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June 3, 2003 Jeff Marshner, Superintendent Dear Mr. Marshner: I am concerned that two contracts now being reviewed by the Department of General Services may be in violation of California law. These contracts involve sale of assets of the state valued at more than $6 million. There are good reasons to believe that these assets are being sold at prices lower than the state could and should receive. If the law requires that assets of the state not be sold for less than their full value, the pending sales should be voided. I ask that you take immediate action to review the questions about the legality of these contracts before their approval by DGS. These contracts may be approved as early as this week if you do not intervene. I ask that you suspend approval of these contracts until these questions are answered. The contracts in question are two contracts for sale of timber in Jackson Demonstration State Forest (JDSF):
The contracts in question are for sale of standing timber in Jackson State Forest. If the state approves the pending contracts, the state will not be getting full value for this timber for the following reasons:
Christopher Rowney, Deputy Chief, State Forest Manager Program, declared in a court declaration on a request for a preliminary injunction that the risk of an injunction lowers bid offers and results in being offered less than the prevailing market value: With the requirements for bid deposits and performance bonds as well as the inability to assure logging contractors of relatively certain operation periods, potential bidders will have to factor in the risk of bidding on a timber sale that is potentially not operable on the advertised date. Such consideration will result in bid values that are lower than prevailing market values for similar timber on properties that are not perceived as being subject to the same risk. The winning bidders for Camp 3 and Brandon Gulch both declared in a court declaration on a request for a preliminary injunction that delays in initiating logging would have severe financial consequences for them: Any circumstances that prohibit the performance of the obligations by Jackson Demonstration State Forest under the Timber Sale Agreement could be catastrophic to Willits Redwood Company’s financial future. Our ability to replace any lost log volume late in the operating season can be difficult and expensive, if not impossible… Christopher Baldo, co-owner of Willits Redwood Company MFP has contracted with the Jackson State Demonstration Forest to provide 7.7 million board feet of logs which comprise the majority of the Ukiah sawmills unfulfilled timber needs. MFP’s inventory of logs ready to process is gone … In addition almost all of the alternate timber offered for sale has already been sold to other buyers. Under these circumstances any interruption to the Jackson State Sale would have direct impact on MFP… Richard Higgenbottom, President Mendocino Forest Products, LLC Given the magnitude of the costs of delay cited by the winning bidders, they would have adjusted their bids to reflect risk of delay. The risk of incurring such significant losses was well known to the bidders before they entered the bidding. Litigation on JDSF has been ongoing since June 2001, and all logging was enjoined in May 2002. On October 24, 2002, a lawsuit was filed challenging the EIR and thereby the legality of the management plan for JDSF. The suit requested injunctive relief. Legal action on JDSF has been the subject of numerous articles in Mendocino County newspapers. The potential for an injunction was sufficiently high that JDSF took the unusual step of providing bidders with an explicit escape clause. In the bid solicitation documents for Brandon Gulch and Camp 3 Timber Sales, the first item in the section Timber Sales Agreement is: The Agreement may be terminated by the Purchaser if legal action by a third party prevents initiation of timber harvesting within 90 days of STATE approval of the Agreement.
The sales and deposit requirements for the JDSF sales are so big that most mills in Mendocino County do not have the financial resources to bid. The timber industry has declined to a small fraction of its former size in Mendocino County. There were only a few big mills able to bid. Apparently even these few bidders trade logs among themselves, raising serious questions about the independence of the bids.
Can the bidding process be competitive when there are so few bidders? Further, mills do not mill all of the logs they purchase in large sales such as the ones in question. Mills specialize in terms of the log species and the log sizes. If a mill discusses sales or trades of logs prior to the bid with other potential bidders, can the bid process possibly be legally competitive? I request that you investigate, prior to approving the pending contracts, the extent to which discussions on trading or sale of logs occurred among the bidders for these contracts prior to the bid date.
CDF had the option of rebidding the sale after the first bidder withdrew. By not rebidding the sale, CDF removed the possibility of getting a bid closer to the initial bid. Given the large discrepancy between the MFP bid and the Schmidbauer bid, good business practice would dictate re-offering the sale. I request you to inquire into:
Given the small size of the timber industry, and the practice of mills trading logs on large sales, JDSF could improve the net proceeds from sales in ways:
I respectfully request that you take action on this matter immediately. The legal situation will become complex if the state approves these contracts and then finds that they are illegal. Thank you for your consideration. Sincerely,
Vince Taylor CC: Andrea Tuttle, Senator Wes Chesbro, Assemblyperson Patti Berg, Senator John Burton
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