Special audit finds Alaska Mental Health Trust Authority violated multiple state laws

The Trust Authority Building in Anchorage houses their main offices. (Photo by Anne Hillman/Alaska Public Media)

The Alaska Mental Health Trust Authority violated state statutes by investing $44.4 million in commercial real estate, acccording to a special audit of the trust released Tuesday by the Alaska Division of Legislative Audit.

The audit also says the trust’s board violated the Opening Meetings Act and the Alaska Executive Branch Ethics Act by purposely trying to keep some board issues out of the public eye.

The Mental Health trust was established in 1956 to fund services for people with mental illnesses, developmental disabilities, traumatic brain injuries, and memory loss.

In 1982 trust beneficiaries sued the State saying they had mismanaged the trust’s land and resources. After a decade, a new settlement was reached and the trust was reconstituted with $200 million and one million acres of land.

Provisions were put in place to try to safeguard the trust and prevent mismanagement in the future.

According to state statute, the principal funds were to be managed by the Alaska Permanent Fund Corporation.

Since November 2008, the board of trustees has not given the money to APFC and has instead held it in a separate account and invested in commercial real estate around the country.

Legislative auditors found this to be in violation of five different state statutes, one of which reads, “The cash principal of the mental health trust fund shall be retained perpetually in the fund for investment by the Alaska Permanent Fund Corporation.”

The trust authority disagrees with this finding saying the law is more ambiguous.

“We believe that there are several other guiding authorities that the trustees were required to follow in making investment choices,” trust authority CEO Mike Abbott said. “The fact that the statute doesn’t clearly identify alternative investment opportunities, other guiding authorities do.”

He said that state and federal statutes regarding trusts in general allow for the actions.

In a written response to a preliminary audit report, the trust authority wrote that “The Trust’s investment decisions were authorized by and consistent with applicable regulations and legal advice.”

The trust’s board cited attorney-client privilege and refused to give auditors access to those legal opinions.

Abbott said the board decided to invest in commercial real estate outside of the APFC “specifically with the goal of increasing the amount of spendable income available for our beneficiaries.” The trust reports that the real estate investments earned about $3 million more for programs than would have been available through the traditional distribution from the APFC.

Though the audit acknowledges that the individual investments made by the trust were sound, the outside contractors hired by auditors, RVK Inc., found that the trust’s overall investment strategy aimed at aggressively increasing their income was not. The contractors concluded that the strategy would decrease diversification and increase risk in the long term.

A consultant hired by the trust in 2016 also identified deficiencies with the investing strategy, but the audit report reads some board members chose to disregard the report and did not share it with the entire board nor release it to the public. Board member and staff names were not included in the report.

The auditors concluded, “Trust asset management policies do not fully comply with State investment laws and industry best practices.”

“The trust has sought advice from a variety of subjects on what the appropriate level of diversification of investment of trust assets is,” Abbott said in response to questions about this conclusion. “We’ve heard a variety of recommendations, including guidance that saying that relying solely on the Permanent Fund, which is managed for different purposes than is the Mental Health Trust Fund, is not necessarily the best option as a sole investment choice for Trust assets.”

The audit recommends that the trust stop investing in commercial real estate, consult with the APFC to determine with to do with their current investments, and restart transferring cash principal to the APFC. The trust is following these recommendations while also pursuing legislative changes that would allow them more latitude in their investment strategies.

Another finding of the audit was that the board of trustees violated the Open Meetings Act on multiple occasions and purposely kept information from the public and from other board members.

“Evidence showed that multiple trustees were, at times, intentionally trying to avoid discussing board business in a public manner,” the audit reads.

The audit report cites emails where board members set up retreats and held meetings without properly noticing the public. The audit quoted one redacted email, “…it would be useful to have a meeting […] to discuss a couple of other options we have for taking action. It isn’t clear to me that we need to notice the meeting and it should be held privately…”

In other instances, some board members conducted business via email without noticing the entire board. Board members issued a $1.375 million Request for Proposal for a multi-year project without consulting the entire board. In another instance, a small group of trustees communicated to arrange the demotion of long-time CEO Jeff Jessee and the hiring of interim CEO Greg Jones. The other trustees only learned of the action during a board meeting.

The board also considered 24 hours to be sufficient public notice for meetings, a conclusion that auditors disagreed with.

Trust CEO Abbott acknowledges that the board has had problems with openness and transparency.

“I think we agree that the trust has not met the community’s expectations regarding open meetings and public notifications in the past,” he said. “I know the trustees are committed to earning back the trust. They can be counted on to behave in a manner that that’s consistent with Alaska values.”

Abbott said that over the past few months the board has re-written their bylaws, written guiding documents for the board’s officers and committees, and received more training on the Open Meetings Act, ethics, and conflicts of interest.

Editor’s note: KTOO’s building sits on land leased from the Alaska Mental Health Trust Authority. KTOO has also applied for and received occasional grants for special reporting projects from the authority. Also, Alaska Public Media has applied for and received a grant in support of health-related educational content and civic engagement activities from the Alaska Mental Health Trust Authority.

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