Montanans for School Trust v. Darkenwald

• Decision Date: 09 August 2005
• Docket Number: No. 04-027.,04-027.
• Citation: 119 P.3d 27,2005 MT 190
• Court: Montana Supreme Court
• Parties: MONTANANS FOR the RESPONSIBLE USE OF the SCHOOL TRUST, Plaintiff and Appellant, v. Scott DARKENWALD, Treasurer of the State of Montana; State Board of Land Commissioners, Montana Board of Investments, and Bud Clinch, Director of the Department of Natural Resources & Conservation, Defendants and Respondents.

119 P.3d 27

2005 MT 190

MONTANANS FOR the RESPONSIBLE USE OF the SCHOOL TRUST, Plaintiff and Appellant, v. Scott DARKENWALD, Treasurer of the State of Montana; State Board of Land Commissioners, Montana Board of Investments, and Bud Clinch, Director of the Department of Natural Resources & Conservation, Defendants and Respondents.

No. 04-027.

Supreme Court of Montana.

Argued February 2, 2005.

Submitted February 8, 2005.

Decided August 9, 2005.

Rehearing Denied September 6, 2005.

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Roy H. Andes (argued), Attorney at Law, Helena, Montana, for Appellant.

Tommy H. Butler (argued), Special Assistant Attorney General, Montana Department of Natural Resources and Conservation, Helena, Montana Hon. Mike McGrath, Attorney General; Candace West, Assistant Attorney General, Helena, Montana, for Respondents.

Justice BRIAN MORRIS delivered the Opinion of the Court.

¶ 1 Appellant Montanans for the Responsible Use of the School Trust (Montrust) alleges that parts of the statutory scheme for administering the school trust lands violate the Montana Constitution and the Enabling Act. Montrust appeals from an order entered by the First Judicial District Court, Lewis and Clark County, granting judgment to Respondents, Scott Darkenwald, in his representative capacity as Treasurer of the State of Montana, State Board of Land Commissioners (Land Board), Montana Board of Investments (BOI), and Bud Clinch, in his representative capacity as Director of the Department of Natural Resources & Conservation (DNRC) (collectively the "State"). We affirm.

¶ 2 Montrust raises numerous issues, but we need address only the following to resolve this matter:

¶ 3 1. Whether the State's commingling of the interest earned on school trust income and the revenue generated from the Spring Creek Bonuses into the State General Fund (General Fund) constitutes a breach of the State's duties under the Montana Constitution and the Enabling Act.

¶ 4 2. Whether the State, when enacting and implementing Senate Bill 495, partially codified at § 17-6-340, MCA, violated its trust duties pursuant to the Montana Constitution and the Enabling Act.

¶ 5 Montrust's withdrawal of its claim that the District Court improperly refused to award attorney's fees to Montrust eliminates our need to analyze that issue.

BACKGROUND

¶ 6 In Montanans for the Responsible Use of the School Trust v. State ex rel. Board of Land Comm'rs (Montrust I), 1999 MT 263, ¶ 13, 296 Mont. 402, ¶ 13, 989 P.2d 800, ¶ 13, we restated our long-standing precept that the Montana Constitution and the Enabling Act impose a trust duty on the State regarding school trust lands. We held in Montrust I that several statutes violated the State's duty to obtain full market value for school trust lands pursuant to the Montana Constitution and the Enabling Act, Act of February 22, 1889 (Enabling Act), § 11, ch. 180, 25 Stat. 676 (1889), and that the Land Board, through its school trust land lease prices and procedures associated with those statutes, had breached its trustee duties by benefitting third parties to the detriment of the school trust's beneficiaries. Montrust I, ¶¶ 23, 32, 42, 51, 58. Montrust now alleges further constitutional violations and breaches of trust by the Land Board arising from the State's alleged improper commingling of trust assets into the General Fund and the State's sale of a 30-year future stream of mineral royalties from school trust land in exchange for an immediate cash infusion of $46.4 million.

¶ 7 Montrust I discusses at length the school trust's history and constitutional underpinnings as well as the State's trustee duties. See Montrust I, ¶¶ 13-17. We will not repeat that discussion here. We must provide a brief summary regarding the current statutory scheme, recent legislative changes, and administrative measures made in response both to Montrust I and this current action, however, to understand Montrust's present allegations.

PRE-2001 STATUTORY SCHEME

¶ 8 The school trust consists of a distributable fund and a permanent trust fund. The distributable fund includes ninety-five percent of both the revenue directly received from school trust lands and the interest earned by the permanent fund (distributable income). Sections 20-9-341 and 20-9-620, MCA (2003). The permanent trust fund consists of proceeds from the sale or other permanent disposition of school trust assets plus five percent of the distributable income. Sections 20-9-341 and 20-9-601, MCA (2003).

¶ 9 Before July 1, 2001, the Legislature required the Land Board to deposit annually the distributable income for each calendar year directly into the General Fund to be disbursed to public schools. Section 20-9-342, MCA (1999). The Land Board, at that time, retained the funds produced from the school trust lands and the BOI invested those funds in order to generate interest. Section 17-6-201(1), MCA (1999). The State then pooled all of the interest earned from the school trust fund with its other revenue into the General Fund and credited the accumulated interest to the General Fund as a whole. Section 17-6-202(2), MCA (1999). The General Fund serves as a common fund into which the State deposits all revenues unless the Legislature specifically designates that revenues be deposited into some other account. Section 17-2-102(1)(a), MCA (2003). Although the State maintained records for the distributable income deposited into the General Fund, the State did not earmark those deposits in any manner, and no statutory sub-fund, sub-account or special revenue account segregated the distributable income from other revenues in the General Fund.

2001 AND 2002 AMENDMENTS

¶ 10 In response to the present case, the Legislature enacted House Bill 41 (HB 41), Ch. 554, L.2001, amending § 20-9-342, MCA, during the 2001 regular session. HB 41 created a special sub-fund of the General Fund specifically designated to receive distributable school trust revenues. Before the creation of this sub-fund, the Land Board removed ninety-five percent of all calendar year 2000 school trust revenues in its accounts and deposited them, pursuant to § 20-9-342, MCA (1999), into the General Fund with all other State monies. These trust revenues included, among others, rental and bonus payments on various coal leases in Big Horn County belonging to Spring Creek Coal Company (Spring Creek Bonuses) that amounted to $6,215,550. The Spring Creek Bonuses were not received until after the 1999 Legislature adjourned, and therefore, were not legislatively appropriated.

¶ 11 The 2002 special session Legislature, however, again in response to this case, further amended the scheme by enacting House Bill 7 (HB 7), Sections 2 and 4, Ch. 10, Sp. L. Aug. 2002, amending § 20-9-342, MCA, and § 20-9-622, MCA. These amendments provided that distributable income be deposited into a "guarantee account" in the state special revenue fund, statutorily appropriated for distribution to public schools (the guarantee account), rather than a sub-fund of the General Fund.

¶ 12 The 2001 Legislature also enacted Senate Bill 495 (SB 495), Ch. 418, L.2001, partially codified as § 17-6-340, MCA. SB 495 authorized DNRC to borrow up to $75 million from the coal trust severance tax permanent fund for 30 years to buy mineral production royalties owned by the school trust. The State intended to enhance short-term distributable revenue from the permanent fund for the benefit of public schools as evidenced by testimony from then-Secretary of State Bob Brown (Brown) and Superintendent of Public Instruction, Linda McCulloch (McCulloch), both of whom testified in their capacity as Land Board members.

¶ 13 Brown testified that "the two political parties were at loggerheads. One political party was opposed to tax increases and the other party didn't want to violate the coal trust." Brown opined that SB 495 represented a compromise offered by the Legislature in response to the Land Board's concerns regarding the State's underfunding of public schools. McCulloch also testified how SB 495 addressed the public schools' need for increased funding and related the importance of the money generated from SB 495's deposit into the permanent trust going into the base budgets of schools.

¶ 14 In attempting to determine full market value, the State calculated that the future stream of mineral royalties owned by the school trust had a present value of $138 million. The State calculated that repaying this amount over 30 years at a 9.81 percent discount rate would result in the permanent fund immediately receiving $46.4 million. The Land Board ultimately authorized DNRC to borrow $46.4 million that DNRC then used to purchase the 30-year future stream of mineral royalties from the school trust.

¶ 15 The Land Board, for its part, deposited the $46.4 million into the permanent fund. This immediate $46.4 million infusion generated increased interest earnings of approximately $5 million in both 2002 and 2003 that the State, in turn, distributed to public schools. Short-term distributable income also increased by approximately $3 million. This short-term increase to distributable income likely will prove to be decidedly temporary, however, as the State projects that it will decline each year to zero dollars by 2013.

¶ 16 The State will not deposit the 30-year future mineral revenue stream into the trust, however, as it no longer represents an asset of the school trust. Instead, DNRC will use a portion of the future mineral revenue stream to repay the 30-year loan to the coal trust severance tax permanent fund and it will deposit the remaining royalties into the guarantee account established by HB 7. DNRC also will deposit short-term distributable income from this transaction into the guarantee account. The State uses the guarantee account to reimburse the General Fund for lost coal trust interest and, if there are any revenues left over, distributes...