Legislature(1997 - 1998)
03/04/1998 12:01 PM House BUD
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Legislative Budget and Audit March 4, 1998 12:00 Noon House Finance Committee Room State Capitol Juneau, Alaska Tape: LBA-980403 Tape 1 Side 1 CALL TO ORDER Chairman Phillips convened the meeting of the Legislative Budget and Audit Committee on March 4, 1998, at approximately 12:45 p.m. in House Finance Committee Room of the State Capitol, Juneau, Alaska. PRESENT The following members were present: Senators Representatives Chairman Phillips Representative Martin Senator Adams Representative Bunde Senator Donley Representative Croft Senator Halford Representative James Senator Pearce Representative Therriault Senator Torgerson (alternate) ALSO PRESENT Pat Davidson, Acting Chief Legislative Auditor; Dane Larson, Legislative Auditor, Anchorage Manager; Mike Greany, Legislative Fiscal Analyst; Gregg Brelsford, Legal Counsel, United Native American Telecommunications. RAILROAD ETHICS BRIEFING Pat Davidson - What each of the members should have in front of them is a copy of an ethics investigation done by the office of the Attorney General relating to questions and concerns over a former Alaska Railroad employee taking employment with a company that the Railroad was doing business with prior to his termination from the Railroad. In summary, the conclusion from the Attorney General was that there were probable causes to believe that our Code of Ethics was violated by Mr. Burns, however, they did not believe those violations influenced the appraisal or the terms of the contracts that were negotiated for the fiber optics lines and did not damage the financial position of the Alaska Railroad Corporation (ARRC) or otherwise result in ARRC's receipts of less than fair market value of its right of ways. In this report, they also recommended that the Alaska Railroad hire a special prosecutor/independent counsel to review what they determine to be probable cause for violation of the ethics. At this point in time, we don't necessarily have any recommendations for the Committee, but we wanted the Committee to know that we do have an audit of the Alaska Railroad that is just starting out that has to do with appraisals and we will be continuing to follow along with this issue and offer comments to the Railroad or to the independent counsel as we deem necessary during the course of their review. Senator Adams - One of the conditions under some of the contracts, a waiver provision, was it not granted and how does it effect the Code of Ethics? Pat Davidson - I believe the Alaska Railroad's Code of Ethics requires a 2-year gap and that the Code of Ethics also allows for a waiver if determined by management of the Railroad. Their own counsel did do a review and made a recommendation to the CEO and the Board and the Board actually did grant a waiver. Senator Torgerson - My question has to do with Governor Sheffield's third question on whether or not Mr. Burns violated the State or Alaska criminal law and the answer was that he did not. I guess my question would be do you concur with that or are they saying since the Railroad didn't have a financial loss in his opinion in these negotiations there was not a breach of law enough to prosecute. Pat Davidson - That is why we believe that our continued involvement as this proceeds with the independent counsel we would like to offer our opinions to them in terms of what we see are other options to investigate. Chairman Phillips - Representative Croft had a concern about the confidentiality of this report, but this is okay. Pat Davidson - We have confirmed with the Railroad that this morning the Alaska Railroad presented this to the Anchorage Daily News and we also understand that the person involved, Mr. Burns, did waive his rights to confidentiality. (Representative Bunde is present.) Representative Martin - I think this just shows time and time again how the audit people have shown us the weakness of the Alaska Railroad not being under the Executive Budget Act. We did make a mistake in my mind according to Norm Gorsuch who was the Attorney General under Governor Sheffield telling the Legislators that we are going too far; that we cannot allow them to have the liberty that the bill transferring the Alaska Railroad gives to the corporation allowing them to have complete asset use without legislative oversight. I do know at the time we were looking at selling the Railroad within a couple of years. We didn't expect to be holding onto it for 15 years, but since it is a State property the Audit Division has told them we must bring them under the Executive Budget Act or we are going to find more and more of this being done. Now I thank the auditors for bringing this to our attention. It is not that Mr. Burns did not know it. I can bring you the minutes when we first began this investigation into the misuse of Railroad State assets for personal gain. At the time, it had to do with the gravel pit in Anchorage. As long as they think they are a private enterprise, completely devoid of legislative oversight, we are going to suffer with these problems and wonder what we are going to do and I want to urge both the House and Senate to consider passing that bill, Senate Bill 42, which is in the Rules Committee that can bring to an immediate end this kind of misuse of State property. It is really a shame that Governor Sheffield has made it a personal vignetta against him. I was after that Railroad long before Governor Sheffield got in there. I could care less about him being in charge although I worry about him more than others. I do also believe that the audit that the Committee is working on needs to be brought forth because here again you will see other things that are very unacceptable when you consider the best use of State property whether it be in Fairbanks, Anchorage or Seward. There is massive amount of favoritism going on and the State is not receiving the best use for its moneys. This expensive deal for $200,000 Mr. Burns got a very nice job out of it. When you consider that maybe two or three other fiber optic organizations may use this land and pay us equal amount then why give exclusive rights and monopoly on a State right of way to only one company. That is completely unAlaskan to allow our resources to be exclusive used by one group and I think after we get into this further you are going to see even worse situations in the use of State property and materials because this is just the tip of the iceberg and I encourage the body to put the Railroad under the Executive Budget Act which the Attorney General and Division of Audit has told us a number of times must be done. (Representatives James and Therriault are present.) Senator Torgerson - I have two questions. One, what do you expect us to do today? I understand that this is more informational, letting us know about the report. Second, you say you have an ongoing audit that is basically parallel to this one. When do you expect that audit to be done? Pat Davidson - Yes, this is just information for the Committee, to bring you up to date on what is going on with this particular issue. In terms of when the audit is going to be complete, I would expect that we should have a draft of the report to the Committee by mid April. Representative Martin - Part of the problem here is the Legislature needs to act this year and I wonder if the Committee Chair would allow expedition of this. Upon that information, I think most legislators will say overwhelmingly that this is no way to protect the assets of the State and what can be done. If we expedite, I know they are loaded with other reports, but I hope we can get the matter solved before the end of this Legislature term and do something concrete. Pat Davidson - It is definitely in its initial stages and when I say mid-April I know that I can make that deadline but probably in a week's time I could probably give you a better estimate. I know it can at least be done by mid-April and what I could do is report back to the Committee members on possibly an earlier date. Senator Pearce - I have a question about the Railroad Code of Ethics. Have the auditors looked at the Code itself and made any value judgments on whether or not the Code is sufficient. Is it substantially similar to the Executive Code which I frankly think is insufficient which is why I added the Executive Ethics Act to our Ethics Code in Senate Bill 5. Have you made any value judgments on this whether or not their Code is complete? Pat Davidson - If my answer is not complete, I hope Dane Larson will jump in here. The Attorney General is making recommendations to the Alaska Railroad to bring their Code of Ethics a little closer in alignment with where the Executive Branch Ethics Act is. The other thing is we have noticed that there are not penalties in the Alaska Railroad Code of Ethics; that there are four violations in the Executive Branch Ethics Act. Those things I know. I would ask Dane if he has done any more research. Dane Larson - The penalties Pat is talking about in 3952 the Ethics Act calls for up to $5,000 penalty per violation whereas the Railroad's doesn't. In this instance, if independent counsel determines that violations occurred, we don't know if anything would be done about it. The Code under the Railroad allows termination but this individual has already left. So there is no real hammer. We have in a past review at the University Russian Programs suggested that all reports, disclosures, be made under penalty of perjury. This might have made a difference in this case and we continue to recommend that here so that is an improvement in the Ethics Act itself. Senator Pearce - In your opinion, is the investigation or at least the laying out of the investigation and recommendations that have been done by the Attorney General complete? Dane Larson - No, what was done, the Attorney General was asked sometime back to do an Ethics Act review. The Attorney General said I don't have the authority to do that because they are exempt from 3952. Senator Phillips then asked them to do a desk review and they reviewed the documents that were provided to them by the Railroad. They've gone in and taken additional depositions which needed to be done and also a complete review of all the files so there is quite a bit of work which still needs to be done. Gregg Brelsford - I am here to make some comments on the Attorney General's report on the Alaska Railroad's Ethics Investigation, File 663-98-0242, released today to the public and provided this Committee. In the first paragraph of this report, the Attorney General says he believes this subject is not within the Attorney General's jurisdiction. That is exactly what he told UNAT a couple of months ago when they came to the Attorney General and asked him for this investigation. He declined to conduct an investigation. As far as I can tell, the Attorney General changed his mind and decided to pursue this investigation after this Committee brought some scrutiny to this issue and discussed it with Governor Sheffield. We are very grateful for the attention this Committee has devoted to this issue. I have not read the report in detail. I received it a few minutes ago. It essentially seems that it says there is probable cause to believe that Mr. John Burns, the former Vice President of Real Estate of the Alaska Railroad Corporation, violated a number of portions of the Railroad Ethics Code. My brief quick read at this point is the report is there's no harm to the Railroad as the result of those violations. I would like to raise the question what is the harm to the public interest? The public interest in the operation of a government agency that's operated in an honest way and with integrity. A senior official of the Alaska Railroad while he is working for the Railroad is discussing employment with a private sector company that has an interest in the materials that that senior official of the Railroad has jurisdiction over and in fact not only was discussing employment but had accepted employment. What this report says that while he was in collaboration with the secret masters of that future employer, he was still conducting Alaska Railroad business in a way that served their interest. Maybe that did not harm the Railroad in dollars and sense, but it clearly raises questions about how our public institutions are operated in the State. The report suggests and recommends that an independent counsel be appointed to pursue this further and UNAT completely endorses that concept and in fact UNAT proposed that to the Railroad last week, a copy of which was given to the Chairman and legislative staff. Our concern is what the scope of that investigation will be and we propose to you and legislative staff that the scope include not only whether or not there were violations of the Railroad Code of Ethics but whether there were violations of civil and criminal laws of this State. As you may understand, UNAT is somewhat skeptical about a narrow scope of investigation given the fact that the Attorney General initially declined to investigation it until this Committee took an interest. So we are here to ask you today to encourage the Attorney General and Railroad to make sure this investigation is indeed independent and is a full and thorough investigation of any violations of the Code of Ethics or civil or criminal laws of this State. We would also ask that this Committee encourage those entities to make sure that the investigator talk with all the parties, including UNAT. No inquiry was made to UNAT in the course of this report that is before you today by the Attorney General. We think it would be appropriate that the independent investigator talk with UNAT and all the parties that may have some appropriate and useful testimony on this issue. I would like to speak on two issues raised by questions in the earlier testimony. Senator Adams asked about the waiver that was generated in this case. It was a conditional waiver and it was a waiver that said that Mr. Burns could indeed go to work for World Net Communications, Inc., as long as he did not represent World Net Communications, Inc., in any discussions with the Railroad on any permits and I believe that this report finds that Mr. Burns violated those conditions. It is certainly UNAT's allegations that he did and there is no penalty for those violations. That goes to the question that Senator Pearce raised about enforcement of violations of the code of ethics. Mr. Burns has left the employ of the Railroad; what penalty can be brought against him for his misconduct as a senior official of the Railroad. My concern is it looks to me that the code of ethics does not allow for penalty; doesn't address this situation of how to enforce violations of the code of ethics particularly against an employee who has left the service of state government. Those are my basic remarks Representative Martin - Did UNAT's have any interest in the fiber optic opportunity for the Railroad right of way. Greg Brelsport - UNAT has the permit for the right of way between Anchorage and Fairbanks, exclusive rights to a 25 foot right of way. Representative Martin - In the procurement law, did anyone tell you that we cannot give exclusive rights to state property or right of way. That is the problem I think we have as legislators who oversee the best use for state properties and it is my understanding that two or three other companies wanted to put fiber optics in that right of way, but you were satisfied with the exclusive rights you had? Greg Brelsport - I was not involved with UNAT or this matter at that time. I do not have first hand knowledge of what UNAT was told about this issue. Representative Martin - It seems you did not agree with what Mr. Burns did, but your company got the right of way. Greg Brelsport - We certainly did; we got a permit to use Alaska Railroad right of way from Anchorage to Fairbanks to lay fiber optic cable. Representative Martin - It is my understanding that there is a civil suit against the state for misuse of the procurement code. Do you know anything about that? Were there depositions done of your group or whoever pertaining to this exclusive contract? Greg Brelsport - There is litigation between UNAT, my client, and World Net Communication, Inc., which is UNAT's partner in a company to build a fiber optic line. I'm aware of no legal action taken against the Railroad in relation to that permit and certainly not by my client, UNAT. Representative Martin - Would there be any against the state because of the illegal use of the procurement act? Greg Brelsport - Not that I'm aware of. Representative Martin - If we conclude this was illegally done, do you think we should redo the opening of the bids? Would you sue the state? Or do you feel you have exclusive rights? Greg Brelsport - I'm not prepared to comment on what my client might do about possible actions in the future. Representative Martin - I'm trying to figure out why you are here. Greg Brelsport - It is our allegations that Mr. Burns manipulated the permit so his secret master, World Net Communication, Inc., could take the permit away from UNAT; that he structured World Net Communication, Inc., ability to do that while he was an official of the Railroad. Representative Martin - Are you asking us for help? Greg Brelsport - Our issue is if we had known Mr. Burns was secretly working for World Net Communications, Inc., as we allege, then we would have raised the issue then, but he didn't knowingly disclose that he was violating the code of ethics. Chairman Phillips - I think what we are saying in plain English is that they agree with this report and that there should be an independent counsel to look at it and UNAT is requesting us to follow up on that. Greg Brelsport - We are requesting this Committee have a role in the selection of the independent counsel rather than leaving it up to the Railroad or the Attorney General who has already shown that he will not address this issue without the Legislature. Senator Halford - One of the things that makes this issue is the exclusive nature of it. If it were just easement right of way, it wouldn't bother me that much, but the way you describe it you have exclusive rights to that 25 foot piece. What I would like to know is how wide is the Railroad's right of way and can they offer parallel right of ways to other competitors? Do they have the capacity to offer two or three more of these not in your 25 feet and not in violation of your 25 feet? Greg Brelsport - I have no first hand knowledge, but I've discussed that issue with the legal counsel of the Railroad. My understanding of her position is that the Railroad does have the freedom in other portions of the right of way outside our 25 foot area. There is really a 200 foot right of way; 100 on one side; 100 on the other. UNAT has exclusive right to 25 feet on one side. Theoretically that leaves 175 feet as not allocated to any permittee or user that would be available to the Railroad for them to issue to someone else. Senator Halford - Is it your position that when the Railroad issues something basically it becomes a contractual relationship of the Railroad and even if were to change the law after the fact that is an enforceable contract and the sanctity of contracts would trigger the constitutional provision that says we cannot change the law. Greg Brelsport - I think that is correct as a matter of law without taking a position on behalf of UNAT. It is a contract between Alaska Railroad and UNAT and contract law and constitutional law would be a breach of that contract. Senator Halford - I agree that the bill sitting in Senate Rules should go to the floor, but I also think that we should do something with the Railroad and its allocation of assets that doesn't allow it to bind itself and thereby us on long term things that they cannot change. They obviously have to work in the market place so there has to be some time limitations. They have to be able to offer multi year contract to get the best deals. Some of their land arrangements should have time limitations on them. Greg Brelsport - I think ours is 35. Senator Pearce - It is 35 without legislative approval. Senator Halford - Far longer than I think it should be in my opinion. Representative Martin - On that right of way is that not twice the space you need? You don't need 25 feet; that is why other companies feel they've been knocked out on that side of the road which is the easiest side of the road. So you have the exclusive clear right of way. You have the better deal and you don't need 25 feet, you could have had 12; it would have been enough? Greg Brelsport - My understanding was that we have 25 out of a potential 200 feet and again I was not privy to this project at its inception, but my understanding is in order to lay the cable next to the track, you need to send a machine on the Railroad track itself. As it reaches out to dig into the ground to lay the cable, it needs a certain amount of clearance and, therefore, the 25 feet seemed to be the most appropriate to the engineering people. I'd like to clarify that there are two permits issued by the Railroad. One is to World Net Communications, Inc., and one is issued to UNAT so we each have a 25 foot right of way on one side of the track from Anchorage to Whittier. Each of those 25 feet are exclusive to those permit holders. (Senator Donley is present) Senator Torgerson - I'm still have a little trouble understanding what you're complaining about other than that the terms that were negotiated with you were negotiated while he was an employee of a competitor. So if this was all thrown out, I'm trying to understand the cure, do you claim that the negotiations in price was not in favor of the Railroad? Was it too high? What terms or things are you looking at being corrected if our audit comes out? Greg Brelsport - I was not involved with the project at its inception. UNAT is raising no challenge to the permit on the Anchorage to Fairbanks section as it was awarded. What we are looking for is an independent investigation which we allege was an abuse of power in the Alaska Railroad in the issuing of this permit and the manipulation of it to favor one of the private parties involved in the transaction, i.e., a full and thorough investigation of that on an ethics base, a civil and criminal law basis with appropriate sanctions and penalties imposed that reflect the conclusions of that investigation. Senator Torgerson - You are not the successful private party then? You talk about two private parties. Is there a different contract on the Northbound? Greg Brelsport - My client has the permit on the Northbound, but the Railroad has forced my client to assign its interest in that permit to the other party as part of an under the table deal which we allege was put together when Mr. Burns was working for the Railroad. Senator Torgerson - In terms of the agreement, would you agree with the report that negotiations monetarily were not rigged? Greg Brelsport - I do not contest the conclusion that the Railroad was not harmed monetarily in the assignment of the value of that contract. Senator Torgerson - It seems pretty high to me - $32 million for the low and $79 million for the high seems like a pretty good deal. They claim that the final negotiations were done by another team. It wasn't done by Mr. Burns. Is that true? Greg Brelsport - I don't know the answer to that. Senator Torgerson - On page 7, it says it was done by somebody else. Senator Pearce - Do you know if the Railroad has any more utility corridor leases that our based on a gross revenue as opposed to appraised value of the land itself? Dane Larson - I don't know that. Senator Pearce - My contention is the Railroad has gone off in the area of earning money on utility leases. The problem is they went off and did gross annual revenues; now both DOT and DNR are looking at that because both of their commissioners sit on the Railroad board. We are not treating the utilities in this state the same in terms of rights of way and I think we need to have a policy on rights of way for all state lands and we should make that decision. Chairman Phillips - We have a bill in the Senate Rules Committee right now that might put the Railroad under the Executive Budget Act. Senator Pearce - That's would help but it is not going to get us to the right of way question. I think we should stick them under the Executive Ethics Act also. OTHER BUSINESS Representative Martin MOVED to move the chief auditor's office to Anchorage. Senator Halford - Is the location set my policy? Chairman Phillips - No. Representative Martin - I think it is worth the chance. The House members are the group that Chair the Committee next and they will see the benefits from it. From my experience, during the interim, the Chairman works harder than he or she does during the regular session. You need your chief auditor down here during session, but you have eight months when you are not in session and that Division really works hard, reports, RPL's. It doesn't mean a major shift of the office itself, although I do believe at least two auditors need to be put up there to expedite audits. I do think it is worth it for a temporary time. Senator Adams - I think most of us have the details; it is the type of work you want to do. I still oppose the motion. Chairman Phillips hearing objection to the motion called for a roll call vote. Yea Senator Donley, Representative James, Senator Halford, Representative Martin, Representative Bunde, Senator Phillips Nay Representative Croft, Senator Pearce, Representative Therriault, Senator Adams Chairman Phillips - The motion was APPROVED by a 6-4 vote. (Senator Torgerson was not present for the vote). Senator Donley - The last matter that was before the Committee should the Committee decide what course of action should be taken on that matter. I was hoping that the Committee would request the Railroad conduct an independent investigation into both the ethics, criminal and civil questions raised. Senator Adams -What we just had was a one-sided deal on this issue and I would first like to hear the other side make its presentation to make it balanced. This is hearsay information not factual. If the Committee feels comfortable after the other side makes is presentation then I think it would be honorable to bring in a special investigator. Senator Donley - We did have the Attorney General's report that concluded there were legitimate questions here and my motion doesn't presuppose it would just ask that the Railroad conduct an independent investigation as to the criminal questions presented by the Attorney General's report. Senator Adams - It is only fair and balanced that we ask the Railroad to make a presentation of their side. I do understand the questions and read the Attorney General's opinion, but that is only an attorney's opinion. The inflicted party should be brought forth to give their side and they can do that the first of the week then this particular body can move for an independent investigation if so desired. Representative Croft - I would like to hear what the Railroad has to say about it. Chairman Phillips - Is a weeks time too long or too short for response from the Railroad? Some of the members want to hear the other side. Perhaps we should have the Railroad respond either verbally or in letter before we proceed on any other course of action. Pat Davidson - I'm not sure what the Railroad's time line for responding is to the Attorney General's recommendation. What we could do is ask them what their timeline is. Maybe they've already decided what action they are going to be taking in regard to that recommendation. What we could do is keep the Committee members informed and if you'd like to call them before the Committee, we could do that. Dane Larson - I spoke with the Railroad's counsel last night and they've decided to go with the recommendation. They've already made that decision. Senator Donley - Maybe we could have something in writing from the Railroad that says that. Chairman Phillips requested Dane Larson get something in writing from the Railroad. Representative Bunde - If we decided to recommend a special prosecutor would the Railroad be the person to employ their independent investigator and pay for them or is that something that Legislative Budget and Audit would have to be responsible for? Dane Larson - The Railroad has said that they wouldn't hire an independent counsel (tape inaudible) Senator Pearce MOVED to name Pat Davidson as the Legislative Auditor. Senator Adams called for the question. Chairman Phillips - Senator Pearce has moved that the Acting Director of Legislative Audit, Pat Davidson, be the Director of Legislative Audit. Senator Halford - I did not expect that motion to come up at this time and I'm not sure I'm prepared to vote on it. Chairman Phillips ruled it is properly before us under Other Business. Senator Pearce - Senator Halford would you like to put it off until time certain? (End, Tape: LB&A-980403 Tape 1 Side 1) Chairman Phillips - The motion will be held until noon tomorrow, March 5. ADJOURNMENT Chairman Phillips adjourned the meeting. LB&A 12 03/04/98
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