Report 2010-125 Recommendations and Responses in 2014-041

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 2013-041 Response Not Implemented as of Most Recent Response
State Lands Commission 3 27 13 4 7

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

As stated in previous responses, 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 (FTB) Interagency 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. For these reasons and those stated previously, this recommendation will not be implemented.

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

As stated in previous responses, 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. For these reasons and those stated previously, this recommendation will not be implemented.

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 has successfully amended regulations with updated per lineal foot rate for pipelines and conduits which will be used in future rent considerations.

Title 2, Division 3, Chapter 1, Article 2, Section 2003 (a) (4) of the California Administrative Code now reads:

Section 2003. Rent or Other Consideration.

(a) Rent or other consideration for the various categories of uses shall be in the best interest of the State and may be based on one or more of the following methods:

...

(4) $0.05 per diameter inch per lineal foot of pipeline, conduit, or fiber optic cable;

Amendment filed 3-10-2014; operative 7-1-2014 (Register 2014, No. 11).

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

As previously reported, the Commission initiated a reorganization creating an External Affairs Division that focuses on the granted lands program. An attorney, an analyst and a Public Land Management Specialist were redirected to that Division. The Commission also developed a standardized financial reporting form (http://www.slc.ca.gov/Granted_Lands/12.26web.pdf) that grantees are annually required to complete and submit. A reminder and instructional letter is mailed to grantees each September and completed forms are available for public review on the Commission's website; http://www.slc.ca.gov/Granted_Lands/AnnualForms.html. The reports summarize each grantees revenues and expenditures in a simplified manner providing an efficient and productive method for staff and the public to use to ensure funds generated from granted lands are expended in accordance with the public trust and the terms of the applicable granting statute.

Staff monitors each grantee's yearly financial information, analyzes the revenues and expenditures for any anomalies and compares the information to the grantee's prior annual reports to identify any gross variances. Staff also reviews the types of expenditures reported to see if they are consistent with the common law Public Trust Doctrine, individual granting statutes and other applicable laws. When the expenditures appear questionable or are vague, staff contacts the grantee to request clarification and/or further information. Staff also checks each reporting form to see if grantees are maintaining separate trust accounts, as required by law. Staff works closely with the grantees to ensure information is timely and accurate and follows up to ensure there is a shared understanding of the requirements of the grant and the compliance and reporting responsibiities of the grantee.

Recommendation To: Lands Commission, State

To ensure that it manages delinquent leases in an effective and timely manner and collects all the amounts owed to it, the commission should develop and adhere to policies and procedures that incorporate the administrative manual’s guidance, including the steps staff should take when a lessee is delinquent, time standards for performing those steps, and a process for consistently tracking the status of delinquent leases between divisions.

Response

These processes are currently under review for inclusion in the workflow of the State Lease Information Center (SLIC) database. We will report further on progress in the next status report. The Senior Staff Enforcement and Compliance team protocols dealing with trespass and delinquent accounts are being updated. These protocols were developed in response to the previous audit and need to be updated to reflect integration of the new database in the processes and workflow.

Recommendation To: Lands Commission, State

To ensure that as few leases as possible go into holdover, the commission should continue to implement its newly established holdover reduction procedures and periodically evaluate whether its new procedures are having their intended effect of reducing the number of leases in holdover.

Response

Commission staff will continue to examine processes and leverage the reporting and workflow capabilities of the SLIC database to enhance holdover reduction procedures to ensure that notifications of lease expirations are timely.

Recommendation To: Lands Commission, State

To ensure that as few leases as possible go into holdover, the commission should consistently assess the 25 percent penalty on expired leases.

Response

In assessing the 25% penalty on expired leases, the standard lease language for future leases has been updated to clarify that the penalty "may" be assessed, rather than "shall". For current leases, staff has developed a protocol to evaluate each expiring lease to determine the whether to assess the penalty. Holdover leases are being billed on a monthly tenancy basis as specified in the lease. Staff is continuing to look into this issue to explore a more definitive resolution. Staff continues to maintain that a lessee should not be penalized for shortcomings of the Commission staff or other permitting agencies in processing leases.

Recommendation To: Lands Commission, State

To complete its rent reviews promptly and obtain a fair rental amount for its leases, the commission should conduct rent reviews on each fifth anniversary as specified in the lease agreements or consider including provisions in its leases that allow for the use of other strategies, such as adjusting rents annually using an inflation indicator.

Response

The rent review processes are currently under review for inclusion in the workflow of the SLIC database. The goal is to ensure all reviews are conducted in a timely manner to ensure maximum recoveries.

Additionally, staff is transitioning a significant portion of all leases to annual fixed percentage or inflation (CPI) adjusted rents as opportunities arise with lease amendments and renewals. All new General Lease - Recreational Use transitioning from rent-free status to rental pursuant to changes per Chapter 585/12 (SB 152) are being established with annual CPI adjustment. Other recreational leases are on a 10-year renewal cycle and will attrition as they expire. Leases of other types can have terms up to 49 years. Where appropriate and when opportunities arise, those leases will also be converted to either CPI or fixed percentage annual increases. This practice should substantially reduce management costs and enhance overall revenue recoveries by specifying rent increases in the lease requiring no further action by the Commission for the term of the lease.

Recommendation To: Lands Commission, State

To ensure that it is charging rent based on the most current value of its properties, the commission should appraise its properties as frequently as the lease provisions allow—generally every five years.

Response

Management has provided staff with instructions (Exhibit 3) for determining lease values and the use of appraisals. While it is the goal of Commission staff to at a minimum, appraise those leases that would result in an annual rental of over $10,000 annually, current staffing realities preclude this. As noted in the initial response to the report, the Commission has only just recently hired a single qualified appraiser. Recruitment continues for additional appraisers but there are challenges in competing with the private sector. The instructions to staff require a comprehensive review of the various methods and criteria to be used in determining rental values. This analysis will be required for all rent reviews, renewals and new leases and must be submitted to management for approval after which it will become part of the lease file for future reference and review.

Current Status of Recommendations

All Recommendations in 2014-041