5.2.14 New Revenues to Fill the Fiscal GapThe Sale of Land
The fundamentals of supply and demand as well as the program costs of administering sales limit the potential revenues from the sale of state lands. The following discussion is taken from the Alaska Department of Revenue, Revenue Sources Book, Spring 2002.
Potential Supply of Land for Sale
Statehood entitled Alaska to 104 million acres of land, not including tidelands. Of those, the federal government has conveyed to the state approximately 90 million acres.
Under existing law, the state can offer for sale only those lands designated in land-use plans for settlement or agriculture. Today, state land-use plans cover about 60 million acres. Much of that land has been reserved for public purposes such as parks and recreation, for example, Chugach State Park and Chena River State Recreation Area. Other areas are managed for commercial uses, such as oil and gas production and timber harvesting, or for multiple uses. Through the land-use planning process, 2.6 million acres have been classified settlement or agricultural lands and could potentially be sold to individuals and businesses.
Its important to note in this discussion that under terms of the Statehood Act and the Alaska Constitution, the state may not dispose of its mineral interest in land. Mineral deposits are developed under lease arrangements and are not part of the deal in any land sale.
The state is not the only owner of saleable land in Alaska. The University of Alaska owns 170,000 acres1; the Alaska Mental Health Trust Authority controls one million; and the various municipalities will have 1.4 million at full entitlement (approximately 800,000 acres have been transferred to date). In addition, the 1971 Alaska Native Claims Settlement Act awarded 44 million acres of previously federal lands (approximately 37 million have been transferred to date) to Native corporations. Finally, there are approximately 2.7 million acres held by other private individuals and companies2. Each of these entities is either an active or potential seller of land, and each operates under a somewhat different set of incentives.
Municipalities generally do not sell land to raise cash. Rather, they seek to meet the needs of community expansion, to place properties on the tax rolls, or to satisfy the desire of citizens for specific parcels of land. In calendar year 2001, the Matanuska-Susitna Borough offered approximately 300 acres for sale, the Kenai Peninsula Borough offered 398, and the Fairbanks North Star Borough auctioned 403 acres. The Haines Borough's last offering, about 340 acres, was in 1997-1998. The City and Borough of Juneau did not hold an auction in 2001 but is currently readying about 44 acres for sale in the near future. These boroughs also operated over-the-counter sales of land that had been offered but not taken in earlier auctions.
The University of Alaska manages its land as part of its Land Grant Endowment Fund. Earnings from this fund finance the Alaska Scholars and other programs. The fund currently has more land than called for under its asset-allocation plan, so land sales can be expected to continue as managers work to balance the fund's portfolio. In 2000, the university sold 1,621 acres.
The Alaska Mental Health Trust Authority similarly regards its land as part of its overall investment portfolio. Earnings on those assets pay for trust programs, and the Trust has adopted a management plan that calls for leasing out its land when returns are likely to be similar or greater than what can be earned on other assets. Conversely, when leasing or other activities cannot bring in a comparable return, the management plan calls for selling the land and investing the proceeds in higher performing assets. Since 1998, the Trust has annually sold between 25 and 80 parcels averaging two to four acres each. Trust land managers expect that number to increase in coming years.
Although Alaska Native corporations hold by far the largest amount of private land in the state, they offer relatively little for sale to the public. Many holdings, especially those of regional corporations, were selected for their mineral or timber resources. Other Native-owned lands, especially those of village corporations, are areas of special cultural importance or traditional use, so shareholders are reluctant to part with them. Still, some Native corporation land is put on the market from time to time and adds to the overall supply.
Demand for State and Municipal Land Sales
Price, and therefore the net amount of money the state could expect from land sales, is determined by the interaction of supply and demand. Today, no land manager attempts to measure demand precisely before preparing a sale, but every manager factors at least a rough estimate of demand into decisions regarding how much land to offer and where to offer it. If too much land is put on the market at once, prices will suffer. Although no one has calculated the upper limit for land sales in any year, there is a common understanding that too much land can saturate the market, driving down property values and leaving land unsold. History backs up that perception.
In the mid-1980s, following the collapse of oil prices and the subsequent economic recession in Alaska, the Matanuska-Susitna Borough halted all new land sales. Not until 1991 did the Borough decide that market conditions had improved enough to resume a land disposal program. More recently, the Haines Borough is waiting for demand to recover after large subdivisions were developed for sale by both the Borough and the university in the late 1990s. And in Tok, after the state put several subdivisions up for sale in the mid-1980s, local residents and officials asked the state to stop making land available until property values recovered.
Clearly, there is a limit to the amount of land that the Alaska market can absorb. While there are no current calculations of that limit, history can give us some guidance.
In the late 1970s and early 1980s, the Department of Natural Resources readied 100,000 acres a year for sale.3 In spite of this supply, the state sold only 21,902 acres in 1982, and in 1983the all time high year for land salesthe total was 25,985 acres. The next highest year is half that.
Although the amount of land sold annually by the state has varied considerably from year to year, it averaged about 9,000 acres between 1980 and 1999. Recently, land sales have been well below that figure. In Fiscal Year 2002 to date, the state has sold 3,480 acres in subdivisions and entered into lease/purchase agreements for 1,203 acres of remote parcels.
One limiting factor specific to state lands is their location. In satisfying their entitlements, municipalities, the University, and Mental Health Trust Authority selected the most easily saleable, accessible, or useable lands close to towns and road systems. The state, by and large, is left with more remote holdings or lands that are more difficult to develop. In fact, the Department of Natural Resources observed in a 2000 report on land sale programs that it had "almost no potential settlement land near the road system or communities." Besides putting the state at a competitive disadvantage in attracting buyers, the lower quality and more remote location of state lands means higher development costs and a lower net return to the treasury.
Costs to the State of Land Sales
Preparing land for sale, holding auctions, and administering sale contracts entail substantial costs. The Department of Natural Resources calculates that during the peak years of land sales, 1980-1985, program costs averaged $267 per acre ($466 per acre in 1999 dollars). However, the department cautions that these figures should not be used to project future costs because not all costs were included. In 2000, the department estimated that preparing new subdivisions would cost $753 per acre, not including roads. Remote recreation parcels would cost considerably less to prepare.
More recently, the department estimated that a land sale program providing 500 acres of new subdivision lots and 5,000 acres of remote recreation parcels annually would cost $794,000, or $144 per acre. The department also envisioned a funding mechanism that would enable the program to pay for itself, eventually returning a projected annual surplus to the General Fund starting in Fiscal Year 2006 of $606,000, or $110 per acre.
Net Income to the State
State land sale prices over the past 20 years have averaged $557 per acre. More recently, from 1995 to1999, they averaged $371 per acre.
Using all of the figures we've looked atprices ranging from $557 to $371 per acre and costs of $144 per acre (the department's recent estimate for a mix of subdivision lots and remote parcels), $466 (the historical average cost in 1999 dollars), $753 (the department's 2000 estimate for preparing new subdivision sales), and even a profit of $110 per acre (under the department's self-funding mechanism)and using the most favorable assumptions; that is, that the state could maintain a sales program at the historic high level of 26,000 acres/year and could earn 7.8% interest on its contracts, we get the following possible revenue scenarios:
Note that these costs do not include roads (subdivision roads as well as access roads to subdivision sites not immediately on a road system) or other infrastructure costs. Estimating these costs is beyond the scope of this report, but they would play a significant role in determining the net revenue generated from a long-term land sale plan.
It is clear from these figures that the possible contribution of land sales toward closing a projected budget deficit of $1 billion would be minimal, even under the most wildly optimistic assumptions. Realistically, we could at best expect several million dollars per year. A poorly designed land sales program could actually wind up a net loss.
Actual cash from land sales is only one argument put forth for selling state land. According to another line of reasoning, getting land into private hands would stimulate population growth and economic development. In this view, people would develop the land and businesses would spring up to meet the needs of new or growing communities, providing jobs and opportunity that did not exist previously.
It is not clear, however, that additional private land would necessarily stimulate economic growth. Alaska currently has 58 acres of private land per capita, including Native corporation land, the third highest ratio among all states. Only Montana (61.7 acres per capita) and North Dakota (60.8 acres per capita) rank higher. The median is 5.1 acres.
Even if more private land did allow for increased jobs and economic opportunities, the corresponding community growth would increase the demands on government services. Road building and maintenance, schools, emergency services, police protection, and other services are necessary and play a key role in opening business opportunities and making communities livable. With Alaska's fiscal structure heavily weighted toward levies on oil and away from more broad-based taxes, the state has few mechanisms to raise revenues to cover these costs as oil production declines. The Legislative Finance Division calculates that the state spends $3,642 of general funds for every Alaskan. Without a tax structure that can raise new revenues from a growing population, development is a net drain on state fundswhat observers have characterized the "Alaska Disconnect." Land sales to spur development could add to the problem unless the state has a tax in place to earn revenue from the new residents and jobs that might be created.
(1)The legislature in 2000 passed a bill allowing the University to select an additional 260,000 acres of state land. That legislation, vetoed by the governor, is in litigation to decide whether the bill was an appropriation and thus requires a three-quarters majority vote of the legislature to override.
(2) Dividing Alaska, 1867-2000: Changing Land Ownership and Management, Hull and Leask, Institute of Social and Economic Research, November 2000.
(3) The first year the department offered 100,000 acres was in 1978, and the last year was 1982. In 1980 and 1981, this 100,000-acre minimum was mandated by law.