UNITED STATES SENATE
COMMITTEE ON INDIAN AFFAIRS

STATEMENT OF PAUL M. HOMAN
SPECIAL TRUSTEE FOR AMERICAN INDIANS
UNITED STATES DEPARTMENT OF THE INTERIOR
JULY 30, 1997

This testimony represents the views of the Special Trustee, independent from the Department of the Interior and the Administration. Departmental views will be provided in the testimony of Donald Lasher, Chief Information Officer.

SPECIAL TRUSTEE'S Strategic Plan RECOMMENDATIONS

SUMMARY

The Special Trustee for American Indians proposes a single organization which will manage the U.S. Government's trust responsibilities to American Indians and American Indian Tribes for trust resource management, trust funds management and land title and records management (collectively, trust management activities).

This will involve consolidating trust management activities into a single, independent institution with its own management structure to assume the responsibility for the reforms identified in the Strategic Plan, to implement the reforms over a two year period and to provide for the ongoing management of the U.S. Government's trust responsibilities to American Indians for trust management activities. The institutional unit should be organized by business line or function and should be dedicated exclusively to trust management activities. The institutional unit should be managed by a full time Chairman and Chief Executive Officer (CEO) and a Board of Directors appointed by the President and confirmed by the Senate.

The unit's proposed organizational form is an independent Government Sponsored Enterprise (GSE) subject to Congressional oversight. The unit's generic name is referred to throughout the Strategic Plan as the American Indian Trust and Development Administration (AITDA).

The proposal would represent a major change in the way the U.S. Government manages its trust responsibilities to American Indians. It would for the first time clearly differentiate trust management activities that arise from the trust management of American Indian Tribal and individual lands and natural resources such as lease approvals and monitoring, timber sales, managing land, oil, gas, timber, and other trust assets; collecting, depositing, investing and disbursing funds derived from the Indian lands and Indian economic activities; and managing the land title and ownership records from those other activities that fall under what the courts have called the general trust responsibility, such as education, housing, welfare programs of all types, law enforcement and other American Indian services provided by the Federal Government.

Generally, the Strategic Plan also proposes, directly and indirectly, that all policies, procedures, systems and practices for trust management activities meet at a minimum the regulatory standards and best practices of national bank trust departments and companies. These standards are guided by, regulated, supervised and enforced by the U.S. Office of the Comptroller of the Currency (OCC). It is proposed that OCC regularly examine and supervise AITDA in much the same way OCC conducts examination and supervision of national bank trust departments. Similarly, the trust powers and account administration flexibility for various types of investments are also modeled after the powers and fiduciary flexibility available to national bank trust departments. In short, the American Indian trust beneficiaries will be receiving equivalent trust services to those trust services provided by the national bank trust departments to their trust customers. These private sector standards are proven, efficient and effective. Notably, no national bank since the 1930s has failed because of losses taken by bank trust departments and companies.

The reforms just noted and the other reforms identified in the Strategic Plan are urgently needed. The principal causes of the longstanding trust problems have resulted in conditions which are unacceptable by any reasonable standards and continue to do significant harm and damage to American Indian trust beneficiaries. They have also caused permanent damage to the core trust management systems the government uses to manage the Indian lands and monies. These defective systems prevent the government from meeting the fiduciary, accounting and reporting standards required by the American Indian Trust Fund Management Reform Act of 1994 and standards of ordinary prudence applicable to all trustees, public or private.

So long as the organization and management of the trust management activities remain status quo and as long as the trust management activities are mingled with general trust functions and other government programs and activities, it is unlikely that any meaningful reforms will be implemented and unlikely that these activities will receive appropriate allocations of financial and managerial resources sufficient to allow them to be administered according to the high moral obligations and trust and exacting fiduciary standards the United States has undertaken and assumed. For these reasons, the Special Trustee believes that the Department of the Interior and the Bureau of Indian Affairs (BIA) do not have the financial and managerial resources to undertake and implement the reforms proposed by the Strategic Plan.

SPECIAL TRUSTEE'S ASSESSMENT AND NEED FOR AN INDEPENDENT ADMINISTRATION OF TRUST MANAGEMENT ACTIVITIES

The problems in the trust management systems are longstanding ones. Mismanagement and neglect have allowed the trust management systems, record keeping systems and risk management systems to deteriorate over a 20 to 30 year period and become obsolete and ineffective. For many of those years, including many years since 1990, the trust programs were seriously under staffed and under funded. The result was that the government increasingly was unable to keep pace with the rapid changes and improvements in technology, trust systems and prudential best practices taking place in the private sector trust industry. This gap continues today and will continue to increase until the reforms outlined in the Strategic Plan are funded and implemented.

There are four principal causes of the mismanagement and neglect which have contributed to the trust management problems both currently and in the past:

1. The primary cause of the trust management problems both historically and currently can be attributed to the trade-offs of financial and managerial resources which take place at every level of government between trust management activities (trust resource management, trust funds management and land title and records management) and other activities and programs of the Bureau of Indian Affairs, the Department of the Interior, the Administration and the Congress. History has consistently shown these politically expedient government trade-offs of competing financial and managerial resources to be adverse and detrimental to the effective and proper administration and funding of the trust management activities.



These trade-offs have been made and are continuing to be made even in the face of a long history of court cases which have consistently held the trust relationship between the United States and the American Indians to be a distinctive one. Decisions of the Supreme Court reviewing the legality of administrative conduct in managing Indian property have held officials of the United States to "moral obligations of the highest responsibility and trust" and "the most exacting fiduciary standards," and "bound by every moral and equitable consideration to discharge its trust with good faith and fairness."



A trustee is not and should not be relieved of his duties, responsibilities and accountability to trust beneficiaries because the trustee lacks the financial and managerial resources to administer the trusts. To be so relieved for this reason is not acceptable for a private trustee. Yet, the most frequently cited reason and excuse for the Federal Government's historical and continued failure to address and resolve the longstanding trust management problems and, by so doing, to fulfill its trust responsibilities is the lack of funding and staffing for the American Indian trust management programs. While most certainly the lack of financial and managerial resources is the primary causal factor for the Federal Government's failure in this regard, under no circumstances should it also serve as an acceptable excuse for the continued neglect of the Federal Government's trust responsibilities to American Indian trust beneficiaries. Yet, this is exactly the case for the executive and legislative branches of the Federal Government. Lack of financial and managerial resources has become the standard and institutionally acceptable excuse for the Federal Government's continued failure to address and resolve the trust management problems. The Strategic Plan proposes that the Federal Government provide sufficient financial and managerial resources to ensure that it can meet its trust responsibilities to the American Indians.



2. Another important cause of the trust management problems is the way the BIA is organized and manages trust management activities. The BIA's organizational alignment causes decision-making and management for Individual Indian Money (IIM) and Tribal issues to be an intricate and complex coordination process and an ineffective one at times. Responsibilities fall within 16 separate organizations all reporting directly to one entity, who has direct line authority for every other Bureau organization and program. Further, the activities are carried out by over 100 field offices. The BIA's organizational structure prevents in many instances informed and expeditious decisions because of the number of entities involved and the large number and complexity of the decisions their activities generate. Nor can discipline, control and accountability be enforced by a good management assessment and audit system since standardized policies, procedures and practices are rare and insufficient financial and managerial resources are provided for audit and risk management of any type. The Strategic Plan proposes a single unit organized along business lines to resolve these issues.



3. The two causes just described acting together over many years have resulted in a third causal factor for the longstanding trust management problems: lack of competent managerial resources to manage effectively and efficiently the trust management responsibilities to the American Indians. Managers and staff of the BIA have virtually no effective knowledge or practical experience with the type of trust management policies, procedures, systems and best practices which are so effective, efficient and prevalent in private sector trust departments and companies. The BIA area and field office managers do not have the background, the training, the experience, and the financial and trust qualifications and skills, necessary to manage the Federal Government's trust management activities according to the exacting fiduciary standards required in today's modern trust environment. Thus, and through no fault of their own, and even assuming adequate financial resources were made available, they are not capable of managing effectively and efficiently the Federal Government's trust management activities on a par with that provided by private sector institutions to their trust customers.

The lack of trust managerial competence and the lack of financial trust orientation and focus throughout the BIA and the Department of the Interior have been institutionalized over many years and are now inherent in the BIA organizational culture. It is the reason in large part:



A. Why the BIA has never originated meaningful reforms of the trust management processes in the last 25 years.



B. Why the BIA has resisted and ultimately failed to implement nearly all of the meaningful reform efforts attempted in the last 25 years.



C. Why a new organizational structure, new management and massive re-training are necessary for the future management of the Federal Government's trust responsibilities to American Indians and the management of the implementation of the reforms identified in the Strategic Plan.

4. Another fundamental problem is fractionation of American Indian Allotment interests. The vast majority of accounting, basic record keeping and other operating problems affecting trust resource management, trust funds management and trust land records and ownership management originate from one source: the ever increasing fractionation of undivided realty interests owned by Individual American Indian allottees.



Fractionation is a direct result of the Federal Government's policies and laws relating to lands owned by American Indians back to at least 1887.



As originally envisioned in the late nineteenth century, allotments were to be held in trust by the United States for their Indian owners no more than 25 years, after which the land would be conveyed in fee simple to its Indian owners. Many allottees died without wills during the 25 year trust period, and it also became evident that many allottees continued to need Federal protection. Consequently, Congress enacted limited probate laws and authorized the President to extend the trust period for those individuals who were not competent to manage their lands. The presumption was, however, that at some point in the foreseeable future the lands would be conveyed to their Indian owners free of Federal restrictions. Nevertheless, Congress continued to extend the period of trust protection but did not amend the probate laws. Under the Indian probate laws, as individuals died, their property descended to their heirs as undivided fractional interests in the allotment. As the years passed, fractionation has expanded geometrically to the point where there are hundreds of thousands of tiny fractional interests. These fractional interests have nominal economic value but pose an enormous cost burden estimated at about $33 million per year on the Federal Government's trust management activities.



Congress attempted to address the fractionation problem with the passage of the Indian Land Consolidation Act (ILCA) in 1984. The ILCA authorized the buying, selling and trading of fractional interests, but most importantly it provided for the escheat to Tribes of interests of less than two percent. 55,000 of the two percent-or-less fractional interests have escheated since 1984, but the fractionation problem continues to worsen. Moreover, the 1997 Youpee vs. Babbitt Supreme Court decision called into question the legality of the escheated property since 1984, further complicating the fractionation problem. Maintaining the heirship and land records and administering the land is inordinately expensive, and the administration of the records pertaining to the money earned by each individual allottee is equally expensive and difficult. In addition, utilization and conveyance of the fractionated property by the numerous owners is difficult because of the need to secure the numerous consents required. Finally, the difficulty in dealing with the fractionated interests often effectively precludes the highest and best use of the land for economic development and the maximization of investment income, thus diminishing its economic value.



Legislation is therefore needed which would consolidate the large number of existing fractionated interests and prevent further fractionation. This alone would remove a primary obstacle to the efficient administration of the trust management systems and provide a major catalyst for the timely resolution of most of the operational problems associated with trust management activities, including trust resource and realty management, probate, land titles and ownership records management, IIM accounting, collections, deposits, investments and disbursements, customer service and record keeping for all trust management activities. An added benefit is the annual administrative cost savings estimated at the same $33 million mentioned above.

SPECIAL TRUSTEE'S RECOMMENDATIONS

To resolve the longstanding trust management problems, the Special Trustee recommends as follows:

1. That the American Indian Trust and Development Administration be approved and be provided with the financial and managerial resources to manage the U.S. Government's trust management responsibilities to American Indians and American Indian Tribes for Trust Resource Management, Trust Funds Management and Land Title and Records Management according to the most exacting fiduciary standards and moral obligations of the highest responsibility and trust.



2. That all the reforms identified in the Strategic Plan be approved, funded, staffed and implemented.



3. That all trust management duties, responsibilities, budgets and activities, including Trust Resources Management, Trust Funds Management and Land Title and Records Management, carried out by the Bureau of Indian Affairs and the Department of the Interior should be transferred to the AITDA as soon as practical and before full implementation of the Strategic Plan reforms.

SPECIFIC ACTION REQUIREMENTS

The Strategic Plan proposes a single organizational structure organized along business lines. Phase I of the Strategic Plan is designed to bring it about and to bring the trust management and trust management information systems up to commercial standards within two years. The specific initiatives are more fully discussed in Appendix One and, at a minimum, will involve acquiring, automating, updating, integrating, coordinating and consolidating to produce:

SYSTEMS IMPROVEMENTS AND CLEANUP

1. A Trust Asset and Accounting Management System (TAAMS).

This will involve acquiring and implementing a Trust Asset and Accounting Management System which will:

A. Provide a new asset management information subsystem for land and natural resource management and a delivery system for asset leasing, contracting, lending, buying and selling, together with standardized and/or integrated asset management, credit and operating policies, procedures and practices. The system must be able to tie to and track from land and ownership records.



B. Provide an accounts receivable/master lease subsystem data, tickler and collection system that uses lease-contract and ownership information for trust income verification, reconciliation, billing, payments, collection, accounting, disbursement, audit, asset quality review and compliance purposes.



C. Provide an accurate and timely trust, depository, payments and delivery system for IIM accounts and Tribal accounts. This will entail purchasing a trust, depository, payments and other financial services accounting and statement system and a delivery system to more efficiently provide current financial services and to facilitate new and improved financial services to individual Indians and Tribes.



D. Provide a general ledger and general accounting system to accommodate all present and proposed TAAMS systems and other improvements.

2. A Land Records and Title Recordation and Certification System.

This will involve the acquisition of a new system which will:

A. Be capable of instantaneous linkage with the TAAMS and other systems used by the service bureaus providing trust services under delegated authority in the near term.



B. Be brought up to private sector standards through LRIS-2 upgrades and implementation in the medium term.

3. A Dedicated Technology Services Center.

This will involve obtaining a centralized technology services center dedicated to trust resources, trust funds and land ownership and trust records management processes with appropriate provisions for disaster/recovery and back-up capability.

4. A National Archives and Record Center.

This will involve obtaining and centralizing a modern national archives and records center for trust asset and accounting management records and land title and records storage and retrieval along with appropriate disaster recovery protection. Implementation of modern imaging technology should be at the fore-front of the improvement initiatives.

5. A Risk Management and Control System.

This will entail obtaining a risk management and control system that will provide for adequate operational audits, credit and asset quality audits, compliance reviews, independent asset appraisals, supervision, enforcement and liaison with outside, independent auditors. It will include annual reviews and audits of all service bureaus providing trust services under delegated authority.

6. A significant investment to clean-up:

Probate Processes
IIM and Tribal Records
LTRO Title Defects
Appraisal Backlog and Defects

7. A significant training investment for all trust management activities, including Tribal users.

8. The acquisition and retention of competent management.

OTHER PROPOSED INITIATIVES

9. A Single Organization to Manage Trust Management Activities.

This will involve consolidating trust resource, trust funds and land ownership and records management processes into a single, independent institutional unit with its own management structure to accommodate the restructuring and reorganization contemplated by Phase I of the Strategic Plan. The unit should be organized by function and dedicated exclusively to trust management. The unit should be managed by a full time Chairman and a Board of Directors appointed by the President and confirmed by the Senate. The unit's proposed organizational form is as an independent GSE subject to Congressional oversight.

10. Legislation on Fractionated Ownership of Indian Lands.

Legislation is needed which would consolidate the large number of existing fractionated interests and prevent further fractionation. This alone would remove a primary obstacle to the efficient administration of the trust management systems and provide a major catalyst for the timely resolution of most of the operational problems associated with trust management activities, including trust resource and realty management, probate, land titles and ownership records management, IIM accounting, collections, deposits, investments and disbursements, customer service and record keeping for all trust management activities.

11. Such systems and organizational improvements must be accompanied by significant legal changes, including adoption of the prudent investor rule.

12. An Indian Development Bank as proposed by Phase II of the Strategic Plan.

CONCLUSION

It is important to understand that any alternative to any of the elements of the reform effort and the Strategic Plan was rejected by the Special Trustee if it would not enable the proper discharge of the trust responsibilities of the United States to American Indian beneficiaries and comply with the American Indian Trust Fund Management Reform Act of 1994 (Act). The Act is clear on the standards to be met in the Strategic Plan: Section 101 reads in part:

"(d) The Secretary's proper discharge of the trust responsibilities of the United States shall include (but are not limited to) the following:
"(1) Providing adequate systems for accounting for and reporting trust fund balances.
"(2) Providing adequate controls over receipts and disbursements.
"(3) Providing periodic, timely reconciliations to assure the accuracy of accounts.
"(4) Determining accurate cash balances.
"(5) Preparing and supplying account holders with periodic statements of their account performance and with balances of their account which shall be available on a daily basis.
"(6) Establishing consistent, written policies and procedures for trust fund management and accounting.
"(7) Providing adequate staffing, supervision, and training for trust fund management.
"(8) Appropriately managing the natural resources located within the boundaries of Indian reservations and trust lands."

The Reform Act at Section 303 further requires that the Special Trustee shall ensure that the Bureau of Indian Affairs establishes appropriate policies and procedures, and develops necessary systems, that will allow it:

"(I) properly to account for and invest, as well as maximize, in a manner consistent with the statutory restrictions imposed on the Secretary's investment options, the return on the investment of all trust fund monies.

"(ii) to prepare accurate and timely reports to account holders (and others, as required) on a periodic basis regarding all collections, disbursements, investments, and return on investments related to their trust accounts.

"(C)...to maintain complete, accurate and timely data regarding the ownership and lease of Indian lands."

Together, Sections 101, 102 and 303 of the Act constitute performance requirements for the United States as trustee and therefore for the Secretary as the official delegated to execute the trust functions for the trustee. In order to meet those requirements, the trustee must establish and maintain an accurate and up-to-date system of auditable records that tracks what assets are held in trust, how those assets are managed and invested and to whom the proceeds of those assets are to be paid. These are minimum standards of fiduciary performance followed by all trustees, whether individual or corporate.

Because the United States as trustee cannot now meet the performance requirements established by the Act, the Act requires the Special Trustee to prepare and submit a plan built around the legislatively set goals to ensure that the Secretary's trust responsibilities are discharged in compliance with the Act. Therefore, the Strategic Plan recommends that the United States as trustee adopt, establish and maintain a system of records generally used by other trustees to meet these minimum standards of performance. While some may argue what standards were applicable to the United States as trustee prior to the Act, the passage of the Act clarifies the standards to be followed in subsequent years. Therefore, to comply with the law, the Strategic Plan recommends acquiring a system used by other trustees to meet these basic trustee standards. The alternatives are to either continue with the present system which cannot meet the requirements of the Act or to develop "in-house" the government's own different system. Both of these alternatives, when compared with the recommendations made in the Strategic Plan will be more expensive to accomplish, take more time to put in place and are subject to a high degree of risk of failure. One only need look at the recent experience at the IRS and DOD with developing "in-house technology" to understand the operational risks of failure associated with high technology "in-house" systems which could not be implemented successfully and which could not keep pace with the rapid technological advances taking place in recent years.

The least expensive alternative is to get competitive bids from outside servicers using core trust systems developed in the private sector to meet the standards that are required at a minimum by the Act. This is the alternative recommended by the plan. These systems were developed through competition during the last 10 to 20 years and possess the flexibility to meet our current and future needs. In addition, if it is desired in the future, such a trust system will facilitate out sourcing of some or all of the trust functions after the system is in place and in compliance with the Act. Therefore, once it is understood that the Act delineates the standards to be met, that at a minimum these standards are the equivalent of private sector standards and that there are several existing systems available that comply with these standards, the acquisition of a trust system through competitive bidding will provide the most cost effective alternative to noncompliance with the law. Perhaps as important if not more important such a system is the most timely method to obtain substantial compliance with the standards imposed on the Secretary since 1994.

The debate as to how best to manage the trust management activities over the middle and long terms can however take place over the next two or three years without jeopardizing the implementation of the Phase I Strategic Plan general elements listed above (Items 1 through 8). These trust systems improvements and cleanup efforts are urgently needed and can be prudently pursued, if necessary, even under the current organizational structure. They should not be delayed pending the approval or resolution of organizational issues, Phase II of the Strategic Plan (a full service development bank), the fractionated heirship issues, or the prudent investor standard, the other major improvement initiatives recommended by the Strategic Plan.

Also testifying today, Mr. Donald Lasher, the recently appointed Chief Information Officer of the Department of the Interior will present the Administration's views of the Strategic Plan.

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