Report 2010-125 Recommendations and Responses in 2015-041

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 2014-041 Response Not Implemented as of Most Recent Response
State Lands Commission 4 27 13 7 4

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

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.

Failure to collect timely rents results in the Commission declaring lessee in trespass and seeking ejectment through the courts. The Commission has been reluctant to pursue this course of action due to the high costs associated with it. Recent analysis of cases successfully pursued by Commission staff and the Attorney General show those costs to be in excess of $300,000 per action yet involve rents of only a few thousand dollars a year.

The Commission has received authority to assess administrative penalties in trespass and lease compliance situations from the Legislature in Chapter 247, Statutes of 2012 (AB2082). The Commission is currently promulgating regulations to give it the authority to levy penalties to those in trespass, including those in breach by failing to pay rents due the State. We expect the regulations to be considered by the Commission in early 2016 and in effect by Fall 2016. Once in place, this will provide Commission staff a more effective tool for dealing with delinquent lessees.

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 result in additional costs in staff time and would result in no revenues to the General Fund until the dispute is resolved. Depositing the rents as revenues upon receipt 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 subject to penalty and interest and a breach in the lease which could result in a trespass action. The potential penalties that could be levied once the enforcement regulations are in place will also serve to motivate recalcitrant lessees to submit timely payment.

For these reasons and those stated previously, this recommendation will not be implemented.

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

Response: The Commission's new State Lease Information Center (SLIC) database is up and running. Rent reviews for leases are identified a year prior to their deadlines and are being process and considered by the Commission in a timely manner.

Additionally, staff has transitioned a significant portion of all leases to inflation-adjusted rents (CPI). All new General Lease - Recreational Use leases transitioning from rent-free status to rent-generating leases pursuant to Chapter 585/12 (SB 152) are being established with annual CPI adjustments, thus eliminating the future need for rent reviews. Other recreational leases are on a 10-year renewal cycle and will be converted as they expire. Where appropriate and when opportunities arise, other leases will also be converted to annual percentage or CPI increases. This practice will substantially reduce management costs and enhance overall revenue recoveries by specifying rent increases in the lease and requiring no further action by the Commission during the lease term. Inflation adjustments are coded into the database upon entry and subsequent invoices are adjusted automatically without any staff intervention.

Commission staff believes this recommendation is fully implemented.

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

Response: Commission staff is now following the established protocols for obtaining appraisals for leases with rent of $10,000/year or higher. The Commission is still working with one in-house appraiser and is actively recruiting for a senior appraiser. Staff is now also contracting with outside appraisers to meet demand. Outside appraisers will be used on an as needed basis until additional staff can be recruited. Additionally, the greater reliance on inflation adjustment being built into leases, with the option to perform an appraisal at specified intervals, is also being used to better manage the workload.

Commission staff believes this recommendation is fully implemented.

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

Response: The Commission has received authority from the Legislature in Chapter 247, Statutes of 2012 (AB2082) and is currently promulgating regulations to give it the authority to levy penalties to those in trespass, including those in breach by failing to pay rents due the State. These regulations are expected to be considered by the Commission in early 2016 and in effect by Fall 2016. Once operational, this will provide a more effective tool for dealing with delinquent lessees.

Staff is following SAM requirements for the notification of past due lessees by letter, however, failure to collect timely rents results in the Commission declaring lessees in trespass and seeking ejectment through the courts. The Commission has been reluctant to pursue this course of action due to the high costs associated with it. Recent analysis of cases successfully pursued by Commission staff and the Attorney General show those costs to be in excess of $300,000 per action and involve rents of only a few thousand dollars a year. Writing off small amounts not economically feasible to recover is not an option as the delinquent lessee is still occupying State-owned land.

Commission staff believes this recommendation is fully implemented.

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

Response: Staff has continued to follow the holdover reduction procedures and it has been extremely successful. Of the more than 1,400 rent-generating leases, there are currently only 18 such leases in holdover (a 99% compliance rate). Over the past three years since the holdover procedures have been in place, the Commission has held 18 meetings, bringing more than 600 compliance/enforcement related items, resulting in an additional $4 million in revenues for the state. The majority of these are not one-time revenues, but increased annual rent. Those leases still in holdover have been brought current on rental valuation and are being held up by other factors often beyond the Commissions control such as completion of environmental documents or issuance of permits or approvals from other regulatory agencies.

Commission staff believes this recommendation is fully implemented.

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

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 whether to assess the penalty. Holdover leases are being billed on a monthly tenancy basis as specified in the lease. . In cases where the lessee is resisting efforts to renew, the 25% penalty is being applied to the monthly billings.

Staff is continuing to look into this issue to explore a more definitive resolution. Staff continues to believe that a lessee should not be penalized for delays in the processing of a lease application that are outside the lessee's or the Commission's control, such as issuance of permits or approvals from other agencies and completion of consultant studies or environmental documents necessary for Commission authorization.

For these reasons staff believes it is in partial compliance with this recommendation.

Current Status of Recommendations

All Recommendations in 2015-041