A performance audit of the Arizona State Land Department

              STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
A PERFORMANCE AUDIT
of
THE ARIZONA STATE LAND
DEPARTMENT
AUGUST 1980
A REPORT TO THE
ARIZONA STATE LEGISLATURE
REPORT 80- 3
DOUGLAS R. NORTON. CPA
AUDITOR GENERAL
STATE O F ARIZONA
OFFICE OF THE
AUDITOR GENERAL
August 29, 1980
The Honorable Bruce B a b b i t t , Governor
Members of the Arizona L e g i s l a t u r e
M r . Joe T. F a l l i n i , S t a t e Land Commissioner
Transmitted herewith is a r e p o r t o f t h e Auditor General, A Performance
Audit of t h e S t a t e Land Department. This r e p o r t is i n response t o t h e
June 19, 1979, r e s o l u t i o n of t h e J o i n t L e g i s l a t i v e Budget Committee:
A summary of t h i s r e p o r t is found on t h e blue pages at t h e f r o n t of t h e
r e p o r t . A response t o t h i s r e p o r t by t h e S t a t e Land Commissioner is found
on t h e yellow pages preceding t h e appendices.
My s t a f f and I w i l l be happy t o meet with a p p r o p r i a t e l e g i s l a t i v e
committees, i n d i v i d u a l l e g i s l a t o r s o r o t h e r S t a t e o f f i c i a l s t o d i s c u s s o r
c l a r i f y any items i n t h e r e p o r t o r t o f a c i l i t a t e implementation of t h e
recommendations.
R e s p e c t f u l l y s u b m i t t e d ,
Douglas R. Norton
Auditor General
S t a f f : Gerald A. ~ i l < a
Dwight A. Ochocki
Robert T. Back
Kirk J. Schneider
Blake P. Peterson
LEGISLATIVE SERVICES WING SULTE 0 0 9 STATE C- AP1mL _ PHOENIX. ARIZONA 85007 255- 4365
OFFICE OF THE AUDITOR GENERAL
A PERFORMANCE AUDIT OF
THE ARIZONA STATE LAND
DEPARTMENT
REPORT TO THE
ARIZONA STATE LEGISLATURE
REPORT 80- 3
TABLE OF CONTENTS
SUMMARY
INTRODUCTION AND BACKGROUND
FINDINGS
FINDING I
If Arizona's r o y a l t y r a t e f o r the e x t r a c t i o n of
m e t a l l i f e r o u s minerals from S t a t e lands were
comparable t o t h a t of other s t a t e s , revenues from
mineral l e a s e s would have been as much a s $ 6.5
m i l l i o n more during 1979.
CONCLUSION
RECOMMENDATION
FINDING I1
S t a t u t o r y and S t a t e Land Department a d m i n i s t r a t i v e
changes a r e needed t o ensure proper payment of
mineral r o y a l t i e s .
CONCLUSIONS
RECOMMENDATION
FINDING I11
The S t a t e of Arizona would receive from $ 703,000
t o $ 5.2 m i l l i o n annually i n a d d i t i o n a l revenues
from grazing l e a s e s i f the grazing l e a s e
r a t e were comparable t o t h a t charged by other
public and p r i v a t e e n t i t i e s .
CONCLUSION
RECOMMENDATION
FINDING I V
The L e g i s l a t u r e h a s not s p e c i f i c a l l y d i r e c t e d
the S t a t e Land Department t o i d e n t i f y and resolve
i n s t a n c e s o f t r e s p a s s on S t a t e lands nor has it
provided t h e Department with ad equate resources
t o do so. A s a r e s u l t , during 1979 a t l e a s t $ 786,000
i n damage was i n f l i c t e d on S t a t e lands by t r e s p a s s e r s
and a r e l a t e d $ 2.3 m i l l i o n i n compensation may be l o s t .
CONCLUSION
Page
1
4
RECOMMENDATION
OTHER PERTINENT INFORMATION
Bureau of Land Management Range Betterment Fund
C l a s s i f i c a t i o n and Appraisal Fund
Royalty Rate f o r Production of O i l and Gas
WRITTEN RESPONSE TO THE AUDITOR GENERAL'S REPORT
APPENDICES
APPENDIX I
APPENDIX I1
APPENDIX I11
APPENDIX I V
APPENDIX V
APPENDIX V I
APPENDIX V I I
APPENDIX VIII
APPENDIX I X
APPENDIX X
APPENDIX X I
APPENDIX X I 1
APPENDIX X I 1 1
Page
5 6
S t a t e survey r e s u l t s - leasing p o l i c i e s
regarding t h e e x t r a c t i o n of m e t a l l i f e r o u s and
n o n m e t a l l i f e r o u s m i n e r a l s
Comparisons of major copper producers on
State- leased lands
S t a t e land mineral royalty r e c o n c i l i a t i o n 1977 &
1978
Processing low- grade ore i n t o pure copper.
Arizona L e g i s l a t i v e Council memorandum -
March 28, 1980
Arizona L e g i s l a t i v e Council memorandum -
February 22, 1980
Monthly mineral l e a s e r e p o r t i n g form required by
the S t a t e Land Department
Arizona L e g i s l a t i v e Council memorandum -
March 21, 1980
Table of grazing fees per animal u n i t month
( AUM) and average c a r r y i n g c a p a c i t y of s t a t e
lands f o r s t a t e s which o f f e r grazing l e a s e s
Glossary of terms p e r t i n e n t t o grazing
Arizona L e g i s l a t i v e Council memorandum - May 28,
1980
Summary of Auditor General survey of s t a t e s 4
which have enacted t r e s p a s s laws
Arizona L e g i s l a t i v e Council memorandum -
February 22, 1980
LIST OF TABLES
Page
TABLE 1 -
TABLE 2 -
TABLE 3 -
TABLE 4 -
TABLE 5 -
TABLE 6 -
TABLE 7 -
TABLE 8 -
TABLE 9 -
TABLE 10 -
Trust lands managed by t h e S t a t e Land Department
which were granted t o S t a t e b e n e f i c i a r i e s between
1863 and 1910
S t a t e Land Department revenues f o r a l l t r u s t s earned
from 1974- 75 t o 1978- 79
Summary of S t a t e Land Department l e a s e r e c e i p t s f o r
the 1978- 79 f i s c a l year and a c r e s leased as of
June 30, 1979
Summary of S t a t e Land Department expenditures
from f i s c a l years 1975- 76 through 1979- 80
Comparison of mining royalty assessment methods
used by the t e n s t a t e s which l e a s e s t a t e lands
t o p r i v a t e e n t i t i e s f o r t h e e x t r a c t i o n of m e t a l l i f e r o u s
minerals a s of July 1, 1980, and t h e impact each
method would have had on Arizona royalty revenues
from January 1, 1979, through December 31, 1979
Summary o f c u r r e n t and h i s t o r i c royalty r a t e s charged by
s t a t e s t o p r i v a t e e n t i t i e s f o r t h e e x t r a c t i o n o f
m e t a l l i f e r o u s minerals
Comparison of copper tons a s reported by one l e s s e e
i n s t a t e Land Department mineral r e p o r t s and annual
r e p o r t s i n 1977 and 1978
Computation of a d d i t i o n a l r o y a l t i e s due t o t h e S t a t e
Land Department f o r one l e s s e e ' s reprocessing of
s l a g i n 1977 and 1978
Production l o s s e s and deductions f o r processing,
t r a n s p o r t a t i o n and taxes allowed under the
s t a t u t e s t h a t reduced r o y a l t i e s paid t o t h e S t a t e
from January 1, 1979, t o December 31, 1979
Summary of a c t u a l revenues generated by grazing
l e a s e s f o r f i s c a l years 1968- 69 through 1978- 79
and estimated revenues f o r f i s c a l year 1979- 80
Page
TABLE 11 - Comparison of Arizona grazing l e a s e r a t e t o t h a t
charged by nine o t h e r western s t a t e s , t h e Bureau
of Land Management and p r i v a t e Arizona land owners,
and the impact the adoption of each r a t e would have
had on Arizona's grazing l e a s e revenues during 1979
TABLE 12 - Summary of s e r v i c e s provided t o grazing l e s s e e s by
Arizona and t h e nine o t h e r western s t a t e land
departments
TABLE 13 - Comparison of grazing f e e s charged by t h e Arizona
S t a t e Land Department and the Bureau of Land
Management f o r f i s c a l years 1959- 60 through 1979- 80
TABLE 14 - A comparison of Arizona S t a t e Land Department and
p r i v a t e grazing l e a s e r a t e s f o r 1977, 1978 and 1979
TABLE 15 - Summary of staff assigned t o t r e s p a s s a c t i v i t i e s f o r
the 19 s t a t e s with t r e s p a s s i n v e s t i g a t o r s and Arizona
TABLE 16 - Summary o f t r e s p a s s cases reported t o t h e S t a t e Land
Department from December 1, 1977 t o December 1, 1973
and the s t a t u s of t h e s e c a s e s a s of January 10, 1980
TABLE 17 - Bureau of Land Management expenditures f o r l i v e s t o c k
management during f i s c a l year 1978- 79
TABLE 18 - Expenditures from t h e c l a s s i f i c a t i o n and a p p r a i s a l
fund f o r f i s c a l years 1977- 78, 1978- 79 and 1979- 80
( through May 31, 1980)
TABLE 19 - Royalty r a t e s f o r production of o i l o r gas on
Federal and S t a t e lands ( a s of February 29, 1980)
I n 1915, the Arizona L e g i s l a t u r e created t h e S t a t e Land Department t o
w... administer a l l laws r e l a t i n g t o lands owned by, belonging t o , and
under the c o n t r o l of t h e s t a t e . "
Acting a s t r u s t e e , t h e Department's primary r e s p o n s i b i l i t y is t o manage
Federal land granted t o Arizona b e n e f i c i a r i e s . In keeping with its
f i d u c i a r y r e s p o n s i b i l i t y , t h e Department is expected t o o b t a i n f a i r market
value f o r t h e lands and products of the land such as minerals, timber, o i l
and gas.
Our review of the S t a t e Land Department revealed t h a t :
- Arizona has one of the lower mineral r o y a l t y f e e s among s t a t e s
t h a t l e a s e s t a t e lands f o r t h e e x t r a c t i o n of m e t a l l i f e r o u s
minerals. If Arizona's royalty r a t e f o r t h e e x t r a c t i o n of
m e t a l l i f e r o u s minerals from S t a t e lands were comparable t o t h a t
of other s t a t e s , revenues from mineral l e a s e s would have been a s
much a s $ 6.5 m i l l i o n more during 1979.
- Arizona's net value method o f a s s e s s i n g r o y a l t y f e e s r e q u i r e s
more paperwork on t h e p a r t of l e s s e e s , and a u d i t i n g and review by
the S t a t e Land Department, than would a g r o s s value method for
determining r o y a l t y r a t e s .
- Current s t a t u t e s a r e vague regarding the determination of mineral
r o y a l t i e s and the t i m e l i n e s s of payment. -
- The S t a t e Land Department has not e s t a b l i s h e d adequate r u l e s and
r e g u l a t i o n s regarding mineral r o y a l t i e s .
- The S t a t e Land Department h a s n o t reviewed o r audited mineral
r o y a l t i e s adequately.
- The S t a t e Land Department charges a grazing f e e r a t e t h a t is
s i g n i f i c a n t l y lower than t h e r a t e charged by the Bureau of Land
Management, nine o t h e r western s t a t e s and p r i v a t e i n d u s t r y . If
Arizona's grazing f e e r a t e were comparable t o t h a t charged by
other public and p r i v a t e e n t i t i e s , Arizona would receive from
$ 703,000 t o $ 5.2 m i l l i o n i n a d d i t i o n a l revenues froin grazing
l e a s e s .
- The S t a t e Land Department has not been given s p e c i f i c s t a t u t o r y
r e s p o n s i b i l i t y t o i d e n t i f y and resolve i n s t a n c e s of t r e s p a s s on
S t a t e lands nor has it been provided with adequate resources t o
d o s o . A s a r e s u l t , during 1979 at l e a s t $ 786,000 i n damage was
i n f l i c t e d on S t a t e lands by t r e s p a s s e r s and a r e l a t e d $ 2.3
m i l l i o n i n compensation may be l o s t t o the S t a t e .
It is recommended t h a t :
- Arizona Revised S t a t u t e s ( A. R . S. ) $ 27- 234( B) be amended t o
provide f o r :
A g r e a t e r r e t u r n on S t a t e mineral r o y a l t i e s .
Assessment of r o y a l t y f e e s on gross valuation r a t h e r than
net valuation.
Giving the S t a t e Land Department a u t h o r i t y t o e s t a b l i s h
r o y a l t y r a t e s f o r mining l e a s e s t h a t provide an e q u i t a b l e
r e t u r n on S t a t e lands and t h a t allow f o r production o r
o p e r a t i o n a l d i f f e r e n c e s between l e s s e e s .
More s p e c i f i c i t y regarding the p r i c e b a s i s f o r c a l c u l a t i n g
g r o s s values and t h e t i m e l i n e s s of r o y a l t y payment.
P e n a l t y p r o v i s i o n s f o r l a t e payments.
- The S t a t e Land Department e s t a b l i s h more d e f i n i t i v e r u l e s and
r e g u l a t i o n s regarding mineral r o y a l t i e s and r e p o r t i n g procedures.
- The S t a t e Land Department acquire the e x p e r t i s e t o review monthly
mineral production r e p o r t s adequately by c o n t r a c t i n g f o r
p r o f e s s i o n a l s e r v i c e s o r h i r i n g personnel who a r e knowledgeable
i n accounting and mining procedures, i f the net valuation b a s i s
is r e t a i n e d i n the s t a t u t e s .
- A. R. S. $ 37- 285( B) be amended t o allow f o r a s u b s t a n t i a l i n c r e a s e
i n the annual r e n t a l r a t e charged f o r each animal feeding on
S t a t e l a n d . Consideration should be given t o adoption of t h e
Bureau of Land Management's grazing r a t e formula a s e s t a b l i s h e d
by the Congress of t h e United S t a t e s i n the Public Rangelands
Improvement Act of 1978.
- The Arizona Revised S t a t u t e s be amended t o r e q u i r e t h a t t h e S t a t e
Land Department i d e n t i f y and resolve i n s t a n c e s of t r e s p a s s on
S t a t e lands.
- The Department be provided with s t a f f i n g and resources
commensurate with t h a t a d d i t i o n a l r e s p o n s i b i l i t y .
- The Department develop and adopt formal procedures t o review,
i n v e s t i g a t e and monitor t r e s p a s s a c t i v i t y promptly.
- The Department c o n t a c t l o c a l law enforcement agencies and o f f e r
t r a i n i n g courses regarding t r e s p a s s on S t a t e lands.
- The Department contact Arizona's communications media regarding
public s e r v i c e announcements d e a l i n g with t r e s p a s s on S t a t e lands.
INTRODUCTION AND BACKGROUND
I n response t o a June 19, 1979, r e s o l u t i o n of the J o i n t L e g i s l a t i v e Budget
Committee, we have conducted a performance a u d i t of t h e S t a t e Land
Department i n accordance with A. R. S. $ 41- 1279.
The scope of the a u d i t was d i r e c t e d mainly t o t h e Natural Resources
D i v i s i o n , C o n t r a c t s and Records Division and Board of Appeals; it did not
include a d e t a i l e d review of Administrative S e r v i c e s , F o r e s t r y Management
or Urban and Commercial Development. A s e p a r a t e r e p o r t e n t i t l e d " A
Performance Audit of the Arizona Resources Information System" was
released i n March 1980 by our Office on the Information Resources Division
of t h e S t a t e Land Department.
In 1915 the Arizona L e g i s l a t u r e c r e a t e d the S t a t e Land Department t o
I t . . . administer a l l laws r e l a t i n g t o lands owned by, belonging t o , and
under t h e c o n t r o l o f the s t a t e . " The Governor was empowered t o appoint a
Land Commissioner t o administer the Department.
Acting a s t r u s t e e , the S t a t e Land Department's primary r e s p o n s i b i l i t y
o r i g i n a l l y was t o manage approximately 10.7 m i l l i o n a c r e s of Federal land
granted t o 13 Arizona b e n e f i c i a r i e s . Those Federal land g r a n t s d a t e back
t o 1863 when the T e r r i t o r y of Arizona received s e c t i o n s 16 and 36 of each
township, t o be held i n t r u s t f o r t h e b e n e f i t of common s c h o o l s w i t h i n
Arizona. In 1910, s e c t i o n s 2 and 32 of each township were added t o the
common school endowment, and an a d d i t i o n a l 2.35 m i l l i o n a c r e s were granted
t o 12 other Arizona b e n e f i c i a r i e s . Table 1 lists t h e acreages granted t o
t h e 1 3 o r i g i n a l b e n e f i c i a r i e s .
TABLE 1
TRUST LANDS MANAGED BY THE STATE LAND DEPARTMENT
WHICH WERE GRANTED TO STATE BENEFICIARIES
BETWEEN 1863 AND 1910"
Beneficiary
Original Acreage
Acreage Remaining
Granted In 1979
University 200,000 164,994.40
L e g i s l a t i v e , J u d i c i a l , Executive 100,000 66,660.29
P e n i t e n t i a r y 100,000 80,830.52
Asylum f o r the Insane 100,000 79,116.44
School and Asylum f o r the Deaf, Dumb
and Blind 100,000 84,209.03
Miners1 Hospital 50,000 48,648.54
Normal School 200,000 172,524.62
S t a t e C h a r i t a b l e , Penal and Reformatory 100,000 79,324.64
Agriculture and Mechanical Colleges 150,000 134,469.14
School of Mines 150,000 132,902.27
M i l i t a r y I n s t i t u t e s 100,000 82,944.65
County Bonds , 1,000,000 799,283.22
Common Schools**
Total
* It should be noted t h a t the acreages granted r e p r e s e n t s u r f a c e
measurements. Subsurface ownership may d i f f e r s i g n i f i c a n t l y from
s u r f a c e ownership.
** Since s e v e r a l of the s e c t i o n s 2, 16, 32 and 36 of t h e common school
grant were a l r e a d y under p r i v a t e ownership or Federal r e s e r v e , the
S t a t e was allowed t o make s e l e c t i o n s i n l i e u of t h e reserved acreage.
The measurements shown r e p r e s e n t s e l e c t i o n s and g r a n t s .
I n a d d i t i o n t o the 9,460,717 a c r e s o r i g i n a l l y granted, the Department
manages 109,236 a c r e s of subsequently granted land and 12,021 a c r e s of
State- owned land f o r a grand t o t a l of 9,581,974 a c r e s . The acreage
granted t o t h e o r i g i n a l 13 b e n e f i c i a r i e s c o n s t i t u t e s more than 98 percent
of the land c u r r e n t l y managed by the Department.
The Enabling Act of Arizona imposes a f i d u c i a r y r e s p o n s i b i l i t y upon
Arizona regarding S t a t e t r u s t lands. Section 28 of t h e Enabling Act f o r
Arizona s t a t e s :
I t . . . it is hereby declared t h a t a l l lands hereby
granted, i n c l u d i n g t h o s e which, having been h e r e t o f o r e
granted t o s a i d T e r r i t o r y , and hereby expressly
t r a n s f e r r e d and confirmed t o t h e said S t a t e , s h a l l be
by t h e said S t a t e held i n t r u s t , ..."
The S t a t e L e g i s l a t u r e delegated t h i s r e s p o n s i b i l i t y t o t h e S t a t e Land
Department. In keeping with its f i d u c i a r y r e s p o n s i b i l i t y , t h e Department
is expected t o o b t a i n f a i r market value f o r the lands and products of t h e
land such a s minerals, timber, o i l and gas. Section 28 o f t h e Enabling
Act f u r t h e r s t a t e s :
" Disposition of any of said lands, or of any money o r
thing of value d i r e c t l y o r i n d i r e c t l y derived
therefrom, f o r any o b j e c t o t h e r than f o r such
p a r t i c u l a r lands, o r the lands from which such money o r
t h i n g o f value s h a l l have been derived, were granted o r
confirmed, o r i n any manner contrary t o the provisions
of t h i s Act, s h a l l be deemed a breach of t r u s t . . . .
! ' A l l l a n d s , l e a s e h o l d s , timber and other products of
land, before being o f f e r e d , s h a l l be appraised a t t h e i r
t r u e value, and no s a l e o r o t h e r d i s p o s a l thereof s h a l l
be made f o r a c o n s i d e r a t i o n l e s s than the value so
a s c e r t a i n e d . ,. .
" Every s a l e , l e a s e , conveyance, o r c o n t r a c t of or
concerning any o f t h e l a n d s hereby granted or
confirmed, o r t h e use thereof or t h e n a t u r a l products
t h e r e o f , not made i n s u b s t a n t i a l conformity with the
provisions of t h i s Act s h a l l be n u l l and void, any
provisions of t h e c o n s t i t u t i o n o r laws of the said
S t a t e t o the contrary notwithstanding."
In a d d i t i o n , a 1951 c o u r t c a s e ( S t a t e ex r e l . Ebke v. Board of Educational
Lands and Funds e t a l . ) , the Supreme Court of Nebraska declared t h a t a
s t a t e must o b t a i n a maximum r e t u r n f o r t r u s t land. The court declared
t h a t :
" The s t a t e a s t r u s t e e owes the b e n e f i c i a r i e s of the
t r u s t its undivided l o y a l t y and good f a i t h , and its
a c t s must be i n the s o l e i n t e r e s t of such b e n e f i c i a r i e s .
" An a c t o f t h e L e g i s l a t u r e d e a l i n g with t r u s t property
of which t h e s t a t e is the t r u s t e e c o n s t i t u t e s a breach
of t r u s t where it appears t h a t it s u b s t a n t i a l l y
b e n e f i t s a s p e c i a l c l a s s of persons at the expense of
t h e t r u s t e s t a t e .
" It is t h e duty of a t r u s t e e t o o b t a i n a maximum r e t u r n
t o t h e t r u s t e s t a t e from t h e t r u s t p r o p e r t i e s under its
control...."
Sources of revenues from t r u s t lands a r e l e a s e r o y a l t i e s and r e n t a l s , land
s a l e s , i n t e r e s t earnings and s e r v i c e fees. Table 2 summarizes t r u s t land
revenues from f i s c a l years 1974- 75 through 1978- 79.
TABLE 2
STATE LAND DEPARTMENT REVENUES FOR ALL TRUSTS EARNED
FROM 1974- 75 TO 1978- 79
Lease Revenues $ 4,454,571 $ 4,715,532 $ 4,990,440 $ 6,297,070 $ 6,319,363
Land S a l e s
( P r i n c i p a l ) 2,435,900 2,847,793 2,854,562 3,829,325 7,894,939
Other Receipts 5,468,285 3,926,346 4,738,126 3,682,933 5,000,784
Total $ 12,358,756 $ 11.489.671 $ 12.583.128 $ 13,809,128 $ 19,215,086
In the 1978- 79 f i s c a l year t h e Department received r o y a l t y f e e s of
$ 3,403,930 which a r e included with o t h e r r e c e i p t s i n Table 2.
The Department l e a s e s t r u s t lands f o r a v a r i e t y of uses. Table 3
summarizes the number of a c r e s leased and d e t a i l s t h e revenues generated
during f i s c a l year 1978- 79 f o r each type o f l e a s e .
TABLE 3
SUMMARY OF STATE LAND DEPARTMENT LEASE RECEIPTS
FOR THE 1978- 79 FISCAL YEAR AND ACRES
LEASED AS OF JUNE 30, 1979
Type of Lease
Surface
U. S. c o n t r a c t s
Grazing
Right of way
Commercial
Agriculture
S p e c i a l u s e p e r m i t s
Homesi t e s
T o t a l s u r f a c e
Subsurface
O i l and gas
Prospecting permits
Mineral
Mineral m a t e r i a l s
U. S. c o n t r a c t s
Geothermal
Total subsurface
T o t a l s u r f a c e and subsurface
Receipts Acres
Although t h e b e n e f i c i a r i e s receive the i n t e r e s t revenues generated by the
t r u s t , they a r e n o t r e q u i r e d t o defray c o s t s incurred by t h e Department i n
a d m i n i s t e r i n g t h o s e lands. I n s t e a d , most of the c o s t s a r e financed
through the Department's General Fund appropriation. Table 4 summarizes
the Department's expenditures during f i s c a l years 1975- 76 through 1978- 79
and 1979- 80 estimated.
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The O f f i c e o f t h e Auditor General expresses its g r a t i t u d e t o the S t a t e
Land Department personnel f o r t h e i r cooperation, a s s i s t a n c e and
c o n s i d e r a t i o n during the course of t h e a u d i t . The Land Depar'tment is t o
be commended f o r t h e i n i t i a t i v e it has shown i n implementing
recommendations made i n the t r e s p a s s and mine production r e p o r t f i n d i n g s .
FINDING I
IF ARIZONA'S ROYALTY RATE FOR THE EXTRACTION OF METALLIFEROUS MINERALS
FROM STATE LANDS WERE COMPARABLE TO THAT OF OTHER STATES, REVENUES FROM
MINERAL LEASES WOULD HAVE BEEN AS MUCH AS $ 6.5 MILLION MORE DURING 1979.
A s of July 1, 1980, Arizona was one of t e n s t a t e s t h a t leased S t a t e lands
t o p r i v a t e e n t i t i e s f o r the e x t r a c t i o n of m e t a l l i f e r o u s minerals."
However, when compared t o t h e nine other s t a t e s , Arizona has one of t h e
lower r o y a l t y r a t e s . I f Arizona's r o y a l t y r a t e were comparable t o the
other l e s s o r s t a t e s , revenues from mineral l e a s e s would have been a s much
a s $ 6.5 m i l l i o n more during 1979. In a d d i t i o n , t h e adoption of a r o y a l t y
method based on t h e g r o s s value o f t h e minerals e x t r a c t e d would reduce
paperwork f o r t h e p r i v a t e l e s s e e s and allow f o r more e f f i c i e n t and
e f f e c t i v e review by the S t a t e Land Department.
Low Royalty Rate
A. R. S. $ 27- 234( B) provides t h a t :
" Every mineral l e a s e of s t a t e land s h a l l provide f o r
payment t o t h e s t a t e by t h e l e s s e e o f a r o y a l t y of f i v e
per cent of t h e n e t value of the minerals produced from
t h e claim. The n e t value s h a l l be deemed t o be the
g r o s s value a f t e r processing, where processing is
necessary f o r commercial use, l e s s , the a c t u a l c o s t of
t r a n s p o r t a t i o n from the place of production t o t h e
place of processing, l e s s c o s t s of processing and taxes
levied and paid upon the production t h e r e o f . "
* Appendix I is a summary of survey r e s u l t s regarding l e a s i n g
p o l i c i e s o f the s t a t e s t h a t l e a s e state- owned lands t o
p r i v a t e e n t i t i e s f o r the e x t r a c t i o n of m e t a l l i f e r o u s and
nonmetalliferous minerals.
The o t h e r nine s t a t e s t h a t l e a s e s t a t e lands t o p r i v a t e e n t i t i e s f o r t h e
e x t r a c t i o n of m e t a l l i f e r o u s minerals from s t a t e l a n d s u s e one of the
following methods t o a s s e s s r o y a l t i e s ( s e e Appendix I):
1. Percentage of gross revenues,
2. S l i d i n g percent o f g r o s s revenues based on g r o s s value p e r t o n ,
3. S l i d i n g percent of n e t revenues based on g r o s s value p e r t o n ,
4. Percentage of net revenues, o r
5. Net r a t e per ton.
Table 5 summarizes the methods used by t h e t e n l e s s o r s t a t e s t o determine
mineral r o y a l t i e s and shows t h e impact each method would have had on
Arizona r o y a l t y revenues from January 1, 1979, through December 31, 1979.*
* During f i s c a l year 1979- 80, t h e S t a t e Land Department received 99.96%
of its r o y a l t i e s from mineral production from four major mining
l e s s e e s ( s e e Appendix 11). During t h i s p e r i o d , t h e Department
received t h e remaining . O4% of r o y a l t i e s from more than 300 other
mining l e s s e e s . A s a r e s u l t , t h e O f f i c e o f the Auditor General
r e s t r i c t e d its review o f t h e r o y a l t y i s s u e t o the four major l e s s e e s .
- S t a t e
California
Michigan
Montana
Tennessee
Texas
Idaho
2
s
Utah
ARIZONA
Washington
Minnesota
TABLE 5
COMPARISON OF M I N I N G ROYALTY ASSESSMENT METHODS USED BY THE TEN STATES
WHICH LEASE STATE LANDS TO PRIVATE ENTITIES FOR THE EXTRACTION OF METALLIFEROUS
MINERALS AS OF JULY 1, 1980, AND THE IMPACT EACH METHOD WOULD HAVE HAD ON ARIZONA
ROYALTY REVENUES FROM JANUARY 1 THROUGH DECEMBER 31, 1979*
Method Used t o Calculate Royalties**
Sliding Percent of Sliding Percent
Gross Revenues of Net Revenues
Percentage Based on Cross Based on Gross Percentage of
Cross Revenues Value per Ton Value per Ton Net Revenues
Impact [ Increase/( Decrease)]
Each Method Would Have Had
Royalties t h a t Arizona on Arizona Rovaltv Revenues
Would Have Received ~ u r i n19~ 79
under the Various Increase Increase
Net Rate Royalty Methods ( Decrease) ( Decrease)
Per Ton During 1979 Amount Percentage
$ 12,675,024 $ 6,514,932 106%
* Projections of r o y a l t i e s i n t h e o t h e r nine s t a t e s a r e based on royalty payments from Arizona's four
l a r g e s t S t a t e mineral leases which comprise over 99.9% of the mineral r o y a l t i e s Arizona received i n
the 1979- 80 f l s c a l year. Mineral leases on the four mines currently producing a r e i n e f f e c t for 20
years with the e a r l i e s t expiration date being 1985 and the l a t e s t expiration date being 1994.
** As used in t h i s t a b l e , net revenues include deductions for processing, transportation and/ or taxes
made before the royalty is calculated. Cross revenues include no deductions before the royalty is
calculated. *** Michigan's royalty r a t e s vary from 3% t o 6%. Based on Arizona mining a c t i v i t y i n 1979, 3% was used
in t h i s table.
* * a * Idaho's royalty r a t e s vary from $. 25 per ton t o 10% of net revenues. Based on Arizona's mining
a c t i v i t y In 1979, 2.753 was used in t h i s table.
***** The minimum r a t e i s 4% of net revenues; however, t h a t r a t e is negotiable and could increase
substantially depending on the appraised value of the land being leased.
A s shown i n Table 5, f i v e s t a t e s c h a r g e h i g h e r r o y a l t y r a t e s than Arizona
does, and four of t h e f i v e charge r a t e s t h a t a r e s i g n i f i c a n t l y h i g h e r t h a n
Arizona1 s. Washington shows a r o y a l t y r a t e lower than Arizona1 s, but four
percent of n e t revenues is the minimum r a t e charged. Washington's royalty
could be s u b s t a n t i a l l y higher depending on the appraised v a l u e o f the land
which is leased.
F u r t h e r , most of the o t h e r l e s s o r s t a t e s , u n l i k e Arizona, have adopted
higher royalty r a t e s within the l a s t t e n years, as shown i n Table 6.
Code or
S t a t u t e
- S t a t e C i t a t i o n
TABLE 6
SUMMARY OF CURRENT AND HISTORIC ROYALTY RATES CHARGED
BY STATES TO PRIVATE ENTITIES FOR THE EXTRACTION OF METALLIFEROUS MINERALS
Can Rate
Be Adjusted Year Current Royalty Rate P r i o r Method of Change i n
Current Royalty Rate By Department? Rate Enacted t o Most Recent Change Royalty Rate
ARIZONA $ 27- 234 5% of net production value No 1941 2- 5% o f n e t production value S t a t u t o r y r e v i s i o n
C a l i f o r n i a PUBR 6895 Not l e s s than 10% of g r o s s production Yes
value ( l e s s t r a n s p o r t a t i o n and
processing c o s t s )
Idaho 47- 704 Not l e s s than 2 1/ 2*$ of g r o s s Yes
production value ( which includes
deductions f o r t r a n s p o r t a t i o n and
processing c o s t s s i m i l a r t o Arizona's
c a l c u l a t i o n o f n e t revenue)*
1976 S t a t e Land Commission e s t a b l i s h e d S t a t u t o r y r e v i s i o n
r a t e a t 7 1/ 41 of net production
value i n 1971
1967 S t a t e Land Commission e s t a b l i s h e d S t a t u t o r y r e v i s i o n
r a t e a t $. 25 per ton produced i n 1957
Michigan 13- 727 Royalty r a t e t o be s e t by S t a t e
Conservation DepartmentY*
Yes 1973 Not l e s s than 4% o f n e t production S t a t u t o r y r e v i s i o n
value
Minnesota 93- 20 $. 60 per ton f o r new l e a s e s Yes 1979 S t a t e Land Department e s t a b l i s h e d Administrative
r o y a l t y r a t e of $. 05 t o $. lo per ton d e c i s i o n
2
0
i n 1969
Montana 77- 3- 116 Not l e s s than 5% of g r o s s production Yes
value
Tennessee 49- 113 Not l e s s than 5% of g r o s s production
value
Texas 5421C. 8 Not l e s s t h a n 6 l/ 4% of g r o s s
production value
Utah 65- 1- 18 Not more than 12 1/ 2$ of g r o s s
production valuex***
Yes
Not more than 5% of net production S t a t u t o r y r e v i s i o n
1973 value
1971 S t a t e Land Department e s t a b l i s h e d Administrative
r a t e a t not more than 5% of g r o s s d e c i s i o n
production value i n 1956
Yes 1957 Not l e s s t h a n 6 1/ 4%*** S t a t u t o r y r e v i s i o n
Yes
Washington 79- 01- 644 Not l e s s than 4% o f n e t production Yes
value
1976 S l i d i n g s c a l e of 3% t o 6% g r o s s S t a t u t o r y r e v i s i o n
e x t r a c t i o n s
1976 Not l e s s than 1% o f n e t production Administrative
value d e c i s i o r
* The Idaho Department of Lands has adopted a " s l i d i n g
s c a l e " f o r r o y a l t i e s on production o f minerals. The
r a t e i n c r e a s e s from $. 25 ton t o 10% of net revenues a s
t h e value o f the ore removed increases. The r a t e is
applied t o the net production value o f ore taken from
t h e leased lands.
** The Michigan Conservation Department has e s t a b l i s h e d
a r o y a l t y r a t e of 3% t o 63 of g r o s s production v a l u e ,
based on the Department's a p p r a i s a l of the area i n
which t h e mine is located.
*** P r i o r t o 1957, t h e Texas code d i d n o t s p e c i f y whether the r o y a l t y r a t e was
based on g r o s s o r net production v a l u e . The 1957 s t a t u t o r y r e v i s i o n
required l e s s e e s t o pay r o y a l t i e s based on gross production v a l u e . **** The Utah S t a t e Lands Board had adopted a " s l i d i n g s c a l e " f o r r o y a l t i e s on
production o f minerals. The r a t e increased I'rom 3% t o 12 1/ 22 a s the
value of t h e o r e removed increased. The r a t e was applied t o t h e g r o s s
production value of ore taken from the leased lands l e s s t r a n s p o r t a t i o n
and processing c o s t s . In 1980, t h e Utah S t a t e Lands Board changed t h e
r o y a l t y t o 4% of g r o s s l e s s t r a n s p o r t a t i o n and processing c o s t s .
A s shown i n Table 6, Arizona has not adjusted its r o y a l t y r a t e since 1941
and is the only s t a t e l e a s i n g S t a t e lands t o p r i v a t e e n t i t i e s f o r the
e x t r a c t i o n of m e t a l l i f e r o u s minerals t h a t has n o t a d j u s t e d its r o y a l t y
r a t e i n t h e l a s t 25 years. In a d d i t i o n , C a l i f o r n i a , Michigan, Minnesota,
Montana, Tennessee, Utah and Washington have s u b s t a n t i a l l y increased t h e i r
royalty r a t e s i n t h e l a s t t e n years.
Arizona is the only s t a t e l i s t e d i n Table 6 t h a t does not allow the agency
t h a t administers mining l e a s e s t o s e t royalty r a t e s . To ensure t h a t the
administering agency does not abuse t h a t a u t h o r i t y , many s t a t e s t a t u t e s
provide f o r a tlfloor" below which royalty r a t e s may not f a l l . Thus,
s t a t u t e s s t r u c t u r e d i n t h i s manner provide f o r both a n e q u i t a b l e r e t u r n on
S t a t e lands and the a b i l i t y t o : 1 ) accommodate production o r o p e r a t i o n a l
d i f f e r e n c e s between l e s s e e s , and 2) modify r o y a l t y r a t e s t o r e f l e c t f e e s
charged by o t h e r l e s s o r s t a t e s .
Advantages of Basing .
Royalties on the Gross Value
of t h e Minerals Extracted
The adoption o f a r o y a l t y r a t e f o r the e x t r a c t i o n o f m e t a l l i f e r o u s
minerals based on t h e gross valuation of production would n o t only
i n c r e a s e S t a t e revenues but would provide the following b e n e f i t s a s well.
- Reporting requirements would be s i m p l i f i e d f o r mines l e a s i n g land
from t h e S t a t e .
- The S t a t e of Arizona would d i s c o n t i n u e s u b s i d i z i n g l e s s e e s who
operate uneconomically o r i n e f f i c i e n t l y .
- The S t a t e Land Department could review and a u d i t r o y a l t y payments
more e f f i c i e n t l y and e f f e c t i v e l y .
Currently, mines t h a t l e a s e S t a t e lands f o r t h e e x t r a c t i o n of
m e t a l l i f e r o u s minerals a r e required t o prepare and submit r e p o r t s t o t h e
S t a t e Land Department t h a t d e t a i l production volume, assay percentages,
invoice pricing and c o s t s t h a t a r e deductible t o a r r i v e a t net v a l u a t i o n ,
against which t h e S t a t e ' s royalty r a t e is applied t o a r r i v e a t t h e S t a t e ' s
royalty payment. By adopting a gross valuation b a s i s f o r r o y a l t i e s ,
l e s s e e s would no longer be required t o prepare and submit d e t a i l e d c o s t
schedules with t h e i r monthly r o y a l t y statements.
An a n c i l l a r y b e n e f i t of using a gross valuation b a s i s t o d e t e r n i n e
r o y a l t i e s would be discontinance o f t h e c u r r e n t p r a c t i c e o f t h e S t a t e
rewarding uneconomical o r i n e f f i c i e n t mining o p e r a t i o n s . C u r r e n t l y ,
l e s s e e s a r e allowed t o reduce t h e r o y a l t y amount paid t o t h e S t a t e through
deduction of production and t r a n s p o r t a t i o n c o s t s before c a l c u l a t i n g the
S t a t e ' s r o y a l t y . For example, i f on its monthly r e p o r t a l e s s e e claims t o
have e x t r a c t e d $ 1,000,000 worth of minerals from S t a t e lands and t o have
incurred $ 500,000 i n d e d u c t i b l e c o s t s , then the S t a t e ' s r o y a l t y is
c a l c u l a t e d a s follows :
Gross value a f t e r processing of minerals e x t r a c t e d
from S t a t e lands $ 1,000,000
Deductible c o s t s incurred 500,000
Net value of minerals e x t r a c t e d from S t a t e lands 500,000
S t a t e r o y a l t y r a t e
S t a t e royalty amount
A s shown above, the S t a t e , i n e f f e c t , s u b s i d i z e s f i v e percent of
deductible c o s t s incul'red by l e s s e e s . This p r a c t i c e would be eliminated,
and i n c e n t i v e s f o r uneconomical or i n e f f i c i e n t mining operations t h a t a r e
inherent i n such a p r a c t i c e would be removed, i f S t a t e r o y a l t i e s were
based on a gross v a l u a t i o n b a s i s .
A f i n a l advantage of adopting gross valuation a s t h e b a s i s f o r r o y a l t i e s
is t h a t it would simplify the review and a u d i t of monthly royalty
statements by the S t a t e Land Department. This function has not been
performed adequately by t h e Department ( s e e Finding 11) and, by
e l i m i n a t i n g t h e need t o review and a u d i t d e t a i l e d c o s t schedules, t h e
Department can perform those functions more e f f i c i e n t l y and e f f e c t i v e l y .
CONCLUSION
1. Arizona has one of t h e lower mineral r o y a l t y f e e s among s t a t e s
t h a t l e a s e s t a t e lands f o r t h e e x t r a c t i o n of m e t a l l i f e r o u s
minerals.
2. Arizona's n e t value method of a s s e s s i n g r o y a l t y f e e s r e q u i r e s
more paperwork on t h e p a r t of l e s s e e s , and a u d i t i n g and review by
the S t a t e Land Department, than would a g r o s s value method f o r
determining royalty r a t e s .
RECOMMENDATIONS
It is recommended t h a t A. R. S. $ 27- 234( B) be amended t o provide f o r :
1. A g r e a t e r r e t u r n on S t a t e mineral r o y a l t i e s .
2. Assessment o f r o y a l t y f e e s on a gross valuation r a t h e r than net
valuation.
3. Giving the S t a t e Land Department a u t h o r i t y t o e s t a b l i s h royalty
r a t e s f o r mining l e a s e s t h a t provide an e q u i t a b l e r e t u r n on S t a t e
lands and t h a t allow f o r production or o p e r a t i o n a l d i f f e r e n c e s
between l e s s e e s .
FINDING I1
STATUTORY AND STATE LAND DEPARTMENT ADMINISTRATIVE CHANGES ARE NEEDED TO
ENSURE PROPER PAYMENT OF MINERAL ROYALTIES.
During 1979, mineral l e a s e s earned the S t a t e of ~ r i z o n s approximately
$ 6.5 m i l l i o n i n r o y a l t i e s . Our review of mineral l e a s e s revealed t h a t :
- The s t a t u t e s governing mineral r o y a l t i e s a r e vague regarding t h e
determination of mineral r o y a l t i e s and the t i m e l i n e s s of payment.
- The S t a t e Land Department has not e s t a b l i s h e d adequate r u l e s and
r e g u l a t i o n s regarding mineral r o y a l t i e s .
- The s t a t ; Land Department h a s n o t a d e q u a t e l y reviewed o r audited
mineral royalty payments.
A s a r e s u l t , it is not p o s s i b l e t o determine i f t h e S t a t e has been
properly paid f o r minerals removed from S t a t e lands.
S t a t u t o r y Vagueness
A. R. S. $ 27- 234( B) provides the s t a t u t o r y b a s i s f o r determining t h e amount
of mineral l e a s e r o y a l t i e s and s t a t e s :
" 13. Every mineral l e a s e of s t a t e land s h a l l provide
f o r payment t o the s t a t e by t h e l e s s e e of a r o y a l t y of
f i v e per c e n t o f t h e n e t value of the minerals produced
from the claim. The net value s h a l l be deemed t o be
the g r o s s value a f t e r processing, where processing is
necessary f o r commercial use, l e s s the a c t u a l c o s t of
t r a n s p o r t a t i o n from the place o f production t o t h e
p l a c e of processing, l e s s c o s t s of processing and taxes
levied and paid upon the production t h e r e o f . In case
of m i n e r a l s n o t processed f o r commercial use, t h e net
value s h a l l be the g r o s s proceeds, o r g r o s s value, a t
t h e place or s a l e or use, l e s s the a c t u a l c o s t of
t r a n s p o r t a t i o n from the place o f production t o the
place of s a l e o r use, l e s s t a x e s , i f any, levied and
paid upon the production t h e r e o f . ( Emphasis added)
The above s t a t u t e is vague i n t h a t it:
- Does not specify t h e p r i c e b a s i s f o r c a l c u l a t i n g " gross v a l u e s f ' ,
- Does not d e f i n e " p r o ~ e s s i n g , ~ ~
- Does not d e f i n e " commercial use,"
- Does not s t i p u l a t e what k i n d s o f c o s t s c o n s t i t u t e t r a n s p o r t a t i o n
o r processing c o s t s ,
- Does not s p e c i f y what c o n s t i t u t e s tirnely payments of r o y a l t i e s ,
and
- Does not provide f o r p e n a l t i e s f o r l a t e payment of mineral
r o y a l t i e s .
Lack of Department Rules
and Regulations
The s t a t u t o r y vagueness regarding t h e c a l c u l a t i o n of mineral r o y a l t i e s is
r e p l i c a t e d i n t h e S t a t e Land Departmentfs r u l e s and r e g u l a t i o n s , i n t h a t
the Department has not e s t a b l i s h e d what c o n s t i t u t e s g r o s s production; how
gross values a r e t o be determined; how processing l o s s e s a r e t o be
determined; how processing and t r a n s p o r t a t i o n c o s t s a r e t o be c a l c u l a t e d ;
due d a t e s f o r royalty payments; and p e n a l t i e s f o r l a t e payment of
r o y a l t i e s .
A s a r e s u l t :
- One l e s s e e underpaid t h e S t a t e a conservatively estimated
$ 125,000 during 1977 and 1978 because it did not include
reprocessed copper i n its g r o s s production.
- A procedure f o r paying mineral r o y a l t i e s has evolved informally
t h a t has no b a s i s i n l a w o r Department r u l e s and r e g u l a t i o n s and
has delayed the f i n a l payment of some r o y a l t i e s f o r a s long a s
e i g h t years.
Gross Production
The Department r e c e i v e s monthly production r e p o r t s from mining l e s s e e s
t h a t a r e used t o c a l c u l a t e t h e S t a t e ' s r o y a l t y payments. One of the
f a c t o r s f o r determining the S t a t e ' s r o y a l t y is g r o s s production.
I n order t o a s c e r t a i n t h e accuracy of gross production information on t h e
monthly production r e p o r t s f i l e d with the Department, a comparison was
made between one l e s s e e ' s monthly production r e p o r t and t h a t same l e s s e e ' s
annual r e p o r t f i l e d with the S e c u r i t i e s and Exchange Commission ( SEC).
The comparison divulged s i g n i f i c a n t d i f f e r e n c e s i n t h e tons of copper
produced by t h e l e s s e e i n 1977 and 1978. The e x t e n t of t h e d i f f e r e n c e s is
d e t a i l e d i n Table 7.
TABLE 7
COMPARISON OF COPPER TONS AS REPORTED BY ONE
LESSEE I N STATE LAND DEPARTMENT MINERAL REPORTS
AND SEC ANNUAL REPORTS I N 1977 AND 1978
1977 - 1978
Tons of copper produced as reported t o SEC 111,105 117,392
Tons of copper produced as reported t o
S t a t e Land Department 96,978 106,494
Differences i n tons - 14.127, 10 _, 898~
Percent d i f f e r e n c e s 15% 10%
When s t a f f from the Auditor General's Office brought t h e above d i f f e r e n c e s
t o the a t t e n t i o n o f t h e l e s s e e , a r e c o n c i l i a t i o n was prepared t o explain
t h e d i f f e r e n c e s ( s e e = lppendix 111). Differences were a t t r i b u t e d primarily
t o adjustments t o recovery r a t e s i n 1977 and copper recovered from
reprocessed s l a g i n 1977 and 1978.
The f i r s t r e c o n c i l i n g item was t h e r e s u l t of adjustments made by the
l e s s e e during 1977 t o copper recovery r a t e s t h a t were not reported t o the
S t a t e Land Department. A s a r e s u l t , the l e s s e e understated its copper
production by 2,291,730 pounds. Because a p o r t i o n o f t h e o r e mined by the
l e s s e e t h a t year came from S t a t e land, the S t a t e should have received
r o y a l t i e s on its share o f t h e a d d i t i o n a l copper.
After d i s c u s s i o n s with the s t a f f of t h e Office o f t h e Auditor General, the
l e s s e e conceded t h a t a d d i t i o n a l r o y a l t i e s were, i n f a c t , due t o the
S t a t e . On May 20, 1980, the S t a t e Land Department received a check f o r
$ 31,950 from t h e l e s s e e f o r a d d i t i o n a l r o y a l t i e s due plus i n t e r e s t .
During the processing of copper ore i n t o pure copper a s l a g is produced
t h a t is discarded a s the copper concentrate is t r a n s f e r r e d from the
r e v e r b e r a t o r y f u r n a c e t o t h e converter and anode furnaces ( s e e
Appendix I V ) . From 1976 through 1979 one o f t h e l e s s e e s e x t r a c t i n g copper
ore from S t a t e land found it economically f e a s i b l e t o reprocess t h e slag
derived from t h e copper p u r i f i c a t i o n process. The copper produced from
t h i s reprocessing of s l a g was t h e o t h e r main r e c o n c i l i n g item when the
S t a t e Land Department r e p o r t s were compared t o the SEC r e p o r t s .
In a March 28, 1980, opinion, the L e g i s l a t i v e Council s t a t e d ( s e e
Appendix V):
" The l e s s e e should pay t o t h e s t a t e r o y a l t i e s on copper
derived from the s l a g which can be traced t o ore
e x t r a c t e d from leased s t a t e land by t h e lessee."
L e g i s l a t i v e Council reached t h i s conclusion because:
" The Land Department cannot e l e c t t o receive r o y a l t i e s
due o r t o raceive the amount the l e s s e e deducted f o r
c o s t s i n reprocessing the s l a g . The l e a s i n g agency has
no a u t h o r i t y t o r e l e a s e a l e s s e e from l i a b i l i t y f o r
r o y a l t y d e f i c i e n c i e s . . . I1
" The mineral l e a s e . . . c o n f e r s on t h e l e s s e e . . . t h e
o b l i g a t i o n t o ' pay a s r o y a l t y 5% of the net value of
the minerals produced from t h e leased premises.'
" The terms o f the s t a t u t e and of t h e l e a s e a s t o the
r o y a l t y payable a r e c l e a r and unambiguous and need no
construction."
Thus, $ 125,297 is owing the S t a t e i n a d d i t i o n a l r o y a l t i e s based on the
information a v a i l a b l e from t h e l e s s e e f o r 1977 and 1978 a s shown i n
Table 8.
TABLE 8
COMPUTATION OF ADDITIONAL ROYALTIES DUE TO
THE STATE LAND DEPARTMENT FOR ONE LESSEE'S
REPROCESSING OF SLAG I N 1977 AND 1978
1977 - 1978 Total
Tons of copper i n reprocessed s l a g 12,748 11,389 24,137
Converted t o pounds
Estimated percentage of copper i n
s l a g p i l e t h a t is e x t r a c t e d from
S t a t e land x 7.99% x 7.99% x 7.99%
Copper pounds traced t o S t a t e land 2,037,130 1,819,962 3,857,092
Average p r i c e per pound of copper
received by mine during the year x$ .6538 x$ .6451
Estimated net value of the copper
i n reprocessed s l a g $ 1,331,876 $ 1,174,057 $ 2,505,933
Royalty percentage x 5% X 5% x 5%
Additional royalty due t o S t a t e
Land Department $ 66.594 $ 58.701 $ 125.297
It should be noted t h a t processing and t r a n s p o r t a t i o n c o s t s were not
deducted above i n c a l c u l a t i n g a d d i t i o n a l r o y a l t i e s because t h e l e s s e e had
already deducted those c o s t s i n its monthly production r e p o r t s f i l e d with
the Department.
It should be noted a l s o t h a t the $ 125,297 is a conservative estimate based
on information a v a i l a b l e from the l e s s e e . The amount does not include
a d d i t i o n a l r o y a l t i e s due f o r 1976 o r 1979. Information on reprocessed
slag f o r 1976 and 1979 h a s n o t yet been made a v a i l a b l e t o the Office of
the Auditor General o r t o the S t a t e Land Department by the l e s s e e .
Royalty Payment
Procedures
Each month, by terms of the l e a s e , l e s s e e s of S t a t e land f o r mineral . a
e x t r a c t i o n a r e required t o f i l e production r e p o r t s and pay r o y a l t i e s due.
A s an example, f o r ore mined i n February 1980, a r e p o r t was due by March
20, 1980. Lessees c u r r e n t l y f i l e preliminary production r e p o r t s a s a
b a s i s f o r determining r o y a l t i e s due t o the S t a t e ; then make adjustments t o
t h o s e p r e l i m i n a r y r e p o r t s on subsequently f i l e d r e p o r t s .
The p r a c t i c e o f f i l i n g preliminary r e p o r t s has no b a s i s i n l a w nor is it
provided f o r i n Department r u l e s and r e g u l a t i o n s . F u r t h e r , such a
p r a c t i c e d e l a y s f i n a l payment of r o y a l t i e s , f o r s e v e r a l years i n some
cases.
A s explained above, t h e amount of t h e r o y a l t y f e e paid t o t h e S t a t e is
derived from preliminary monthly production r e p o r t s which a r e prepared by
t h e l e s s e e s and f i l e d with t h e Department 20 days a f t e r the end of the
month i n which the ore is mined. The f i n a l adjusted r e p o r t , submitted a t
a l a t e r d a t e , d e t a i l s changes i n tonnage or s h i f t s i n the market p r i c e of
the mineral. Such adjustments a r e r e f l e c t e d e i t h e r a s a d d i t i o n a l royalty
fees paid t o t h e S t a t e or r o y a l t y payments reduced on the c u r r e n t month's
preliminary r e p o r t .
According t o t h e L e g i s l a t i v e Council t h e r e is no b a s i s i n Arizona s t a t u t e s
or Department r u l e s and r e g u l a t i o n s f o r the above procedures ( See
Appendix VI) .
'! The Arizona s t a t u t e s and t h e r u l e s and r e g u l a t i o n s of
the s t a t e land department do not provide f o r an
a d j u s t e d r e p o r t . . . There a r e no s t a t u t o r y o r r e g u l a t o r y
provisions regarding the adjusted r e p o r t and t h e r e f o r e
no d e a d l i n e f o r such a r e p o r t . The deadline i n
the. . . r e g u l a t i o n a p p l i e s t o the production r e p o r t or
preliminary r e p o r t , a s it is known by the department."
Discussions with Department personnel revealed t h a t t h e p r a c t i c e o f f i l i n g
preliminary r e p o r t s apparently evolved informally and has never received
o f f i c i a l sanction from t h e L e g i s l a t u r e o r the Department.
The p r a c t i c e of allowing l e s s e e s t o f i l e preliminary r e p o r t s has r e s u l t e d
i n d e l a y o f f i n a l r o y a l t y payments f o r a s long as e i g h t years. For
example, over a seven- year period, two l e s s e e s f i l e d f i n a l r e p o r t s an
average of 20 months a f t e r they f i l e d t h e i r preliminary r e p o r t s .
During t h a t seven- year period, these two l e s s e e s paid $ 153,000 i n
a d d i t i o n a l r o y a l t i e s when the f i n a l r e p o r t s were f i l e d . Thus, these
l e s s e e s had the use of t h e $ 153,000 f o r an average of 20 months, f r e e of
i n t e r e s t charges.
A t h i r d l e s s e e d i d not f i l e a f i n a l r e p o r t with the Department from August
1972 t o May 1980, n e a r l y e i g h t years, because of a d i s p u t e regarding the
assayed value of S t a t e ore mined.
In March 1980, s t a f f from t h e O f f i c e o f t h e Auditor General met with
employees of t h e t h i r d l e s s e e t o determine why the mine abstained from
f i l i n g f i n a l r e p o r t s f o r nearly e i g h t years. According t o t h e l e s s e e s 1
employees:
1. S t a t e Land Department personnel met with the l e s s e e on
December 17, 1973. The l e s s e e ' s i n t e r o f f i c e correspondence shows t h a t :
I t . . . SLD personnel i n d i c a t e d ' t h a t s t a t e ore should be
analyzed f o r the above metals' ( gold, s i l v e r , molybdenum)
and values determined on t h a t b a s i s . The b a s i s f o r t h e i r
proposal was t h a t the c o n t e n t o f g o l d , s i l v e r and moly would
increase i n d i r e c t proportion t o the copper c o n t e n t , and,
since the s t a t e , re through August, 1972 ( t h e last f i n a l
s e t t l e m e n t ) was o f s i g n i f i c a n t higher g r a d e t h a n non- state
o r e , values as reported have been too low..."
2. Later correspondence from the mine t o Department personnel, dated
September 30, 1974, i n d i c a t e d :
" On January 21, 1974, ( t h e Director of t h e Land
Department) wrote and told us of new r e p o r t i n g
requirements and asked us t o advise him if the new
requirements posed a problem.
" We have advised your o f f i c e of t h e problems t h a t we
face i n complying with the requirements and would l i k e
t o o b t a i n c l a r i f i c a t i o n of them.
" Could you please come t o our o f f i c e s so t h a t we can
show you t h e records and a l s o , s o we may d i s c u s s t h e
s i t u a t i o n s with the a p p r o p r i a t e people on our s t a f f .
" We look forward t o your reply so t h a t we can comply
with the department's requirements."
This was the l a s t evidence of communication between t h e Department and t h e
l e s s e e u n t i l Department personnel accompanied s t a f f from t h e Office o f t h e
Auditor General t o the l e s s e e ' s o f f i c e s i n January 1980.
On May 12, 1980, the S t a t e Land Department received the first o f t n e old
preliminary r e p o r t s i n f i n a l form from t h e l e s s e e . A s of July 28, 1980,
f i n a l s e t t l e m e n t s from t h e l e s s e e had been made f o r the period of
September 1972 t o December 1977, r e s u l t i n g i n a n e t reduction i n r o y a l t i e s
t o the S t a t e of $ 35,267.
Although c u r r e n t Department mineral l e a s e s s t i p u l a t e t h a t r o y a l t i e s s h a l l
be paid within 20 days a f t e r t h e c l o s e o f t h e month within which the
minerals were e x t r a c t e d , a L e g i s l a t i v e Council opinion s t a t e d t h a t :
" There is no s t a t u t e p r e s c r i b i n g t h e d a t e when royalty
payments a r e due.. ."
L e g i s l a t i v e Council a l s o noted t h a t Texas h a s a s t a t u t e g r a n t i n g the s t a t e
a first l i e n on minerals produced t o secure payment of unpaid r o y a l t i e s ,
and New Mexico has a s t a t u t e r e q u i r i n g t h e l e s s e e t o f u r n i s h a bond t o
s e c u r e r o y a l t y payment and providing t h a t a n a t t e m p t t o defraud the s t a t e
of r o y a l t y is a felony. New Mexico and Texas a l s o r e q u i r e t h a t a f i n a l
report f o r t h e month's business be f i l e d i n 30 days. If t h e r e p o r t is not
received by the due d a t e , a d e f a u l t l e t t e r is mailed and/ or i n t e r e s t ( one
percent a month on the unpaid balance) and p e n a l t i e s a r e assessed.
Inadequate S t a t e Land Department
Reviews o r Audits of Royalty
Payments
Preliminary monthly production r e p o r t s , which a r e used t o c a l c u l a t e
estimated mineral l e a s e r o y a l t i e s , usually d e t a i l t h e following
information:
1. Gross monthly production from S t a t e lands,
2. Gross production n e t of processing l o s s e s ,
3. P r i c e s used t o value g r o s s production - net of processing l o s s e s ,
4. The value of t h e g r o s s production n e t o f processing l o s s e s ,
5. Processing and t r a n s p o r t a t i o n c o s t s ,
6. Taxes,
7. Net v a l u e ( I t e m 4 l e s s Items 5 and 61, and
8. The S t a t e ' s r o y a l t y amount ( f i v e percent of Item 7 ) .
F i n a l r o y a l t y r e p o r t s , which a r e f i l e d sometime l a t e r , contain an imposing
volume of d e t a i l e d and complicated schedules t o support f i n a n c i a l
information i n t h e r e p o r t s .
Currently, both r e p o r t s a r e reviewed by a g e o l o g i s t i n the Department's
Mineral Resources Division.
In 1979 alone, production l o s s e s and deductions allowed under t h e s t a t u t e s
reduced r o y a l t i e s paid t o the S t a t e by approximately $ 11.2 m i l l i o n as
shown i n Table 9.
TABLE 9
PRODUCTION LOSSES AND DEDUCTIONS FOR PROCESSING,
TRANSPORTATION AND TAXES ALLOWED UNDER THE STATUTES THAT
REDUCED ROYALTIES PAID TO THE STATE FROM
JANUARY 1, 1979 TO DECEMBER 31, 1979
Production Losses
Losses on production of copper $ 24,683,570
Losses on production of molybendum 98,309,376
Losses on production of s i l v e r
Royalty r a t e
Production Costs. T r a n s ~ o r t a t i o na nd Taxes
Processing c o s t s
Transportation c o s t s
Taxes
Royalty r a t e
T o t a l r o y a l t y reduction f o r production
l o s s e s and deductions
It is noteworthy t h a t i n t h e l a s t e i g h t years the Department h a s n o t
challenged a s i n g l e processing l o s s o r c o s t deduction on a monthly r o y a l t y
r e p o r t .
It is not p o s s i b l e t o determine i f the r o y a l t i e s paid t o the S t a t e a r e
proper from t h e information t h a t is submitted t o t h e Department. During
the course o f t h e Auditor General's review, it was necessary f o r s t a f f t o
ask l e s s e e s how c e r t a i n c a l c u l a t i o n s o r determinations were made. This
procedure was necessary because t h e personnel i n t h e Department who a r e
r e s p o n s i b l e f o r reviewing royalty payments did n o t possess a complete
understanding a s t o how l e s s e e s c a l c u l a t e t h e S t a t e ' s r o y a l t y .
An a d d i t i o n a l note is t h a t one o f f o u r primary mineral l e s s e e s r e f u s e s t o
f i l e monthly production r e p o r t s i n a form required by t h e Department.
The form required by t h e S t a t e Land Department is a two- page form ( s e e
Appendix VII), which is f i l l e d out i n its e n t i r e t y by t h e other t h r e e
primary l e s s e e s . However, the f o u r t h l e s s e e f i l l s o u t o n l y the f i r s t page
and not the second page, which c o n t a i n s information on t h e assayed values
of copper, gold, s i l v e r and molybdenum contained i n t h e o r e and processing
l o s s e s .
The l e a s e agreement between t h i s l e s s e e and the Department c o n t a i n s t h e
following provision:
" The l e s s e e agrees t o pay a l l r o y a l t i e s ... such payments
w i l l be accompanied by a sworn statement on forms
( emphasis added) furnished by the Department."
L e g i s l a t i v e Council was asked about t h e l e g a l r a m i f i c a t i o n s regarding t h i s
s i t u a t i o n and its opinion was ( s e e Appendix V I I I ) :
" The s t a t u t e s , the l e a s e and t h e department's
r e g u l a t i o n s do not r e s t r i c t t h e type of information
which t h e commissioner is authorized t o o b t a i n a p a r t
from t h e f a c t t h a t t h e information must r e l a t e t o the
leased ' mineral c l a i m . ' ( See A. C. R. R. R12- 5- 706,
subsection C.)
'' The information s p e c i f i e d i n the example s t a t e d i n
y o u r q u e s t i o n ( s i l v e r assay per ' dry tons ore
t r e a t e d . ' ) is within the information which t h e s t a t e
land commissioner is permitted t o o b t a i n from the
l e s s e e .
" The l e s s e e would be i n v i o l a t i o n of the l e a s e terms i f
t h e l e s s e e was not completing a l l of t h e forms provided
by t h e department ."
F i n a l l y , a n a d d i t i o n a l hindrance t o an e f f e c t i v e Department review o r
a u d i t function is t h a t , according t o the L e g i s l a t i v e Council ( s e e
Appendix VI) :
" There is no provision f o r challenging t h e l e s s e e ' s
determination of value.. ."
L e g i s l a t i v e Council did point o u t , however, t h a t o t h e r s t a t e s ' s t a t u t e s ,
such a s i n Texas and New Mexico, have provisions f o r an examination of
l e s s e e s 1 books and records and f o r adjustments t o r o y a l t i e s a s a r e s u l t of
those examinations.
CONCLUSIONS
Current s t a t u t e s a r e vague regarding the determination of mineral
r o y a l t i e s and the t i m e l i n e s s of payment. In a d d i t i o n , t h e S t a t e Land
Department h a s n o t e s t a b l i s h e d adequate r u l e s and r e g u l a t i o n s regarding
mineral r o y a l t i e s . F i n a l l y , t h e S t a t e Land Department h a s n o t adequately
reviewed o r audited mineral r o y a l t i e s .
RECOMMENDATIONS
It is recommended t h a t :
A. R. S. $ 27- 234( B) be amended t o provide f o r :
1. More s p e c i f i c i t y regarding t h e p r i c e b a s i s f o r c a l c u l a t i n g gross
values and t h e t i m e l i n e s s o f r o y a l t y payment.
2. Penalty provisions f o r l a t e payments.
3. Assessment of r o y a l t y f e e s on g r o s s v a l u a t i o n r a t h e r than net
valuation ( s e e Finding I).
4. S t a t e Land Department a u t h o r i t y t o e s t a b l i s h r o y a l t y r a t e s f o r
mining l e a s e s t h a t provide an e q u i t a b l e r e t u r n on S t a t e lands and
allow f o r production o r o p e r a t i o n a l d i f f e r e n c e s between l e s s e e s
( s e e Finding I).
The S t a t e Land Department e s t a b l i s h more d e f i n i t i v e r u l e s and r e g u l a t i o n s
regarding mineral r o y a l t i e s and r e p o r t i n g procedures.
If t h e n e t valuation b a s i s is r e t a i n e d i n the s t a t u t e s , then the S t a t e
Land Department should a c q u i r e the e x p e r t i s e t o adequately review monthly
mineral production r e p o r t s by c o n t r a c t i n g f o r p r o f e s s i o n a l s e r v i c e s o r
h i r i n g personnel who a r e knowledgeable i n accounting and mining procedures.
FINDING I11
THE STATE OF ARIZONA WOULD RECEIVE FROM $ 703 THOUSAND TO $ 5.2 MILLION
ANNUALLY I N ADDITIONAL REVENUES FROM GRAZING LEASES IF THE GRAZING LEASE
RATE WERE COMPARABLE TO THAT CHARGED BY OTHER PUBLIC AND PRIVATE ENTITIES.
The Arizona S t a t e Land Department is responsible f o r i s s u i n g l e a s e s t o
persons wishing t o graze animals on S t a t e lands. The amount of revenues
generated by grazing l e a s e s is the product of the annual r e n t a l r a t e f o r
each animal feeding on the leased land m u l t i p l i e d by t h e c a r r y i n g capacity
or number of animals feeding on the leased l a n d . During f i s c a l year
1979- 80, grazing l e a s e s were expected t o generate $ 1,190,000 based on a
c a l c u l a t e d l e a s e r a t e of 91d per animal u n i t month. The grazing l e a s e
r a t e charged by Arizona is s i g n i f i c a n t l y lower than t h a t charged by t h e
Federal Bureau of Land Management, nine o t h e r western s t a t e s and p r i v a t e
land owners. Arizona would earn from $ 703 thousand t o $ 5.2 m i l l i o n
annually i n a d d i t i o n a l revenues from grazing l e a s e s i f its grazing l e a s e
r a t e were comparable t o t h a t charged by those other e n t i t i e s .
Grazing Leases Administered
by the S t a t e Land Department
Since its inception i n 1915, the S t a t e Land Department has leased a l a r g e
segment of S t a t e land f o r grazing. I n f i s c a l year 1978- 79, t h e Department
had 8,757,461 a c r e s under grazing l e a s e or 91.4 percent of t h e 9,581,975
a c r e s managed by the Department. Table 10 shows t h e revenues generated by
grazing l e a s e s f o r f i s c a l years 1968- 69 through 1978- 79 and the estimated
revenues f o r f i s c a l year 1979- 80.
TABLE 10
SUMMARY OF ACTUAL REVENUES GENERATED BY GRAZING
LEASES FOR FISCAL YEARS 1968- 69 THROUGH 1978- 79 AND
ESTIMATED REVENUES FOR FISCAL YEAR 1979- 80
F i s c a l
Year
1968- 69
. 1969- 70
1970- 71
1971- 72
1972- 73
1973- 74
1974- 75
1975- 76
1976- 77
1977- 78
1978- 79
1979- 80 ( estimated)
Amount of Grazing
Lease Revenues
Under Arizona law, grazing l e a s e revenues a r e based on two f a c t o r s ; the
c a r r y i n g c a p a c i t y , or number of animals t h a t can feed on t h e acreage being
l e a s e d , and the annual r e n t a l r a t e f o r each animal, o r animal u n i t ,
feeding on t h e leased acreage. Our review of S t a t e Land Department
grazing l e a s e s revealed t h a t the Department h a s e s t a b l i s h e d c a r r y i n g
c a p a c i t i e s t h a t appear t o be s u f f i c i e n t l y high when compared t o carrying
c a p a c i t i e s r e c e n t l y developed by t h e Federal Bureau of Land Management.
However, the annual r e n t a l r a t e per animal u n i t , which is s e t by s t a t u t e ,
is much too low.
Arizona S t a t e Land Department
Grazing Lease Rate Is Far Less
than t h a t Charged by Other E n t i t i e s
The Arizona grazing l e a s e r a t e is determined by a formula s e t f o r t h under
A. R. S. $ 37- 285( B) :
" A l l grazing land s h a l l be c l a s s i f i e d and appraised on
t h e b a s i s of its annual carrying capacity. The annual
r e n t a l r a t e f o r grazing land s h a l l be t h e amount
determined by multiplying the c a r r y i n g c a p a c i t y o f t h e
lands by the annual r e n t a l r a t e per animal u n i t . The
annual r e n t a l r a t e per animal u n i t s h a l l be twenty- two
percent o f t h e average market p r i c e o f c a t t l e f o r t h e
preceding year.. . ."
Arizona c u r r e n t l y charges by f a r t h e lowest grazing l e a s e r a t e
when compared t o nine o t h e r western s t a t e s , t h e Bureau of Land
Management and p r i v a t e land owners, as shown i n Table 11.
TABLE 11
COMPARISON OF ARIZONA GRAZING LEASE RATE TO THAT CHARGED BY NINE
OTHER WESTERN STATES,* THE BUREAU OF LAND MANAGEMENT AND PRIVATE ARIZONA
LAND OWNERS, AND THE IMPACT THE ADOPTION OF EACH RATE WOULD HAVE
HAD ON ARIZONA'S GRAZING LEASE REVENUES DURING 1979
ARIZONA
Wyoming
New Hexico
Utah
C a l i f o r n i a
Oregon
Coloramdo
Washington
Idaho
Montana
Bureau of Land Managenent
P r i v a t e land owners
Calculated Animal Animal Unit Months In
Unit Month Rate Arizona During 1979
$ .91 1,302,662
1.45 1,302,662
1.60 1,302,662
1.89 1,302,662
1.89 1,302,662
2.50 1,302,662
3.00 1,302,662
3.25 1,302,662
3.50 ( average) 1,302,662
3.64 1,302,662
1.89 1,302,662
4.88 1,302,662
Arizona Grazing Lease
Revenues Using t h e
Indicated Annual
Unit Month Rate
$ 1,185,422
1,888,859
2,084,259
2,462,031
2,462,031
3,256,655
3,907,986
4,233,651
4,559,317
4,741,690
2,462,031
6,356,990
Impact t h e Adoption of
Each Rate Would Have Had
on Arizona's Grazing
Lease Revenues During 1979
$ - 0-
703,437
898,837
1,276,609
1,276,609
2,071,233
2,722,564
3,048,229
3,373,895
3,556,268
1,276,609
5,171,568
Nevada is not included because it has no g r a z i n g l e a s e s . " For information on a l l s t a t e s t h a t responded t o the Auditor
General survey see Appendix I X .
It should be noted t h a t f o r comparative purposes Arizona's grazing l e a s e
r a t e was converted t o an animal u n i t month r a t e . For example, i n Arizona
the animal u n i t month r a t e was determined a s follows:
Average p r i c e of beef per hundred weight = animal u n i t
f o r the previous year X 22% month r a t e
12
For the 1979- 80 year, the S t a t e Land Department's animal u n i t month r a t e
was c a l c u l a t e d t o be 916.
The Nine Western S t a t e s
A s shown i n Table 11, Arizona's grazing l e a s e r a t e is not only lower than
the nine o t h e r western s t a t e s , but its l e a s e r a t e is s i g n i f i c a n t l y below
t h e c a l c u l a t e d average of $ 2.36 per animal u n i t month f o r a l l o f t h e
s t a t e s . Two s t a t e s , C a l i f o r n i a and Utah, have r a t e s t h a t a r e adjusted
annually t o t h e same r a t e charged by the Bureau of Land Management.
A survey conducted by the Office o f t h e Auditor General of t h e n i n e o t h e r
western s t a t e s did not prove t h a t they had higher grazing l e a s e r a t e s
because t h e y o f f e r e d more l e s s e e s e r v i c e s . For example, none of t h e s t a t e
land departments c o n t r o l l e d t r e s p a s s e s of persons o r v e h i c l e s on leased
grazing lands o r repaired damage t o land improvements caused by vandalism,
and only one s t a t e land department, i n Idaho, repaired damage caused by
vandalism t o the l e a s e d l a n d s . The survey, however, did r e v e a l t h a t f i v e
s t a t e land departments had land improvement programs t h a t included such
s e r v i c e s a s reseeding grazing lands. Table 12 summarizes the r e s u l t s of
t h i s survey.
TABLE 12
SUMMARY OF SERVICES PROVIDED TO GRAZING LESSEES
BY ARIZONA AND THE NINE OTHER WESTERN STATE LAND DEPARTMENTS*
Repair Repair
Control of Vandalism Vandalism t o Land Improvement
S t a t e Trespass t o the Lands Improvements ( reseeding, etc. ) **
ARIZONA N o No N o No
C a l i f o r n i a No No No No
Colorado No No N o N o
Idaho No Yes No Yes
Montana N o N o No Yes
New Mexico No No No No
Oregon No No No Yes
Utah No No No Yes
Washington No No N o Yes
Wyoming - No - No - No - No
Total No = i 10 9 = 10 2
Total Yes -- 0 1 S -- 0 = a;
* Nevada is not included because it has no s t a t e grazing l e a s e s .
** Montana a l l o c a t e s two and one- half percent and Idaho and Washington
a l l o c a t e up t o t e n percent o f t h e grazing f e e s received on s t a t e lands
t o a land improvement fund. The Utah S t a t e L e g i s l a t u r e appropriated
s e p a r a t e l y funds for land improvement equal t o approximately 15
percent of the grazing f e e s c o l l e c t e d i n 1979- 80 f i s c a l year. Oregon
has expended f o r land improvement approximately 35 percent of the
grazing f e e s c o l l e c t e d i n t h e l a s t ten years.
The Bureau of Land
Management
The Federal Bureau of Land Management was formed i n 1946 by combining t h e
General Land Office and the Grazing Service. P r e s e n t l y , t h e Bureau of
Land Management ( BLM) manages more than 450 m i l l i o n a c r e s o f p u b l i c l a n d s
i n 23 s t a t e s , making it t h e n a t i o n ' s l a r g e s t land manager.
In Arizona, BLM manages 12,596,043 a c r e s of public l a n d s , o f which
12,289,000 a c r e s ( 98 percent) a r e leased f o r grazing. Table 13
i l l u s t r a t e s how S t a t e Land Department grazing r a t e s have f a l l e n below the
r a t e s charged by BLM i n recent years.
TABLE 13
COMPARISON OF GRAZING FEES CHARGED BY THE ARIZONA
STATE LAND DEPARTMENT AND BUREAU OF LAND MANAGEMENT
FOR FISCAL YEARS 1959- 60 THROUGH 1979- 80
F i s c a l
Year
S t a t e Land
De~ artment
Bureau of Land
Management
In 1953, the General Accounting Office issued s e v e r a l a u d i t r e p o r t s t h a t
noted i n c o n s i s t e n c i e s i n the methods grazing f e e s were e s t a b l i s h e d by
Federal agencies and were c r i t i c a l of the low f e e s charged by the Bureau
of Land Management. The Comptroller General s r e p o r t of 1958 recommended
t h a t a j o i n t study be undertaken t o a r r i v e a t a uniform method f o r
I e s t a b l i s h i n g Federal agency grazing fees.
Based on a 1966 Western Livestock Grazing Survey,* t h e Bureau of Land
Management i n 1969 adopted r e g u l a t i o n s t h a t provided f o r : 1) a schedule
of incremental i n c r e a s e s i n the Bureau's $. 33 grazing f e e s r a t e t o $ 1.23
over a ten- year p e r i o d , and 2) annual adjustments t o t h e grazing f e e r a t e
t o r e f l e c t charges i n r a t e s paid on p r i v a t e l y held rangelands i n eleven
Western s t a t e s .
The Congress of the United S t a t e s passed the Public Rangelands Improvement
Act of 1978,** which s t i p u l a t e d t h a t : 1 ) t h e Bureau's grazing f e e r a t e
equals t h e f a i r market value of the land l e a s e d , and 2) the f a i r market
value f o r p u b l i c g r a z i n g should equal the $ 1.23 base e s t a b l i s h e d by the
1966 Western Livestock Grazing Survey m u l t i p l i e d by the Forage Value Index
( FVI)*** plus t h e Beef C a t t l e Price Index ( BPI)*** minus the P r i c e s Paid
Index ( PPI)*** and divided by 100. Stated a l g e b r a i c a l l y , t h e formula is:
Grazing f e e per animal u n i t month = $ 1.23 ( FVI + [ BPI - PPI])
100
* The S t a t i s t i c a l Reporting Service, U. S. Department of Agriculture,
cooperated with t h e F o r e s t S e r v i c e and Bureau of Land Management t o
plan and c a r r y out the d a t a c o l l e c t i o n and compilation f o r t h e
survey. The suryey encompassed 98 n a t i o n a l f o r e s t s , 19 n a t i o n a l
g r a s s l a n d s , 48 BLM d i s t r i c t s and 10,000 i n d i v i d u a l s i n 17 western
s t a t e s . ** In October 1973, the American National Cattlemen's Association ( ANCA)
proposed a new index t o t h e S e c r e t a r i e s o f Agriculture and I n t e r i o r t o
replace the index t h a t was c u r r e n t l y i n use by BLM. The index
proposed by ANCA formed a s i g n i f i c a n t p a r t of t h e grazing formula used
t o e s t a b l i s h " f a i r market valueu i n the 1978 Public Rangelands
Improvement Act. *** For f u r t h e r explanation of these terms see Appendix X.
le
Based on t h e above formula, t h e c a l c u l a t e d f a i r market value o f p u b l i c
g r a z i n g l a n d s f o r f i s c a l year 1979- 80 was $ 2.03 per animal u n i t month. It
should be noted, however, t h a t the Bureau charged $ 1.89 per animal u n i t
month because t h e Bureau's grazing f e e r a t e for f i s c a l year 1978- 79 was
$ 1.51 per animal u n i t month and 43 USC 1905, Section 6 ( a ) s t a t e s , I t . .. the
annual i n c r e a s e o r decrease i n such f e e f o r any given year s h a l l be
limited t o not more than plus or minus 25 per centum of t h e previous
y e a r ' s fee."
Thus, $ 1.51 per animal u n i t month X 125 percent equals $ 1.89 per animal
u n i t month.
P r i v a t e Land Owners
The U. S. Department of Agriculture - Economics, S t a t i s t i c s and Cooperative
Service provides t h e Bureau of Land Management and the F o r e s t S e r v i c e with
a derived index of the r e l a t i v e change i n the previous y e a r ' s average
monthly r a t e per animal u n i t month f o r grazing animal u n i t s on
nonirrigated p r i v a t e permanent pasture o r grazing land. This index is
used as a f a c t o r i n the annual updating of t h e grazing f e e formula used by
the Bureau of Land Management and the F o r e s t Service.
The p r i v a t e grazing l e a s e r a t e s a r e determined from a p r o b a b i l i t y survey
u t i l i z i n g ranching a r e a s and s e v e r a l s p e c i f i c lists of o p e r a t o r s i n eleven
western s t a t e s . The a r e a sampling involves subdividing t h e e n t i r e a r e a
within each s t a t e i n t o ' s m a l l a r e a sampling u n i t s , c a l l e d segments, and
s e l e c t i n g a sample of these segments t o be enumerated personally by
trained interviewers. In the eleven western s t a t e s t h e sample ranching
a r e a s have been s t r a t i f i e d on land use. Producers must have a minimum
number of livestock. t o be included i n t h i s c l a s s i f i c a t i o n . The
s t a t i s t i c a l l y weighted p r i v a t e grazing l e a s e r a t e s a r e compared t o S t a t e
Land Department r a t e s i n Table 14.
t
TABLE 14
A COMPARISON OF ARIZONA STATE LAND DEPARTMENT
AND PRIVATE GRAZING LEASE RATES FOR 1977, 1978 AND 1979
P r i v a t e Grazing S t a t e Land Department
Lease Rate per Grazing Lease Rate p e r
Year Animal Unit Month Animal Unit Month
It should be noted t h a t i n an October 21, 1977, r e p o r t e n t i t l e d " Study Of
Fee For Grazing Livestock On Federal Lands," t h e S e c r e t a r i e s of the
I n t e r i o r and Agriculture determined a value f o r grazing lands which is
designed t o be !!... equitable t o t h e United S t a t e s and t o holders of
grazing permits and leases." The study s t a t e d " The 1966 survey* and
a n a l y s i s attempted t o develop a v a r i a b l e value base on forage q u a l i t y , but
s i g n i f i c a n t d i f f e r e n c e s could not be s u b s t a n t i a t e d . I f The same r e p o r t a l s o
s t a t e d , " Differences among ranching a r e a s , a s shown by the d a t a , were not
l a r g e enough i n r e l a t i o n t o the wide v a r i a t i o n t h a t e x i s t e d w i t h i n areas
t o provide a b a s i s f o r recommending d i f f e r e n t i a l base f e e s among ranching
areas." ( Emphasis added)
Thus, it appears t h a t grazing f e e r a t e s per animal u n i t month should be
approximately t h e same throughout the western s t a t e s . F u r t h e r , i n Arizona
d i f f e r e n c e s i n q u a l i t y and q u a n t i t y of forage would be recognized i n
c a r r y i n g c a p a c i t y o r the number of animal u n i t s t h a t could properly be run
i n the various rangeland a r e a s .
* The survey was designed t o provide d a t a needed t o estimate grazing
values on some 98 n a t i o n a l f o r e s t s , 19 n a t i o n a l g r a s s l a n d s , and 48
Bureau of Land Management d i s t r i c t s i n 17 western s t a t e s .
CONCLUSION
The S t a t e Land Department charges a grazing f e e r a t e t h a t is s i g n i f i c a n t l y
lower than the r a t e charged by t h e Bureau of Land Management, n i n e o t h e r
western s t a t e s and p r i v a t e industry. If Arizona's grazing f e e r a t e were
comparable t o t h a t charged by o t h e r public and p r i v a t e e n t i t i e s , Arizona
would receive from $ 703 thousand t o $ 5.2 m i l l i o n i n a d d i t i o n a l revenues
from grazing l e a s e s .
RECOMMENDATION
A. R. S. $ 37- 285( B) be amended t o allow f o r a s u b s t a n t i a l i n c r e a s e i n t h e
annual r e n t a l r a t e charged f o r each animal feeding on S t a t e land.
Consideration should be given t o adoption of t h e Bureau of Land
Management's grazing r a t e formula a s e s t a b l i s h e d by t h e Congress o f t h e
United S t a t e s i n the Public Rangelands Improvement Act of 1978.
FINDING I V
THE LEGISLATURE HAS NOT SPECIFICALLY DIRECTED THE STATE LAND DEPARTMENT TO
IDENTIFY AND RESOLVE INSTANCES OF TRESPASS ON STATE LANDS NOR HAS IT
PROVIDED THE DEPARTMENT WITH ADEQUATE RESOURCES TO DO SO. AS A RESULT,
DURING 1979 AT LEAST $ 786,000 I N DAMAGE WAS INFLICTED ON STATE LANDS BY
TRESPASSERS AND A RELATED $ 2.3 MILLION I N COMPENSATION MAY BE LOST.
Damages May Be Lost
t o the S t a t e
Under Arizona law the S t a t e Land Department is r e s p o n s i b l e f o r managing,
p r o t e c t i n g and preserving S t a t e lands. However, the i d e n t i f i c a t i o n and
r e s o l u t i o n of i n s t a n c e s o f t r e s p a s s on S t a t e lands is not s p e c i f i c a l l y
included i n t h a t r e s p o n s i b i l i t y . A s a r e s u l t :
- The Department does not have s u f f i c i e n t s t a f f committed t o
t r e s p a s s a c t i v i t i e s .
- The Department does not have a formal program t o monitor S t a t e
lands f o r i n s t a n c e s of t r e s p a s s .
- The Department does not have adequate procedures t o resolve
i d e n t i f i e d i n s t a n c e s of t r e s p a s s .
- An unknown but p o t e n t i a l l y s u b s t a n t i a l amount of damage is
i n f l i c t e d upon S t a t e lands by t r e s p a s s e r s .
- A p o t e n t i a l $ 2.3 m i l l i o n i n compensation r e s u l t i n g from 1979
t r e s p a s s damage may be l o s t t o the S t a t e .
Lack of S t a t u t o r y Requirement
to I d e n t i f y and Resolve Instances
of Trespass on S t a t e Lands
A. R. S. $ 37- 501 provides t h a t :
" A person is g u i l t y of a c l a s s 2 misdemeanor who:
1 . Knowingly commits a t r e s p a s s upon s t a t e lands,
e i t h e r by c u t t i n g down or destroying timber o r
wood standing o r growing thereon, or by carrying
away timber o r wood therefrom, or by mowing,
c u t t i n g o r removing hay o r g r a s s thereon or
therefrom, or grazing l i v e s t o c k thereon, u n l e s s he
h a s a n a p p l i c a t i o n pending f o r l e a s i n g the lands
or the lands a r e then leased t o any o t h e r person.
" 2. Knowingly e x t r a c t s o r removes o i l , gas, c o a l ,
mineral, e a r t h , rock, f e r t i l i z e r o r f o s s i l s of any
kind or d e s c r i p t i o n therefrom.
" 3. Knowingly without r i g h t i n j u r e s o r removes any
b u i l d i n g , fence o r improvements on s t a t e lands, o r
unlawfully occupies, plows o r c u l t i v a t e s any of
t h e l a n d s .
" 4. With criminal negligence exposes growing t r e e s ,
shrubs o r undergrowth standing on s t a t e lands t o
danger o r d e s t r u c t i o n by f i r e . "
Although t h e S t a t e Land Department is given t h e r e s p o n s i b i l i t y t o p r o t e c t
and t o preserve S t a t e lands held i n t r u s t and t o manage those lands f o r
t h e b e n e f i t of Arizona's p u b l i c s c h o o l s and o t h e r b e n e f i c i a r i e s it is not
s t a t u t o r i l y required t o enforce t h e provisions of A. R. S. S37- 501.
In a memorandum dated May 28, 1980, t h e L e g i s l a t i v e Council s t a t e d ( See
Appendix X I f o r e n t i r e t e x t ) :
" There is no law which s p e c i f i c a l l y imposes a duty upon
the ( S t a t e Land) department t o i n v e s t i g a t e and r e s o l v e
cases of t r e s p a s s upon s t a t e lands. However, A. R. S.
$ 37- 211, subsection A , paragraph 4 does provide t h a t :
" A . The S t a t e Land Commissioner may conduct
i n v e s t i g a t i o n s and experiments on the l a n d s o f t h e
s t a t e to:
" 4. Obtain other information and d a t a which
w i l l aid i n the l e a s i n g , s a l e and
a d m i n i s t r a t i o n of lands belonging t o the
s t a t e . ' I ( Emphasis added)
The Department Does Not
Have S u f f i c i e n t S t a f f
Committed t o Trespass
A c t i v i t i e s
The S t a t e Land Department is r e s p o n s i b l e f o r 9.6 m i l l i o n s u r f a c e a c r e s of
S t a t e land t h a t is s c a t t e r e d throughout Arizona's 72.7 m i l l i o n a c r e s . O f
97 f u l l - t i m e e q u i v a l e n t p o s i t i o n s i n the Department, not one f u l l - t i m e
employee is assigned t o i d e n t i f y , review and i n v e s t i g a t e t r e s p a s s cases.
A survey conducted by the Office o f t h e Auditor General ( See Appendix XI11
revealed t h a t t h e r e a r e 19 o t h e r s t a t e s t h a t have a t l e a s t one f u l l - t i m e
i n v e s t i g a t o r assigned t o c o n t r o l l i n g t r e s p a s s a c t i v i t y . When compared t o
these 19 o t h e r s t a t e s , it appears t h a t Arizona is not committing
s u f f i c i e n t resources t o t r e s p a s s a c t i v i t i e s , a s shown i n Table 15.
TABLE 15
SUMMARY OF STAFF ASSIGNED TO TRESPASS
ACTIVITIES FOR THE 19 STATES WITH TRESPASS
INVESTIGATORS AND ARIZONA
Full- time
S t a f f Assigned Ratio o f S t a f f
Acres of t o Trespass t o Acres of
State* S t a t e Land A c t i v i t i e s S t a t e Land
Alabama
New Hampshire
Rhode Island
Wisconsin
I l l i n o i s
C a l i f o r n i a
New York
Tennessee
Nebraska
Hawaii
Colorado
Michigan
New Jersey
Washington
Florida
Idaho
New Mexico
Texas
Pennsylvania
ARIZONA
* Listed i n order from the lowest s t a f f / a c r e r a t i o t o t h e highest
s t a f f / a c r e r a t i o . Appendix V I contains a d d i t i o n a l information f o r the
l i s t e d s t a t e s .
** E f f e c t i v e January 1, 1980, t h e Arizona S t a t e Land Department assigned
one f u l l - t i m e employee t o t r e s p a s s a c t i v i t i e s . This employee's time
is a l l o c a t e d a s follows: 50% of time t o t r e s p a s s i s s u e s ; 50% t o
n a t u r a l resources a r e a s . Therefore, s t a f f i n g is s t a t e d a s 1/ 2 FTE.
While the comparison with o t h e r s t a t e s a s shown i n Table 15 i n d i c a t e s t h a t
s u f f i c i e n t S t a t e Land Department s t a f f is not committed t o t r e s p a s s
a c t i v i t i e s , a review of known t r e s p a s s e s on Arizona State- owned land
s i m i l a r l y i n d i c a t e s t h a t the l e v e l of Department resources c u r r e n t l y
devoted t o t h e a r e a o f t r e s p a s s is inadequate.
Further, our review o f t h e S t a t e Land Department revealed t h a t the
Department does not have a formal program t o monitor S t a t e lands f o r
i n s t a n c e s of t r e s p a s s o r adequate procedures f o r resolving reported
i n s t a n c e s of t r e s p a s s . A s a r e s u l t , an unknown but p o t e n t i a l l y
s u b s t a n t i a l amount of damage is i n f l i c t e d on S t a t e lands by t r e s p a s s e r s .
The Department Does Not
Have a Formal Program
t o Monitor S t a t e Lands
From December 1, 1977 t o December 1, 1979, 135 cases o f a l l e g e d t r e s p a s s e s
on S t a t e land were reported t o the S t a t e Land Department. These 135 cases
were reported by the following sources:
Number of
Trespass Cases Percentage of
Source Reported Reported Cases
Law enforcement agencies
Private c i t i z e n s
Lessees
Other governmental agencies
S t a t e Land Department
It is noteworthy t h a t t h e S t a t e Land Department i d e n t i f i e d only 21 percent
of the t r e s p a s s c a s e s shown above. Such a small r e p r e s e n t a t i o n c l e a r l y
i n d i c a t e s t h e absence of a formal program within t h e Department t o monitor
S t a t e lands for i n s t a n c e s of t r e s p a s s . F u r t h e r , t h e s e r i o u s n e s s of t h e
absence of such a program is compounded by t h e f a c t t h a t , according t o
Department personnel e s t i m a t e s , only 20 percent of t r e s p a s s e s on S t a t e
land a r e reported t o t h e Department.
It appears t h a t one e f f i c i e n t means t o i n c r e a s e t h e i d e n t i f i c a t i o n of
t r e s p a s s on S t a t e lands would be t o b e t t e r educate law enforcement
agencies and the public a t l a r g e regarding t r e s p a s s e s on S t a t e lands. For
example, the Office of the Auditor General contacted the following l a w
enforcement agencies t o determine t h e i r a b i l i t y and w i l l i n g n e s s t o assist
the S t a t e Land Department i n i d e n t i f y i n g i n s t a n c e s of t r e s p a s s on S t a t e
lands.
Coconino County S h e r i f f Pinal County S h e r i f f
Maricopa County S h e r i f f Yavapai County S h e r i f f
Pima County S h e r i f f Phoenix P o l i c e Department
A l l the above agencies s t a t e d t h a t : 1 ) t h e i r resources were l i m i t e d , and
2) they could n o t d e v o t e a d d i t i o n a l resources t o i d e n t i f i c a t i o n of
t r e s p a s s on S t a t e land. However, these agencies i n d i c a t e d t h a t t r e s p a s s
i d e n t i f i c a t i o n might be increased i f the Department provided them with
t r a i n i n g regarding t r e s p a s s on S t a t e lands.
Additionally, d e s p i t e the f a c t t h a t t h e S t a t e Land Department does not
have a formal program of education f o r the public regarding t r e s p a s s ,
p r i v a t e c i t i z e n s i d e n t i f i e d 19 percent of the t r e s p a s s e s reported t o the
Department between December 1, 1977 and December 1, 1979.
The Office of the Auditor General contacted s e v e r a l Arizona t e l e v i s i o n and
radio s t a t i o n s and determined t h a t these s t a t i o n s would be w i l l i n g t o a i r
public s e r v i c e announcements regarding t r e s p a s s on S t a t e land f o r the
S t a t e Land Department, provided :
- The Department prepared a statement explaining the purpose of
such messages and assured the s t a t i o n t h a t t h e messages were from
a n o n p r o f i t o r g a n i z a t i o n , and
- The Department typed the s c r i p t s f o r such announcements.
By u t i l i z i n g public s e r v i c e announcements, the Department could :
1) i n c r e a s e the i d e n t i f i c a t i o n and r e p o r t i n g o f t r e s p a s s e s , and 2) put
p o t e n t i a l t r e s p a s s e r s on n o t i c e as t o what c o n s t i t u t e s a t r e s p a s s and what
t h e a t t e n d a n t p e n a l t i e s a r e f o r t r e s p a s s i n g on S t a t e land.
The Department Does Not
Have Adeauate Procedures
t o Resolve I d e n t i f i e d
I n s t a n c e s o f Trespass
Of the 135 c a s e s o f t r e s p a s s reported t o the S t a t e Land Department between
December 1, 1977 and December 1, 1979, 91 were still unresolved as of
January 10, 1980, and t h e average age of these unresolved c a s e s was 428
days. Table 16 summarizes t h e s t a t u s of t h e t r e s p a s s cases reported t o
the Department from December 1, 1977 t o December 1, 1979.
TABLE 16
SUMMARY OF'TRESPASS CASES REPORTED TO THE
STATE LAND DEPARTMENT FROM DECEMBER 1, 1977, TO
DECEMBER 1, 1979, AND THE STATUS OF THESE CASES AS OF
JANUARY 10, 1980
Period Trespass
was Reported t o Number of Number of Open Trespass
the S t a t e Land Trespass Cases Trespass Cases Cases a s of
Department Received Resolved January 10, 1980
December 1, 1977
t o
December 1, 1978 78
December 2, 1978
t o
December 1, 1979 - 57
T o t a l s a2
Average age of unresolved
t r e s p a s s c a s e s a s of January 10, 1980 - 428 days
* There is n o t adequate documentation i n t h e S t a t e Land Department f i l e s
t o determine how o r why t e n o f t h e s e 44 t r e s p a s s c a s e s were closed.
A major cause of t h e S t a t e Land Department's i n a b i l i t y t o r e s o l v e t r e s p a s s
cases i n a timely manner is t h a t the Department has not e s t a b l i s h e d a
formal procedure f o r t, respass review and i n v e s t i g a t i o n .
Currently, r e p o r t s of t r e s p a s s on S t a t e land a r e s e n t i n i t i a l l y t o the
Director of the Contracts and Records Division within t h e S t a t e Land
Department. The D i r e c t o r , who devotes only a small f r a c t i o n of h i s time
t o t r e s p a s s , must request a s s i s t a n c e from another Department d i v i s i o n t o
conduct an o n - s i t e i n v e s t i g a t i o n of a t r e s p a s s . Such an i n v e s t i g a t i o n
u s u a l l y d o e s not occur u n t i l Department personnel a r e r o u t i n e l y scheduled
t o be i n the v i c i n i t y of an a l l e g e d t r e s p a s s . These i n v e s t i g a t i o n s
normally occur within 60 days o f t h e i n i t i a l r e p o r t i n g , but s e v e r a l cases
were observed t h a t were not i n v e s t i g a t e d u n t i l 120 days a f t e r i n i t i a l
reporting.
Once an o n - s i t e i n v e s t i g a t i o n is completed, a r e p o r t is prepared and s e n t
t o the Contracts and Records Division f o r t h e D i r e c t o r ' s review and
comments. In many cases t h e i n v e s t i g a t i o n r e p o r t does n o t c o n t a i n
s u f f i c i e n t information, and another i n v e s t i g a t i o n is r e q u i r e d , r e s u l t i n g
i n f u r t h e r delays.
In a d d i t i o n , a s of January 1980, t h e following conditions were observed
within the S t a t e Land Department regarding t r e s p a s s e s .
- P r i o r i t i e s have not been e s t a b l i s h e d f o r reported t r e s p a s s e s . A s
a r e s u l t , p o t e n t i a l l y s e r i o u s t r e s p a s s cases a r e t r e a t e d
r o u t i n e l y .
- A log is supposed t o be maintained f o r recording i n i t i a l r e p o r t s
of t r e s p a s s . However, s e v e r a l reported t r e s p a s s e s a r e not
recorded i n the log.
- There is no regular o r systematic review made of open t r e s p a s s
c a s e s t o ensure t h a t a p p r o p r i a t e s t e p s have been taken t o resolve
them.
a
The absence of adequate resources and procedures within t h e S t a t e Land
Department t o i n v e s t i g a t e and resolve t r e s p a s s e s has r e s u l t e d i n t r e s p a s s
cases l e f t unresolved f o r e x c e s s i v e p e r i o d s of time. A s a consequence,
a p p r o p r i a t e a c t i o n cannot be taken a g a i n s t many t r e s p a s s e r s because: 1 )
t h e t r e s p a s s e r may have r e l o c a t e d , 2) evidence of t h e t r e s p a s s may have
been destroyed by the time a n i n v e s t i g a t i o n is made, and 3) the
Department may be precluded from criminal a c t i o n a g a i n s t a t r e s p a s s e r
because o f t h e s t a t u t e of l i m i t a t i o n s .
In a memorandum dated February 22, 1980, the Arizona L e g i s l a t i v e Council
s t a t e d ( See Appendix X I 1 1 f o r e n t i r e t e x t ) :
" The s t a t u t e o f l i m i t a t i o n s f o r i n i t i a t i n g a criminal
proceeding f o r most criminal t r e s p a s s e s is one y e a r ,
and t h e s t a t e is s u b j e c t t o t h e s t a t u t e of l i m i t a t i o n s . "
An Unknown but P o t e n t i a l l y
S u b s t a n t i a l Amount of Damage
is I n f l i c t e d on S t a t e Lands
by Trespassers
Based on one review o f t h e S t a t e Land Department, it appears t h a t an
unknown but p o t e n t i a l l y s i g n i f i c a n t amount of damage is i n f l i c t e d on S t a t e
lands by t r e s p a s s e r s . For example, of t h e 135 t r e s p a s s c a s e s t h a t - were
reported t o t h e S t a t e Land Department between December 1, 1977, and
December 1, 1979, s e v e r a l f a l l i n t o p o t e n t i a l l y d e s t r u c t i v e c a t e g o r i e s , as
shown below:
Type of Trespass Reported
Dumping on S t a t e land
Removal of:
Native p l a n t s
Minerals
Destruction of fences
Number of Trespasses
Reported
Destruction of S t a t e land
Unauthorized improvements
Other unauthorized use
Total
F u r t h e r , s e v e r a l of the t r e s p a s s f i l e s a t the S t a t e Land Department
c o n t a i n documentation t h a t c l e a r l y a t t e s t s t o the d e s t r u c t i v e n e s s of some
t r e s p a s s e s . The following is a synopsis of t h r e e noteworthy t r e s p a s s
f i l e s .
CASE I
On March 29, 1979, t h e S t a t e Land Department was informed t h a t a labor
t r a i n i n g c e n t e r had been conducting a b l a s t i n g and d r i l l i n g school on
S t a t e land since March 1973. The c e n t e r claimed t h a t it d i d n o t l e a r n of
t h e S t a t e ' s ownership of the land u n t i l March 1, 1979. On September 20,
1979, a S t a t e Land Department employee f i l e d a r e p o r t which s t a t e d t h a t
t h e r e was severe and extensive damage t o the land and t h a t major
r e s t o r a t i o n would be required.
On A p r i l 1 9 , 1979, t h e Department s e n t a l e t t e r t o t h e t r e s p a s s e r which
s t a t e d , i n p a r t :
"... they ( t h e t r e s p a s s e r s ) should approach the S t a t e
Land Department f o r a S p e c i a l Land Use Permit. It may
be h e l p f u l i n t h e community t o have such a b l a s t i n g and
d r i l l i n g t r a i n i n g program, i f so, then t h e S t a t e Land
Department could provide f o r such a permit."
CASE I1
On April 18, 1978, the S t a t e Land Department was n o t i f i e d t h a t
unauthorized i n d i v i d u a l s were using S t a t e lands without paying l e a s e
r e n t a l fees. An i n v e s t i g a t i o n by the Department revealed t h a t : 1) t h e
land had been leased t o a p r i v a t e i n d i v i d u a l , and 2) t h e l e a s e had been
canceled f o r nonpayment of r e n t a l fees. However, a s of January 10, 1980,
t h e i n d i v i d u a l still was using t h e S t a t e land i n question.
It should be noted * t h a t t h i s t r e s p a s s involved S t a t e land along the
Colorado River. The l e a s e authorized the i n d i v i d u a l t o use t h e S t a t e land
f o r a boat dock. According t o the S t a t e Land Department, t h e r e a r e
approximately 3,000 boat docks on S t a t e land along the Colorado River
without permits from t h e Department. The Department has made an e f f o r t t o
i d e n t i f y unauthorized uses of S t a t e land f o r boat docks along the Colorado
River and has e s t a b l i s h e d a f e e schedule t o b i l l i n d i v i d u a l s who a r e using
t h e land. However, Department o f f i c i a l s s t a t e d t h a t it w i l l be d i f f i c u l t
for t h e Department t o enforce the new schedule because of a lack of
resources.
CASE I11
On September 28, 1979, the S t a t e Land Department was n o t i f i e d t h a t a
l e s s e e had removed n a t i v e p l a n t s i l l e g a l l y from leased S t a t e lands. An
i n v e s t i g a t i o n revealed t h a t n a t i v e p l a n t s had, i n f a c t , been removed. The
c h a r t below lists the number and type of n a t i v e p l a n t s removed between
1975 and September 1979.
Type of Native P l a n t s
Removed I l l e g a l l y
Agave
B a r r e l
Cholla
Hedgehog
O c o t i l l o
Prickly pear
Saguaro
Yucca
Number of P l a n t s
Removed*
Total damages t o t h e S t a t e t r u s t as a r e s u l t of t h i s t r e s p a s s a r e at l e a s t
$ 161,600. The f i l e still was open a s of January 10, 1980.
ina ally, our review of S t a t e Land Department t r e s p a s s f i l e s revealed t h a t
a t l e a s t $ 786,000 i n damage was i n f l i c t e d on S t a t e lands during 1979
alone, as d e t a i l e d below.
Type of Trespass
Destruction of S t a t e land
Estimated Damage
t o S t a t e Land
Removal of minerals 45,981
Removal of n a t i v e p l a n t s
Unauthorized improvements on S t a t e land
Dumping on S t a t e land 10,000
Other unauthorized use of S t a t e land 6,250
Total estimated damages
* Based on S t a t e Land Department records and an i n v e s t i g a t i o n by the
Arizona Agriculture and H o r t i c u l t u r e Commission.
It should be noted t h a t the above estimate is the minimum amount of damage
i n f l i c t e d on S t a t e lands during 1979 i n t h a t : 1) the estimate was derived
from t r e s p a s s f i l e s i n the S t a t e Land Department and s e v e r a l o f those
f i l e s did n o t c o n t a i n any estimate of damage, and 2) t h e above t r e s p a s s e s
r e p r e s e n t o n l y 20 percent o f a c t u a l t r e s p a s s e s on S t a t e land, according t o
Department e s t i m a t e s .
A P o t e n t i a l $ 2.3 Million
i n Compensation Resulting
from 1979 Trespass Damage
May be Lost t o the S t a t e
The S t a t e has t h e a u t h o r i t y t o bring c i v i l a c t i o n s a g a i n s t t r e s p a s s e r s and a
t o c o l l e c t damages amounting t o t h r e e times t h e damage caused by the
t r e s p a s s . A s a r e s u l t , t r e s p a s s damage i n f l i c t e d on S t a t e lands during
1979 r e p r e s e n t s a p o t e n t i a l $ 2.3 m i l l i o n i n compensation t o t h e S t a t e .
A. R. S. $ 37- 502( A) provides t h a t :
" Whoever commits any t r e s p a s s upon s t a t e lands as
defined by s e c t i o n 37- 501 is a l s o l i a b l e i n a c i v i l
a c t i o n brought i n t h e name o f t h e s t a t e i n t h e county
i n which t h e t r e s p a s s was committed, f o r t h r e e times
the amount of the damage caused by t h e t r e s p a s s , i f the
t r e s p a s s was w i l f u l , but f o r s i n g l e damages only i f
c a s u a l o r involuntary.
Thus, t h e o r e t i c a l l y , t h e S t a t e could bring c i v i l a c t i o n s a g a i n s t those
persons g u i l t y o f t h e 1979 t r e s p a s s e s l i s t e d on page 53 and c o l l e c t up t o
$ 2,358,273 ($ 786,091 x 3) i n compensating damages.
According t o S t a t e Land Department r e c o r d s , d u r i n g 1979 t h e Department did
c o l l e c t $ 45,980 i n damages from t r e s p a s s e r s . Therefore, it appears t h a t
c o l l e c t i n g damages from t r e s p a s s e r s is: 1 ) a v i a b l e o p t i o n , and 2) a
p o t e n t i a l l y s i g n i f i c a n t revenue source.
I n f a c t , it appears t h a t t h e revenue- generating p o t e n t i a l of c i v i l a c t i o n s
a g a i n s t t r e s p a s s e r s is s i g n i f i c a n t enough t o support an aggressive
t r e s p a s s program by t h e S t a t e Land Department.
It should be noted t h a t t h e S t a t e Land Department has i d e n t i f i e d the
t r e s p a s s i s s u e as one of its p r i o r i t y items. Since November 1979, the
Department h a s t a k e n s t e p s t o improve its procedures f o r t h e review and
i n v e s t i g a t i o n of t r e s p a s s cases. The Department should be commended f o r
its e f f o r t s and encouraged t o continue improving its t r e s p a s s program.
Further, t h e S t a t e Land Department i n its 1980- 81 budget proposal
requested a d d i t i o n a l personnel and equipment a t a c o s t of $ 39,360.
However, t h e Department's 1980- 81 budget, a s approved by t h e L e g i s l a t u r e ,
did not make provision f o r t h e request.
CONCLUSION
The S t a t e Land Department h a s n o t been given s p e c i f i c s t a t u t o r y
r e s p o n s i b i l i t y t o i d e n t i f y and r e s o l v e i n s t a n c e s of t r e s p a s s upon S t a t e
lands nor has it been provided with adequate resources t o do so. A s a
r e s u l t , during 1979 at l e a s t $ 786,000 i n damage was i n f l i c t e d on S t a t e
lands by t r e s p a s s e r s and a r e l a t e d $ 2.3 m i l l i o n i n compensation may be
l o s t t o t h e S t a t e .
RECOMMENDATIONS
It is recommended t h a t :
- The Arizona Revised S t a t u t e s be amended t o r e q u i r e t h a t t h e S t a t e
Land Department i d e n t i f y and resolve i n s t a n c e s of t r e s p a s s on
S t a t e lands.
- The Department be provided with s t a f f i n g and resources
commensurate with t h a t a d d i t i o n a l r e s p o n s i b i l i t y .
- The Department develop and adopt formal procedures t o review,
i n v e s t i g a t e and monitor t r e s p a s s a c t i v i t y promptly.
- The Department c o n t a c t l o c a l law enforcement agencies and o f f e r
t r a i n i n g courses regarding t r e s p a s s on S t a t e lands.
- The Department c o n t a c t Arizona's communications media regarding
public s e r v i c e announcements d e a l i n g with t r e s p a s s on S t a t e lands.
OTHER PERTINENT INFORMATION
Bureau of Land Management
Range Betterment Fund
The Bureau of Land Management administers a Range Betterment Fund. This
Fund d e r i v e s its revenues from grazing l e a s e f e e s . O f t h e grazing f e e s
c o l l e c t e d , 25 percent goes d i r e c t l y t o t h e grazing d i s t r i c t i n which it
was c o l l e c t e d , 25 p e r c e n t g o e s i n t o the Range Betterment Fund and is
d i s t r i b u t e d a t the d i s c r e t i o n of t h e Secretary o f t h e I n t e r i o r and 50
percent goes t o school d i s t r i c t s , t h e U. S. Treasury o r t o a p a r t i c u l a r
county.
In f i s c a l year 1978- 79, the Bureau of Land Management i n Arizona spent
$ 635,974 from t h e Range Betterment Fund on improvements of which $ 516,711
went t o l i v e s t o c k management. The $ 635,974 is t h e sum of $ 251,135
a l l o c a t e d d i r e c t l y t o t h e grazing d i s t r i c t and $ 384,839 i n d i s c r e t i o n a r y
funds d i s t r i b u t e d by t h e Secretary o f I n t e r i o r . Table 17 i n d i c a t e s t h e
Bureau of Land Management expenditures on l i v e s t o c k management i n Arizona
during 1978- 79.
TABLE 17
BUREAU OF LAND MANAGEMENT EXPENDITURES FOR LIVESTOCK
MANAGEMENT I N ARIZONA DURING FISCAL YEAR 1978- 79
S t u d i e s and research
Environmental a n a l y s i s
Use adjustment
Project survey
Vegetative manipulation
Water f a c i l i t i e s
Fences
Management f a c i l i t i e s
Maintenance :
Land & vegetation
Water f a c i l i t i e s
Fences, enclosures
Management f a c i l i t i e s
Total
Amount of
Expenditure
* See Appendix I X f o r type of improvement d e s c r i p t i o n .
5 6
Grazing improvements may be separated i n t o two major c a t e g o r i e s a s follows:
1. Improvements made d i r e c t l y t o t h e land such as v e g e t a t i v e
manipulation and c o n t r o l of erosion.
2. Improvements placed on the lands such as f e n c e s , water and stock
pond s .
It should be noted t h a t t h e S t a t e Land Department d o e s n o t have the
funding t o improve grazing land n o r d o e s it place improvements on S t a t e
lands f o r use by the rancher. The Bureau of Land Management does provide
improvements d i r e c t l y t o the land and w i l l pay f o r a l l o r a portion o f t h e
c o s t of improvements placed on lands f o r use by the rancher.
C l a s s i f i c a t i o n and
Appraisal Fund
A. R. S. $ 37- 107 s t a t e s :
" The c l a s s i f i c a t i o n and a p p r a i s a l f e e s provided f o r i n
$ 37- 108 a r e appropriated f o r the use and b e n e f i t o f t h e
s t a t e land department. Such f e e s s h a l l be paid i n t o
the s t a t e t r e a s u r y as o t h e r s t a t e funds and claims
s h a l l be drawn i n t h e manner provided by law, approved
by t h e department of a d m i n i s t r a t i o n d i v i s i o n o f finance
and paid by t h e s t a t e t r e a s u r e r , when i n proper form.
The amount of twenty- five thousand d o l l a r s o f t h e
monies derived from c l a s s i f i c a t i o n and a p p r a i s a l f e e s
s h a l l not be s u b j e c t t o t h e provisions of $ 35- 190. A l l
such monies i n excess of twenty- five thousand d o l l a r s
s h a l l r e v e r t t o t h e general fund."
A. R. S. $ 37- 108 lists t h e f e e s t h a t s h a l l be charged by the S t a t e Land
Department. These f e e s include:
F i l i n g bonds,
F i l i n g a p p l i c a t i o n s f o r l e a s e s ,
F i l i n g a p p l i c a t i o n s f o r use permits,
F i l i n g a p p l i c a t i o n s f o r assignment of l e a s e s ,
Issuance of land p a t e n t , and
Purchase of maps, d a t a processing outputs o r copies of other
records o f t h e Department.
Table 18 i l l u s t r a t e s t h e expenditures made from the c l a s s i f i c a t i o n and
a p p r a i s a l fund f o r f i s c a l years 1977- 78, 1978- 79 and 1979- 80 ( through
May 31, 1980).
TABLE 18
EXPENDITURES FROM THE CLASSIFICATION AND APPRAISAL
FUND FOR FISCAL YEARS 1977- 78, 1978- 79 AND 1979- 80
( THROUGH MAY 31, 1980)
F i s c a l Year F i s c a l Year F i s c a l Year
Type by Expenditures 1977- 78 1978- 79 1979- 80"
Office f u r n i t u r e and equipment
P u b l i c a t i o n o f n o t i c e s
Management consulting and
a p p r a i s a l by p r i v a t e companies
Management consulting by other
S t a t e agencies
Aerial photographs
Report p r e p a r a t i o n
Terminal leave pay
Deposits on postage meter
Travel expenses
Legal expenses
Conference r e g i s t r a t i o n and
t r a i n i n g expenses
Payroll and personnel- related
Revolving fund
Maps
Other
* Through May 31, 1980
Royalty Rate f o r
Production of O i l
o r Gas -
A. R. S. $ 27- 555( B) s t a t e s :
** The noncompetitive l e a s e s s h a l l provide f o r the,
payment by the l e s s e e o f a r o y a l t y of twelve and
one- half percent o f t h e market value of a l l o i l , gas
and other hydrocarbons produced, saved, sold and
removed from t h e lands a t the well as of t h e time of
s a l e o r removal from the lands, a s the department may
e l e c t . I*
Currently t h e r e is no production of o i l o r gas on Arizona lands.
Therefore, t h e S t a t e Land Department c u r r e n t l y r e c e i v e s no such r o y a l t y
payments from its l e s s e e s . If production were t o be i n i t i a t e d , t h e S t a t e
would r e c e i v e 12 1/ 2 percent of a l l production a s r o y a l t y payments.
In a survey conducted by t h e Office of t h e Auditor General, it was
determined t h a t , as of January 31, 1980, t h e r e were 27 s t a t e s which leased
state lands f o r production of o i l o r gas. The highest r o y a l t y rate f o r 4
production was 25 percent ( Texas) and t h e lowest r o y a l t y r a t e was 12
percent ( Alaska). Table 19 i l l u s t r a t e s t h e r o y a l t y rates f o r production
of o i l and g a s on s t a t e lands. The s t a t e s a r e l i s t e d i n o r d e r from
highest r o y a l t y rate t o lowest r o y a l t y r a t e .
TABLE 19
ROYALTY RATES FOR PRODUCTION
OF OIL OR GAS ON FEDERAL AND STATE LANDS
( a s o f February 29, 1980)
Owner o r Trustee*
Texas
Louisiana
Oklahoma
North Carolina
South Dakota
C a l i f o r n i a
F l o r i d a
North Dakota
Tennessee
Alabama
Fed e r a 1 land s* *
Montana
Michigan
New Mexico .
Ohio
ARIZONA
Arkansas
Colorado
Idaho
M i s s i s s i p p i
Nebraska
New York
Oregon
Pennsylvania
Utah
Washington
West Virginia
Wyoming
Alaska
Royalty Rate
Percentage
25
2 2
19
17
17
16 2/ 3 - 50"""
16 2/ 3
16 2/ 3
15
13 - 25"""
12 1/ 2%- 30%***
12 1/ 2 - 25***
1 2 1 / 2 - 19"""
12 1/ 2 - 17"""
1 2 1 / 2 - 16***
12 1/ 2****
12 1/ 2
12 1/ 2
12 1/ 2
12 1/ 2
12 1/ 2
1 2 1 / 2
12 1/ 2
12 1/ 2
1 2 1 / 2
12 1/ 2
12 1/ 2
1 2 1 / 2
12
Royalty Fees
Collected
F/ Y 1978- 79
* Listed i n o r d e r from highest r o y a l t y r a t e t o lowest r o y a l t y r a t e .
** Lands administered by t h e Bureau of Indian A f f a i r s and t h e Bureau
of Land Management.
*** Royalty r a t e is dependent on l o c a t i o n . Lands i n c l o s e proximity t o
known d e p o s i t s o b t a i n a higher r o y a l t y r a t e . **** Currently r e c e i v e s no r o y a l t y from o i l o r gas l e a s e s .
N/ R No response.
Bruce Babbitt
Governor
1624 WEST ADAMS
PHOENIX. ARIZONA 85007
Joe T. Fallini
Conrmissianer
August 27, 1980
Mr. Douglas R. Norton, Auditor General
Legislative Services Wing - Suite 200
State Capitol
Phoeni x, Ari zona 85007
Re: Performance Audit of the
State Land Department
Dear Mr. Norton:
The following comments are offered on the Performance Audit of the
State Land Department in response to your request of August 22, 1980:
Finding I:
The State Land Department agrees with the conclusion and recom-mendations
in Finding I. Consideration should be given by the Legis-lature
to update the mineral royalty rate which has not been adjusted
since 1941. Legislation similar to that proposed in Senate Bill 1294,
introduced in 1979, would provide for assessment of royalty rates on
gross rather than net value. Such legislation, if enacted, would pro-vide
for true value returns to the trust, simplify and reduce paper
work for the mining companies and the State Land Department, and would
provide for more equitable payment of royalties among mining compan-ies.
Finding 11:
The State Land Department agrees that statutory and administra-tive
changes are needed to insure proper payment of mineral royalties.
We believe that statutory changes should be made before the Land De-partment
undertakes a revision of the rules and regulations so that
rules and regulatians are clearly within the intent of the law and dis-creti
onary authori ty given to the Land Department by the Legislature.
The Department is increasing i t s scrutiny over mineral leases with
particular emphasis on reporting of revenues from copper leases. The
Department has recently contracted with a major big- eight accounting
firm to review accuracy of reporting by copper lessees.
Finding 111:
The State Land Department agrees that the grazing lease rate
charged by Arizona is significantly lower than that charged by the
Mr. Douglas R. Norton - 2- August 27, 1980
Bureau o f Land Management, nine other western states and p r i v a t e
landowners.
Consideration should be given by the Legislature t o the adop-t
i o n o f the grazing r a t e formula established by the Congress o f the
United States i n the Rangeland Improvement Act o f 1978. The formula
was adopted by Congress a f t e r many years o f study o f the grazing fee
issue, numerous p u b l i c meetings and contacts with l i v e s t o c k operators
i n the western states.
Finding TV:
The State Land Department agrees w i t h the conclusion and rec-ommendations
i n Finding I V . Destruction o f resources and loss o f
revenues t o the t r u s t from i l l e g a l a c t i v i t i e s presents one o f the
most serious problems f a c i n g t h e Land Department. The trespass
law needs t o be strengthened and the Land Department provided ade-quate
resources t o deter i l l e g a l a c t i v i t i e s . Aggressive action, as
pointed out i n the audit r e p o r t , i s needed t o resolve the backlog
of trespass cases as well as the cases being reported. The Land De-partment
has made a concerted e f f o r t during the past year t o deter
abuses o f s t a t e t r u s t lands with the l i m i t e d manpower available.
From July 1, 1979 t o August 15, 1980, $ 328,396.00 has been c o l l e c t -
ed f o r grazing and mineral trespasses, i l l e g a l dumping, t h e f t o f
fuelwood and other unauthorized uses. I n addition, as o f August
15, 1980, outstanding accounts receivable ( b i 1 l i n g s mailed) for
trespass a c t i v i t i e s amount t o $ 214,300.00.
The State Land Department agrees t o the recommendations t h a t
the Department develop procedures t o review, i n v e s t i g a t e and moni-t
o r trespass, contact l o c a l law enforcement agencies f o r t r a i n i n g ,
and t o contact the media regarding p u b l i c service announcements re-garding
trespass. Some progress has been made t o implement these
recommendati ons, which i ncl ude: ( 1 ) the development o f a computer
program t o document and track a l l trespass cases, ( 2) several county
law enforcement agencies have been contacted and provided with maps
o f s t a t e land status, statutes on trespass and information on t r e s -
' pass problems. As a r e s u l t o f these contacts, about ten trespass
cases have been resolved.
We b e l i e v e t h e a u d i t r e p o r t accurately r e f l e c t s the l e g i s l a t i v e and
a d m i n i s t r a t i v e changes needed t o insure compliance with t h e p r o v i s i o n s of
the Enabling Act and the Arizona Constitution.
The audit team i s commended f o r t h e i r o b j e c t i v e report.
Sincerely ,
+ FF~ L&&.& JoeT. a l l i n i
Commissioner
JTF: r m
APPENDIX I
STATE SURVEY RESULTS
LEASING POLICIES REGARDING THE EXTRACTION
OF METALLIFEROUS AND NONMETALLIFEROUS MINERALS
STATE SURVEY RESULTS
LEASING POLICIES REGARDING THE EXTRACTION
OF METALLIFEROUS AND NONI" ETALLIFER0US MINERALS
Nonmetallif erous
Minerals
Extracted From
S t a t e Lands
- Yes No
M e t a l l i f e r o u s Minerals Extracted Minerals Extracted
Sand FY 78- 79
Mineral
Revenues
R o y a l t i e s Collected
- Yes - No
b
- S t a t e C o p p e r u g = & i a I r o n M o l y * G r a v e l C o a l - Other Royalty Pee
Alabama
Alaska
ARIZONA
Arkansas
C a l i f o r n i a
X X S h e l l
X
X X
X X
X Trona, Talc,
Sliell
5 - 7 112 - 10X
12; b of revenue
Yi of n e t value
K/ R
Not l e s s than 105
of net revenue
Colorado X X S c o r i a , Clay,
Limes tone
Varied
Connecticut
Delaware
F l o r i d a
Georgia
Hawaii
Idaho
Limerock
Clay,
Phosphate
99,460 S l i d i n g scale or
2 5 ~ pe r tori t o
I l l i n o i s 10% of net revenue
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
X N/ R i \ / K
X , S a l t , S u l f u r 2,700,000 \' ar ied
NIR NegaLiilted
Limestone, 59,500 3 - 6;: s l i d i n g scale
Doloini t e on gross
Minnesota
M i s s i s s i p p i
Missouri
Montana
N/ R = No Response
* Molybdenum
Nonmetalliferous
Minerals
Extracted From
Metalliferous Minerals Extracted Minerals Extracted
Sand FY 78- 79
S t a t e Lands Royalties Collected & Mineral
- Yes - NO Yes NO
A S t a t e - Copper S i l v e r Gold Zinc Iron Molytr Gravel Coa! - Other Revenues Royalty Fee
X X Uranium $ 1,510 2 0 ~ / c u b i c yd. remdved
X
X 9
X
X
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico X X Uranium, 2,475,000
S a l t , Potash
X 1,000,000
Varied
New York
North Carolina
Varied
12 112 "/, of n n r h c t a l ~ l e
phosphate
12 112%
Varied
7 1/ 2Y0
Phosphate 30,000
X
X S a l t
X
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania X X Limestone, Shale, 317,000
Fieldstone
3
N
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
X 60,000
X X 133,000
X X X X Sulfur, llranium, 6,450,267
Thorium
X X X X X X 1,000,000
57, of market valuc
5% of f i 1 O S S
6 1 / 4 / oL gross
Utah 44 of net revenue
V e m n t
Virginia
Washington 4% net mi~~ i~ npulmu s
,, CL>\> I 1 aLc.' l ~,,, c>, I,, L
West Virginia
Wisconsin
Wyoming X Uranium, 10,650,000
Ucntonite
Vnr icd
N/ R = No Response
* Molybdenum
APPENDIX I1
COMPARISONS OF MAJOR COPPER PRODUCERS
ON STATE- LEASED LANDS
APPENDIX I1
COMPARISONS OF MAJOR COPPER PRODUCERS
ON STATE- LEASED LANDS*
Gross Gross
Value Royalty Per Ton
c o s t
Per Ton
Net Royalty
- Year Company Content of Ore - Tons Per Ton Per Ton
Total 111,668,616
Average f o r 7 years - 15.952.659
* Source - S t a t e Land Department
** Weighted average ( Royalty tons)
APPENDIX 111
STATE LAND MINERAL ROYALTY RECONCILIATION
1977 & 1 9 7 8
APPENDIX 111
Stat? h d P. Li- ler~ l Roy. 2 L ty RcConci 1 ia t ion
1377 s 1378
1977 - 1978
DLY tons ore ix~ L~ tfil
Tbns ore ~. L: L+
:~ iir: e ore dccj .: s flux
@ Ilry tons ore b-?; it- 4 ( liulltd)
Y n c l t c r layable mpAwr punds
hijll; tre? t for differmce in rixovery rztes
) i'd j G ta5 >~ y& le co?- r> er puiids
Smlt> r ; ay& le copper tons
-' Tens of c q p r wr 1C- K
Tbns of c c ? p r in r ~ p r o c e s s e d slag
Tons of ccxper in mine ore flux
Ro~~ icli:- i~ ng c a l c u l a t i o n of state
b cop- r L'. S. l . i i i l Production &- mrt
S- wltcr lass~ sc n 3djustrncnts
Smelter pay- xble copper tons
) bblyi\ lcni tz pmJs
3fl j t for cangutation of errors
- Uj u ; tmat for r~ prtedc cntained
~ twl:~ k! i. ntx iiistezd of rmlykder- i te
? u? jutc; d rrollk. dmite p o ~ n ~ ? s
: blybAcr. ite tons
D ' bns nulyMcr? un sul f i d c p r 10- K
B ( 1) As r- grted in provisional reprt to State Lxd kparbrcnt
( 2 ) t2s re; ort& Li.. . lo- K report
APPENDIX I V
PROCESSING LOW- GRADE ORE INTO PURE COPPER
Processing 0.6h .1o w grnc! e ore
into 99.99% pure copper.
APPENDIX IV
A ORE TRUCK - -
CRUSliER
A m : ~ ~ ~ ~ rcnr: u~ shl her bri3aks
huvp cl1: irrks ol ore lrii;.:
11: ilna: i: onai stages
KOL) I\ BALL ~ nvolvini: massive crush-
I" 2nd : rirOing rniihir~ es
these pie1 c. s ( 11 ore 3re
progressively redu1: ed to a
A I ~ is hiown ~ n t o powdery sludge
. i / r o ! oris of waslc rock
must he dlccarded to obtaln one
ton 01 ore at Ihe crustter
Ihe t ~ n n , lorming e.
an oily lrolh ol
The siud~ eIS d~ ilrtedn ith
bubbles carrying
the copper min-el
lrualws T~ henset oov Iehre- 15' t'ATER -->
lrcughs beside the tanh CIIEhlICALS -- 3
The concenlraled copper nlinrrals are z , l ~- ~. f~ llereil ot11, bcconl~ ng a cake ol llle
powder containing from 15% lo 30%
copper
Sullu: diox! de and olher
1npuriI: cs are vei~ i,) dlo a , a~ c ~ d
plant sricre : he g?; i r ~ crubbed
drypd. cooled and zonverted
to sulfuric acio
. . . In tile smei! er the 45
pounds ol copper concentrate
are reduced to approx~ mately
in a roaring reverberatory Iofnace the ron- 10 pounds ol copper. The rest
cc~ ili,? lcis ~~ lcltc: d[ il! [ l nlony ol tne I~, I~ IIIII~ S is discarded in Ihe lor-,
dic iellloved yir! Idlilq rfiollerl " rllalte ' conldrnlng
vsriously liom 3545 lo 50% copptf 25%
slrllur anti lt! c b< llancc trun
COS\' IRTER AND
ANOI) li FURNACES
In convprler and anode
furnacrs lhc matte 1s
slill lurlher purllied lor
many cases 99 99%
Mosl ol the remafning
impurfl~ es( i ncludiri~
cold and yflvcr) fall to
%? LI, I!, II~ PI f i e tank
Note: Figures used are statewide
industry averages and w111 vary
a1 each operation.
APPENDIX V
ARIZONA L E G I S L A T I V E COUNCIL MEMORANDUM
MARCH 28, 1980
TO: Doug1 as R. Norton, Auditor General
D FROM: Arizona L e g i s l a t i v e Council
RE: Request f o r Research and S t a t u t o r y I n t e r p t - e t a t i on ( 0- 80- 13)
This i s i n response t o a request submitted on your behalf by Gerald
B A. S i l v a i n a menlo dated March 17, 1980. No input was received f r o 3 the Attorney
General concerning t h i s request.
FACT SITUATION:
A. R. S. section 27- 234, subsection B states:
B
Every mineral lease o f s t a t e land s h a l l provide f o r paynent t o the
s t a t e by the lessee o f a r o y a l t y o f f i v e per cent o f the net value o f
the min2rals produced from the claim. The net value s h a l l be deemed
t o be the gross value a f t e r processing, where processing i s
necessary f o r comerci a1 use, l e s s the actual cost o f t r a n s p o r t a t i o n
from the place of production t o the place o f processing, l e s s costs
of processing and taxes l e v i e d and paid upon the production
thereof. . .
A. R. S. section 27- 235, subsection C, paragraph 6 states:
Termination o f the lease by t h e commissioner upon w r i t t e n n o t i c e
s p e c i f i c a l l y s e t t i n g f o r t h the d e f a u l t f o r which f o r f e i t u r e i s
declared, and preserving t h e r i g h t t o cure the d e f a u l t w i t h i n a
stated period o f not less than t h i r t y days.
I n the processing o f the copper ore, one o f the mines on s t a t e land had been
@ accumulating a slag p i l e f o r a number o f years. The slag, which r e s u l t s from the
me1 t i n g process, i s set aside i n p i l e s adjacent t o t h e smelter brit same distance
from s t a t e land. The slag c o r ~ t a i n s low concefitrations of copper which was
o r i g i n a l l y extracted from:
1) s t a t e iands,
2) p r i v a t e lands owned by t h e company x i t h the s ~ et el r accumulating the
slag,
3) other mines ;+ hich send their sre to the sinelter to be processed.
In recent years the coTpany has reprocessed the slag and derived more copper i n
sdlable concentrations.
I n past reports filed with the State Land Departnent this company has deducted
the costs of reprocessing the slag b u t has not p a i d the state additional
royalties on the sale of the slag.
QUESTIONS PRESENTED:
1. ( a) Should the mine pay the State Land Department ( SLD) for costs
deducted in the reprocessing of the slag or ( b) should the state be paid
royal ties on the copper derived from the slag which can be traced to ore
extracted from state land?
2. Since there may be a difference of mounts derived in l ( a ) or l ( b ) , can
the Land Department pick the met hod of determining additional royal ties due?
3. Is there any limitation on the nuxber of years SLD can go back to
determine royalties on reprocessed slag ( i . e . , 5, 10, 15, 20, 25 years)? Would
the fact that a final report had been filed with SLD have any bearing on
royalties du2 the state ( see Request for Research and Statutory Interpretation
0- 80- 7 and SLD regulation R12- 5- 706)?
4. Would the inclusion of costs for reprocessing slag on previous reports
or nonpaynent of royal ties on reprocessed slag p u t the mine in danger of having
i ts 1 east terrni nated?
1. ( a) No.
( b) The lessee should pay to the state royalties on copper derived
from the slag which can be traced to ore extracted from leased state land by the
lessee.
The mineral lease enclosed with Request for Research and Statutory
Interpretation 0- 80- 12 is assumed to be the usual form of lease involved here,
af