Agency for Alaska's mentally ill tests legal limits with $40 million real estate investment

The board of the $600 million state government trust charged with caring for Alaska's mentally ill has purchased tens of millions of dollars of Outside real estate as investments, in apparent defiance of state law.

Since 2011, the Alaska Mental Health Trust has invested $39 million in seven commercial properties — two in Anchorage, three in Texas, and one each in Utah and Washington. That's in spite of a state law that requires the trust's cash assets to be invested through the Alaska Permanent Fund.

The four trustees who form the majority bloc of the divided, seven-member board say they have legal authority to make the investments based in part on the Alaska Mental Health Enabling Act, passed by U.S. Congress in 1956 — when Alaska was still a U.S. territory. But there's no publicly available legal opinion supporting their position, and the trust's board chair, Russ Webb, refused to turn over advice from an attorney that outlines the legal basis for the investments and which might also cite the legal risks.

The trust says it's paused its investment program and is cooperating with a review by Alaska Attorney General Jahna Lindemuth.

It also appears to believe it is not getting its message across. On Friday, it released a request for proposals for a $250,000 contract with a public relations firm, with tasks that include "maintaining and building confidence among Alaskans" that the trust is "managing assets appropriately and effectively."

But the trust's actions will now be subject of a legislative audit, approved last month by a bipartisan House-Senate committee chaired by Rep. Mike Hawker, R-Anchorage.

The board is also facing growing criticism from key figures involved in the trust's restoration in the 1990s, as well as members of its beneficiary groups.

"The Permanent Fund has got a big real estate portfolio and theoretically the best people they can hire," said Harry Noah, a former director of the trust's land office and natural resources commissioner under the late Gov. Wally Hickel. "So why go out and duplicate it?"

Noah, along with former Alaska attorney general Bruce Botelho, requested the legislative audit. In a phone interview, Noah questioned whether the profits from the real estate program are justifiable.

"Why go out and take the risk for seemingly minor increases from what the Permanent Fund's getting?" Noah said. He also criticized the board's recent demotion of the trust's longtime chief executive, Jeff Jessee, who opposed the real estate investment program.

In an interview, two of the board members in the majority downplayed questions about their legal position and the direction of the trust, suggesting that the recent criticism was prompted by the friendships Noah and the others have with Jessee.

The board members, Russ Webb and Larry Norene, described the trustees' moves as a response to new financial imperatives brought on by an oil-price crash — which has prompted deep cuts to the state budget, threatening Alaska's mental health programs.

"Jeff isn't attuned to making additional income — he feels this weakens his position in lobbying the state to pay for things," said Norene, a semi-retired Anchorage real estate broker, referring to Jessee. "But now we're in a different world. We're not a $100-a-barrel CEO. We need a $40-a-barrel CEO."

In a brief phone interview, Jessee said it was a "ludicrous and insulting" idea that the criticism of the trustees stemmed from his personal friendships.

"The point isn't whether oil is $100 per barrel or $40 a barrel, or whether making more money is a good idea," said Jessee, who still works at the trust as a program officer. "The point is: What is the legal and appropriate role for the trustees in following the law and managing the trust?"

Congress, in the 1956 enabling act, created an initial framework for the trust, which was to provide care for Alaskans with mental illness who were previously treated Outside.

The act granted 1 million acres of federal land to Alaska, which was supposed to pay for the territory's mental health expenses. But much of the land was transferred out of state ownership and in 1985, Vern Weiss, whose son suffered from mental illness, won a lawsuit against the state in which the Alaska Supreme Court ruled that the original trust should be restored.

A final settlement was approved in 1994, which included 500,000 acres of replacement land, 500,000 acres of original trust land, and $200 million cash.

The trust now uses the land — which includes timber, mineral, and oil and gas holdings — to generate income. The trust's land office produces some $5 million a year, although it's also faced a backlash recently over plans to log some of its land near Ketchikan and Petersburg.

The settlement assigned the trust's cash principal to the Permanent Fund, which now manages $460 million on the trust's behalf.

That settlement provision was adopted into law by the Alaska Legislature in 1994, and the resulting state statute says the trust's cash principal "shall be managed by the Alaska Permanent Fund Corp."

The trust withdraws about 4 percent of its Permanent Fund assets each year to help pay for programs and grants. The Permanent Fund grew just 1 percent in the last fiscal year, though it's grown an average of 6 percent annually over the last five years.

That's not fast enough for the trustees on the board's majority, who say their real estate investing program returned 15.6 percent last year.

"If we can't beat the Permanent Fund, there's no point in it," Norene said. "The only reason we do it is to make more money."

The board began developing its real estate plans in the wake of the 2008 global financial crisis, which dropped the Permanent Fund's value by billions of dollars.

The board, working with Greg Jones — who directed the land office from 2010 to 2013 and is now the temporary chief executive after Jessee's demotion — approved the first direct real estate investments in Anchorage, where the trust bought two properties in 2011 and 2012. That real estate is now owned by a pair of Alaska-registered limited liability companies controlled by the trust.

Over the next four years, the trust bought five more properties in Utah, Washington and Texas, using companies registered in those states.

It had also borrowed more than $30 million against its buildings as of June 30 — a move that trustees say takes advantage of low interest rates while using the companies to shield the trust from liability.

Most of the trust's real estate investments are in office buildings. But in one of its latest moves, the board in May authorized a joint venture to build a 200,000-square-foot warehouse in Everett, Washington, with Panattoni, a California-based developer.

The trustees voted to spend as much as $11 million on the project.

Webb and Norene said they and trust staff had no personal stake in any of the purchased properties. In ordering the audit, the Legislature directed investigators to ensure that was true.

Investors typically have to take on higher risk to generate higher returns. But the majority board members and their staff say their real estate program is less risky than the Permanent Fund's portfolio.

Their legal justification for the real estate program stems from the 1956 enabling act for the territory, Alaska administrative code, and a state law that requires trust land to be managed "for the benefit of the trust" and for "long-term sustained yield."

The law referring to the Permanent Fund's control over the trust's cash assets may seem "fairly clear," said Jones, the interim chief executive.

But, he argued, the trust's assets are also legally required to be managed "in the best interest of the beneficiaries," Jones added.

"It's important that we preserve the value, enhance the value, diversify income," he said.

The Permanent Fund also describes its investments as diversified, with real estate holdings as well as private equity, stocks and bonds.

The Mental Health trustees have consulted with attorneys about the real estate investment program. But they won't publicly release the advice because it's "privileged," said Webb, the chair.

"I believe that we've followed the law and done, based on the advice we've been given, what is correct and the right thing to do," Webb said.

But the board's investment program is drawing increasing skepticism after Jessee's ouster and the audit request from Botelho and Noah, who represented then-Gov. Wally Hickel's administration in the 1994 settlement negotiations.

A subsequent letter supporting the audit request came from Philip Volland, a former judge and lawyer who, along with Jessee, sat across the table from the Hickel administration as plaintiffs attorneys in the same settlement negotiations.

"To be sure, I favor a high return to the beneficiaries of the trust," Volland wrote. "But as someone who fought for eight years to re-establish the trust, I fear more the actions of trustees of a public trust who think they know better than what the law demands they do."

The chairs of two state advisory boards, of mental health and alcoholism and drug abuse, have also questioned the real estate investment program, suggesting in their own November letter to legislators that the program may fall outside of "statutory powers."

And the offices of Gov. Bill Walker and Attorney General Jahna Lindemuth are also "reviewing this matter closely," said Katie Marquette, Walker's spokeswoman, in an email.

Noah said the dispute over the real estate investments could have been avoided if the board had taken its case to state lawmakers first.

"If they wanted to do what they're doing, there was nothing stopping them from going to the Legislature," he said.

The trust's investments, Noah added, aren't made with "private, venture capital money."

"It's public money," he said. "And I don't think you treat it the same way."