Legislature(2015 - 2016)
12/19/2015 09:00 AM House LEC
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| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
LEGISLATIVE COUNCIL
DECEMBER 19, 2015
9:00 AM
Approved August 3, 2016
MEMBERS PRESENT
Senator Gary Stevens, Chair
Representative Bob Herron, Vice Chair
Senator Lyman Hoffman
Senator Charlie Huggins
Senator Kevin Meyer
Senator Peter Micciche
Representative Mike Chenault
Representative Craig Johnson
Representative Sam Kito
Representative Charisse Millett
MEMBERS ON TELECONFERENCE
Senator John Coghill
Senator Anna MacKinnon
Representative Mark Neuman
MEMBERS ABSENT
Senator Lesil McGuire, alternate member
Representative Mike Hawker
Representative Steve Thompson, alternate member
OTHER LEGISLATORS PRESENT OR ON TELECONFERENCE
Senator Costello; Representatives Drummond, Guttenberg,
LeDoux, Lynn, Stutes, Tarr, Tuck, and Vazquez
AGENDA
ANCHORAGE LIO - EXECUTIVE SESSION IF NEEDED
SPEAKER REGISTER
Pam Varni, Executive Director, Legislative Affairs Agency
Doug Gardner, Legal Services Director, LAA
Tanci Mintz, State Leasing & Facilities Manager, Div. of
General Services, Dept. of Administration
Mark Pfeffer, Real Estate Developer, Pfeffer Development,
LLC, and co-owner of 716 W Fourth Avenue, LLC
(SPEAKER REGISTER CONTINUES ON NEXT PAGE)
SPEAKER REGISTER CONTINUED
Peter Shorett, Exec. Vice President, Kidder Matthews Real
Estate Appraisal
Serena Carlsen, Partner, Stoel Rives, LLC
Deven Mitchell, Debt Manager for the State of Alaska and
Executive Director for the Alaska Municipal Bond Bank
Mark Davis, Chief Infrastructure Officer for the Alaska
Industrial Development Export Authority (AIDEA)
Representative Bob Lynn, District 26
Representative Louise Stutes, District 32
Representative Liz Vazquez, District 22
9:04:08 AM
I. CHAIR GARY STEVENS called the Legislative Council meeting
to order at 9:08 a.m. in the Anchorage Legislative
Information Office Auditorium. Present at the call were
Senators Stevens, Meyer, Hoffman, Huggins, and Micciche;
Representatives Herron, Chenault, Johnson, Kito, and
Millett. Participating via teleconference were Senators
Coghill and MacKinnon, and Representative Neuman. Absent
were Senator McGuire, alternate member; and Representatives
Hawker and Thompson, alternate member.
II. ANCHORAGE LIO
CHAIR STEVENS reminded members that this was a follow-up
meeting to the December 4, 2015, meeting. The goal today
was to provide the committee with an update on the analysis
of the Anchorage office space options as was requested. He
asked that members keep in mind as they go forward the
obvious fiscal problems in the state, which have been
discussed in both the House and the Senate; the governor's
budget has indicated a reduction last year of some nine
percent, a reduction this year of two percent plus in this
year's plan, as well as an income tax and use of the
permanent fund; so we all know we're facing some pretty
serious problems here. He said he knows the Senate is
looking at additional reductions from the governor's
suggested budget cuts.
Chair Stevens said that in this morning's paper there was
an article about this issue and about two representatives
who commented on their thoughts. There has been a
consistent mistake made when we see it in the paper talking
about "breaking the lease." He said that, if we do move,
that we wouldn't be breaking the lease, but rather taking
advantage of a negotiated clause in the lease that went
through a lot of discussion as two sides negotiated a
contract. He said further that members should remember that
what may be done here today is advisory to the Legislature;
Council doesn't have the power of funding anything and we
have to make a recommendation, hopefully, one way or the
other, to the entire Legislature to include whatever
decision is made in the budget.
He said he also wanted to make notice of the letter sent to
the Council by Senator Wielechowski and Representative
Tuck. He said that what they are talking about is a concern
about moving to the Atwood Building; they suggest having
individual offices around Anchorage someplace within an
individual Legislator's district. That is something that
can certainly be accommodated and, should it happen that we
go to the Atwood, we can reduce the space that we are
leasing there quite readily. He said his response to the
letter is that can be taken into consideration and
Legislative Council can establish smaller offices around
Anchorage, for example, should they choose to.
Chair Stevens said in closing that to all Legislators in
the room, he was pleased to have them here. They will be
recognized and may ask any questions they want; please
respond and let us know your thoughts - not only the
members of Council, but any Legislators that are here.
Having said that, Chair Stevens asked Pam Varni and Doug
Gardner to the table to give an overview of what happened
at the last meeting. He said also available on
teleconference are Serena Carlsen, our attorney with Stoel
Rives, LLC, and Peter Shorett from Kidder Matthews, to
present the various options they have as well, talking
about the discount rate and the inflation analysis.
Chair Stevens said, in response to a request by
Representative Millett, that Council hear from the owner of
the building, Mr. Pfeffer, that if he was willing to speak,
they would find the time for him.
PAM VARNI, Executive Director of Legislative Affairs
Agency, put herself on the record and noted that also with
her at the table was Doug Gardner, Legal Services Director,
and on teleconference was Chuck Burnham, Research Manager.
She said the Agency worked on coming up with some scenarios
that looked at annual cash outlays over a ten year period,
from 2016-2025. We went over those scenarios last time, and
for the benefit of the members that were not at the last
meeting and others in the audience, she said she would
briefly go over those. She noted that these scenarios do
not look at inflation and do not look at net present value.
Peter Shorett and Serena Carlsen will speak to that after
she, Doug, and Chuck go through the five scenarios.
Ms. Varni said the first scenario was to continue the
current lease at 716 W 4th Avenue. Looking at a 10 year
period, the total cost is $40,320,000; total monthly cost
per usable square foot is $7.41. The Legislature would need
to fully fund the lease through the Legislature State
Facilities Rent component every year for the remainder of
the original 10 year lease, which expires on May 31, 2024.
The cost per square foot are based on usable space of
45,371 and a total of 86 parking spots.
In response to a question by Representative Millett, Ms.
Varni said the lease is based on a gross figure of 64,000
square feet and all of the other legislative leases
throughout the state and also in the Executive Branch are
based on usable and not on gross. Usable does not include
bathrooms, the vertical penetrations, and some of the
common floor areas. The square footage was double-checked
by RIM Architects and asked Peter Shorett to confirm her
definition of usable space.
PETER SHORETT, Exec. Vice President, Kidder Matthews Real
Estate Appraisal, said that Ms. Varni had described it
accurately. He said that the usable areas are those that
are occupied by the Legislators or for their conference
uses. It does not include the lobbies, hallways, corridors,
and vertical penetrations.
REPRESENTATIVE MILLETT asked if the Auditorium and the
conference rooms across the hall, as well as the conference
rooms on each of the floors, would be considered usable
space.
MS. VARNI AND MR. SHORETT both confirmed that they would
be.
MS. VARNI continued with Scenario #2: Purchase 716 W 4th
Avenue Funded by AHFC Issuing Fixed Rate Bonds. She said
the total after a 10 year period is $48,850,000; total
monthly cost per usable square foot is $8.97. The
Legislature would need to pass a stand-alone bill to enable
AHFC to finance the purchase of the building. This scenario
shows a 10 year maturity at a fixed rate at approximately
2.16 percent.
However, Ms. Varni said that last night, Friday, December
19, 2015, Senator Stevens and Representative Herron, along
with herself and Doug Gardner, met with Mark Pfeffer. She
told Council members that he had agreed to come down on his
price from $37,000,000 to $36,000,000. The new offer still
includes the $950,000 cost for the loan pre-payment fee for
his $28,000,000 loan. Due to the late hour of the meeting,
she was not able to create new scenarios, but that under
Scenario #2, with the new purchase price, the total after a
10 year period is now $45,701,840.
In response to a question from Speaker Chenault, Ms. Varni
said the meeting between building owner Mark Pfeffer,
Senator Stevens, Representative Herron, Doug Gardner and
herself took place at 4:30pm.
CHAIR STEVENS commented that he was in his Senate Caucus
meeting and received a call from Doug Gardner saying that
the owner would like to meet. He said we did meet with him
briefly for about 30 minutes. He wanted to make sure that
Mr. Pfeffer knew that while he knew about the non-
appropriation clause, the Chair was in no way meeting with
him to try to get him to lower his price, but that if Mr.
Pfeffer had a different offer he wanted to make, the Chair
was certainly glad to listen to him.
MS. VARNI moved to Scenario #3: Purchase 716 W 4th Avenue
via Issuance of Variable Rate Certificates of
Participation. The total for this scenario after a 10 year
period would be $42,948,659; total monthly cost per usable
square foot would be $8.19. The Legislature would need to
pass a stand-alone bill outlining the project, cost, annual
payment and total payments. There being no questions, Ms.
Varni moved on to the next scenario.
Scenario #4: Purchase 716 W 4th Avenue through the Capital
Budget. The total after a 10 year period would be
$41,750,000; total monthly cost per usable square foot
would be $7.93. The Legislature would own an asset and be
responsible for all ongoing maintenance and operating costs
of the building. The Legislature would not be reimbursing
the landlord for property taxes or insurance once the
Legislature owns the building. A building manager position
was factored into this scenario. There being no questions,
Ms. Varni moved on to the next scenario.
Scenario #5: Move to State-Owned Space at the Atwood
Building. The action required would be a non-appropriation
of the lease with 716 W 4th Avenue and to enter into a
State lease with the Department of Administration for the
Atwood Building. She said the Legislature would be charged
for 84 parking spots based on the square footage of the
proposed lease space. Actual parking would include 80
underground parking spots reserved for Legislators on a
first-come, first-served basis; and an additional 266 spots
available on a first-come, first-served basis located in
Blocks 102 and 79. The total cost for a 10 year period
would be $6,647,760; total monthly cost per usable square
foot of $1.85. In addition, there would be tenant
improvement costs for the Atwood Building of $3,500,000.
SENATOR MICCICHE, noting the state fiscal gap and the
$7,500,000 in tenant improvements already invested in the
current space, asked what was the bare minimum to spend in
tenant improvement costs, even at a certain level of
discomfort, to move into the Atwood Building.
MS. VARNI, after confirming that Senator Micciche was
asking if the tenant improvements could be done for less
than $3.5 million, said that they would have to work with
Tanci Mintz, and her architects and staff to see if that
was possible. For instance, on the 19th floor, there was
possible space for leadership offices with existing office
walls and beautiful wood trim that could potentially work
as-is. Some of the space needs new carpet for sure, but
there is some room to save some money.
CHAIR STEVENS added that a lot of it is offices on the
perimeter of the floor with cubicles in the center, which
would not be adequate for Legislators who would need more
privacy to talk to constituents. He said there wasn't
really a way to just move in and make it work without some
changes.
REPRESENTATIVE MILLETT said it was her understanding that
Mark Davis from AIDEA was present and Deven Mitchell from
the bond bank on teleconference with some other options and
asked if Council would be hearing from them. She asked if
there were any documents with regard to those options.
DISCUSSION FOLLOWED to confirm that there were documents
available and the request was approved to hand them out to
Council prior to the presentation.
SENATOR MACKINNON asked about parking at the Atwood
Building. She said Legislators are in and out of meetings
in the downtown area on a regular basis and asked if there
were any parking spaces that would be dedicated to
Legislator parking. She wanted to know if the State could
accommodate some spots designated specifically for
Legislators.
MS. VARNI noted that the Linny Pacillo parking facility has
838 parking spots, also Legislators and Directors and
Commissioners in the Executive Branch have 80 underground
parking spots at the Atwood Building. In addition, there
are surface parking lots at Blocks 102 and 79 where there
are 266 spots. She said it would likely be the same
practice that is currently followed at 716 W 4th Avenue,
where there wasn't a spot reserved for a Legislator but
there were enough open spots to accommodate parking. She
said when she went through the underground parking facility
recently, there were at least 25 vacant spots and she
didn't think there would be a problem with parking. In
response to a follow-up question by Senator MacKinnon,
Tanci Mintz was asked to come forward.
TANCI MINTZ, State Leasing Facilities Manager for the
Department of Administration, said that the State had not
been planning to do reserved spaces for Legislators as it's
not very often everyone is there at the same time and they
want to try and maximize the use of the space. As Ms. Varni
had said, there were plenty of spaces for everyone to park,
whether it be in the Linny Pacillo Parking Garage directly
across the street or in the Atwood Building underground
garage.
SENATOR MACKINNON expressed her concern that there be a few
spots dedicated for use by Legislators and asked that her
concern be considered.
CHAIR STEVENS invited Mark Pfeffer to address Council at
the request of Representative Millett, who had questions
for Mr. Pfeffer who said he had not planned to be at the
meeting but was asked to do so.
REPRESENTATIVE MILLETT asked Mr. Pfeffer to walk Council
through how we got here. She said she was new to
Legislative Council and this building had preceded her. She
said she understood that at one point that we were in
negotiation to purchase the building when we started doing
building improvements. She said it would be helpful to walk
through that history.
MARK PFEFFER said that the Legislature had occupied this
building for a little over 22 years; first under an
original procurement in 1992 or 93 and then a follow-on
procurement in 2003 and 2004. The last procurement was for
a five year lease with five one-year options to renew. He
said he was not an owner of the property through all of
that but was asked for help in trying to find a path
forward for the Legislature by the building owner Bob Acree
and he eventually became a partner with Mr. Acree in the
building. Through the first five years and the five one-
year options, the Legislature issued numerous RFIs
(Requests for Information) that were all published in the
newspapers, so like everybody else, he said he watched what
was going on. There were several attempts at government-to-
government procurements, there were a couple attempts to
buy buildings and renovate them. Eventually, in May 2013,
the Legislature was down to one year left on the lease and
after 12 procurement attempts with no resulting awardable
contract, Representative Hawker, who was Chair of
Legislative Council at the time, approached the building
owners and asked if we could provide a proposal for how to
extend the lease.
Mr. Pfeffer said that in May 2013 they gave three
proposals: one was carpet and paint, with the lease rate
remaining the same; the second was carpet, paint, re-do
bathrooms, put in new elevator and some mechanical upgrades
and the lease rate would moderately tick up; the third
choice was a full modernization. At that time, the Council
didn't take any action but rather said the Legislature
should go out for an RFI one more time before they figured
out what they wanted to do. The RFI did go out and they got
two responses. In June 2013, the Council met and apparently
they had considered those two options and rejected them. At
that point, they passed a series of resolutions authorizing
Representative Hawker to negotiate an extension of the
lease based on the full modernization approach.
REPRESENTATIVE MILLETT interrupted to ask if it was a
unanimous vote to go ahead with that authorization. It was
confirmed that it was a unanimous vote.
MR. PFEFFER added that there were five motions needed to
make it happen. One of those motions was to obtain AHFC
(Alaska Housing Finance Corporation) as the Legislature's
representative in the discussions. He said that AHFC had
represented the Legislature in discussions when it
attempted to put together a project on Block 39 with the
Court System a few years earlier, so AHFC had some
background with the subject and they had the expertise on
staff. Those motions passed and technically at that time
Representative Hawker was authorized to execute a lease
amendment; that's not what he did. He said Representative
Hawker then, along with his staff, had the owners,
Legislative Affairs staff and AHFC staff and AHFC's third
party consultants spend about 11 weeks meeting weekly to go
over the details of what the scope should be - how many
rooms, how many offices, how many conference rooms, what
kinds of finishes, elevators, security, telecommunications,
servers, all the details. He said that by the time that 11
weeks was up it was late August 2013 and by that time, the
scope had been put out to bid and the numbers were back,
AHFC had back-checked those numbers and Representative
Hawker brought that to the Council and presented all of
that information. The Council didn't take specific action
because it had already authorized Representative Hawker to
execute the lease, so it was a presentation to see if there
was any objection to moving forward. Mr. Pfeffer said at
that time there was no objection but there was a motion to
request that Representative Hawker attempt to negotiate a
purchase option with the owners. After that Legislative
Council vote in August 2013, it took several weeks to kind
of button up the details of the lease extension and
amendment. There were two key exhibits to that lease: one
was a finding of the procurement officer that all of the
statutes had been met and that was Exhibit C to the lease.
Exhibit D to the lease was a certification by the Executive
Director that the lease had been reviewed by an appraiser
and the lease amount was at least 10% below market rate for
a comparable product here in downtown Anchorage. He said
based on that certification and the signed lease, there was
then a document that was executable, which was then
executed and with that they were able to secure
construction financing and advance the project.
Mr. Pfeffer said a purchase option was negotiated then and
that went to Legislative Council in 2014 during the last
legislative session. He said on their side, they wanted to
defer the income taxes that they would have to deal with if
there was a sale, so they suggested that the Council buy
the building for the debt amount, which was $28,000,000 and
then the $9,000,000 they had in equity would be in the form
of a ground lease. The Council didn't like the idea of a
ground lease, so did not take action on that signed
agreement. In response to a question by Representative
Millett, Mr. Pfeffer confirmed that a "ground lease" meant
they would still own the land and the Legislature would
lease the land. He continued that the Legislature would buy
the building and there would be a fixed price option to buy
the land at a future date.
SPEAKER CHENAULT asked if what Mr. Pfeffer meant was that
in 2014 at a Legislative Council meeting, a proposal was
put together that Legislative Council could have bought the
building for the cost of the renovations, which was
$28,000,000; and then the owners wanted to lease the land
for tax purposes back to the State for approximately 10
years and then the Legislature could have bought the land
at fair market value.
MR. PFEFFER said that the way the numbers really worked was
that the total project cost was $44.5 million, the
Legislature put in $7.5 million, which left $37 million of
cost and they had $9 million of cash that they put into it
and they borrowed $28 million. He said that's the reason
that, today, they've said they'll sell it at their cost,
which is $37 million with the land. He said last year there
was no action taken by Council but there was a lot of
concern about buying the building without buying the land.
Now, given the fiscal reality, we recognize that's
important to the Legislative Council so they've agreed that
they would sell the building and the land. He said they've
asked to sell the building at their cost, which is $37
million. He said there is a prepayment penalty because they
are now on their long-term loan; last year, they were on
their construction loan and there would have been no
prepayment amount if the sale had occurred last year.
SENATE PRESIDENT MEYER thanked Mr. Pfeffer for the history
because during that time period, he served off and on
Legislative Council. He said that there used to be a bar
here, Anchor Pub, and they were pretty anxious to get that
out of the way, there'd been some problems.
MR. PFEFFER confirmed that was so and said there was
literally blood on the street. He confirmed that the
Auditorium used to be the Anchor Pub.
SENATE PRESIDENT MEYER said he had advocated for leasing
instead of buying because his friend Charles Wohlforth and
Senator MacKinnon were all on the Anchorage Assembly back
in the 1990s when the State bought the Atwood Building and
took that off the tax rolls, which essentially then raises
the property taxes for the rest of the folks in Anchorage.
He said he was not a fan of buying this building and taking
it off the tax rolls. Also, he said he thought it was in
the Anchorage 2020 Plan that government buildings stay
downtown, so we were limited on where we could go. That's
why the Courthouse, the Federal Building, the Atwood
Building, City Hall, all government buildings are downtown.
He said there was not much space available and some wanted
to lease versus buy. Others he remembered said that if the
Legislature was going to stay at this location, let's make
it big enough that if a special session occurred, which
happened just last year, it could be held here. He said the
history of this and how it's evolved is very complex and he
doesn't think it's ever been fully described, so he
appreciated Mr. Pfeffer enlightening Council and the rest
of the folks here. He said he appreciated everything Mr.
Pfeffer has done to try to work with the Legislature and
we're not an easy group to work with because we all have
different opinions as you're hearing. He said he's not sure
what's going to happen here, but he wanted to thank Mr.
Pfeffer for his time and patience in working with
Legislative Council over all these years.
REPRESENTATIVE JOHNSON said he wanted to clarify the
addendums to the lease. He said there was one where
Legislative Council and the Agency, the LAA staff, got an
independent appraisal that it was 10% below market value,
and that was an addendum to the lease, correct?
MR. PFEFFER confirmed that was so, and went on to further
explain that it was an independent appraisal that was
ordered by AHFC. Under the statute under which the lease
extension was done, a lease can be extended if the lease
rate is at least 10% below market value. In the case of
that appraisal, the question was is there 64,000 square
feet downtown with parking dedicated on site. He said he
believed if Council reviews that appraisal, what they'd see
is that in order to accomplish that, the market comparable
would have to be created. The appraisal analyzed what it
would cost to do that and then it analyzed what it would
cost to renovate the existing building and the difference
was 13% lower to renovate. The appraisal itself was not
attached to the lease, he didn't believe, but there was a
certification signed by the LAA Executive Director
referring to the appraisal saying that it had been
reviewed, it had been back-checked and it had been
certified that the lease rate was 13% below market value.
In response to a follow-up question by Representative
Johnson, Mr. Pfeffer said that was from AHFC and the
Legislature. Mr. Pfeffer added that the owners didn't
actually know what that appraisal was going to say until
after they had laid out their total costs after putting the
project out to bid, developed the lease rate and presented
that to Legislative Council; subsequent to that, the
appraisal came in, so they weren't targeting a number based
on the appraisal.
SENATOR HOFFMAN asked about the provision that the Chairman
talked about, a clause or an option in the lease that says
that the Legislature can terminate the lease by not funding
it. He asked Mr. Pfeffer to describe how that clause got in
the lease and Mr. Pfeffer's interpretation of that clause.
MR. PFEFFER said that every government lease - city, state,
federal - in every state has a subject to annual
appropriation clause. He said he would encourage
Legislative Council to talk to the investment banking
community and the commercial banking community to get their
take on the importance and significance of that clause. It
is a rarely, if ever, used clause because once it's used
that subsequent leases have to be looked at as though they
are basically only a one year lease. So, one would have to
pay the full cost of whatever it is one's leasing basically
in one year because the lessor cannot count on a longer
term payment schedule. He said there was probably 200-300
leases around the state that are current that have that
clause in it. Landlords and banks and investors invest in
projects for government knowing that the clause is there
but also knowing that it's virtually never used and if it
is used, it's going to have a significant effect on the way
one is able to do things in the future. He said he knew
there was a letter out from the Alaska Bankers Association
and he encouraged members to look at that carefully. He did
not request that the letter be written, he said he just
knew that last year when the Senate didn't appropriate the
lease payments, the bankers were pretty concerned and got a
letter out to Legislative Budget and Audit, and he knows
there have been a few other letters from the investment
banking community since then. The clause exists but it is a
tricky credit issue to use that clause.
REPRESENTATIVE KITO said he understood that the clause has
been used and he didn't know of detrimental impacts to the
ability to enter into leases, so he said he didn't see that
as being a challenge here.
CHAIR STEVENS said that he believed Ms. Mintz said the
Administration has used it two or three times and, of
course, the Legislative Council used it once in Juneau as
well.
SENATOR MICCICHE thanked Mr. Pfeffer for being here and for
all he'd put up with throughout this deal. He said people
like to shoot arrows at folks for various reasons; we can't
always identify what's in their hearts or in their minds.
He asked if Mr. Pfeffer could list other projects he's done
with municipalities and state government so Council
understands he has a background in this kind of business.
MR. PFEFFER said he facilitated the Anchorage City Hall
being renovated in 1992 for the then-owner Warehouser
Mortgage Company; eight years later, they were ready to get
out of the state, so he bought that building from them and
that's a current and ongoing lease subject to annual
funding clause. He said he developed the downtown fire
station, he developed as a partner the convention center
and the Linny Pacillo garage but those were all done with
capital budget monies, not leases. He has a lot of
experience and he is working on other projects in the Lower
48 with other local governments, but again, those are
capital appropriations.
SENATOR MICCICHE said that his only point was that this had
been a difficult deal since long before this particular
stage, when this happened and there was no space available,
they went with someone with the experience in developing
similar types of properties; it's not that this was a one-
time deal for Mr. Pfeffer, he's got a lot of applicable
experience and he thought that, with the times that we're
at, this is exacerbating a difficult situation and he
wanted folk to be aware of that.
VICE CHAIR HERRON said that with regard to exercising the
right to termination which is in the contract, this was
probably the crux of the whole decision. He said the
Legislature had used it in the past, it was the Behrend's
Building, and it was in the last year of the lease and the
lease was $300,000. They sued and we paid them off
$300,000, so the Legislature didn't win that legal battle.
He said he spoke with Angela Rodale, the executive officer
of the Permanent Fund, and her caution to the Legislative
Council is, again, that if we exercise this right, members
have to realize the potential problems that could come down
the road. So, using the Alaska Permanent Fund as an
example, in our near future, hopefully within seven years,
we could ask the Permanent Fund, if they're interested in
investing in it, other people would like to invest in it,
but if we do exercise that right, it will always be a
concern not only to the Permanent Fund but to other people
that wish to invest in Alaska. He said we can talk about
all these scenarios, and the history, etc., but the
decision is about do we really want to exercise that right
or try to figure something out, some other alternative.
MR. PFEFFER said they've gone on the record as saying that
they realize that the fiscal situation is different today
than when the decision to ask us to do this was made. So,
their mantra has been let's find a pathway to savings. They
know the Legislature needs to save money, they believe
there are numerous ways to do that where we don't incur
what comes from using that clause, sort of as described by
Representative Herron. In a way that they're not
necessarily profiting but they're also not taking a big
financial hit, so he thought Council had some alternatives
in front of them. He knows Mr. Mitchell from Department of
Revenue is on the line and he'd seen that hand out and that
definitely looks like a pathway to savings. He said he
knows that AIDEA was present and they had some ideas. He
said they have put some other options on the table; their
debt is fully assumable, so there are numerous ways to do
it, but there just hasn't really been a robust dialogue
about that. He encouraged Legislative Council to get a
committee or team of folks to have that dialogue with them
and they are happy to do that as soon as possible.
REPRESENTATIVE MILLETT asked Mr. Pfeffer if he felt like
there had been a robust enough conversation and negotiated
with him or talked to him about some of the other options.
She asked if the dialogue had been back and forth or if he
had just been given a set of options - scenario 1, 2, 3,
and 4 - and left with no other options. She asked if she
could request from him if he did have other options, she
wanted to see them. She said she felt it was unfair if
Council made a decision without all the information. She
said she was starting to feel like she just walked in the
door and she gets these options that she hasn't seen before
that maybe she's not getting the full picture. She said she
would hate to make a decision being new to Legislative
Council and just getting involved in this. She had been on
the record saying that she wanted to do the most
inexpensive thing and make sure that the fiscal house is in
order, but she said she also did not want to end up in
continued lawsuits about things that may hurt the State's
credit rating, that may make the State an unreasonable
partner in business. She said protecting the State was the
utmost responsibility, also managing the fiscal deficit.
She repeated her question to Mr. Pfeffer about whether he
felt there had been enough dialogue and was he willing to
continue that dialogue if Council was to hold off on making
a decision with the only scenarios that we've been
presented today. She asked if there was an opportunity to
still continue looking at some of these options that she
just got this morning that she didn't know were out there.
She said it was frustrating at best.
MR. PFEFFER said he would not characterize the
conversations to date as robust and back-and-forth. He said
there was one meeting in July 2015 where he offered to sell
the building for the owners' cost. There was a follow-up
meeting in September where he was asked if they could do it
less than the owners' cost and he said he begrudgingly said
no, he didn't think that was appropriate. He said he was
asked to do this level of improvements, it was back-checked
and certified before he spent the money, so he said he
thought the number should be the cost. That was the last
thing he heard until the memo got laid on the table in
November before the last Legislative Council meeting. He
said he never saw that memo before it went out, he didn't
know what it said, and only saw it after the fact. Since
then, he knows that the sheet that Representative Millett
held up he believes came from Department of Revenue, he had
nothing to do with it. He said he had seen it and all it
does is take the dollar amount that we said we would sell
the building for and show different ways to analyze how the
Legislature would deal with that dollar amount to find
savings. He said he knows AIDEA has done the same thing on
their own and he believed AHFC has some ideas, but all
that's in that memo is the debt service schedule for how to
pay off $37,950,000 over 10 years. He said he didn't
believe all the options have been looked at. He added that
he was happy to meet and continue a dialogue.
SENATE PRESIDENT MEYER said that Ms. Varni shared quite a
laundry list of problems with the building. He said it was
certainly understandable that there's always a punch list
after there's been a major renovation done. He said one of
the Council's concerns was the Auditorium itself; sometimes
meetings include an executive session and the noise carries
over into the halls. He asked if Mr. Pfeffer had been made
aware of the problems.
MR. PFEFFER said that he checked with his property
management person and they are responsible for maintaining
the mechanical systems in the building. There have been
service calls with regard to that and his people get right
on them. He asked if there was a good email record of back-
and-forth call response and it was his understanding that
there was although he hadn't dove into the details of that.
With regard to other things, whenever a project like this
is finished, he gets a one year warranty from the
contractor that he hired and so there's a warranty period
under which he can go to the contractor about issues and
they'll take care of it. In order for him to do that he
needs to know what the issues are. He said he hadn't had a
lot of communication about that. He heard a list that was
shared at the last Legislative Council meeting, some of the
deficiencies, and said that's really the first he had heard
of it other than the mechanical service calls. That one
year warranty is up December 31, 2015, so two weeks; but
having said that, he said they would honor an extension of
that and they would get in here and take care of whatever
needs to be done. In response to a follow-up question by
Senate President Meyer, Mr. Pfeffer said that he thought it
was possible to better sound proof the Auditorium.
REPRESENTATIVE MILLETT asked Mr. Pfeffer that when the
Auditorium was built and the other conference rooms were
built, was sound-proofing part of the specs he had.
MR. PFEFFER said that in the specifications that they
prepared with the Legislature's consultants, there were STC
ratings - Sound Transfer Coefficient ratings. He said he
knows all the walls and ceilings meet and exceed STC
ratings for these kinds of rooms. Where he thought it fell
apart was with the glass doors and with the crack between
the doors. In terms of everything else, he thought it was
all workable. He said they would take a look at the glass
doors because any time there is a crack, there's going to
be sound through that crack. In response to a follow-up
question from Representative Millett, Mr. Pfeffer said the
Auditorium wasn't supposed to be sound-proof, it was
supposed to be a room with the right STC ratings, which
doesn't mean sound-proof. To get it sound-proof, the doors
would need to be replaced.
REPRESENTATIVE JOHNSON said that just for the record his
new window in his office in Juneau actually leaked and had
to be fixed, so that window is considerably newer than
anything in this building and it was leaking.
CHAIR STEVENS thanked Mr. Pfeffer for taking the time to be
here today.
REPRESENTATIVE JOHNSON asked if Mr. Pfeffer would be able
to please stick around in case there were additional
questions. Mr. Pfeffer indicated he would be available.
CHAIR STEVENS asked Ms. Varni and Mr. Gardner to return to
the testifier's table. He asked if there was any response
to what had been discussed in the previous testimony. He
said he would be particularly interested in information
about exercising the right to termination or anything else
they would care to speak to.
DOUG GARDNER, Director of Legal Services, said that he has
discussed the termination clause language with Legislative
Council on a number of occasions and it's all been within
executive session. He said that present in the audience was
Mr. Jim Gottstein, an opponent of the Legislature in some
litigation, so he said he would tailor his comments with
that in mind.
CHAIR STEVENS said that if Mr. Gardner thought Council
needed to enter into an executive session because of legal
issues, to please advise him. As much as possible he wanted
to be on the record since this has gone on forever and it
could go on forevermore; because members don't come to some
meetings and when they do come, they have more questions,
and this could just extend for the next 10 years as it has
extended for the last 10 years.
MR. GARDNER said he would respond in a way that he thought
was appropriate. The lease is public and mentions the right
to termination on a number of occasions. He said he agreed
with Mr. Pfeffer on a couple of points, one is that the
Legislature does have the right to exercise the clause;
it's in the lease, and it's in the lease in multiple
places, not in some hidden fine print at the bottom. It has
to be in the lease, as Mr. Pfeffer observed, it's in all
the leases that the State has. It's there because future
legislatures cannot be bound and it's there because long
term state debt cannot be contracted. It's a vehicle that
allows termination for an appropriation decision; and this
is a quintessential appropriation discussion. The question
is does the Legislature have the money to remain at its
current Anchorage location because of changed
circumstances. He said he didn't want to comment on whether
it creates an issue with the State's credit rating or how
it may affect other leases; those are policy decisions that
the Council needs to make. He said the Legislature has the
right to terminate the lease for non-appropriation. He said
that as Council works through this, ultimately, if a court
were to evaluate that, a court would find that the
Legislature has that right to do that. He said he
recognized that with Mr. Pfeffer, that's a painful process
and one that likely would be avoided if possible, but it is
a right the Legislature has nonetheless.
Mr. Gardner said his purpose at being at the table today
was to follow on from Ms. Varni's presentation that went
back over the cash flow analysis that's been presented to
Council before. At the last Council meeting, several
members asked questions about the scenarios that were
presented and they wanted an update on net present value,
some issues related to discount rates and inflation. As
Council is aware, there is a contract with Serena Carlsen,
who is a partner with Stoel Rives in Seattle and is online
today. Stoel Rives Anchorage represents the Legislature in
litigation with Mr. Gottstein. He said also available for
questions is Peter Shorett, who he hired to both appraise
the Anchorage LIO and to provide Council with a financial
analysis that members have in front of them. Those are the
scenarios that say "Scenario Analysis for Legislative
Affairs Building" with a turquoise heading at the top. He
said he would like to try to efficiently ask a series of
questions to Peter Shorett and, where appropriate, Ms.
Carlsen, and go through these scenarios and to facilitate
the conversation. He said one of the important things for
the public that is watching and for the members present in
evaluating this is to understand what the inputs are to
these models. Financing is all about inputs and some of the
assumptions that we've made, he's noticed, may be a little
different than some of the assumptions that Mr. Mitchell
may talk about and that is probably a result of different
availability to information.
CHAIR STEVENS noted for Council members that there are two
documents Mr. Gardner will be referring to in his
discussion with Peter Shorett, one at 5% discount rate and
one at 8.25% discount rate.
MR. GARDNER said he was going to pick the 8.5 percent
discount as most of the remaining variables remain the
same, so once members understand the first spreadsheet,
it's simple to see what the difference in the 5 percent
discount rate is to evaluate the second one.
Mr. Gardner confirmed that Mr. Shorett worked at and was a
partner in Kidder Matthews in Seattle. He confirmed that
Mr. Shorett has been qualified as an expert in court before
on matters related to real estate appraisal and the topics
that he will address this morning. He confirmed that Mr.
Shorett had been listening to the discussion today and that
Mr. Shorett was familiar with the numbers that Ms. Varni
worked through, which Mr. Gardner described as the cash
flow approach to looking at how to buy or otherwise
continue to lease the 716 W 4th Avenue building. He
confirmed that he had hired Mr. Shorett to do an appraisal
of the building to help understand options to be used by
Legislative Council to either purchase the building or
address the financing of it.
Mr. Gardner confirmed that Mr. Shorett had the Scenario
Analysis for Legislative Affairs Building with the note in
the left that all scenario variables are at 8.25 percent.
He asked Mr. Shorett to discuss what is a discount rate and
why did he use 8.25 percent.
MR. SHORETT said that a discount rate is a rate of return
that an investor would expect on a real estate investment.
It factors the time value of money, which basically is the
theory that the value of money you have now is greater than
the promise to reach or receive the same amount of money in
the future. He said it's a rate that's used to basically
convert the defined cash flow into a value. He confirmed
that, per Mr. Gardner's comment, he assumed for purposes of
both models that there would be a 3 percent annual increase
in operating expenses. He confirmed, in response to a
question by Mr. Gardner, that the models are based on a
purchase price of $37,950,000; he agreed to Mr. Gardner's
assertion that the price, which the owner had just reduced
to $36 million, was based on an original purchase price of
$37 million plus the prepayment penalty of $950,000.
Mr. Shorett, in response to a question by Mr. Gardner, said
he would explain the term "reversion price" in the context
of the analysis he did. The analysis he performed based on
the direction from Mr. Gardner in terms of various
assumptions is modeling a cash flow, and in looking at the
present value of that cash flow over a 10 year period. The
"reversion" is a word that is used to describe the sale
event of a property at the end of a hold. In other words,
most sophisticated investors that use discounted cash flow
analysis, which is what is being done here, that make
projections for rent, etc.; and then, at the end of that 10
year analysis, they assume that they will sell the
property. The investors initially put the money out as a
cash out flow and then, in turn, the property sells. It is
the future event of the sale of the property at the end of
the tenth year.
MR. GARDNER confirmed with Mr. Shorett that, in reference
to Scenario #3 - purchasing with Certificates of
Participation - that number, when compared to moving to the
Atwood Building, those costs begin to look like there might
be an advantage potentially to purchase the building, the
closer those numbers come together. He confirmed with Mr.
Shorett that the assumption on the purchase versus the
moving to Atwood is a way of looking at this transaction
but part of that analysis and that number means the
Legislature sells the building at the end of 10 years. He
confirmed with Mr. Shorett that if you go through the
analysis with net present value, but the Legislature does
not sell the building at the end of 10 years, then it's
really costing the price noted in Mr. Shorett's scenario,
in this case $14,300,000, plus the amount of the value of
the building at the end of the 10 year period. In response
to a request for clarification by Mr. Shorett, Mr. Gardner
said the assumption is that state governments don't tend to
acquire buildings and then sell them in a short time
period, they tend to occupy or own buildings for the long-
term. Given that assumption, Mr. Shorett agreed that the
value would go up if that were the case, as described by
Mr. Gardner.
MS. CARLSEN, Partner at Stoel Rives, LLC, interrupted to
say that under these assumptions, the cost would go up but
the value would be in the asset of the building rather than
the cash from the building.
MR. GARDNER said that was a good point and that at the end
of a Certificate of Participation process, if from a cash
flow standpoint, you want to get to that number of
$14,300,000, the building needs to be liquidated. If the
belief is that the building is an asset and the Legislative
Council wants to have that asset instead of money in the
bank, then the comparison that's closer to moving to the
Atwood, it makes this process more competitive. If the
Legislature doesn't sell the building and the primary
concern is purely cash flow, then it isn't as competitive.
MS. CARLSEN said that was correct and added that you would
have to remember that you do still have the value of the
building and you can sell it. She said the second point is
that this scenario shows the value of the building in a
general market scenario rather than as a specialized
building.
MR. GARDNER directed to Mr. Shorett that if the assumption
that was discussed earlier on the reversion price, in other
words if the amount that you get for the building at the
end of 10 years, if it is just viewed as an asset on the
books or if it is sold, the higher that number goes, the
more competitive the purchase is with moving to Atwood. Mr.
Gardner reframed his statement to say that Mr. Shorett had
appraised the building without the lease and without the
lease, the building is perhaps worth less than with the
Legislature's lease.
MR. SHORETT confirmed that was so and offered the following
explanation. The reversion price represents the value of
the property that he estimated in July 2015. That appraised
value was $20 million. That appraised value assumed that
the State would not be in the building but that there would
be a market rent paying tenant, not the rent that the
Legislature is currently paying. To further address this
issue, he said that if that reversion value were higher,
there would be more asset value and the occupancy cost
would become more in line with moving to the Atwood
Building.
MR. GARDNER asked Mr. Shorett if there was an argument to
be made that the reversion price that he had assigned to
the building at the end of the 10 years may be a little on
the conservative side; that the Legislature may actually
have a more valuable asset at the end of the 10 years. He
said perhaps that is a judgment call.
MR. SHORETT said no, it was not a judgment call. There was
an answer to that and the answer was that there is value to
the State because the building suits their needs, but there
probably isn't value to too many other tenants in that
market. The State has to look at their real estate a little
bit differently than the market might because of the more
unique requirements in how the space is laid out.
MR. GARDNER asked if the issue was for a higher value of a
building like this. He said there are a lot of public
spaces, a lot of large meeting rooms in this building; was
the consideration to purchase a building like this that
this kind of building might be worth more to the State than
it might be to a private party. In other words, a business
might not want to pay as much to be in here, but the
Legislature asked for improvements and, ultimately, the
building is more suited for a public use than it might be
for a private space. He asked if this was a problem that
municipalities and states have to deal with in terms of
valuing an asset.
MR. SHORETT said it was not uncommon that there's a special
purpose-type use building like the Legislature has. He said
he described it as special purpose because of the
Auditorium for example; that's not a common type of
improvement for even a lot of other state buildings. The
large lobby area is another atypical improvement but it
suits the needs of the Legislature, so there's value to the
State for those improvements. He said it's not uncommon for
other agencies and the like to have a value premium to do
their business, so it's kind of the cost of doing business.
SPEAKER CHENAULT asked Mr. Shorett if a tenant-occupied
building would have the opportunity for a higher purchase
price than a building that was sitting vacant.
MR. GARDNER, in response to Mr. Shorett's not understanding
the Speaker's question, attempted to clarify. He said Mr.
Shorett valued the building at $20 million but if there
were tenants in the building, that amount would certainly
be higher and asked Mr. Shorett if that was correct.
Speaker Chenault agreed and added if the building was
occupied or unoccupied, would that make a difference in the
reversion price.
MR. SHORETT said it would make a difference and his
appraisal was based on the assumption that the building
would be occupied by a market rent paying tenant. He said
he believed he assigned a rent value to the property of
$3.50 per square foot. If it was not occupied, it would
probably have a lower value because of the need to lease
the space, so there would be lost income and tenant
improvement requirements, and the like.
MR. GARDNER said he'd like to close by requesting a summary
from Mr. Shorett. He said Mr. Shorett knew that Legislative
Council was looking closely at possibly moving to Atwood
versus perhaps financing a purchase of this building and
let's get down to the crux of it. He asked Mr. Shorett
about the pros and cons of moving to the Atwood Building
from both a cash flow standpoint and a purchase standpoint,
and what are the pros and cons based on his analysis of
purchasing the building with Scenario #3 and Certificates
of Participation.
MR. SHORETT said he hadn't been prepped on this and would
try to be as succinct as he could. He said he had been to
the Atwood Building but had not seen the space the
Legislature is considering. He said he would have to make
the assumption that the comparison would be apples-to-
apples with regard to how nice the space was; the space
that the Legislature is currently in is very nice space. He
said he can't imagine the Atwood is going to be quite as
nice as that. He said that two scenarios were run - 5A and
5B. 5A was looking at 30,000 square feet that was on the
table as being needed by the Legislature; and we also
looked at it as though it was the same square footage of
what of the current space. There is not a huge difference
between those two numbers - $8.5 million and maybe $11
million, so a couple of million dollars difference. He said
he heard the discussion about parking and there was better
parking at the current location. He said at the end of the
day it is clearly a lower cost to move to the Atwood
Building than to stay at 716 W. 4th Avenue under the
current lease. The numbers don't actually reflect what
exactly is happening because the scenarios are for 10 years
and the Legislature has already burned one year off the
lease. If you look at the cost of staying in 716 W. 4th
Avenue, it is very significant, it's $27 million, under the
current contract. It appears that the financing options are
very attractive, but there is a downside to financing
although he was surprised at how close the numbers were. He
said there are three main components of expenses or cash
outflow. One is the debt service, the second is the
operating cost, and the last is the purchase price and then
the sale of the property. The Legislature has the ability
to borrow at such a low rate that it makes borrowing
extremely attractive. He said that the problem is that with
a purchase price of $37.9 million and the Legislature only
receives a reversionary benefit at the end of something
that is considerably less, then the Legislature will incur
a loss. One of the things that this covers up, the purchase
with fixed rate bonds or certificates of participation, is
the deferral of that loss for 10 years; and that has to do
with the time value of money. He said, in other words,
instead of incurring that loss now and writing a check for
$37.9 million, the Legislature is deferring that.
VICE CHAIR HERRON said to Mr. Gardner, just for
clarification, let's return to September 19, 2013, letter
that Ms. Varni signed, and that he assumed Mr. Gardner
prepared, that's certifying that the appraisal that we had
was the value at that time.
MR. GARDNER said that was correct. That letter was based
wholly on the appraisal done by Tim Lowe that AHFC worked
through. That's a number that was delivered to both he and
Ms. Varni; and they asked Mr. Lowe a number of brief
questions before they worked through the September 19,
2013, letter. He said the issue with this appraisal is
that's the value of the building with the Legislature
occupying it with a fairly robust lease for a public space.
That is not necessarily the same as the valuations that Mr.
Shorett's talking about. The letter is accurate and he
doesn't have a reason to believe the Lowe appraisal isn't
accurate, but the appraisal views the building with the
Legislature leasing it; if we leave, then there are
different numbers that have to be addressed. The amount
that someone would pay to lease it would be a market rate;
we have a rate that includes the improvements that we asked
Mr. Pfeffer to put in. He said he respected Mr. Pfeffer, he
worked with him a lot and Mr. Pfeffer did what he said he
was going to do. He built the building that Legislative
Council asked for, but as a public space, more expensive
than it would be as a law firm or a bank or something like
that. He asked Ms. Carlsen if she thought that was a fair
response to Vice Chair Herron's question.
MS. CARLSEN agreed that it was. Clearly, the building would
not have been built at the cost that was spent if the
Legislature was just going to go out and get a market rate
rent.
REPRESENTATIVE JOHNSON said he is still having trouble with
the apples-to-apples comparison on 10 years. If we own the
building, it's a 40 year building, why aren't we amortizing
it over 40 years instead of 10; what did that do to the
numbers. He directed a question to Mr. Shorett about
whether he had ever done something like this on a 10 year
basis; is 10 years standard or is it longer term.
MR. SHORETT said that was a very good question. He said
this was the term he was asked to consider; however, he did
look at longer term financing and the relationship between
the numbers don't change considerably. Obviously, the
numbers go up is what happens. At the end of the day, the
Legislature is buying a $30+ million building and the value
has to be realized over a period of time. This is a little
bit different scenario because it's an occupancy cost
analysis, it's not an appraisal of the property.
MS. CARLSEN interrupted to say she just wanted to make it
clear that Mr. Shorett did use a 20 year amortization
period in the scenarios before Council. While the cost are
looked at in a 10 year period, which was chosen because the
lease was for a 10 year period; but the amortization of the
building has been done on 20 years, which is a market-based
look at amortizing a building.
CHAIR STEVENS said as Council will recall, we have
scenarios for a 20 year period and the 10 year scenarios
were used because the lease was for 10 years, allowing for
an apples-to-apples comparison.
REPRESENTATIVE JOHNSON said he wasn't sure he agreed with
that statement. He said that comparing a 10 year lease with
a 10 year purchase isn't even in the same vegetable group,
much less apples-to-apples. He said we are really talking
about cash flow in a time when we don't have a lot of cash,
so in terms of cash flow and the price per square foot, to
do a 10 year comparison with a 30 year comparison doesn't
make sense. For example, a cost per square foot of $7.41,
if taken over 30 years, the cost of the building is paid
for and after that it's the cost of maintenance and upkeep,
so that needs to be figured on that cost per square foot if
we're going to have a legitimate conversation about cost.
He said in the 20, 30, and 40 year scenarios when the
Legislature is paying $1.70 or $1.60 per square foot,
what's that going to look like. If Legislative Council in
30 years is looking at this and saying we're paying $1.70
per square foot and you look around, that's going to be a
pretty sweetheart deal. He said he thinks we need to look
at cash flow and he doesn't think anything in here does
that. Hopefully with Deven Mitchell and AIDEA, maybe
there's an opportunity to look at those numbers and we can
compare strawberries-to-apples, which is what he thinks
needs to be done.
MR. GARDNER asked if Mr. Shorett could respond to
Representative Johnson's point. He asked Mr. Shorett what
is the impact, to the extent he knows, on cash flow over
time. If the building is purchased over a 30 year period,
what do the Legislators have to confront then each year in
their budget from a cash flow standpoint.
MR. SHORETT confirmed that all the attachments to his
spreadsheets were handed out to Council. He said that his
answer is that if members look at each of those sheets,
then for leasing, staying in the 716 W. 4th Avenue building
is $4,032,000 annually. In the second scenario, it's $1.26
million; third is $2.5 million, and you can see the numbers
are there.
MR. GARDNER clarified that he believes Representative
Johnson's concern is have we analyzed what a cash flow
would look like if we purchased this building over a longer
period of time and what does that do to the annual total
cost from a cash flow perspective.
MR. SHORETT said that the longer you stretch out a loan,
the lower the debt payments are. Your operating costs are
consistent. It really depends upon the assumptions that are
used. He said he didn't know what vehicles would be used
for financing. If it was bond financing, you're paying it
back in a lump sum. If it was Certificates of Participation
financing, you're paying principle and interest. He said he
didn't know how long those debt loads could be carried.
MS. CARLSEN asked if it was fair to say that it would
depend on over what period of time do you want to pay the
purchase price. Once you've paid the purchase price,
obviously the cash flow price goes way down because it is
just operating expenses at that point. It goes back to the
discussion about deferring when the purchase price is
actually paid. There was a short discussion between Ms.
Carlsen and Mr. Shorett clarifying the details. Ms. Carlsen
then said that if the debt payment was stretched over a
longer period of time, there is more interest, but the
actual out of pocket every year goes down.
REPRESENTATIVE JOHNSON said that under any of the scenarios
where the Legislature purchases the building, in year 2036,
we would only be paying $525,000 per year adjusted for
inflation to be in this building. In year 2036, we would be
paying under $1 per square foot and is that or is it not a
good deal.
MS. CARLSEN said in some ways it's the situation being
faced in the Atwood Building right now because that
building is paid for. So all you have is the operating
expenses.
MR. GARDNER asked if, ultimately, under any of the purchase
scenarios, the Legislature would have the value of the
asset. If the Legislature sold it, there would be cash in
the pocket; if they valued the asset on the State's balance
sheet as the building as it is right now, that asset would
be owned by the State. Under any of the purchase scenarios,
the cash outlay would have to occur each year to make the
purchase, so there would be a cash flow on the purchase, so
you realize the gain at the end. It is either sold or it is
an asset on the balance sheet. Ms. Carlsen agreed. Mr.
Gardner repeated that each year, the Legislature would need
to appropriate the sufficient amount to purchase it, which
is in Mr. Shorett's analysis.
MS. CARLSEN said that was correct and it just depended upon
how the purchase was financed. That number changes based on
how it was financed and over what period of time.
MR. GARDNER said that Representative Johnson's point was
that once the building was paid for, then you start reaping
the kind of savings that are consistent with the Atwood
Building. Ms. Carlsen agreed.
SENATOR MICCICHE said he felt that we were softening the
value of ownership of the asset. Someone made the statement
earlier that we do have the value in the building and we
can sell it if we were to purchase this building. He said
he noticed the ownership value remains at $37,950,000 and
that there is no escalation in that value over a 20 or 30
year note period. He asked how would escalation in value be
applied and assume a reduced long-term per square footage
cost. He further asked how that would be applied in
understanding which is the right way to go at a lowest cost
per square foot basis.
Discussion followed between Mr. Gardner and Senator
Micciche in an attempt to clarify Senator Micciche's
question.
SENATOR MICCICHE said he wanted to know how to capture the
inflation in the value of an asset as they make this
analysis considering we'd be holding a real asset as a
state that could be sold. There's no ownership value in the
Atwood since it is already owned. There would be a
substantial ownership value somewhere above $37,950,000 at
the end of a financing term, whether that be 20 or 30
years.
MR. SHORETT said it really depends upon the assumptions
that are made. The assumptions that he has made, which are
reflected in the reversion price, is the $20 million
escalated at three percent a year. Most investors, when
they do a cash flow model, use three percent a year, it's a
very common escalator factor. Now, if you're looking at it
from an owner/investor prospective and you want to be in
the building, then you might use a different number than
$20 million. At the $37,950,000 price, you have a lot of
ground, a lot of years to make up to get to that number if
you use the $20 million figure. He said if you're assuming
that you're not in the building, than you have 25-30 years
before you get there. The other thing to factor and
recognize is that it's not going to be a new building
anymore. Right now, it's almost a brand new building,
subject to some renovation of the building; but the
condition and quality of the building will be considerably
less in 25-30 years than it is today.
MR. GARDNER said that in Mr. Shorett's appraisal, he also
looked at the replacement costs of the building. That is a
different value.
MR. SHORETT said that the building is so unique that he
looked at how much it would cost to recreate that building;
not rebuild it in the same site, but to find a similar
site, similar land, and recreate the building there. The
cost numbers when he added the cost to develop, provided a
reasonable developer's profit, before assigning any
depreciation to it, was somewhere around $35 million. When
he came to look at it from the prospective of the current
building, recognizing that it is not a new building and
that there are some dated components of the building; he
believed he took a 10 percent depreciation off and came up
with a lower number. That contrast what was actually paid
for the building, or reported to be paid, of $44.5 million
and the big difference there is that they were working
around an existing building as opposed to starting fresh
from scratch.
MR. GARDNER said if you used that number as a reversion
value, if you can do so, what does that do to giving weight
to the ownership of the asset at the end in terms of making
this more attractive from a purchase standpoint.
MR. SHORETT said it raises it considerably. It brings the
value of the property, assuming that it's going to be
reverting back to you, to a price point that is more
consistent to the price that you are actually paying. So if
he were to put in the price that you were actually going to
pay into the reversion, the cost of ownership goes down
considerably and the cost of ownership then is just the
cost of financing.
SENATOR MICCICHE said that was the answer he was looking
for. He does think there is real value in ownership, not
saying that's the way he is going, but he does think it's
something Council has to carefully understand before they
make the decision.
REPRESENTATIVE KITO said he thought we might be talking a
little too far ahead of ourselves. The people of Alaska do
own the Atwood Building. It may not be the Legislature but
it is the Administration. In this time when we're asking
everybody to tighten their belts, it's not well-advised for
the Legislature to be looking at buying a new building when
we can get past that purchase price already in the Atwood
and pay basically the operating costs, post-purchase, for
space in that building. We avoid the expenditure of the $37
million for the State of Alaska and we're in a situation
where we are just paying for the operating costs.
REPRESENTATIVE MILLETT asked how much money has been spent
to renovate the Capitol Building in Juneau. She asked if we
should we stop that renovation too because we're broke.
MS. VARNI said that money is already set aside, it is
encumbered. It is a four year project for a total of $33
million. The building needed new windows; to change from
the steam heat; there were lots of problems with pieces of
brick and cement falling from the building. The Legislature
owns that building and we need to maintain that building.
This committee approved that project, which is going very
well and is on time and on budget. It's something that will
last us another 80 or 100 years.
CHAIR STEVENS, in response to Representative Millett's
request for a follow-up, said he thought Council was
getting too far afield and didn't know what the Capitol
Building had to do with this discussion. He allowed
Representative Millett to ask her question.
REPRESENTATIVE MILLETT said her question was in response to
Representative Kito's comparison that we're spending money
and she said we're spending lots of money in Juneau. The
operating costs alone, she can't imagine the heat bill. So,
if we're going to tighten our belts, we should really
tighten our belts and start thinking about things that
aren't necessary.
MS. VARNI said the Capitol Building Renovation and Retrofit
was necessary. It was a project that needed to be done and
the Legislature needs to maintain its buildings. Going back
to the maintenance on the 716 W 4th Avenue building, she
said that Mr. Pfeffer and his staff have been very
responsive. The items that she listed were just to let
people know that there is substantiation for having a
building manager for this building if Council decided to
purchase it, because the number of maintenance problems are
ongoing. Unlike other property management companies that
the Agency has had to deal with in the past 20+ years the
Legislature has had offices in this building, Mr. Pfeffer
and his staff respond quickly and it has been outstanding.
SENATOR MICCICHE said he normally doesn't do this but he's
going to. He said he's not sure he appreciates someone
advising him on what to ask. He said he has a deal with his
constituents and that his vote on operating this government
is going to be on the lowest cost per square foot that he
can possibly find. In order to do that, he needs to
understand all the aspects, not just with surface factors,
but to look deeply into what the value of this decision is
in the long-term. He said he's going to ask every question
associated with that so that he makes the right decision.
He just wanted to make sure that when we're talking to the
people of Alaska, he thinks he has a record that proves
that's the way he's going to go, but he wants to make sure
he has the right information. He appreciated the Chair
giving him the opportunity to state that.
REPRESENTATIVE JOHNSON said he wanted to go back to the
value of this building in the future. He asked if Mr.
Shorett had any idea what the Atwood Building is worth
today. In response to Mr. Shorett saying he had not given
that a thought, Representative Johnson said that he wanted
to point out that the State paid $18 million. He then asked
if Mr. Shorett would agree that the Atwood Building is
worth considerably more than that today.
MR. SHORETT said he was not trying to avoid the question,
but he really had no idea. In order to answer that
question, he would need to spend a little time.
CHAIR STEVENS said Mr. Shorett was not asked to evaluate
the Atwood Building.
REPRESENTATIVE JOHNSON said his point was that we bought it
for $18 million and it is worth considerably more than that
now. It's a building the State has owned for 15-20 years.
He wondered what this building was going to be worth in 20
years; maybe nothing if our economy continues to go down.
That's the point of reference that he'd like to look at as
opposed to two percent evaluation over a 30 year period
divided by the sum of the square of the earth.
MR. GARDNER said he had no further questions for Mr.
Shorett. His goal was to facilitate the discussion and to
ensure that some of the questions that have been asked at
previous meetings were answered today.
MR. SHORETT said he wished Council luck, he knows it is not
an easy decision and if he can be of any help, please let
him know. He agreed to stay online in case further
questions arose.
SENATOR MACKINNON said the only thing that hasn't been
brought out that was discussed at the previous meeting is
that there is revenue that the current facility is
generating that hasn't been used in any of the calculations
put before the Legislature. Apparently there are some
antenna rentals on the top of the building, as well as some
minimal income coming from the existing parking structure.
She wanted to make sure that as Council looks at the
analysis on all of the components comparing the advantages
and disadvantages to moving or continuing the current lease
that there is a revenue structure in this current lease; as
there could be at the Atwood Building if we utilized less
space than what is there today. She put that forth for
consideration for those who may not have been at that
earlier meeting.
CHAIR STEVENS, with agreement from Ms. Varni, said that the
next step was to hear from Deven Mitchell with the
Department of Revenue about his projections.
DEVEN MITCHELL, via teleconference, said he hadn't planned
to make any comments. He did, at the request of
Representative Johnson, put together a somewhat simplified
analysis of some different cash flows related to the
potential decisions before the committee. He said he
understood that analysis had been distributed to the
Council. He said he agreed with Mr. Shorett and the
declarations he's made about the present value
calculations. He said he was not an expert on real estate
pricing and Mr. Shorett's expertise should be valued in
that arena. He used a discount rate of five percent. He
said he wasn't necessarily looking at it like Mr. Shorett
would have. He was maybe looking at the expected earnings
of the Permanent Fund or the Retirement Trust or the CBRF,
other places that if money is spent in the future, where it
might reside and where it might be invested in the interim
time frame for purposes of establishing a discount rate and
that's how he arrived at five percent. As far as the value
of the building, he just used a very simplistic assumption
that the building is worth the purchase price today or in
the future; meaning that you would anticipate that the
building would appreciate through time and if you bought it
for a price today, that's what it's worth and you could
turn around and sell it today presumably for the same
price.
Mr. Mitchell said it is a difficult analysis and that is
very apparent to everyone. There are two different things
on the table with the move to the Atwood Building versus
the options with 716 W 4th Avenue building currently
occupied. One of the components that maybe hasn't been
discussed as much as it could is the move to the Atwood
Building is what otherwise is going to happen to that
30,000 square feet in the Atwood Building if the
Legislature doesn't move in. Is there an opportunity cost,
is there going to be less expensive or folks that don't
need the same quality of space or don't need to be located
downtown that are going to be placed in that space as an
alternative to the Legislature. He said there is some
additional analysis that could happen on that side to
determine what the true opportunity cost of moving into the
Atwood Building might be. As far as the alternatives
related to the Anchorage LIO Building, from his
perspective, the alternatives seem to suggest that
purchasing the building is going to be better than
maintaining the status quo with the lease arrangements that
the Legislature's currently in. This analysis has the same
deficiency that Mr. Shorett pointed out, that it is a 10
year analysis when one year has already expired from that
10 year period, so it is off in the same fashion that Mr.
Shorett discussed. He said that was really the extent of
the comments he might make associated with that analysis.
Mr. Mitchell said he was here before the committee as the
State's debt manager, not as the Alaska Municipal Bond
Bank's executive director. With that in mind, there's been
discussion about the potential of a failure to appropriate
for this lease, resulting in a downgrade of the State's
credit. This State's credit is somewhat tenuous at this
point. We have negative outlooks from Moody's that was put
in place in December 2015; we have negative outlooks from
Standard and Poor's that was put in place in August 2015;
and by definition those outlooks imply that there's going
to be 30% chance of a ratings change within the following
12-18 months. There's already stress on the State's credit
rating; as has been discussed, there is a prohibition in
the constitution on dedicating revenue which results in the
subject to appropriation clause in lots of different
contracts, including this one. This lease wasn't a secured
type lease of the State of Alaska like the Atwood Building
was when it was purchased. It doesn't carry a rating based
on the State of Alaska's balance sheet but it would, as Mr.
Pfeffer mentioned earlier, send a negative message to the
banking community as well as the underwriting community. In
the national market right now, there is some stress on
subject to appropriation type credits that are out there
due to issuers like Puerto Rico and Detroit, Michigan, not
paying on those types of obligations. So, if the State of
Alaska, with some of the negative news that you see, both
locally and nationally, related to the low price of oil and
the correlated reduction in state revenue, if we start not
paying on obligations, it's just going to be one more
negative story for potential investors to consider or our
credit analysts to take into consideration when they're
reviewing how to evaluate our credit, which is essentially
the investors' trust that we're going to repay the
obligations that we say we are. Mr. Mitchell ended his
testimony and made himself available for questions.
REPRESENTATIVE JOHNSON thanked Mr. Mitchell for being
available on a Saturday. He said that when he looks at the
scenarios from LAA, specifically Scenario #4 to purchase,
he sees a square footage of 53,479 and he noticed that Mr.
Mitchell used 45,371 square feet. If Mr. Mitchell was to
use the same square footage number as Scenario #4, that
would basically lower the per square foot cost. Mr.
Mitchell agreed. Representative Johnson asked for an
updated calculation based on using 53,479. Mr. Mitchell
said that in the 30 year appropriation from general funds
option, it drops it to $2.79 per square foot.
There was no further questions for Mr. Mitchell.
CHAIR STEVENS said Council would move on to the material
and testimony from Mark Davis with AIDEA.
11:02:14 AM
MARK DAVIS, Chief Infrastructure Officer for the Alaska
Industrial Development Export Authority (AIDEA), said that
the working assumption AIDEA had was quite different from
anything heard this morning. He said their assumption was
Council might not want to continue with the lease, and
therefore would be interested in a purchase. AIDEA is a
finance organization, so we only operate on the basis of
purchasing an asset. AIDEA owns assets throughout the
state. Examples would be the FEDEX hangar at the airport;
the risk there was that land was owned by the Department of
Transportation, purpose-built building for FEDEX but they
were comfortable with that and it's worked out. AIDEA also
built the US Coast Guard Headquarters at JBER; that on a
Department of Defense license which creates risk. They have
a right to take it back in a time of warfare. The Coast
Guard then pays the Department of Military Affairs and then
the DMA pays AIDEA and there's risk that the Coast Guard
may not have an appropriation from the federal government
and there's risk that the Department of Military Affairs
may not have appropriated money to pay AIDEA. He said
they've worked through these kind of transactions in
various things they've done.
Mr. Davis said the numbers before Council reflect a
purchase/loan price of $43 million which was in the report
and that includes a maintenance figure. It results in a
figure of about $2.3 million per year. Using the
purchase/loan price of $37 million which was based on a
press report of what the developer might be willing to
take, the figure comes out to about $1.9 million per year.
He said the testimony this morning was that the building
might be for sale for less than that and so that was
another possibility.
Mr. Davis said he didn't have many facts prior to attending
this meeting, but now that he does, he said a scenario
could probably be developed for purchase that would deal
with the different tranches of finance. That is, there is a
note on this building that is $28 million; that note is
essentially equal to the capital expense lease valuation of
the building. If a 35 percent assumption of cost was run in
the amount of the lease agreed to by the Legislature, the
value of the building would be approximately $28 million.
He said it looks like the mortgage company probably did
that analysis. He said there was also testimony that there
were construction loans that were taken out by EverBank;
typically those construction loans will have construction
loan analysis appraisals and he hasn't seen those so he
doesn't know what they came up with. When AIDEA looks at a
project, they like to dig up all the information. There is
a process - there is a suitability committee that they take
a project to and the committee has to decide that AIDEA can
make a rate of return. Then there's a loan committee that
changes depending on what division is doing the project. He
said it could be structured in a number of ways. It could
be structured at a purchase price of $28 million for
example, that would take out the note, then there would be
the issue with the developer of how to pay the residual
amount which sounds like it is between $8 million and $9
million. He said they ran it by some of their consultants
and financial advisors, probably the least expensive way to
purchase this building would be for AIDEA to be the owner
and then it would be an asset. AIDEA is very interested in
the residual value of things it finances, so that if AIDEA
owned it, we would definitely run it out for 30 years. He
said he ran that lease by their internal committee and they
see no reason to finance a 40 year building for less than
30, which is the way they can get the best cost of money
and the best return. The nominal annual rate he used of
4.11 percent came from looking at figures from one of their
underwriters, Goldman Sachs. The actual bond rates now are
floating between 3.5 and 3.87 percent. As Mr. Shorett said
very correctly, every investor is going to want an internal
rate of return and, as Council knows by statutes passed by
the Legislature, AIDEA has to make a rate of return, so
there's a little room for that. He said, of course, AIDEA
will give some of that back via a dividend, which makes
them a little unique; it will be over time, it won't be
fast. It does actually reduce the costs over time.
Mr. Davis said in response to an earlier point made by
Senator Meyer, if AIDEA did buy this building, and this
would have to be checked with their counsel, it would
probably take the building off the tax rolls, which has
been the situation with other AIDEA properties. He said
there is an exemption from taxation in the AIDEA statutes
although it can vary on the type of project. That doesn't
preclude a PILT; they have a PILT on the Ketchikan
Shipyard, for example. He said that what could be done if
the Legislature wanted to save money, a private placement
through AIDEA does not need legislative approval. If AIDEA
was interested, there would be their own internal process.
The AIDEA committees would have to vote that they're
interested in owning an asset like this; that it has a rate
of return risk analysis, although they are willing to take
appropriation risks as illustrated by the two examples he
mentioned. So, maximum flexibility is with a private
placement debt obligation. The Legislature could also do a
tax exempt financing with a private placement through a
bank. He said this building might also be susceptible to an
AIDEA loan participation depending on the valuation and the
appraisal. If it was broken into tranches of 28 and 8, then
one of those tranches would definitely qualify under
current statutes for loan participation by AIDEA, which is
currently capped at $25 million. The current interest rate
for that is about 4.16; that rate fluctuates with the
Federal Home Loan Bank of Seattle and that's by statute.
That is a transparent number that isn't picked out of the
sky, it comes out of an index.
Mr. Davis said municipal bonds could also be used, as Mr.
Mitchell has already gone very carefully through. There is
less payment flexibility with those. There are multiple
investors, higher issuance costs and an extended funding
cycle. On the other hand, financing terms could be longer.
Mr. Davis said Representative Johnson asked how come nobody
had run a 40 year scenario; he said that AIDEA internally
just briefly looked at going beyond 30, but this looks like
a 40 year building, so you're pushing the life of the
building up against the financing, so traditionally that is
not done. On the other hand, if the lease was the same as
the building then you can sometimes go longer. AIDEA ran 30
years thinking it's a 40 year building, with a 30 year term
and a 30 year lease, which is common in commercial
transactions; a 10 year residual value, which could be
substantial, given inflation, but they'd have to run the
numbers; and a change in location.
Mr. Davis said that the next issue is the cost to run it.
He said he'd seen a figure of $525,000 throughout the
figures, which strikes him from his experience as a former
transaction lawyer, that you've owned this building for
almost a year and we should be able to get actual hard
figures for the operating costs. He said if AIDEA was going
to look at it, what was actually paid for utilities, what
is being paid for maintenance. They'd need the actual
figures to run them through because that makes a big
difference. Then you'd have an escalator factor as the
building ages. That can be covered with a capital lease; it
can be covered with a "sink and reserve fund"; or it can be
covered with a capital reserve fund. He said there are
various ways to structure it.
Mr. Davis said all AIDEA was trying to do was give the
Legislature options on purchase. Legal structures can
change. This building could also be purchased by the
Department of Administration if that was a better way to
go. That would make it look more like the Atwood Building.
AIDEA could provide project financing for that type of
scenario. That might change some of the parameters and some
of the numbers, but then it could be managed under the
current system and that might be what you would like. If
AIDEA owns it, we would not have a project manager; we
would not hire someone because we already have building
managers under contract. That doesn't mean we can't do it
that way. If the Legislature likes it that way and it's an
important public policy to the Legislature, AIDEA could run
those numbers. They're not trying to give the Legislature
any advice on how to run buildings. He said the Legislature
could try other legal structures that might effect that
outcome of the figures and AIDEA hasn't done that. They
could; it would take a little time. It would probably mean
sitting down at length with the owners, which they've done
many times. AIDEA sometimes buys projects that the owners
want to sell. With Ketchikan Shipyard, AIDEA stepped in to
deal with issues of devolving federal grants that would not
be available if it was under private ownership. The legal
structures on how this was approached would affect the
overall financing. He said AIDEA didn't assume that the
Legislature wanted to keep the current deal. They assumed
that the Legislature would want to finance it using AIDEA's
capabilities to its fullest to result in the lowest
possible cost per month especially given the current fiscal
situation.
REPRESENTATIVE MILLETT asked Mr. Davis what would happen if
the Legislature does decide to get out of the lease and a
lawsuit ensues. She asked him if he could give any history
of any other type of lawsuits like this and what the type
of costs were incurred and if the State has prevailed on
them. She asked if Mr. Davis could give some of the
ramifications if the Legislature decides to move into the
Atwood Building and a lawsuit does result.
MR. DAVIS said that on behalf of AIDEA he really can't give
a legal opinion on litigation. As a citizen of the state,
he said that Representative Herron mentioned the Behrend's
Building in Juneau, which is one he is aware of as an
attorney. That was settled to his understanding. In the
commercial transactions he has been involved with, which
are not with an appropriation risk, there have often been
disputes and those can be resolved various ways, sometimes
in litigation, or by cancelling the deal and trying to
restructure it. Obviously, there are significant
transaction costs that could ensue.
REPRESENTATIVE MILLETT said maybe the lawsuit question is
better directed to Mr. Gardner. She then asked Mr. Davis if
this was something that AIDEA would be interested in
pursuing on its own without the Legislature's involvement
in it and leasing it back to the Legislature. Much like the
Atwood Building, government exists, and the Legislature
would obviously be a long-term tenant; AIDEA wouldn't have
to worry about who would occupy the building. She asked if
the Legislature could request that AIDEA do all the due
diligence of the process so they could at least have come
up with some of the other options so the Legislature is not
exposed to litigation and we can find a way that preserves
the State's bond and credit rating. She said she is looking
for solutions, especially because of the fiscal situation.
She said she wanted to be very prudent and make sure that
Legislative Council was doing what was best for the State
of Alaska. If we end up getting in a lawsuit and owe $20
million; we need to be fully aware of what we are doing.
She said she doesn't think they have gone deep enough and
looked at and reviewed all of the options to make a
decision today.
MR. DAVIS said that if the Legislative Council wanted AIDEA
to, we could take it to our committees. He said he is in
charge of what's called Unconventional Finance at AIDEA. An
example would be that they recently lent the Bond Bank some
money as they were a little short at the end of their
fundraising and they stepped in to do that. They also
recently did a loan for Alaska Pacific University, which
was not a typical loan because they have unplatted land, so
they had to take security against the entire University;
which is not typical in commercial lending. If there was a
request, he thought AIDEA would look at it. It's going to
take time, they would definitely have to talk to go through
the record, which they haven't done yet. They would
probably want to talk to the Legislature's counsel to see
what he has done previously and then they'd want to talk to
the developer.
SPEAKE CHENAULT thanked Mr. Davis for putting together the
numbers on short notice. He asked Mr. Davis to confirm that
the State of Alaska would actually finance a building built
on anyone else's property other than the State of Alaska.
MR. DAVIS confirmed that AIDEA has done that before. He
said that AIDEA financed JBER-U.S. Coast Guard; that was
through a legislative change and the Legislature let them
invest in what's called Federal Facilities. Once AIDEA had
that legislative change, they worked with the Department of
Defense; they have a license, which is essentially a lease
and then AIDEA did the transaction. They brought that
building in under budget from the estimates and it saved a
substantial number of jobs in the U.S. Coast Guard that
were perhaps going to move to Seattle. That was AIDEA's
emphasis in doing that. He said AIDEA assessed risk based
on how they think they are going to get paid, how much they
are going to get paid, and that one did involve
appropriation risk.
SPEAKER CHENAULT said he was actually being facetious; he
knows that the Legislature does it, the Alaska Railroad
does it and numerous other things. He said sometimes when
we talk about the history, as Mr. Pfeffer did earlier, he
remembers all those reasons why we're in this position that
we are today. Maybe it wasn't being built in the right
place; maybe it took the building off the tax rolls; maybe
it wasn't in the right part of town; maybe the building's
old. As we've heard today is all that we really did was
update this building, we're certainly doing that in other
parts of the state; our Capitol being one on a building
that was built in 1928. We're certainly putting a lot of
money into the Capitol. We might argue whether that is the
right expenditure of funds; we're going to argue about what
this building's worth or even maybe what the Capitol
Building is worth. Maybe if we would have bought this
building 20 years ago, maybe we would be remodeling it
today and owning an asset instead of talking about either
still leasing an asset or actually buying the asset. He
said there are lots of questions, lots of concerns and he
does appreciate the information the Mr. Davis brought up.
He liked the idea of it. He said he doesn't really have a
dog in this fight in all reality. He comes from Kenai and
while he has an office here, it's out of convenience, not
out of necessity. Anchorage's Legislators have needed for
years and have had a place in Anchorage to be able to meet
and have meetings and be able to do the work that they're
required to do. He represents nine communities in his
district. He has an LIO in his district and it's actually
120 miles from where he lives. There is an LIO in the next
district over. Anchorage is a big area. We did receive a
letter from a Senator and a Representative about having
individual offices in their district, in their community,
so they can talk to the people that live in their
community. He said he wouldn't even propose that he have
nine LIO's in his district so he can go to the people in
his area that he represents and be able to meet with them
for coffee every day or every other day. There are other
people sitting at this table who have a lot more
communities than he does in their districts, but we find
ways to get to those communities. He said this is a central
place. Anchorage is the biggest city in the state of
Alaska; there should be a place for out-of-town Legislators
to meet. We've had a gentleman that is a member of the
House that has been crucified over this building. He said
that what he can tell people is that it's not this
gentleman's fault. He said he would take as much or more
blame for this building because of the inactions of
Legislative Council. We have thrown this project under the
bus for the last 12 years that he has been on Legislative
Council. It's unfortunate that we actually have a lease, a
lease that we agreed to, that we've signed, and that we
knew the cost of before it was signed. We've had many
opportunities to buy; we've had many opportunities to
lease; but Council has always found a reason, whether that
was that we didn't want to take it off the tax rolls, or it
has to be downtown - we can't move to midtown or uptown.
Whether it was perceived as a threat whether we build a
building or we buy a building that's big enough, maybe
we'll move the Capitol out of Juneau or maybe we'll move
the Legislature out of Juneau, or maybe we will have
special sessions some place other than the Capitol. Maybe
we haven't done it because maybe we'll move the Capitol to
Willow or some other place in the state. There's always
been a reason, there's always been a catch. Unfortunately,
there have been many people thrown under the bus and he
told the Chair he may not probably be one of them but he
could be. He said he doesn't have the answer. He's been
looking for information; how could it be put together so
that it benefits all Alaskans and not just those in
Anchorage. Legislative Council has had to deal with this
for the last 10-12 years and we need to make a permanent
decision, not one that just gets us out of hot water with
the voters right now, but one that makes actual business
sense. He said in order to get to that point, we have to
have the information that we need and the options that are
available. He again thanked Mr. Davis for the work he and
his folks have done. He also thanked everyone else for the
opportunities that they've given Council. Even in these
sheets, he sees ulterior motives as to why those numbers
are how they are. He would never have looked at buying a
building of this magnitude on a 10 year loan and he can't
think of any other business that probably would have. Why
was that number picked, because it was the term of the
lease, he assumed. As Council continues to dig down through
this thing, they keep seeing new numbers that drive those
costs down for not only the Legislature but for the State
of Alaska. He said he does believe in owning, he doesn't
believe that leasing the majority of the time is of good
benefit for the State of Alaska. He thinks we ought to own
the assets. If we don't believe that we ought to own
assets, than why does that State own the LIO building in
Kenai and many, many other buildings around the state? If
there's an advantage to leasing, we ought to just be
leasing them all and just pay someone else. He said he
thought it behooved the Legislature to look at how we
invest our money and make those decisions wisely.
REPRESENTATIVE JOHNSON directed to Deven Mitchell asking
about exposure costs and whether Mr. Mitchell had any
insights into if the Legislature does exercise the option
of the lease, what the repercussions would be from a bond
aspect.
MR. MITCHELL said that failure to appropriate for this type
of lease wouldn't necessarily result in a rating action
against the State because it's not a securitization of a
subject to appropriation pledge that the State of Alaska
authorized by law or where the State's credit was actually
pledged. So there's a distinction there, but it would be
another negative story in a recent history of negative
stories about our state. He said we are talking about other
subject to appropriation pledge credits right now,
including pension obligation bonds, and future potential
undertakings for large infrastructure projects in the
state, that if you were an investor, you're going to say,
well, they started down a path of not paying when they said
they were going to pay. He said the investor understood it
was not the same obligation that the investor was buying,
but it would make them a little more hesitant to lend them
money because they can't be trusted as much as they were
the day before they didn't appropriate for that lease in
this circumstance; where you're at the beginning of a
lease, you have asked the developer to do something and
they've performed and provided a facility that was
requested and then we have an alternative that's less
expensive and, granted, the times are more difficult now,
but from the investor prospective, they're going to
potentially use that as a means from extracting more value
out of the state.
REPRESENTATIVE JOHNSON followed up to ask about Mr.
Mitchell's spreadsheet and asked if it was his building,
what would he do.
CHAIR STEVENS interrupted to allow Mr. Davis to leave the
testifier's table and thanked him for his time.
MR. MITCHELL responded that on his spreadsheets, the yellow
across the page has the present value of the cash flows.
For nominal cash flows, go to the bottom of the
spreadsheet. He said he didn't inflation proof operating
costs, he just used the same information that was in the
November 24 memorandum analysis, just flat numbers. For
example, the 10 year appropriation, the total cash flows,
which is the purchase plus the operating costs comes to a
nominal dollar cost of $43,200,000. If you present value
those cash flows of the future, which are really just the
operating cash flows, it diminishes to $42,488,799 that is
shown in the yellow box. The ownership value is assumed to
be $37,950,000 either today or the future value of that
$37,950,000. Even though that's a static amount, this
analysis assumes you're not discounting that $37 million,
you're in fact doing the opposite by leaving it static when
you're comparing it to otherwise present valued numbers.
The real cost would be the differential, so $4,538,799
would be today's cost of buying the building if you were
just looking at cash flows. A greater amount for the 20
year option at $8 million and then $11 million for the 30
year option. He said for the COP option, it's the same
thing essentially. Mr. Davis described different scenarios
under which AIDEA might be able to help facilitate the
financing of the building or AHFC might under a different
circumstance be able to finance the building. He said those
alternatives and the COP alternative are all, at the end of
the day, going to be fairly similar. The reason why in the
10 year scenario the real cost is actually negative is
because the cost to capital for the COP's is 1.94 percent
and the discount rate is 5 percent so on those future cash
flows you're going to make more money on the money being
retained than you're going to be paying on your annual
interest expense and that overcomes that and the operating
costs during that 10 year period. He said, theoretically,
if you could sell the building at the 10 year term for the
future value of the purchase price, you would be able to
save $1 million in real dollar cash flows, so you're
theoretically creating money in that scenario. The 20 year
option has more operating costs incorporated into it and
there's more interest expense as the financing is stretched
out for a longer period of time. Your annual cost goes down
and your present value cash flows go up and the real costs
go up over the value of the building, so if you sold it at
the 20 year period - and that same relationship holds true
for the 30 year analysis for the real costs goes up to
$3,168,000 - at some point, he said you reach equilibrium
where the annual operating costs, the increment of the cost
of the real property would be minimized by the number of
years in the analysis due to that annual operating expense
incorporation. He said for the lease options, the cash
flows are pretty self-explanatory. There's not an ownership
value at the end and so you just have the annual cash flows
present valued for the three lease options within the
current Anchorage LIO and then the three options within the
Atwood Building, and those have a correlated real cost
today.
Mr. Mitchell said in the first six columns, this was really
an attempt to do what Mr. Shorett was talking about as
well, incorporating some concept that if you buy a
building, if you buy an asset, well, there's a value to
that. This might not be the right value, it maybe should be
a different number. For the information he had, this was
the best number that he had to use. He said Council needed
to take that into consideration when you're considering
your cash flows because after you own the building, there's
going to be a benefit. Whether you sold it or whether you
had a diminished operating cost; and that's all relative to
staying in the LIO. The Atwood Building, as has been
pointed out, the final payment is in fiscal year 2017 on
the $40 million of bonds that were issued back in 1997 and
so, at this point, you're just paying the operating costs
and that's all that the $664,776 incorporates. So the
benefit of that purchase road is already being realized in
those three columns.
REPRESENTATIVE JOHNSON said it did answer his question. He
then asked Mr. Mitchell that in looking at the columns,
which is the best value for the State, in his opinion.
MR. MITCHELL said, of course, like everybody, he's going to
say it depends. He said you stay in the Anchorage LIO or
you don't and he doesn't know how you make staying in the
LIO versus you don't apples-to-apples because they are very
different options. He said if you're staying in the LIO, in
this environment, you would be considering the use of debt
and probably the 30 year debt option because you're going
to have the benefit of right out of the gate reducing the
annual cash flow by $1.4 million or thereabouts and so
you've got a reduction to the budget; you're going to own
the building at the term of the financing; and after that
you know you have an expectation of just paying operating
costs for some period of time and recognizing that there
will be maintenance at some point in the future. He said if
you're going to move into the Atwood Building, he said
there's a different analysis, although it's difficult to
compare the two. There's a different number of square feet,
he doesn't know what that space is otherwise going to
facilitate if it doesn't facilitate the Legislature; and he
doesn't know if that value is comparable to the Legislature
moving in there, if it's less or more. Once you start
saying what's the best choice, you're jumping across those
two different options. He said the lowest total cash flow
at this point, just in isolation, is of course going to be
the Atwood Building. Going across the bottom lines, you're
looking at the 10 year $10,147,000 in nominal dollars;
$16.8 million for the 20 year and $24.1 for the 30 year
option, with these assumptions that you just have static
operating costs and those are more than these other
alternatives but you don't own a building at the end.
SENATE PRESIDENT MEYER asked that Mr. Mitchell give his
title on the record for the general public and what he does
for the state.
MR. MITCHELL said he is the Debt Manager for the State of
Alaska and he is also the Executive Director for the Alaska
Municipal Bond Bank. As the Debt Manager, he works with the
State Bond Committee for issuance of State of Alaska
obligations, which would include general obligation bonds;
revenue bonds with the State including airport system
revenue bonds; Certificates of Participation of the State,
which are subject-to-appropriation lease transactions of
the State, as well as operating lease securitizations or
other special projects including working on things like the
pension obligation bond issuance that's contemplated. He
said he had been doing this since around 1997. As the Bond
Bank's Executive Director, he works with municipalities
around the state to issue debt to fund anything that
municipalities fund, from community buildings, ports,
harbors, schools, roads, airports, you name it.
SENATE PRESIDENT MEYER said that in the six years that he
was co-chair of Finance, he and Mr. Mitchell worked
together on a lot of debt issues. He said he knew Mr.
Mitchell was in constant contact with the credit agencies
and bankers back in New York and back east. He said he was
concerned that Mr. Mitchell had mentioned that Standard and
Poor's and Moody's, which we've all seen in the media, are
concerned about our future outlook. He is concerned about
Mr. Mitchell's comments that if we don't appropriate the
money to stay in the LIO, then that's just another negative
story that they're going to look at and perhaps use against
us in the future as to when we get ready to borrow money.
He said he would imagine the risk will be greater and we'll
have to pay more. So, for potentially looking at and
wanting to borrow billions on a gas pipeline in the near
future, how much value should be put on this being another
negative story.
MR. MITCHELL said that's more of an art than a science.
There is a lot going on when they pull the ratings
together. Of course, they are looking at a variety of
factors and they try to make it scientific, but at the end
of the day, there is a certain amount of art that goes into
it. He said that he would expect that this, by itself,
would be an action that wouldn't have any ratings impact.
He said in the broader context right now, it could get more
attention than he would suggest that it maybe is warranted
from a ratings perspective. What exactly that is, he does
not know. He said the real concern that he has would be
that a potential investor would see this story and, if
we're selling subject-to-appropriation bonds, say well the
state failed to appropriate on that operating lease, are
they in such bad shape that they can't afford to pay their
commitments anymore and where is that likely to waterfall
to; maybe this credit is what they say in their minds,
whether they truly believe that or they see it as an
opportunity to say they need a 3-5 basis point increase in
yield, so that's where he sees the real risk. He said there
could be some increase in a future issue based on an
investor's reluctance to continue to trust the State as
much as they might have otherwise.
SENATE PRESIDENT MEYER followed up to say that if Council
tried to compare numbers and numbers, should that be a
factor we should also consider.
MR. MITCHELL said it was very difficult to say what the
impact would be. It would depend on when we were going to
issue debt, and of what size, and how recent this story
was, and how it was picked up by national media. He said
there would be a lot of variables that would go into that.
He said it's certainly something that Council should be
aware of as you make your decision, that there is a
potential that it could have some impact on a future bond
issue. He said he cannot define that and the impact could
be zero or it could be 5 basis points that we wind up
paying in extra yield on a particular sale.
CHAIR STEVENS noted that Representatives Millet and Johnson
were in the queue to speak, but before that happened, he
invited any other Legislators that are present in the room
or are online to address this issue before Council. Mr.
Mitchell was requested to stay online by Representative
Johnson who had a follow-up question.
REPRESENTATIVE BOB LYNN, District 26 in South Anchorage,
said that everyone knows that we have a big problem with
this LIO situation. Whatever we do, he thinks should be
done expeditiously. He said he knows Council was
considering moving out the LIO to perhaps the State-owned
Atwood Building and, if we move, that might work out okay
and he would certainly hope so. He said perhaps there were
some better alternatives; alternatives that would be more
practical for Legislators, less expensive and more
constituent-friendly. He said the current LIO is
underutilized by Legislators, though staff are here of
course. He thought it would likely be the same in the
Atwood Building. There's a reason you don't find that many
Legislators in the building, except during special
occasions such as we're going through today. He said he
does what most other Legislators do; when he meets with a
constituent or some other person, his first choice for the
meeting is coffee at a place near his home or near his
district. His favorite meeting place for constituents and
others is a coffee shop down on Huffman; he calls it his
"branch office." He said it works well and it brings the
government closer to the people. Most constituents like it
better than the formality of a big, fancy building such as
this one and maybe a steel office downtown. He said it puts
constituents more at ease, especially people that have
never met with a Legislator before and there are a lot of
them. He suggested that if, in fact, the Legislature
vacates the building, put some mini-LIO's in the east,
north and west parts of town. There are strip malls and
small professional buildings all over the place with space
that could work as mini-LIO's, and the rent would surely be
less than it is at the current location. If, by chance, we
got into some problems with some future mini-LIO landlord,
the scale of the problem would be far, far less than here.
We can put a north side mini-LIO for staff in the Atwood
Building; that should drastically reduce the cost of
renovating the Atwood, as well as the hassle of moving the
current occupants all of the Atwood Building to make room
for the Legislature. He said he was asking Council to
consider the mini-LIO concept and asking Council to have
someone pencil out the estimated cost of the mini-LIO such
as we've been hearing for staying here in the lease, or
buying here, or going to the Atwood Building. He said he
thinks that trying to put the whole kit-and-caboodle of the
Legislature in the Atwood is going to be interesting. He
said he didn't have and doesn't have now, a vote on any of
this LIO stuff. He is not on Legislative Council and
doesn't plan to apply any time soon, at least until this is
over. He said he doesn't envy Council's job, but does
appreciate Council's willingness to make tough decisions
such as this will be. None of us are going to be able to
make everybody happy. He said he really enjoyed listening
to what folks have been having to say this morning and
thanked Council for listening to his testimony.
CHAIR STEVENS said he appreciated Representative's Lynn's
comments and referred members to a document in their packet
titled a "Legislator Statewide Office Space Lease Expense,"
which is exactly what Representative Lynn was talking
about. It's all there, and those Legislators in Anchorage
are at $7.41 per square foot. The Chair said for his LIO in
Kodiak, it's $2.29 per square foot; and he has one with
Representative Seaton which is $1.69 per square foot. He
said for Senator Micciche, it's $1.87 per square foot, so
it's all over the place. In some places, like Bethel, it is
more expensive because of the cost of doing business there.
REPRESENTATIVE LYNN said he assumed that the cost of the
Anchorage area would be a little less than someone that is
out in the villages. Rent is cheaper here.
CHAIR STEVENS said he didn't think there were any Anchorage
Legislators that had offices outside of the Anchorage LIO.
He said that was certainly something the Legislative
Council would consider and would be glad to work with folks
on, particularly if we were in the Atwood Building, we
could reduce the space we are leasing from the State there.
He said he didn't think we could reduce the space in the
current LIO location but we could sublet, that's always a
possibility.
REPRESENTATIVE LYNN said he wanted to point out that he
wasn't the only one thinking about this. He said there were
several in the majority as well as in the minority who are
considering some concept of this mini-LIO idea.
CHAIR STEVENS noted there was also the letter from Senator
Wielechowski and Representative Tuck as well, referring to
a similar idea of small offices located in each Anchorage
district.
REPRESENTATIVE LOUISE STUTES, House District 32,
representing Kodiak, Cordova, Yakutat, and several small
villages along coastal Alaska, said, unlike the Speaker,
she does feel like she has a dog in this fight. She said
there is an LIO in Kodiak and there is also one in Cordova
that has been reduced to session-only at this point.
Kodiak's LIO is a very, very, very active LIO; in the short
time that she has been there, there's nary a day that goes
by that we don't have a constituent in and out of their
office. It is very well-utilized. She said it is very
difficult for her to explain to her constituents, as well
as for her to understand, when we have urban Legislators
that have two and three offices, and we as rural
Legislators are being threatened with having their LIO's
closed. Her constituents just don't understand that and
neither does she. She said she hopes that Council will take
that into consideration in making that decision, because
it's very important to rural Legislators to have that
contact with their constituents; they know where we are,
they utilize us, and they are grateful the Legislators are
there, just as we appreciate the constituents. She thanked
Council and said she appreciated the opportunity to
testify.
REPRESENTATIVE LIZ VAZQUEZ, House District 22, representing
West Anchorage, Sandlake, Jewel Lake and Northern Campbell
Lake, said she wished other Legislators could have had the
packet to review previously, she would have loved to have
really studied all of the documents. She said it was a very
important decision. She said all of the options need to be
explored, we need to do our due diligence, because we are
talking about facing litigation. She said if we break the
lease, assuredly we will be in litigation, either from the
parties that we owe the money or, if they go into
bankruptcy, we will then deal with a very aggressive
trustee. Trustees will go after deep pockets and everybody
knows the State of Alaska has deep pockets. We do have a
fiscal crisis in that our income doesn't equal our
expenditures, but we do have savings and we do have a
Permanent Fund and everyone knows that. She said that, for
the record, she did commercial litigation in her previous
lives; she has done bankruptcy litigation. She said the
judge, the court, the trustee will look at the
Legislature's due diligence, what exactly we looked at, did
we do our homework properly. She said it appears to her,
and she hasn't been involved as she just got elected last
fall, from a 40,000 foot level, that we have not done our
due diligence and we're going to pay for it if we get into
litigation. The bottom line is that it's going to cost us a
lot more money. We are talking about paying attorney's
fees; we are not talking about $50,000 attorney's fees and
this type of litigation is going to drag on for years,
you're talking about millions of dollars. You're going to
see probably litigation fees upwards of a half a million
dollars if not over a million dollars; and we're probably
going to pay damages; and we're going to get bad press.
There's water under the bridge what happened previously.
She said she thinks we need to do our due diligence, we
need to look at the numbers, to look at the facts, and make
a decision based on that. She said, by the way, we are
spending lots of money in Juneau and she knows the
delegation in Juneau harps about we don't need this LIO,
whatever, but we are spending $33 million renovating the
Capitol in Juneau. Doing the math here, this is not really
accurate because the Juneau delegation would be paying a
lot more in rent. She said to the Chair that in the future
it would be good to identify all the documents, who
prepared them and the exhibit number so that for future
reference and even litigation, parties would know.
CHAIR STEVENS noted that the document Representative
Vazquez was referring to was prepared by the LAA at the
request of Council at the last meeting for that
information.
REPRESENTATIVE VAZQUEZ repeated that it would be very
useful if that information was contained within the
document; the name of the person that prepared it and the
date of preparation. She said that in looking at this whole
process, it looks like we haven't done our homework. It's
very dangerous in light of the litigation and the
litigation will come; either through the parties themselves
or through a trustee. She said from her experience, her
observation, in litigating in bankruptcy and litigating in
commercial court, trustees are very aggressive. They take a
percentage of what they collect, so they are very
incentivized to collect as much as they can. She said we
will have to pause, we will have to take a "patience pill,"
but we'd better do our due diligence before we proceed to
break a lease. She reminded Council about the older case in
1987 that the Legislative Council lost; they broke a lease
and they had to settle. She also mentioned an article in
the Alaska Journal of Commerce that said there may be a
negative impact on the State's credit rating. She shared
her experience with credit rating agencies. She told
Council that while she is not on the committee, she is
going to get tagged with whatever reckless actions
Legislative Council makes or whatever responsible actions
made. She said she is requesting that Council does their
due diligence, she's sorry that it is a difficult job and
she's sorry that there's a lot of water under the bridge
but we need to move on and do our work well.
CHAIR STEVENS noted that the Legislative Council's vote is
simply advisory. Whatever Council decides to do is a
recommendation to the Legislature. The Legislature makes
every decision on any funding; that will be in the budget,
worked out in Finance and will be voted on the floor of the
House and the Senate.
REPRESENTATIVE TARR said she wanted to be on the record as
being present.
REPRESENTATIVE MILLETT requested to AIDEA and to Mr.
Pfeffer for them to get together and have a conversation.
She said she would like to put politics and emotion aside
and actually have an honest conversation about what it
means to the State of Alaska if we break our lease; what it
looks like if we buy the building; and she said she would
like some true costs of moving into the Atwood Building.
She said she would like the true costs of when we would be
leaving the current building and leasing another building.
She said she heard rumors that we're looking at the
McKinley Building already and she didn't know who
authorized that. She said she would like to know an actual
cost of all of this on every option that we have. Right now
she doesn't feel like we have. She said she'd like
litigation to be equated into that cost also because
nobody's talked about the option if we break the lease,
what litigation looks like and what we could be possibly
losing. Talk about saving money, these are the things that
we should be doing. We shouldn't have half of the
information that may be slanted one way or another. We need
someone independent that doesn't have politics in the back
of their mind looking at this instead of a group of
Legislators that are not real estate brokers, that are not
attorneys, and that do not do leases every day. We're
trying to learn lease issues on a committee on a Saturday
afternoon. She said PFD and LIO are all people know and
it's going to continue that way if we get ourselves into a
piece of litigation, it's never going to end. She said
she'd like to put this to bed but she'd like to do it in
the right way. She said she'd like to do it with accurate,
unbiased, non-political, factual information. She said if
she could request that, maybe they could put together at
some point, some type of committee outside the Legislature
that can give Council a true evaluation; it's not the
Legislature's attorney; not Pfeffer's attorney. Maybe AIDEA
is the right person, maybe AHFC, people that do it all the
time. She said right now she feels like we brought AIDEA in
at the last minute and he's giving us new information that
she didn't know about. She said she'd be very interested to
know if AIDEA would be interested in buying the building.
Making us take a vote today on information that is
imperfect and incomplete would be a sad state. Like the
Speaker, she's been getting beaten up right and left on
this issue but she doesn't want to continue to make poor
decisions and continue to get beat up. At some point, we
have to try to restore public confidence in the committees
that we have.
CHAIR STEVENS said that one of the problems he had as Chair
was that people don't show up for the meetings. We had a
meeting last time in which we went into Executive Session
and we heard information on what litigation may cost. He
told Representative Millett that he was sorry she missed
that.
REPRESENTATIVE MILLETT said she was on the phone listening
to that.
CHAIR STEVENS said then you heard the potential costs of
litigation. That was in Executive Session.
REPRESENTATIVE JOHNSON directed his question to Deven
Mitchell. He said we're looking at bonding for over $100
million for capital in the next cycle and every two years
after that. He said if we lost and went up three to five
basis points, what the additional costs on that $100
million a year be.
MR. MITCHELL said he would be a little reluctant to try and
put a dollar figure on it. Three basis points is three
hundredths of one percent, so when you start doing larger
issues, it starts adding up and it's money but it's not
going to be millions and millions of dollars at the end of
the day until you start doing very large deals.
CHAIR STEVENS asked Tanci Mintz to come forward to answer
some questions.
TANCI MINTZ, State Leasing Facilities Manager, Department
of Administration, put herself on record.
SENATE PRESIDENT MEYER, on behalf of Council and the
general public, asked Ms. Mintz why we didn't do this three
or four years ago when we were trying to make a decision on
whether to stay in the current building or move. He said as
he recalled the Atwood was not an option at that time and
asked Ms. Mintz what had changed to make space in the
Atwood now that wasn't available before.
MS. MINTZ said that three or four years ago is
approximately when they started the new universal space
standards that were put in place by the previous
administration. Through that process, they were able to
identify more efficiencies within the building and we had
more space available. As time passed, they started working
with the Legislature to offer space in the Atwood and the
other process was put on pause as to who was going to be
backfilling the space until a decision was made; knowing
that the potential savings that the State could have in its
entirety, between the Legislature and the Executive
Branches, would be substantial as compared to the rate that
is currently being paid to lease the current space.
SENATE PRESIDENT MEYER asked that wasn't the thought too,
that two or three years ago, we could get out of some of
the leases we have city-wide. By consolidating state
employees into one building, there would be some cost
savings there. He said he thought that was why the
Legislature felt that wasn't an option because it was going
to be either filled with other state employees or leased
out to law firms at a higher rate. He said he thought that
information was important if we're going to do additional
analysis so they can determine what the opportunity costs
are that we either lose or gain by moving into the Atwood
Building.
MS. MINTZ said one of the points of the universal space
standards was to help identify who could be brought in and
provide the best value and be the best fit within the
Atwood Building. She said they had started that process and
got out of some leases that naturally expired in the
Bayview Building, by bringing in a couple of different
agencies there. She said that process had started and then
it was put on pause to wait for a decision by the
Legislature. If the Legislature decides not to move into
the Atwood Building, they have a list of potential agencies
that would move in to backfill the vacancy to bring the
cost down as compared to where they are at now.
SENATE PRESIDENT MEYER asked if that comparison had been
done. If the Legislature buys the current building versus
getting out of our other leases and moving various
employees into the Atwood Building - has that analysis been
done.
MS. MINTZ said it has not been done. She said she could
only go by the square footage of what the Legislature is
paying currently versus the agency that is first on the
list, what they would probably be paying at their existing
location.
REPRESENTATIVE JOHNSON said that he knows that there has
been some discussion of litigation in Executive Session and
asked if that was something that should be made public or
something that should remain confidential. Does that fall
under the category of potentially detrimental to the state?
CHAIR STEVENS said he is in favor of making everything
public that we possibly can but the Legislature's attorney,
Doug Gardner, may have other ideas. He asked Mr. Gardner to
address that issue.
MR. GARDNER said it is hard to have that kind of
conversation in public. He said it is fair comment on those
who have touched on it, that nobody wants to get into any
kind of litigation. Why would we want a court making
decisions about the Legislature; he said that everything he
does for the Legislature is in effort to try and avoid
litigation. Litigation is expensive and the issues related
to this case, if we did get into litigation regarding the
non-appropriation, could be complicated. Certainly would
raise issues of constitutional law; it's undesirable for
the Legislature, in his opinion, to ever get into court if
it can be avoided, on constitutional issues. Litigation is
expensive and it is a valid cost to crank into whether or
not the Legislature buys the building or moves to Atwood.
He said if the Legislature goes to Atwood, a fairly large
number would need to be put on litigation expense. In
response to a request for clarification by Representative
Johnson, Mr. Gardner said if you want the public to have
this information, it wouldn't surprise him that the
Legislature could spend $1 million to $2 million litigating
the case. He said that he thinks that the Legislature has a
right constitutionally not to appropriate if you determine
that we can't spend our dollars on this. He said he
believes the Legislature will ultimately prevail, but it's
going to cost a lot of money. Litigation is just money out
of pocket no matter what. It's not unreasonable to add $1
million to $2 million to this project analysis. Those
numbers may be high, but by putting the numbers high, he's
trying to be conservative so nobody gets a surprise. He
said he would not talk about a losing scenario at this
point, in response to a question by Representative Johnson,
and said he wasn't trying to be cavalier with his answer.
REPRESENTATIVE JOHNSON said he didn't want to do or say
anything on the record that would jeopardize anything in
the future, but it was something Council needed to think
about.
MR. GARDNER said he believed the Legislature's position to
be superior in this regard, but he's not unwise enough to
think that until it's litigated and until we see what the
other person's arguments were, he's just on a pull and
shoot in a vacuum.
REPRESENTATIVE MILLETT said the reason that she wanted to
have this conversation out of Executive Session is because
there are a lot of reporters here and this is one issue
that has not been out in the press; the cost of litigation
and breaking the lease. We hear a lot about how much the
building costs, how much it costs to buy, how much it costs
to lease, but we don't hear the other side of the story and
what's at risk for the State, the bond rating, litigation.
Speaking to Mr. Gardner, she said he was optimistic in that
he thinks that the Legislature would win but we've seen in
the past in the '80s, we lost and had to pay the full
price. She said she wants the full story to be out there
because we've been demonized an awful lot about this
building but we also have to make very, very wise decisions
in the future especially because of the fiscal situation.
She said she just wants accurate information out there so
the public understands the gravity of the situation. It's
not just a move to the Atwood Building, there's much more
moving parts. It could be a very expensive option, it's not
just this cheap idea of spending $1.00 per square foot at
the Atwood Building, it's much more involved. It's been
very simplified in the press and with the public. She said
she wanted to emphasize that there's much more at risk than
just taking a cheaper lease. She appreciates the Chair's
commitment to being as transparent as possible because
that's the way they keep their constituents informed.
Legislators are obligated not to talk about what is
discussed in Executive Session.
SENATOR MICCICHE said it's difficult to quantify the
potential liability. We've heard about a couple of
instances where we've exercised that option to not
appropriate. He said he only knows of one that's been sort
of concrete and we lost it. What he doesn't know if they
were rewarded the remainder of the term or if they were
rewarded a year of the lease fees.
CHAIR STEVENS interrupted to say he wasn't sure we lost the
case, it was settled out of court.
MR. GARDNER said there was litigation surrounding a non-
appropriation scenario regarding the Behrend's Building in
Juneau. He said that case was not particularly relevant or
helpful to this, and said he didn't think he had ever
provided the Senator with the briefing, so he wouldn't know
that. It was a non-appropriation that happened in the last
year of the lease. The way that the appropriation bill was
drafted was a bit murky, it left arguments that probably
wouldn't exist in this situation. He said Senator Micciche
was right, the Legislature did pay what he believes was the
very last year of the lease, we paid out the last piece of
the lease in some settlement. He said it is a case worth
noting and the answer is there are risks involved if the
Legislature non-appropriates; there are also ways to
protect the Legislature.
SENATOR MICCICHE said his point was making an assumption of
cost that could be applied to the value of whether the
Legislature moves or not. So, we think that there's a
between $1 million and $2 million in legal fees alone,
potentially if we were to not be successful. If we're not
successful, there's likely some settlement and he's not
sure what number to use. If we use a year, because that's
the only model, even if it's not apples-to-apples, it's a
$6 million settlement. He's applying a number in his mind,
he doesn't like risk and wants to protect the people of
Alaska as much as possible, and if you apply that number,
it reduces the value of moving on a square footage basis.
CHAIR STEVENS reminded Council that we're discussing a lot
of things that were discussed in a confidential session,
but to clarify, the range we heard was $200,000 to $2
million was the range of litigation.
MR. GARDNER said that it was possible to spend $30,000 per
month for two years and he came up with a number of about
$1.7 million and he added another $250,000 on to that as a
cushion and as a cost for some experts which could be very
expensive in a case like this. Directing this comment to
Senator Micciche, he said that we have not ever tried to
bake those numbers into any of the project costs because he
didn't think that was traditionally done with project
costs, but he didn't think it was unreasonable and was glad
the Senator had brought it up. It is not unreasonable for
the Legislature to be looking at a litigation scenario and
how negative that could be, both from a fiscal standpoint
and from a legal standpoint.
SENATOR COGHILL said the way he had to consider this was
like many others. When we made a lease, was the non-
appropriation clause an option to exit or was it a safety
valve based on, for example, the fiscal time we are in,
which is catastrophic. If it's not an option similar to an
option to purchase, then exercising it seems like one of
the last resorts we'd want to do. The economics of the
Atwood Building make it very, very attractive, but
generally speaking, a deal is a deal and he'd like to stick
with that deal as much as possible. If there is some
willingness to go back and negotiate and re-negotiate the
cost of the current building or if there are any offers
that will come this way, before he'd be willing to use the
non-appropriation clause that is legal, that it may not be
the wisest thing to do. He said that's where the balance of
his struggle was. He said he tries to listen to the
Legislators from the Anchorage area the most because
they're the ones who will be impacted the most. For him,
the temptation to move to the Atwood Building is huge with
a couple of exceptions. He does not have a comfort level
with the non-appropriation clause that it's an option that
should be exercised until we absolutely have no other
option. The Legislature is probably not going to go away
any time in the near future unless the whole government
collapses. He said he thinks the Legislature should have a
house that people can go to that is the Legislature; and
the identity of the Atwood Building could be made that way,
but it is not that way right now, as the current LIO is.
So, there's the legal and political ramifications that he
struggles with; that he can tell you that $5 per square
foot or somewhere in that neighborhood sure makes it
attractive to move on. He said it may be AIDEA may have
some ways to help us navigate through financing but he
didn't hear anything in the numbers that would help us get
there. In any case, a 30 year loan doesn't seem to get
anywhere close to the Atwood Building. So, then it's just a
matter of the cost of breaking the lease, which is both a
bond and legal, and then the value to the Legislature to
have a separate place along the way. He said he has tried
to weigh that as much as he can. He said listening to the
legal discussion on the non-appropriation clause, it
doesn't look like it's as much of an option as it is a last
resort exit clause. He said he would probably like to see
us head in the direction of getting better numbers to see
if we can buy the building and land; and make a little
progress on the value of this building. He said he wanted
to let people know that he had been listening and really
struggling between our legal responsibility and the poor
budgeting that we've found ourselves in.
CHAIR STEVENS said that if Council is amenable, it would be
best to take a 15 minute break to let the House and Senate
members talk to each other and see if there's any reason to
carry on this meeting. Council will take a brief 15 minute
break and return at 12:45pm.
12:28:05 PM Legislative Council took an "at ease."
NOTE: Vice Chair Herron left the meeting prior to the "at
ease."
1:32:25 PM Legislative Council returned from the "at ease."
CHAIR STEVENS brought the meeting back to order.
SENATOR MICCICHE moved that Legislative Council advises the
Legislature not to appropriate for the 716 W Fourth Avenue
lease pending the outcome of the currently pending
legislation or unless negotiations between counsel for the
Legislature and a State entity within the next 30 days
result in a competitive cost on a per square foot of usable
space basis.
SPEAKER CHENAULT clarified to ask if Senator Micciche had
used the word "litigation" or "legislation."
SENATOR MICCICHE restated the motion. He moved that
Legislative Council advises the Legislature not to
appropriate for the 716 W Fourth Avenue lease pending the
outcome of the currently pending litigation or unless
negotiations between counsel for the Legislature and a
State entity within the next 30 days result in a
competitive cost on a per square foot of usable space
basis.
CHAIR STEVENS said we are expecting some serious
negotiations. We expect to have our attorney Serena Carlsen
involved in this and a State agency in the hopes of winding
up with a contract that we can agree to on this building.
SENATE PRESIDENT MEYER asked Doug Gardner if he had any
comments or thoughts on the motion made by Senator
Micciche. He said was it a legitimate motion or one that
was going to get us in trouble if we vote one way or
another.
MR. GARDNER said he didn't think the motion was going to
get Council members into any trouble. He said during the
stating and restating of the motion, he spoke briefly with
Mr. Davis from AIDEA and he was concerned about the 30 day
timeline, especially with the upcoming holidays, to the
extent that he's an entity that might work on this. Mr.
Davis respectfully was hoping he might get 45 days and
authorized Mr. Gardner to mention that. He said he did not
think there was a problem with the motion. As he understood
Chair Stevens' comment, the idea was that within that
period of time, however, that period of time was defined -
30 or 45 days - the Council's expectation was that Stoel
Rives' Serena Carlsen and others would work with the owners
to try to bring back a proposal that Council can evaluate
and he thought that could be done.
CHAIR STEVENS said Council is under the gun to a certain
extent in that they have asked for some time Tanci Mintz
and the Department of Administration to not lease the space
to others in the Atwood Building and we want to make sure
that we don't dawdle too long, as has happened in past
years, to the point that we lose that as an opportunity.
Ms. Mintz said 30 days was acceptable and he thought more
would be problematic with the Department of Administration.
At this point, he would like to stick with the 30 days and
ensure progress is being made. It was possible that if
progress is being made, we can work with the Department to
try and get that extended; but he thought a 30 day period
was pretty crucial so we don't lose that facility.
MR. GARDNER said that as counsel for the Legislature and in
working with Stoel Rives, they'd do everything they can to
provide all the documents to whatever entity is trying to
price this for Council.
SENATOR MACKINNON asked if Ms. Mintz could come forward to
ask about the 45 days. One of the reasons that she believed
she would be supporting the motion that is before Council
is so that there can be an opportunity for some additional
price comparison on that square footage or the overall
investment opportunity or challenge that the State faces.
MS. MINTZ again put herself on the record again as the
State Leasing Facilities Manager for the Department of
Administration. In response to the question from Senator
MacKinnon about the possibility of extending the timeline
to 45 days, because of the Christmas and New Year's
holidays making it difficult to get the work done by the 30
day timeline, Ms. Mintz said she believed 45 days would be
acceptable.
SENATOR MACKINNON asked Senator Micciche to consider a
friendly amendment changing the timeline from 30 to 45 days
to ensure Council can get the results that we want.
SENATE PRESIDENT MEYER said that since Council's vote is
only advisory, the ultimate decision is still going to be
done during session in Juneau. He asked Senator Micciche to
withdraw his original motion and bring forward a new motion
with the 45 days.
SENATOR MICCICHE withdrew his original motion.
1:40:53 PM
SENATOR MICCICHE moved that Legislative Council advises the
Legislature not to appropriate for the 716 W Fourth Avenue
lease pending the outcome of the currently pending
litigation or unless negotiations between counsel for the
Legislature and a State entity within the next 45 days
result in a competitive cost on a per square foot of usable
space basis.
CHAIR STEVENS, in response to a request by Representative
Neuman for clarification of the motion, said the motion was
to not appropriate, to await the litigation that is now in
place; to negotiate a price with a State agency and Mr.
Pfeffer; and to give 45 days to do that. He explained
further that if, after the 45 day time period, there was no
agreement, then Council would recommend to the Legislature
that the funds not be appropriated for the lease.
SENATOR MICCICHE said that clearly the people of Alaska are
paying attention to this issue and we owe it to them to
operate at the lowest cost possible. He said the
Legislature is moving, unless the pending litigation
results in a null and void lease or negotiations result in
a cost that competes with other space that we are currently
leasing. That way, we would be operating here at the lowest
cost. If that doesn't happen, our recommendation is that we
simply move on.
CHAIR STEVENS asked for a roll call on the motion and
repeated that a "yes" vote would be a non-appropriation,
wait for litigation 45 days, and negotiate a price.
A roll call vote was taken.
YEAS: Stevens, Meyer, Coghill, Huggins, MacKinnon,
Micciche, Chenault, Johnson, Kito, Millett, Neuman,
Herron
NAYS: None
The motion passed 12-0.
NOTE: Representative Herron participated in the roll call
vote via teleconference.
There being no further business before the committee, the
Legislative Council meeting was adjourned at 1:45 p.m.
1:45:09 PM
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