State Trust Lands in
Arizona: A Primer
PRESENTATION TO THE ARIZONA LAND TRUST NETWORK
JANUARY 21, 2016
Land Ownership in Arizona
State Trust Lands: A Unique Category of
Land Ownership
Granted to states by Congress upon entrance into
the Union
Held in a perpetual, intergenerational trust to
support a variety of public institutions – the
primary beneficiary being public schools
Managed largely for revenue generation –
primarily for grazing and agricultural leasing,
commercial leasing, real estate development,
oil/gas/mineral extraction
23 states still hold state trust lands from their
original grant – mostly in the interior West –
totaling approximately 46 million acres
Origin of State Trust Lands
Following Revolutionary War, Congress faced three-part
challenge
◦ Flood of recent immigrants and settlers heading West
◦ Jeffersonian vision: a free people must be an educated people
◦ Need to secure claims to the frontier from rebellion or
European rivals
◦ Massive war debts and limited federal revenues
Solution: General Land Ordinance (1785) and Northwest
Ordinance (1787)
◦ Federal government had one resource in abundance: land
◦ Organizing settlement through rectangular survey, repaying
national debt through sale of lands, providing for education and
essential services through trust grants
General Land Ordinance (1785)

Established the rectangular survey
system
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
36-square mile “townships” divided into
sections and fractions of sections
Basis for legal descriptions of land in most of
Western U.S.
Provided for first reservation of trust
lands for new states, with section 16 of
every township reserved “for the
maintenance of public schools within
the said township”
Northwest Ordinance
(1787)

Created a system of territorial governments and
process for transitioning territories into new states

Article V required that states be admitted on “equal
footing” with the existing states

Carried through the vision of cheap land, state
equality and public education as critical to the
success of western settlements

Ohio (in 1803) was the first “public domain” state
admitted to the union which received a land grant
in support of schools
State Trust Land Grants

New states received the central section of
every township as reserved lands (Section 16)
to support public education
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

Mathematical vision of community-building
Originally reserved to local township, consistent
with agrarian vision
 Later, reserved to the state
Grants later expanded to include 2, 32, 36 as well
(Western lands not amenable to farming) – Arizona
one of the states to receive four sections
Congress also issued block grants for
universities, hospitals, and other essential
state functions
Increasing Restrictions on State
Trust Land Management

Early history of trust lands fraught with extensive land fraud and rapid
disposals

Several states divest themselves of virtually all trust lands and/or trust
funds in ill-considered transactions

States and Congress imposed more restrictions on land disposals and
management as experience with lands grew

Michigan (1837) – Constitution included provisions requiring
proceeds from sale of state lands go into a permanent fund

Soon complemented by increasingly complex restrictions on sale and
lease of these lands

Minimum sales price, fair market value appraisals

Public auctions

Long term retention of lands rather than disposal
The Trust Responsibility

The trust lands grants in the lower 48 states were
brought to a close with the New Mexico-Arizona
Enabling Act of 1910


Most extensive land grants of any of the lower 48 states
Enabling Act imposed detailed requirements for
trust management and stated explicitly that lands
were held in “trust”


U.S. Supreme Court found that a legal “trust” was created
by the Enabling Act
Since then, all Western states except CA have found that
their lands are also held “in trust”
What is a “trust”?


A trust is a legal relationship in which one party holds property for the benefit
of another.
Three parties:




“Settlor” or “trustor” – establishes the trust
“Trustee” – administers the trust
“Beneficiary” – receives the benefits of the trust
Identified beneficiary or charitable public purpose for which the property is
held in trust. Typical examples:


Family trust for education of direct descendants
Charitable trust for education of children in the community (state trust doctrine similar to
charitable trust)
 Critical to note: state trust is NOT a private trust – it has a public mission and public
beneficiaries
Fiduciary Duties in a Trust Relationship
Duty to follow the settlor’s instructions
◦ Manage trust resources for the intended purpose
Duty of loyalty
◦ Cannot put interests of self or third parties ahead of interests of trust/beneficiaries
Duty of prudence
◦ Due care, diligence, and skill in management of trust (affirmative and negative conduct)
◦ Appropriate expertise, diversification, investigation and assessment, monitoring and reassessment
Duty to preserve the trust
◦ Protect trust corpus to ensure that trust objectives are met for the long term
Duty to Preserve the Trust

Requires the trustee to manage the corpus of the trust in a manner that
takes a long term perspective and preserves the trust asset



Opportunities for short term gain must ALWAYS be balanced by long-term
preservation
Ensure trust will satisfy both present and future needs of beneficiaries
This duty plays a critical role in the trust responsibility for state trust
lands:

For a perpetual intergenerational trust, critical to ensure the trust asset will remain
undiminished to serve the needs of future beneficiaries in perpetuity


Current beneficiary needs do not outweigh future needs
Important to recognize that in light of this duty, current trust beneficiaries frequently face a
conflict of interest
Trustee’s Additional Obligations as a
Public Entity

Important to understand that state trust managers are NOT private trustees, and trust
beneficiaries are NOT private beneficiaries



Trust is a public obligation to public beneficiaries
It is not the school board association’s trust or the teacher’s union’s trust – it is a trust for a broad public
purpose
Trust land managers have a broader obligation as public agencies

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
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Higher standards for environmental analysis of trust activities
Consideration of fiscal impacts to communities before approving developments on state trust lands
(Colorado & Arizona)
Public notice and reporting of trust related decisions
Hold public hearings, maintain public records, and accept public comments
Subject to legislative appropriations and directives (although legislature is also subject to the trust
responsibility)
Arizona’s State Trust Land Grant




At statehood, Arizona received sections 2, 16, 32, and 36 in every township
“for the support of the common schools”
Enabling Act restrictions

Requirement that trust lands & natural products of trust lands be sold or leased “to the highest and
best bidder at public auction”

Lands must be appraised at their “true value” and cannot be disposed of for less than their appraised
value

Standards for conduct of auctions – minimum notice, advertising, and locational requirements
1912: 10.2 million acres conveyed as state trust lands
Today: 9.2 million acres remain
14 Beneficiaries

The Common Schools (K-12) are by far the
largest beneficiary – 8.1 million acres of the
9.2 million remaining are held for this
beneficiary
Arizona State Land Department


State trust lands managed by the Arizona State Land Department under the direction
of the State Land Commissioner, which is appointed by and serves at the pleasure of
the Governor
ASLD Mission:


“To manage State Trust lands and resources to enhance value and optimize economic return for
the Trust beneficiaries, consistent with sound stewardship, conservation, and business
management principles supporting socioeconomic goals for citizens here today and generations
to come. To manage and provide support for resource conservation programs for the well-being
of the public and the State’s natural environment.”
Trust Management Activities

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
Surface Uses (grazing leases, commercial leases)
Subsurface Uses (mineral sales & leasing)
Trust Land Sales & Dispositions
Total Trust Land Holdings in West – Compare with Arizona
10,000,000
9,000,000
8,000,000
Other Trusts
Trust Acreage
7,000,000
Current Common
School Trust
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
AZ
CA
CO*
ID
MN*
MT
NE
NV
NM ND*
States
OK
OR
SD
TX
UT* WA*
WI
WY
Majority of Trust Lands Managed for Grazing &
Agriculture
Revenue Generated through Grazing and Agricultural Leases
from State Trust Lands 2003-2004
$14,000,000
Revenue generated
$12,000,000
$10,000,000
$8,000,000
grazing
$6,000,000
agriculture
$4,000,000
agriculture and grazing
$2,000,000
$0
AZ
CO
ID
MT NM OR UT WA WY
States
Fossil Fuel Resources on Trust Lands
Oil and Gas Revenue from State Trust Lands 2003-2004
$300,000,000
$250,000,000
Revenue
$200,000,000
$150,000,000
$100,000,000
$50,000,000
$0
AZ
CO
ID
MT
NM
States
OR
UT
WA
WY
Mining Activities
Mineral Revenue from State Trust Land 2003-2004
$8,000,000
$7,000,000
Revenue
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
$0
AZ
CO
ID
MT
NM
States
OR
UT
WA
WY
Real Estate Development
Land Sales Revenue from State Trust Land 2003-2004
$140,000,000
$120,000,000
Revenue
$100,000,000
$80,000,000
$60,000,000
$40,000,000
$20,000,000
$0
AZ
CO
ID
MT
NM
States
OR
UT
WA
WY
Revenue Generation
in Arizona
 Land sales is the largest source of revenues
from state trust lands in Arizona (BUT typically
only involves 1,000-3,000 acres of land per year
on average)
 Majority of lands (nearly 84%) are held in
grazing or agricultural leases – which bring in a
relatively small slice of revenues
Importance of State Trust Lands for
Future of Arizona
Trust lands represent a tremendous resource for state education, for conservation, and
for future development
◦ In Arizona, there are over 1 million acres in or adjacent to urban areas
◦ Approximately 50% of future developable lands in Maricopa, Pima & Pinal Counties are state trust
lands
◦ 70% of North Phoenix developable area
◦ 66% of Pinal County developable area
Also represent the largest tracts of remaining un-subdivided lands in proximity to urban
areas
◦ Could generate tens of billions in revenue for education
◦ Some positioned such that they could provide landscape-scale preserves accessible to urban areas
◦ The manner in which they are developed and conserved will shape the future development patterns
and quality of life
Challenges for State Trust Land
Management in the “New West”
Changing demographics leads to
changing perceptions of traditional
land uses
New pressures on state trust lands –
recreation, public desire for open
space
Changing economy means that many
state trust land revenue portfolio’s are
not always capturing the highest value
for the lands
Invoking the Trust Responsibility to
Improve Trust Land Management

Trust responsibility is frequently misstated to require “revenue maximization”

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Ignores the significance of the trust as a perpetual, public trust and the objectives that trust
lands were created to serve
Sally Fairfax: “Maximum financial return is barely tolerated as a controlling notion, and is
rarely practiced even on lands privately held by corporations.”
The trust responsibility ultimately requires a holistic and sustainable approach
to the management of land that can be used to improve trust management
(and to achieve meaningful conservation)
Total asset management, not “highest and best use”
Institutional Capacity Challenges for
Arizona State Land Department
ASLD budgets based on legislative appropriations (other states
permit departments to keep % of proceeds)
Difficulty attracting well-qualified employees, chronic
understaffing
Brain-drain during funding cycles, difficult to hire outside
expertise
Inability to participate in ongoing planning activities; narrow,
short-term focus on highest-value urban parcels
No funding for enforcement, land improvements, or enhanced
management
Funding disconnected from fiduciary requirements
Significant opportunity costs associated with lack of
planning, missed opportunities & timing
Significant damage occurring to trust lands
Challenges for Conservation of
Ecologically Significant Trust Lands
Difficult and sometimes impossible to
achieve conservation on state trust
lands
 High costs of land
 Auction requirements
 Political limits on conservation dispositions
 Legality of existing mechanisms (API)
Failure to manage for conservation
values leads to conflict
 The need and desire to conserve trust lands
has been a major driver – if not the major
driver – of many trust reform efforts
Arizona State Trust Land Reform
 Comprehensive state trust land
reform needed to modernize the
State Land Department
 Efforts to pass elements of reform
have been attempted frequently
over the past 20 years, some
successfully, and others not so…
Early State Trust Land Measures
1990’s
◦ A series of state trust land exchange
authority measures – all failed
1996
◦ Arizona Preserve Initiative passed by
Legislature
1998
◦ Growing Smarter passed by Legislature
◦ Prop 303 – Funding for API match (passed)
2000
◦ Prop 100 – Growing Smarter Plus (failed)
◦ Prop 301 – Classroom Site Fund (passed)
Comprehensive State Trust Land Reform
2001 - “Ed Fox Group” commences 3-year stakeholder process to develop a
comprehensive reform package
◦ Participants included agency representatives, developers, educators,
conservationists, ranchers, counties, cities and towns
2004 – Ed Fox Group presents package of reforms to Legislature – which finds
measure too complex (included both a constitutional & statutory measure to act
in concert – criticized by some as a glittering Christmas tree of multiple
provisions affecting trust land management)
2005 – Ed Fox Group gives it another go with a simplified version – Legislature
rejects
2006 - Prop 106 – Ed Fox Group launches Conserving Arizona’s Future initiative proposal narrowly defeated
◦ Prop 105 – Legislative reform measure referred to confuse voters also fails
2008 – New, simplified version of Prop 106 initiative disqualified from ballot
Subsequent Reform Efforts
After the failure of comprehensive, consensus-driven reform, state trust land
issues briefly devolved into a hodgepodge of various stakeholder-driven
proposals
◦ “Conservation” lands give-aways to any non-profit
◦ Definition of “conservation” allowing conservation lands to be used for virtually any non-development
purpose
◦ Special lessee protections on “conserved” lands, including long-term leases and economic damage
payments
◦
◦
◦
◦
◦
◦
Sand & gravel provisions
Absolute management standards enabling lawsuits against trust managers
Military base protections
Cancelling trust interests in pre-1969 roadways
Changes to state fund investment formulas
Preventing use of development impact fees as part of trust land acquisitions, with a
finding that use of development fees is against the interests of the trust (demonstrably
false)
Most of these concepts didn’t go anywhere…
Moving to a More Modest Approach
 In 2010, a legislative referenda on
the ballot to establish state trust land
exchange authority under certain
circumstances (military base
preservation and conservation)
Failed
Measure attempted again in 2012,
and narrowly passed – the first
successful measure on state trust lands
in over a decade
Exploring Conservation Tools within the
Context of the Trust Responsibility
 Conservation Sales & Leases
 Contributory Value – Conservation
Set-Asides as Part of Master Planning
Process
 Ecosystem Services Markets
 Land Tenure Adjustment (Land
Exchanges to Achieve Conservation
Outcomes)
Conservation Sales & Leasing
 Arizona one of the most deliberate
in creating a pathway for state trust
land purchase for conservation
through the Arizona Preserve Initiative
(API)
 State trust land sales account for a
significant portion of sale revenue
from state trust lands (esp. during
recession)
 But it is an expensive strategy
Arizona Preserve Initiative
 Established in 1996 to provide a mechanism for
purchase of lands with conservation values for
preservation
 State agencies, local governments, businesses,
NGOs or other civic groups may nominate lands they
believe have significant ecological or open space
values (only applies to “urban” lands)
 State Land Commissioner has discretion to
reclassify those lands as “suitable for conservation”
and eligible for purchase under API
 Matching grant program to provide funds for
purchase of lands under API
However, a constitutional challenge in 2004 put the
program under a legal cloud – but it is still in use
Conservation Leasing
 Idaho Department of Land – Conservation
Leasing Program
 Small portfolio
 Allows resource protection, viewshed preservation,
and wildlife management
 Colorado State Land Board – Stewardship Leasing
Program
 Longer term grazing leases in exchange for
enhanced stewardship of lands (invasive weed
management; wildlife habitat protection)
 New Mexico State Land Office – Range
Stewardship Incentive Program
 Provides for a 25% reduction in grazing lease costs in
exchange for improvements to rangeland condition
Contributory Value
 Conservation set-asides occurring
through the master planning process
 Similar to density transfer programs
(TDRs)
 Land value premium associated with
being adjacent to protected public
lands compensates trust for
conservation
 Often difficult to measure or
standardize in terms of “non-monetary
consideration” to the trust
Ecosystem Services Markets and State
Trust Lands
Mitigation & Conservation Banking via
Compliance Markets
 Endangered Species Act – U.S. Fish & Wildlife Service
 §404 of Clean Water Act (wetlands mitigation) – U.S.
Army Corps of Engineers
 2008 rule on compensatory mitigation
PWS & PES (Payment for Watershed Services
& Payment for Ecosystem Services)
Instruments
Pre-Compliance Markets & Voluntary
Markets
 Advance Mitigation
 Carbon Credits
Compliance Markets vs. Pre-Compliance
and Voluntary Markets
Compliance Markets:
◦ Regulatory-driven , correcting for market failures
◦ Create demand for ecosystem services
Pre-Compliance Markets
◦ Market participants expect that a resource will be regulated in the
future, therefore invest now
Voluntary Markets
◦ Ecosystem services purchased without a requirement to do so –
philanthropic, image, personal value motivators
2008 EPA Rule – a Game Changer for
Ecosystem Services Compliance Markets
2008 EPA Mitigation Banking Rule §404 – no longer a preference for
on-site mitigation, but rather mitigation that preserves larger-scale
intact systems
 Reduces piece meal “postage stamp” approach to conservation efforts by
establishing larger reserves that can better preserve intact ecosystem functions
and habitat connectivity
Trust land managers, including ASLD, are in a position to identify
lands suitable for mitigation or conservation banking (as large land
owners), and can make them available to the ecosystem services
market
U.S. Conservation Banking
Estimated figures for conservation
banking in the U.S. is $200-$300 million
per year*
Prices range from $3,000 per acre for
San Joaquin kit fox to $125,000 for a
breeding pair of Least Bell’s Vireo*
U.S. Species Banking - Market Snapshot
Number of Banks
• 137
Species Credit Types
• 94 Types
Habitat Credit Types
• 53 Types
States with Banks
• 11 States
Land Area Protected
*Presentation to WSLCA on Land
Conservation and Revenue Generation on
State Trust Lands. Adam Davis, 2007.
• 299,519.31 acres
Data source: http://www.ecosystemmarketplace.com/pages/dynamic/marketwatch.landing_page.php
2007 – Sonoran Institute Study to Explore Opportunities
to do Mitigation/Conservation Banking for ASLD
Evaluation of state trust lands
within two watersheds of Arizona
 Agua Fria River Watershed
 Hassayampa River Watershed
Assessment of demand for
mitigation or conservation credits
Legal constraints and
opportunities
Study Area – Hassayampa/Agua Fria Watersheds
Growth & Development = Demand for
Environmental Mitigation
Study results:
Impacts from transportation related projects likely to be the most consistent and
predictable mitigation driver
Demand for credits depends on:
Similar resource impacts within a scientifically relevant distance (i.e. watershed)
Developers have the option of on-site mitigation or payment of in-lieu fees in
some cases
In the initial study area, the Hassayampa watershed, demand was not
projected to be sufficient to pursue transactions
CWA demand would occur, but USACE planned to use in-lieu payments in that
area
Demand for Compensatory Mitigation in
Arizona – Demand for Ecosystem Services
 Planned average annual highway spending
(2011-2015): $1.275 billion
 Anticipated that of this, $96 million would go to
environmental mitigation (7.5% of total highway
spending)
 38% will go to Pima County
 11% to Pinal County
 U.S. Army Corps of Engineers issued 178
permits from November 2009 to November
2010 – officials estimate 90% of these projects
will require environmental mitigation
Opportunities in Marketing Mitigation Credits
ASLD land holdings may be significantly more valuable
for disposition if mitigation for planned development is
already an integral part of the auction process
◦ Addressing mitigation needs during a master planning process or
facilitating “turnkey” conditions prior to land auction
◦ Properties faced with mitigation obligations could be sold with the
provision of mitigation opportunities elsewhere on ASLD properties
(assuming regulatory agency approval)
◦ An advance mitigation strategy that meets overall environmental
objectives of governing agencies could be a significant consideration
for bidders
Opportunities, cont’d.
Development of formal banks intended to meet
mitigation demands of a range of projects
◦ Currently 2 conservation banks in Arizona – both for the
Pima pineapple cactus
◦ Utah SITLA precedent:
◦ Utah Prairie Dog conservation bank
◦ Immediately upon bank approval, the state sold all of the mitigation
credits and property development rights to Iron County but retained
surface and mineral ownership
◦ The credit price was established by dividing the appraised value of the
transferred development rights ($126,000) by the total number of
credits available (77), thus credit price set at $1,636 plus $200
endowment fee per credit
Opportunities, cont’d.
Develop endangered species habitat protection and mitigation
as an “insurance policy” to increase the value of ASLD land for
potential developers
◦ Endangered species habitat restrictions are a liability for
residential/commercial developers
◦ Development of conservation banks for mitigation impacts in advance of
disposition could increase property value by reducing customer risk
◦ A 20 to 30 year time horizon for ASLD property disposition value, mirroring
the long term nature of development, along with the risk averse nature of
investment capital, indicate that addressing species-related liability could
be a real value proposition
Land Tenure Adjustment (Exchanges)
 Checkerboarded land ownership pattern
problematic for management – both for
conservation, and for the trust land agencies
in managing for revenue generation
Consolidation of ownership of ecologically
sensitive lands, while allowing the trust to
retain lands with leasing values is a potential
win-win
 In Arizona, a challenge to land exchange
authority under the constitution in the late
1980’s resulted in ASLD no longer being
allowed to engage in exchanges
Passage of Prop 119 in 2012
 Restored land exchange authority to the
Arizona State Land Department for certain
purposes, and under certain conditions
 For the purpose of protecting military facilities
or for improved management, protection, and
conversion to public use of state trust lands
 Exchange required to be in the best interests of
the trust beneficiaries
 Required to have at least two independent
appraisals
 Requires independent analyses of fiscal impacts
to trust and impact of exchange on local
communities
 Public notice & comment provisions
 Exchange must be approved by a vote of the
public
Pilot Projects to Explore Exchange
Opportunities
 Sonoran Institute’s Sun Corridor Legacy Program exploring opportunities to model a successful
exchange under the provisions established by Prop 119
 However… to date, not much movement has been made in pursuing an exchange
“School lands [should not] be administered to
maximize economic return in the short run… some
school lands have unique scenic, paleontological,
and archeological values… it would be
unconscionable not to preserve and protect those
values.”
- Utah Supreme Court
Thank You!
Susan Culp
[email protected]
(928) 554-4546 or (602) 402-6669
http://www.lincolninst.edu/pubs/default
.aspx?pub_type=3