During his introduction of the action, Rep. Mike Hawker, who chairs the committee, said “I have talked to folks over at Mental Health Trust who assure me they are also taking steps currently to remedy some apparent concerns. And the point of this audit is to document whether or not the concerns were valid and beyond that, of course, to document the process, procedures in place and being taken by the Mental Health Trust Authority to remedy any concerns that may be out there.”
The special audit will be looking at the Trust’s investments and asset management. Lawmakers want to know if the Trust’s board and employees are complying with statute. They are also looking into whether or not all of the transactions are considered to be “at arm’s length.” Meaning, none of the Trust employees and Trustees or their family members benefit from any of the transactions.
Bruce Botelho and Harry Noah, two former government officials who were involved in the settlement that reconstituted the Trust in the 1990s, requested that Hawker ask for an audit. They raised concerns about the Board of Trustees’ decision to invest Trust principal funds on their own rather than have the money invested by the Alaska Permanent Fund Corporation, as is written in statute. At the direction of the board, the Trust Land Office, which was established to manage the non-cash assets of the Trust, is using funds from the principal to buy real estate and has not transferred principal funds to the Permanent Fund since 2008.
According to the TLO’s 2016 Resource Management Plan, the legal authority to buy real estate and pursue investment comes both from the 1956 Alaska Mental Health Enabling Act and from Alaska Administrative Code. One code states that “from time to time, the board may determine that it is in the best interest of the trust and its beneficiaries to use receipts from the management of trust land to (1) acquire new trust land”. The board also cites a fiduciary responsibility to Trust beneficiaries that includes diversifying the Trust’s assets.
At present, the TLO owns seven separate Limited Liability Corporations for each of its real estate assets. That includes three different properties in Texas, one in Utah, one in Washington, and two in Anchorage. The TLO reports real estate investments total about $39.2 million with a 15.6% total return in fiscal year 2016.
At least $17 million of that, or nearly half, is invested in an office building in Tumwater, Washington that houses the Washington State Parks and Recreation Commission. The Trust’s management strategy states “Single investments should not be too large in relationship to the portfolio as a whole in order to maintain diversity.”
It is unclear if these properties are being audited on a yearly basis.
In an April 2015 memo, the Trust’s Chief Financial Officer, Kevin Buckland, suggested that the board of trustees adopt an audit policy for the LLCs similar to the one the Alaska Permanent Fund has in place for its investments. The LLCs “are not within the scope of the Trust’s existing external audit,” the memo read.
Minutes from the April 16, 2015 Resource Management Committee meeting show that Trust Land Office Executive Director John Morrison said the properties are under the umbrella of the current audit. Buckland disagreed.
“The $600 million portfolio, all the Trust assets as a whole are audited, but these LLCs or the real estate portfolio are not included,” the minutes read. The statement is attributed to Buckland.
According to the minutes, Trustee Larry Norene said calling for “audits on individual properties does not warrant the expense, at this point.”
An audit policy for the individual LLCs has never been adopted.
There is no cap on the TLO’s investments, and all decisions are made on a case-by-case basis.
The Trust’s Chief Communications Officer, Carley Lawrence, wrote in an email, “In January 2016, the board of trustees unanimously voted and directed the TLO executive director to develop a plan to generate annually from the Trust’s noncash assets an amount of spendable income equal to or exceeding the spendable income generated from the Trust cash assets.”
Using revenue numbers from FY2016 as listed on that year’s cash management sheet, that means the TLO would have to quadruple its income from real estate, land management, and other sources.
Lawrence wrote that the plan is still being developed.
The Resource Management Strategy gives some avenues, such as developing new properties. However, it states “Acquiring and developing land, or acquiring existing improvements for redevelopment are the highest risk options and should be expected to provide the highest returns.”
During a special meeting on May 2, 2016, the board voted to spend up to $11 million to enter a joint venture with Panattoni Development Company to build a dock warehouse facility in Everett, Washington. According to meeting minutes, TLO director Morrison said that the property would bring in $725,000 dollars per year with a 20-year hold. The trustees voted to allow Morrison to represent the Trust in making decisions about the venture including modifying the project plan, leasing, financing, and buying out the other investors.
During a telephone interview Lawrence said no money has been spent on the project to date.
The Monday morning meeting was publicly noticed at 4 pm the previous Friday. Lawrence said Trust meetings are typically announced seven to 10 days before. Due to administrative oversight the board packet with details of the motions was not put online until this week.
The legislative audit will also look into potential violations of the state’s open meetings act, which applies to both the entire board and its committees.
Accusations of potential violations arose earlier this year.
One concern involves an email sent by board chair Russ Webb that directed a staff member to hire legal counsel to deal with personnel matters but not to tell any other board members or staff about the directive. The two other members of the executive committee were included in the email string. There were no public notices about the committee either holding a meeting or taking action in September when the action started.
Trustee Jerome Selby called the matter to attention during the November board meeting when Webb tried to dismiss the discussion of the attorney contract, which was worth up to $50,000.
“The whole issue begins and ends with a memo from you to a staff member who you do not supervise where you specifically directed the information be withheld from the board,” Selby said. “That, Mr. Chairman, is beyond the pale. It needs to never happen again.”
Webb declined to comment both during the meeting and during a follow-up interview.
The special audit could take months. Some audits have taken more than a year to be completed.