Giving Away Montana’s Old-Growth Forests By George Ochenski
By Matthew Koehler, New West Unfiltered 10-28-08
By George Ochenski
Does giving away the state's old growth timber at bargain basement prices in a severely depressed lumber market make sense? Conservationists say "no," but Montana's Department of Natural Resources and Conservation (DNRC) and some Land Board members say it's part of a necessary effort to maintain the state's timber industry in tough economic times. The role of the state - and the disposition of state trust land resources to bolster private timber companies -- is a debate which is likely to heat up significantly in the coming months.
The state's highly controversial Three Creeks timber sale, which is primarily old growth situated in critical wildlife and fisheries habitat od Montana's Swan Valley, is a prime example of the issue. The state received about $46 per ton two years ago when it sold the first of the three-phases of the Three Creeks sale. Now, however, the remaining timber will be offered for sale at about one-third of that price, at $16.75 per ton. While some Land Board members question the wisdom of selling valuable timber in a hugely depressed lumber market, others say the sales are necessary "to preserve the state's timber infrastructure."
At the August meeting of the Land Board, the sale of the last two remaining parcels of the Three Creeks project were approved. DNRC director Mary Sexton told the Board the Small Lost Timber sale, was a "small project we put together so local folks could bid." As Sexton described the sale, she added that it "won't meet old growth criteria once it is harvested." That comment prompted Governor Schweitzer to ask for clarification and Sexton replied: "This 15 acres is old growth and it won't be there once harvested."
The Three Creeks #3 sale followed, which put the remaining 242 acres of the state's largest old growth timber sale on the block for a minimum bid of $16.75 per ton, which prompted State Auditor John Morrison, who was attending the Board meeting via speakerphone, to comment on the price. "My concern is that we did the Three Creeks sale in March of last year at $45.96 per ton. Three Creeks #2, this year, was $21 per ton. Now, with Three Creeks #3, we're talking a minimum bid of $16.75 per ton. It seems like the price just keeps going down." Morrison went to say he commended the department on the salvage sales for pine beetles, but noted that it is "bound to create a growing glut in the market for timber and there's a heck of a lot of pine beetle killed timber yet to be removed. So why are we cutting 240 acres of healthy old growth at $16.75 per ton when we have all these dead pines we could harvest?"
In response to Morrison's question, Sexton replied that: "Yes, the timber market is down at this time. We're getting half of what we used to get from timber sales. But we're working with communities and stakeholders because if there isn't an on-going effort to provide timber, there may not be a timber industry. We're working hard to maintain on-going harvests in a sustained fashion and improvements we are implementing on the ground are having a significant impact on the land."
Morrison then asked Sexton: "What is our obligation as Trustees when the timber industry and market price is such that it is not in the best interest of the trust to sell at that price?"
Sexton replied: "You have to look at the long term, what we can harvest 50-60 years down the road. If there aren't any mills, we will pay a significant price for that. We only supply 10% of the harvest in Montana, so we are a small player."
"So," Morrison replied, "your position is that sometimes we have to sell when the price is low so the industry can be there when the price is high?"
"It's part of the cyclical nature of these things," said Sexton. "If we pull out when the price is low, we may not have the [timber] infrastructure when the price is high."
"It concerns me to be doing the largest timber sale since I've been on the Land Board when prices are so low," Morrison replied.
"When we initiated this sale, prices were high," said Sexton.
Although neither Land Board members nor DNRC staff brought it up, Anne Hedges of the Montana Environmental Information Center (MEIC) points to a Washington State legal ruling (County of Skamania v. State, 685 P.2d 576, 578-579 -- Wash. 1984) that affirms that trustees must have "undivided loyalty" to the trust - not to third parties or interests - and cites a report from the Sonoran Institute that explains the issue succinctly.
"In 1982, in response to collapse in timber prices precipitated by falling housing starts, the Washington Legislature passed the Forest Products Industry Recovery Act, which enabled timber companies to either extend timber contracts on state lands at no cost or to terminate contracts, essentially without penalty. The Act contained language indicating that by helping the timber companies, it would ultimately benefit the trust beneficiaries, noting that if the companies went bankrupt, there would be no buyers for state timber in the future. (at 578-579). Skamania County ultimately sued the state,
arguing that the grant of lands to the state constituted a trust, and the Forest Products Industry Recovery Act violated the state's fiduciary duties as a trustee of state lands (the County was joined in the suit by the State Board of Education and the Board of Regents for the University of Washington). The court ultimately agreed, holding that the grant of lands to the state in fact constituted a trust. Because the Act provided direct, tangible benefits to the contract purchasers and the state economy, at the expense of the trust beneficiaries, the state's actions violated its undivided duty of loyalty as a trustee. (at 581-82)."
"Every time the Land Board puts in the interest of the timber industry ahead of the interests of the trust it is violating the law," said Hedges. "Old growth forests have value beyond immediate short term timber revenues. By selling old growth at bargain basement prices, the Land Board devalues the long term interests of the trust to the benefit of the short term timber industry profits. There are plenty of state lands where timber could be harvested to generate revenue for schools that would not result in destroying valuable old growth habitat. But the Land Board bows to the short term interests of the timber industry instead of the interest of present and future generations."
Despite a letter from Friends of the Wild Swan and MEIC explaining that their staffers could not be at the August Land Board meeting and opposing the last Three Creeks sales, in the end the Board unanimously approved the sale except for Attorney General Mike McGrath, who was absent and not voting. [End of article]
So if you farm wheat on the Hi-line and market prices for wheat take a complete dive, do you stop selling wheat?
Comment By Ochenski, 10-29-08Jeff - The Land Board is not in the business of selling wheat, they are the TRUSTEES of Montana's school trust lands. The difference is significant...as in Trustees must have, by law, an UNDIVIDED LOYALTY to the Trust and its beneficiaries. You might do yourself a favor by reading the Skamania ruling. Giving away Trust assets for virtually nothing may well land the Board in court if they persist in their futile attempts to "save" the timber industry. By the way, the new low, low price for state-owned timber comes from the most recent October sales, which went for $12 a ton -- 25% lower than even the giveaway prices I cited in the article. But you'd have to go online to find that number, since Mary Sexton, the Director of DNRC, didn't even mention the price at the Land Board meeting.
Comment By Matthew Koehler, 10-29-08Mr. Jeff Schmalenberg:
It's good to see your busy working as a soil scientist at the State of Montana's DNRC. However, you left out some important points, which renders your comparison useless. George has already pointed out one of the fallacies of your argument. (ie we're talking about trustees that must have, by law, undivided loyalty to the Trust and its beneficiaries). Shouldn't a State DNRC know this?
Anyway, a more accurate form of your question to get the comparison right with the timber industry's latest calls would be:
So if you farm wheat on the Hi-line and market prices for wheat take a complete dive and wheat is at its lowest demand since the Great Depression and nobody is purchasing wheat do you complain your problem is that environmentalists aren't allowing you to grow more wheat and call for a bailout from Montana taxpayers so you to grow more wheat on public lands?
Good day,
Matthew
George,
Thanks for the responce. I have searched for the Skamania ruling but couldn't find the actual ruling. Do you by chance have the link or a pdf of the brief?
I just wanted to add a couple of things...
First, MCA 77-1-202; Powers and Duties of the Board:
(1) The board shall exercise general authority, direction, and control over the care, management, and disposition of state lands and, subject to the investment authority of the board of investments, the funds arising from the leasing, use, sale, and disposition of those lands or otherwise coming under its administration. In the exercise of these powers, the guiding principle is that these lands and funds are held in trust for the support of education and for the attainment of other worthy objects helpful to the well-being of the people of this state as provided in The Enabling Act. The board shall administer this trust to:
(a) secure the largest measure of legitimate and reasonable advantage to the state; and
(b) provide for the long-term financial support of education.
(2) It is consistent with the powers and duties provided in subsection (1) that the people are entitled to general recreational use of state lands to the extent that the trusts are compensated for the value of the recreation.
(3) When acquiring land for the state, the board shall determine the value of the land after an appraisal by a qualified land appraiser.
History: En. Sec. 3, Ch. 60, L. 1927; re-en. Sec. 1805.3, R.C.M. 1935; amd. Sec. 1, Ch. 113, L. 1969; amd. Sec. 1, Ch. 67, L. 1973; amd. Sec. 3, Ch. 428, L. 1973; R.C.M. 1947, 81-103(part); amd. Sec. 1, Ch. 136, L. 1983; amd. Sec. 3, Ch. 609, L. 1991; amd. Sec. 1, Ch. 222, L. 1995; amd. Sec. 1, Ch. 335, L. 2005.
I also searched MCA for "UNDIVIDED LOYALTY" and found nothing. Seems that this is not codified Montana Law...please search for yourself....http://data.opi.state.mt.us/bills/mca_toc/index.htm
Secondly, Three Creeks #3 minimum bid was in fact 16.75 a ton BUT what was left out was that the high bid for that sale was $31.17 a ton for a total of $1,063,333.38 for the trust only a 32% decline from previous sales in the Three Creeks bids...not the best I'll admit but given this market it's reasonable in my own opinion.
Small Lost minimum bid was $21.80/ton. High bid was $40.65/ton for a total of $56,259.60 to the trust.
See for yourself...
http://www.dnrc.mt.gov/trust/timber/salesresults.asp
Just wanted to make sure all the information was presented.
Thanks!
I stand corrected George...a matter of semantics. You still would have to agrue that a million dollar revunue for the Trust is not acting in the interest of the beneficiaries...a stretch in my own opinion. This is where individual value systems come in and I exit stage left...Cheers.
MCA 72-34-103. Duty of loyalty. (1) The trustee has a duty to administer the trust solely in the interest of the beneficiaries.
(2) It is not a violation of the duty provided in subsection (1) for a trustee who administers two trusts to sell, exchange, or participate in the sale or exchange of trust property between the trusts, if both of the following requirements are met:
(a) the sale or exchange is fair and reasonable with respect to the beneficiaries of both trusts; and
(b) the trustee gives to the beneficiaries of both trusts notice of all material facts related to the sale or exchange that the trustee knows or should know.
So who determines when to sell? Or what determines when it is time to sell? Who sets the market? Is the State of Montana the market setter for timber and lumber?
I worked for a sawmill owner who thought when prices were going up he would not sell and wait for higher prices. Inevitably, he had a pile of inventory when the market went down, and he ended up selling at lower prices than he demurred to sell at on the upswing. The moral: You sell into the market, in all markets, and the average will take care of you. I imagine that the Montana Trust Lands are used to produce revenue that goes into a fund that only the interest can be spent. So the interest on nothing is nothing. Zero. Every sale grows that fund, and the fund earns and/or loses based on market conditions in the financial markets (wanna bet the Trustees or the Montana State Investment Council or whoever is in charge of collected taxes, parked retirement funds and state trust accounts have lost a pile of money in the market in the last 4 months?) I am going to assume that a significant amount of the Trust accounts are holding less money than they did a year ago. Or Montana has a Wall Street Wizard investing for them.
So the real question is whether it is best for Montana to have people working, and some commerce ongoing, or is it best for the loggers, sawmill workers, truckers, chip haulers, to be on unemployment and waiting out the uptick in the market that will come someday. When, nobody knows. And when the uptick comes, at what price will Montana enter the market? Will there be a market to enter? And in the meantime, where did the revenue come from to maintain the State Lands, to keep the management staff employed?
When you quit a process for one reason, there is every chance in the world that the law of unintended consequences will provide for a far different result that was intended. Think about it long and hard before you quit selling timber. The savings might be a net loss.
Jeff, Thanks for doing some additional research and for also correcting yourself. I admit to not knowing all the information about how Montana DNRC manages our state's forests or how the Land Board operates.
However, as you point out, according to MCA 72-34-103: " The trustee has a duty to administer the trust solely in the interest of the beneficiaries."
That language is crystal clear and the "beneficiaries" in this case is not the timber industry.
Your statement that "You still would have to argue that a million dollar revunue [sic] for the Trust is not acting in the interest of the beneficiaries...a stretch in my own opinion" is one way to look at the Three Creek #3 old-growth timber sale.
However, perhaps a more accurate way to look at Three Creek #3 is that the Land Board approved old-growth logging (according to Land Board member Morrison "the largest timber sale since I've been on the Land Board") and ended up losing over $340,000 for the Trust compared with what they had gotten with Three Creek #2 a few months prior.
Is making a decision that costs the beneficiaries of the Trust $340,000 really administering "the trust solely in the interest of the beneficiaries?"
Consider Mary Sexton's comments from the Land Board meeting in George's article, "Yes, the timber market is down at this time. We're getting half of what we used to get from timber sales. But we're working with communities and stakeholders because if there isn't an on-going effort to provide timber, there may not be a timber industry."
Again, if you have a trustee (Sexton) publicly admitting that "We're getting half of what we used to get from timber sales" and then rationalizing that fact by saying " if there isn't an on-going effort to provide timber, there may not be a timber industry" I have a hard time seeing where the trustees are administering "the trust solely in the interest of the beneficiaries."
I'd also point out that given current economic realities affecting the timber industry (ie historic glut of unsold homes, historic glut of lumber on the market, mills only getting 1/3 of the price for their dimensional lumber compared w/ four years ago, etc) dumping more timber into the market will just continue keeping market prices rock bottom and will just ensure that the beneficiaries of the Trust get hosed for a longer period of time.
How these facts jive with MCA 72-34-103: "The trustee has a duty to administer the trust solely in the interest of the beneficiaries" is the question and the concern. Thanks.
Timberland is just that: land dedicated to growing timber. The State owns timberland to generate revenue for a trust, usually for education as the beneficiary. The value of the land is its ability to grow timber. Standing timber is inventory. It has no value to the trust until it is converted to dollars by sale. There are other values in that standing timber that are favored and held in high status than dollars to an education trust, and those are environmental and aesthetic values. However, neither of the those values can be captured as dollars and claimed by the trust to buy a book or educate a child.
The timber has a value that can rise or fall due to economic conditions. The earnings of the trust are also not static. I see in my morning paper the Oregon public employee pension fund has lost $13 Billion of value in the past year. I would suppose the Common School Fund, the beneficiary of gains on the sale of Common School Lands timber sales and grass sales to ranchers, is without doubt worth less than it was last year at this time. Even socialism has to respond to market prices, ups and downs.
When timber is harvested, the growth potential of that acre of land has been realized, and it is time for new trees to sequester carbon, grow, and add more timber volume to the acre for future harvest. The land is the asset, and the timber the interest income from that land. Standing timber, past the periods of optimum growth, is inventory at risk to loss by fire or insects, wind or storms. Cut it and that growth, the bounty of the land, is captured and the money put into Trust for the State, and there it, too, earns interest and can be accessed at any time for whatever legal reasons or purpose. It is the land, and its ability to grow timber that is the asset. How much, and at what value on any particular date is not anywhere as important as that it be sold, cut, and the dollars put in the trust. It is like the kid you tell to put $20 a month into an interest bearing account when he is 6 years old, and by the time he is 65, there will be a million bucks there, or whatever the amount. The same with the Trust. A dollar today is much more valuable than the same dollar or even three dollars, twenty years down the road.
The big losses to the Trusts are their investments at this time. Selling timber really does produce a net gain, even in times of market distress. I have no idea how people can make the judgement call that to sell timber now into a lower market is to "lose" money. It might take 20 years to regain the prices of two years ago. The dynamic of supply and demand will change in this recession, and the Montana managers are certainly fearful that down the road, there will be no mill to buy the timber and remove logs. That is a very real possibility. My son, a logger, whose pay is electronically deposited, suddenly found he had bounced checks (also electronically generated as payments to utilities, etc.) last week. The company did not get paid by the mill, and there was no money to deposit for the company. The company has paid them their bounced check fees and has issued an apology. I don't know what the mill has done for the company, but they did not deposit the logging check, electronically, as they had in the past. Times are double tough.
So, for people to work, timber has to be cheaper. Private timber is logged with far less profit than last year, and mostly to pay management costs and taxes, fire protection costs. The same applies to public timber. Without sales, the whole of their infrastructure has to be paid by taxes, from the Trust accounts, or people sent down the road. When things are "good" again, and the timber will bring what it did two years ago, (because that is when last year's timber sold was planned for and appraised) then how do you start from scratch? Who is there to hire to once again staff the timber sale layout, road engineering, appraisal staff? Government is not a temp agency, and if it is, temp help is what you get. No esprit de corps, and no legacy or institutional memory does not bode well for efficiency, thrift or skill.
It would be wonderful if all business, and all government, could enter or leave the market at will, all on a temporary basis. Only that is not possible. There has to be continuity so that there is some sort of certainty to business and government.
Right now, some farmers are fall planting for harvest next summer. Some are planting on contract, and most are planting on faith that there will be a market and a price to justify their investment. Stores are ordering spring market goods, and hoping their Christmas and winter buying in styles, types and volume will be profitable. And at the same time, American Express is laying off thousands due to lack of business volume in the credit card business. That is business continuity. Like the cowboys say, "Ya don't pay the entry fee, then ya don't get a ride and ya won't win the rodeo." The State of Montana has to stay in the business for there to be a business. And nobody from the Greenie Side has stepped up to the plate to offer to pay the equivalent to the Trust to keep the people employed, the income stream moving, and new timber growing on cutover land.
In this entire discussion is the failure to consider the non-monetary values associated with state lands. For instance, just the value of clean water coming from those lands, or the wildlife habitat protected by not logging, and other ecosystem services are likely worth far more than the wood. Because of the state's archaic way of valuing state forestry lands, and its obvious bias towards cutting timber, the DNRC is not living up to its fiduciary responsibility to manage these lands for the long term benefit of the state. Economists can put a dollar value on these things, but the same has no interest in even trying to make such an economic evaluation because it is beholden to the timber industry.
Does it make sense to destroy something worth more to get back something worth less? Does this do anyone in Montana good in the long run?