statutory trust grant compliance program, however, that request was not approved. To improve the Commission's monitoring of the management of public trust lands and assets by the State's grantees, staff has requested summaries of the required Comprehensive Annual Financial Reports (CAFR). This is being done to encourage more detailed reporting by grantees and to streamline staff's analysis of the grantees' finances consistent with Public Resources Code §6306.

At its August 14, 2012 meeting, the Commission voted to support state legislation (AB 2620, Achadjian) requiring the Commission to prepare a workload analysis to ensure that it is fulfilling its oversight responsibilities over legislatively granted public trust lands, codifying trustee duties in connection with granted lands, and requiring the annual financial statement filed with the Commission to be accompanied by a standardized form developed by the Commission (previously submitted to BSA as Exhibit IV). On August 27, 2012, the Governor signed AB 2620 as Chapter 206, Statutes of 2012. Staff is beginning to prepare its workload analysis and develop a standardized form for the required annual financial statement pursuant to this new law. Through this workload analysis, staff will develop information to identify the Commission's specific needs for additional staff and resources for legislative and administration review. Staff is also exploring potential funding sources for its granted lands program pursuant to a request by the Senate and Assembly Budget Committees. The Executive Officer has also directed a reorganization of those currently working on granted lands issues within a new External Affairs Division (previously submitted to BSA as Exhibit V). This is intended to focus attention to this area and result in closer coordination between all divisions on granted lands issues. Through this reorganization and pursuant to the requirements of Chapter 206, staff will be able to develop a monitoring program to ensure that the funds from granted lands are expended in accordance with the public trust. However, implementation of that program is dependent on whether the Commission's request for additional staff and resources are granted. Staff continues, albeit on a limited basis given constrained resources, to improve outreach to local trustees and assist them with their waterfront revitalization programs.

Recommendation To: Lands Commission, State

To ensure that all of its oil and gas leases have current surety bonds and liability insurance, as required by law and certain lease agreements, the commission should require lessees to provide documentation of their surety bonds and liability insurance. If the commission believes that assessing a monetary penalty will be effective in encouraging lessees to obtain surety bonds or liability insurance, it should seek legislation to provide this authority. Finally, if it obtains this authority, the commission should enforce it.

Response

The specific recommendation was “to ensure that all of its oil and gas leases have current surety bonds and liability insurance, as required by law and certain lease agreements, the commission should require lessees to provide documentation of their surety bonds and liability insurance. If the commission believes that assessing a monetary penalty will be effective in encouraging lessees to obtain surety bonds or liability insurance, it should seek legislation to provide this authority. Finally, if it obtains this authority, the commission should enforce it.”

In accordance with the specific language of the recommendation, this is already done on the Commission's offshore oil and gas leases and the bondsmen are required to give at least 90-day notice (some are longer) before they can terminate a bond. Further, staff requires that the offshore lessees show evidence of current bonding and insurance or a replacement bond for any expiring or terminating bond at the annual meetings with all lessees. For the Commission's surface leases, as described in our one-year response, staff has contacted Federal, State, and local agencies with leasing responsibilities, both in California and in other states. Many agencies indicated that they do not require insurance of any kind when leasing to private individuals. Those that do require insurance communicated significant difficulty in obtaining insurance compliance. Staff's communications with the insurance industry indicate there is no stand-alone product available that covers recreational piers.

Insurance companies appear to be reluctant to name the state as an additional insured and to provide notice of cancellation to the state. In some instances lessees can obtain insurance, but this appears to be an exception that the companies make to retain clients with large insurance portfolios.

Staff is currently exploring options including: 1) strengthening the indemnity provisions in the lease language; 2) contacting the insurance industry and educating them on the market for an insurance product that covers recreational piers; and 3) contacting various insurance companies and attempting to create a pilot program providing insurance coverage.

Current Status of Recommendations

All Recommendations in 2012-041