Legislature(1999 - 2000)
11/30/1999 09:06 AM Senate PRI
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
COMMISSION ON PRIVATIZATION AND DELIVERY OF GOVERNMENT SERVICES
Anchorage, Alaska
November 30, 1999
9:06 a.m.
COMMISSION MEMBERS PRESENT
Representative Cowdery, Co-Chair
Senator Ward, Co-Chair
Representative Brice (via teleconference)
Senator Al Adams (via teleconference)
Tom Fink, Former Mayor of Anchorage
Emil Notti
Mike Harper, President, Kuskokwim Corporation
Kathryn Thomas, Former Chair of Alaska State Chamber of Commerce
Don Valesko, Business Manager of Public Employees Local 71
George Wuerch, Alaska Municipal League
COMMISSION MEMBERS ABSENT
Bill Allen, Former Mayor of Fairbanks
COMMITTEE CALENDAR
Reports from the following Privatization Subcommittees:
Department of Revenue: Alaska Housing Finance Corporation
(AHFC)
Department of Community and Economic Development: Alaska
Industrial Development and Export Authority (AIDEA)
Department of Military and Veterans Affairs
Department of Community and Economic Development, Alaska
Railroad Corporation (ARRC)
Department of Community and Economic Development, Alaska
Energy Authority: Hydro-Electric Projects
PREVIOUS ACTION
See Commission on Privatization minutes dated 7/20/99, 8/16/99,
9/20/99, 10/28/99, 11/04/99, 11/10/99, 11/18/99 and 11/24/99.
WITNESS REGISTER
MARY ANN PEASE, Chairman
Department of Revenue Subcommittee
POSITION STATEMENT: Presented the subcommittee's recommendations
regarding the Alaska Housing Finance Corporation (AHFC).
MARCO PIGNALBERI, Commission Director and
Legislative Assistant to Representative John Cowdery
POSITION STATEMENT: Answered questions and presented information
on behalf of the commission and various subcommittees.
RANDY SIMMONS, Executive Director
Alaska Industrial Development and Export Authority (AIDEA)
Department of Community and Economic Development
POSITION STATEMENT: Answered questions and provided information
on AIDEA.
JOHN BITNEY, Legislative Liaison
Alaska Housing Finance Corporation (AHFC)
Department of Revenue
POSITION STATEMENT: Answered questions and provided information
on AHFC.
CHRIS NELSON, Chairman
Department of Military and Veterans Affairs (DMVA) Subcommittee
POSITION STATEMENT: Presented the subcommittee's recommendations
regarding the DMVA.
JIM CHASE, Deputy Commissioner/Chief of Staff
Department of Military and Veterans Affairs
POSITION STATEMENT: Presented the subcommittee's recommendations
and answered questions regarding the DMVA.
LEE WAREHAM, Chairman
Alaska Railroad Corporation Subcommittee
POSITION STATEMENT: Presented the subcommittee's recommendations
and answered questions regarding the Alaska Railroad Corporation.
ERIC YOULD, Member
Hydro-Electric Projects Subcommittee
POSITION STATEMENT: Presented the subcommittee's recommendations
and answered questions regarding the Hydro-Electric Projects
Subcommittee.
KEITH LAUFER, Development and Finance Manager
Alaska Industrial Development and Export Authority (AIDEA)
Department of Community and Economic Development
POSITION STATEMENT: Answered questions regarding the agreement
between the Alaska Energy Authority and all the utilities that
participate in the intertie.
ACTION NARRATIVE
TAPE 99-19, SIDE A
CO-CHAIR WARD called the Commission on Privatization and Delivery
of Government Services meeting to order at 9:06 a.m. Members
present at the call to order were Representatives Cowdery and
Brice; Senators Ward and Adams; and Commissioners Fink, Thomas,
Harper, Notti, Valesko and Wuerch. Marco Pignalberi, Commission
Director, was also present. Commissioner Allen was not in
attendance.
APPROVAL OF PREVIOUS MINUTES
CO-CHAIR WARD noted that members should have copies of the
minutes dated November 18, 1999.
COMMISSIONER WUERCH moved that the commission approve the minutes
dated November 18, 1999. He pointed out that at the November 18
meeting a departmental representative had offered to provide a
report regarding the costs that would be incurred with the
Department of Natural Resources (DNR) taking on a data processing
task that Motznick Computer Services has been providing for free.
There being no objection, the minutes were approved.
OLD BUSINESS
CO-CHAIR WARD noted that pending were comments from the DNR; the
Alaska Industrial Development and Export Authority's (AIDEA's)
response; the Governor's response; the Department of Law's
comments on performance measures and the management information
system; and the Attorney General's comments. Therefore, no
action was necessary. Co-Chair Ward requested that those
responses, as well as the Motznick report, be provided as soon as
possible.
NEW BUSINESS - Reports by Subcommittees
[Most of the information contained in subcommittee reports will
be available at the commission's web site at
www.privatizealaska.org.]
Subcommittee Report on the Department of Revenue: AHFC & AIDEA
MARY ANN PEASE, Chairman, Department of Revenue Subcommittee,
noted that the full commission had requested that the
subcommittee perform a more in-depth review, focusing on AHFC's
participation in the secondary mortgage market. She said this
report encompasses those recommendations. Currently AHFC holds
$2.3 billion in mortgages and approximately $1.8 billion in cash
and short-term investments; almost all of this financing has
occurred through the issuance of bonds. Two-thirds to three-
fourths of AHFC's mortgage portfolio consists of mortgages backed
by tax-exempt bonds. Some of the loan programs, which are not
currently focused on by the private sector, are loans to
veterans, first-time home buyers, and developers of multifamily
housing. Conversely, about one-quarter of the portfolio is
backed by taxable bonds. Although AHFC's taxable programs are
primarily designed to provide financing in areas poorly served by
the secondary market, AHFC has not had a great deal of interest
over the last ten years.
MS. PEASE noted that the subcommittee did not conduct an in-depth
review of all of Alaska's private lenders. However, they had
spoken with various people such as Jim Crawford of City Mortgage
and Dick Dolman of Seattle Mortgage, and she had spoken with Jan
Seifert (ph) of National Bank of Alaska; all said AHFC is doing a
good job, not crowding out the private sector, and is
significantly contributing to Alaska's economy. It was suggested
that significant changes to AHFC would have a detrimental effect
on Alaska's housing market and the economy as a whole.
Furthermore, revenue from AHFC's secondary market provides
important benefits to the state. For example, revenues subsidize
[AHFC] public programs, which would otherwise require about a $40
to $50 million cash infusion from the state. There is also the
ability to lower mortgage programs through the use of arbitrage
funds.
MS. PEASE said AHFC currently has a very good bond rating and a
large cash balance, $1.8 billion. The subcommittee recommends
that a capital requirement study be performed by an independent
expert such as a credit rate agency. Such a study would
determine how much cash is actually needed to maintain AHFC's
strong market position; any additional cash freed up could be
used for other purposes. The subcommittee highly recommends
combining other bonding entities with AHFC for the aforementioned
reason, supporting the prior recommendation. The subcommittee
believes that AIDEA and possibly the postsecondary loan program
and the Municipal Bond Bank should be combined under one
umbrella, freeing up additional capital. For example, AIDEA has
approximately $850 million that could be freed up for other
purposes if it were to rely on AHFC's cash balances. Other
alternatives could be reviewed, including segregating AHFC under
a state charter; that would require (indisc.--coughing) to
provide the public services provided by AHFC and pay a dividend
back to the state.
MS. PEASE informed members that the subcommittee had broken down
the numerous ways that AHFC could be privatized into two
conceptual categories. The first treated AHFC as a public
corporation with its shares being held by the State of Alaska.
Under such a scenario, the state would continue to receive
dividends back into the treasury, and the state would be entitled
to appoint AHFC's board of directors. In all other respects,
AHFC would operate as a private corporation in a manner similar
to the operation of the Alaska Railroad Corporation - with the
exemption from the provisions of the Executive Budget Act. The
second alternative is to fully privatize AHFC, resulting in an
extremely large, one-time benefit to the state treasury. There
are a number of ways to achieve the sale of the entire
corporation, and "Fannie Mae" would be an example of how such
privatization could occur; a key to this alternative is ensuring
that the state housing market will continue to have access to a
secondary market that continues to offer tax-exempt financing
program. Of some concern to her, Ms. Pease indicated, is that
the secondary mortgage lenders contacted were not extremely
interested in this scenario because they felt AHFC serves that
purpose.
MS. PEASE suggested that the state may also consider distributing
shares of AHFC to all Alaskan residents. The report reviewed
privatization of AHFC under two approaches, and the subcommittee
also reviewed the combination of AHFC with AIDEA and the other
bonding agencies within the state. Ms. Pease emphasized that
real savings would occur if AHFC, AIDEA and the Municipal Bond
Bank were combined, freeing up capital now specifically marked
for each of these organizations. She reiterated that review by
credit-rating agencies and the underwriters may also be helpful.
LEONARD STEINBERG, Member, Department of Revenue Subcommittee,
agreed that AHFC appears to serve a purpose that would not
otherwise be fulfilled, and the private sector working with AHFC
is pleased with the service and the product. He said the real
question is whether some capital set aside could be freed up for
other uses. Mr. Steinberg questioned whether $1.8 billion is
necessary to maintain AHFC's good credit rating; he suggested
that experts could determine the necessary amount to set aside.
He also echoed the notion of combining other bonding agencies
with AHFC so as to have only one capital requirement, which would
cover several agencies and again free up capital.
MS. PEASE mentioned the presence of Jim Crawford, whom she
believed to be the largest lender on the secondary market in
Alaska.
COMMISSIONER FINK inquired as to Mr. Steinberg's livelihood and
asked whether Mr. Steinberg is associated with AHFC or the three
people contacted by the subcommittee.
MR. STEINBERG first noted that he is an attorney, then answered
that he has never had any professional dealings with them.
COMMISSIONER FINK said he interpreted the subcommittee report to
say that without AHFC, something would be lacking. He offered
his impression that no other state has such a program, however.
MS. PEASE agreed, specifying that AHFC, a subsidized home
program, offers something not found in other states.
MR. STEINBERG pointed out that historically it appears there was
some discrimination by national lenders for providing home loans
to Alaskans, for a number of reasons. Those people contacted by
the subcommittee felt such discrimination would continue absent
AHFC.
CO-CHAIR WARD noted that six other states have lending programs,
although not on the order of AHFC.
COMMISSIONER WUERCH called attention to page 2 of the
subcommittee's report, which refers to Mr. Crawford's comment
that AHFC is not crowding out the private sector and
significantly contributes to Alaska's economy; the report also
notes Mr. Crawford's belief that major changes to AHFC may result
in a detrimental effect. Mentioning the notion of combining the
liquid reserves to protect the bond rating, he asked if combining
AHFC with the Alaska Postsecondary Loan Program, AIDEA, the
Municipal Bond Bank, and others would have a detrimental effect.
Furthermore, would such a combination change the way in which
AHFC would operate in its mortgage area?
JIM CRAWFORD, Member, Community and Regional Development
Subcommittee, noted that the Community and Regional Development
Subcommittee had reviewed AIDEA among other functions; that
subcommittee recommends that AHFC and AIDEA be merged, as had
occurred successfully - with a monetary savings - several years
ago with the Alaska State Housing Authority (ASHA) and AHFC. He
said the $1.8 billion net worth of AHFC is sufficient to meet the
needs of AIDEA plus the housing market. Mr. Crawford commented
that AHFC has a unique function performed in all 50 states and
territories: tax-exempt financing. He recommended having a
capital adequacy study performed by a credible third party.
Short of that, Mr. Crawford suggested that $850 million could be
recovered in the next legislative session by liquidating AIDEA.
He clarified that the recommendation specifies that the functions
of AIDEA should not be affected, although there would be some
staff consolidation.
UNIDENTIFIED COMMISSIONER asked whether there is any negative
aspect to this that the commission should be aware of.
MR. CRAWFORD answered that he did not see a downside so long as
the functions continue. He does not believe the bond buyers care
whether the bond is an AHFC bond or an AIDEA bond. He emphasized
that the tax-exempt function must continue, which is a federal
Act. Prior to AHFC, he noted, each municipality issued its own
tax-exempt bonds for housing. That method was very inefficient,
not to mention the favoritism that occurred during that time.
The AHFC program has been a well run program.
CO-CHAIR WARD, noting that he is a licensed real estate agent,
asked what would happen if AHFC were liquidated 100 percent and
its assets placed in the general treasury.
MS. PEASE indicated the difficulty of the market absorbing such a
large entity as AHFC. Who would take over the existing program?
And is there a secondary market willing to absorb that? Although
the subcommittee had a limited review, Ms. Pease said she would
have had a different view if one of the three contacted would
have said that [AHFC's] activity could be picked up. She agreed
that no other state subsidizes home loans to the extent performed
in Alaska.
MR. STEINBERG suggested that liquidation of AHFC would result in
an immediate decline in statewide real estate property values.
Furthermore, some individuals who could currently purchase homes
would probably be excluded from the market. That seemed to be
the consensus from those contacted by the subcommittee.
MR. CRAWFORD stated that the primary impact of the closure of
AHFC would be in the new construction market, which would be cut
in half. About 70 to 80 percent of new construction is funded
under the First Time Homebuyer tax-exempt program, which amounts
to $200 million a year. Taking $200 million from the housing
market would create a huge impact. The other major function is
the veterans' tax-exempt program. There are a tremendous number
of veterans in Alaska. Furthermore, the veterans' tax-exempt
program is a federal program; it takes the ability of a nonprofit
or government entity to issue the taxes and bonds to pass along
the savings of the tax-exemption to the veteran. Those important
functions should be preserved, but would not without AHFC.
Although AHFC has some subsidies, they are targeted subsidies.
Therefore, he did not know if it would be fair to consider the
tax-exempt bond capability of $200 million a year as a subsidy
because it is available to every citizen in the United States.
The uniqueness of AHFC is that some mixing of programs can occur.
MR. CRAWFORD noted that he has been in the mortgage business
since starting City Mortgage in 1981. He pointed out that a
number of markets will not purchase mortgages from Alaska; for
example, Nationwide Funding refuses to buy mortgages from Alaska.
He suggests preserving AHFC's functions in order to access the
capital markets.
CO-CHAIR WARD informed members that he would be asking questions
posed by other legislators, as was the case with his previous
question. He asked whether the subcommittee had considered
submitting inquiries or a request for proposals (RFP) to national
mortgage investors to determine interest in purchasing and
operating AHFC. This would release equities to the state, but
[AHFC] would remain in existence.
MS. PEASE restated that the subcommittee had discussed fully
privatizing AHFC. One of the keys that they wanted addressed is
whether the function currently performed by AHFC is necessary.
She believed that people interested in taking over the operation
for profit might be different from what is set in statute under
AHFC's current requirements. For example, if the function of
AHFC is to remain in place, somebody else won't have the
capability because of the inability to offer tax-exempt
financing.
MR. CRAWFORD added that the functions of AHFC include those
functions previously held under ASHA; that entity operates
approximately 3,500 rental units owned by the state, as well as
the Section 8 programs for the U.S. Department of Housing and
Urban Development (HUD), with HUD money, which doesn't cost the
state money. The functions of AHFC would have to be broken up in
order to sell it.
REPRESENTATIVE BRICE asked whether whoever takes over the
functions of AHFC would follow up and continue those programs; he
cited as examples weatherization, emergency housing grants and
addressing the needs of the homeless.
MS. PEASE replied that the subcommittee didn't make specific
recommendations on the programs currently performed by AHFC and
whether they would continue under any entity that would take it
over.
CO-CHAIR WARD indicated some of those functions could be
transferred.
REPRESENTATIVE BRICE stated that if the legislature were to take
action, a lot of off-budget numbers would come on-budget.
Transferring AHFC fund expenditures to general fund expenditures
would cause a lot of concern.
CO-CHAIR WARD said some legislators like everything to be on one
budget sheet.
UNIDENTIFIED SPEAKER stated, "That's one of the reasons I want to
get out of the AHFC. It is a cash cow for finance committees in
the legislature - a hidden."
REPRESENTATIVE BRICE emphasized that it helps a lot of people as
well. He noted the need, if moving along those lines, to ensure
that those responsibilities are picked up by the organization.
It is a cost that must be kept in mind.
COMMISSIONER VALESKO referred to the comment that getting rid of
AHFC altogether would cause property values to drop, but noted
that Mr. Crawford (of City Mortgage) had said there would be less
new construction, which would seemingly increase property values.
He requested an explanation of the logic.
MR. STEINBERG said this information had led the subcommittee to
believe there would be fewer individuals able to obtain
mortgages, which would reduce demand and lead to a drop in
prices.
UNIDENTIFIED SPEAKER indicated increased mortgage rates would
dramatically increase the cost of housing for new construction;
many people would drop out, and fewer people would be able to
buy. It would reduce the number of people who could buy housing,
which may affect the rest of the market. Not having the $200
million active in the first-time home buyer market would drive
those costs up and diminish the number of buyers.
COMMISSIONER VALESKO asked if the subcommittee had looked into
AHFC executive salaries.
MS. PEASE replied no, the big savings realized in this would not
be with the salaries. Rather, it would be with either the
program elimination or the capital freed up for other purposes.
RANDY SIMMONS, Executive Director, Alaska Industrial Development
and Export Authority (AIDEA), Department of Community and
Economic Development, stated that the numbers are incorrect and
that he would not be speaking against or in support of the
recommendations. As it relates to AIDEA and the $847 million
(indisc.), that is the net equity of AIDEA as of June 30, 1999,
not cash available. He explained that it includes AIDEA's
development projects, loans, investments and cash. Approximately
$457 million is cash, as of that date, and it would not be easy
to liquidate the development projects. For example, holding Red
Dog (Mine) basically means they would not be able to do tax-
exempt financing for that project; there is tax-exempt financing
because the state or governmental entity owns the project.
CO-CHAIR WARD said they would not be able to do tax-exempt
financing through AIDEA.
MR. SIMMONS said they could do it through AHFC for someone else.
He emphasized that they can't liquidate it and get cash out of
it.
CO-CHAIR WARD asked whether that is for all of it.
MR. SIMMONS indicated it is for any of the Red Dog (Mine), if
they want it to stay structured the way it is, regarding where
they are getting financing.
CO-CHAIR WARD indicated there are ways to do it, if that's
something the legislature decides to do.
MR. SIMMONS emphasized that it doesn't free up any cash.
CO-CHAIR WARD asked if it would free up any bonding capabilities
or liabilities to the state.
MR. SIMMONS pointed out that it would not free up any
capabilities or liabilities to the state. He reiterated that
there is not even $50 million.
CO-CHAIR WARD asked how much is there.
MR. SIMMONS responded that the cash and securities are $450-some
million as of June 30. For instance, if one were going to
restructure AIDEA, some bonds would have to be defeased; cash
would have to be taken to defease the bonds.
CO-CHAIR WARD indicated the possibility of some other revenue
stream to make it defease its fund.
MR. SIMMONS agreed.
CO-CHAIR WARD reiterated that there are ways to do this if, in
fact, the legislature sets out to do it.
MR. SIMMONS specified that he was not arguing about that.
Rather, one needs to be careful because there are ramifications.
It is not as easy as just merging an entity into another entity
when there are $300 billion worth of outstanding bonds. It won't
free up the type of cash that Co-Chair Ward was talking about.
MR. SIMMONS added that AIDEA is much unlike AHFC. He explained
that they operate two corporations, AIDEA and the Alaska Energy
Authority, a billion-dollar corporation in itself. When the
subcommittee talked about the $5 million operating budget, half
of that could be saved; that is the operating budget of both
AIDEA and the Alaska Energy Authority, and it is a double
counting of $300,000. For AIDEA, the personnel service is less
than $2 million. And duplicative positions in both agencies are
few because of AIDEA's other responsibilities. Furthermore, the
bonding that does (indisc.) is not pass-through, although the Red
Dog (Mine) was a pass-through. AIDEA does pass-throughs, and it
does make a difference as to the entities and the ownerships of
those projects. Mr. Simmons suggested that someone look at the
contract of bond covenants (indisc.) because a lot of those
aren't easy to do away with. He said it is not impossible, but
it is just not a simple process.
COMMISSIONER WUERCH mentioned there are three recommendations by
the subcommittee; most of Mr. Simmons comments seemed to be
focused on the third, which presumes that the agency is done away
with. Recommendations include a capital requirement study and
the combining of bonding entities, he noted, which still
preserves the functions of the combined entities. He asked Mr.
Simmons what he sees as a problem with the latter.
MR. SIMMONS replied (indisc.--noise) that he thought the capital
requirement study would be best because the other issues would be
looked at before doing something like that. It is not the rating
agency's job to do that. Mr. Simmons further stated, "The last
thing I'd be doing is talking to bond rating agencies right now
about what this recommendation -- maybe because I know what their
answer is already. You may not talk to underwriters, but there
are other financial people out there that you would talk to." As
for the combination, one must look at ramifications involving
things such as the existing contractual relationships, he said.
For example, AIDEA has lease agreements with Cominco and Federal
Express. They also have bond agreements with bond holders and
bond insurers (indisc.--noise).
MR. SIMMONS said an example of what the commission should look at
is that AIDEA was able to sell AAA-rated bonds for the first time
on the last Red Dog (Mine) issuance of $150 million, in part
because the legislature and governor reached an agreement and put
a dividend program in effect in AIDEA; that basically creates a
statutory dividend program which says so much money can be made
available from a dividend from AIDEA earnings. And AIDEA was
able to sell AAA-rated bonds because they would get insurance
partly because of that. Mr. Simmons stated, "If for some reason
that was changed in the merger, there's a question as to whether
we have to defease those bonds ... because they relied on that."
Although he couldn't say what the downsides are, Mr. Simmons
concluded, he could caution commissioners to look at this closely
before going forward.
UNIDENTIFIED SPEAKER mentioned combining bonds and entities,
saying the same analysis would need to be done with some of
AHFC's obligations as were suggested to be done with AIDEA.
MR. SIMMONS agreed.
UNIDENTIFIED SPEAKER referred to Mr. Simmons' comment that it's
only a small portion, roughly half.
TAPE 99-19, SIDE B
UNIDENTIFIED SPEAKER continued, suggesting outside capital
analysts could look at the totals. He said he believes the
outcome could be a sizeable amount of cash freed up if the
commission had a decent study. He also hoped that when the
commission comes back to this issue they could again look at the
requirement study, the potential for gain for the state. He
suggested that hundreds of millions of dollars is too much to
ignore.
JOHN BITNEY, Legislative Liaison, Alaska Housing Finance
Corporation, Department of Revenue, said he believes Mr. Simmons
gave a good synopsis of AHFC's reports and assets as well. He
informed the members that he would give just a little bit of a
sense to some of the issues that will be looked at when trying to
put the "billion dollar eight number" on the table. For example,
approximately a billion of that is held by a trustee that has
already pledged for bonds which are already outstanding, and $205
million of it is already spent by the legislature. Mr. Bitney
said it is his understanding that when one goes to defease bonds,
one has to actually purchase U.S. government security for
treasury notes as collateral to redeem those bonds. This
generally means one is probably going to pay a higher coupon rate
for those than probably the bonds that one is defeasing. He
stated:
So, to get into a situation like that, you're going to
be pulling down some of the value as you go through
this process. In addition to the fact that you've
generally announced to the world that you're in a
buyer-sale mode, a prudent investor is going to look at
you and they're going to negotiate the best deal for
themselves at that point in time. So, understand that
once you actually go down that road, that sometimes
these numbers don't come out the end in terms of the
cash, that you're going to receive that. You're
actually seeing on a balance sheet in a financial
statement when you get started into some of this stuff.
... I'm not here to say that that's not a valid
discussion to have, but it's just to make folks aware
that there are other issues that come into this table
once you get into these things, that it's not just a
straight-up math question.
MR. BITNEY expressed his understanding that all states do have a
housing finance function, or a housing authority function, which
makes available to the residents tax-exempt financing or is a
pass-through for federal programs, grants, tax credits, et
cetera, where there will be multifamily financing. In some
cases, it may be an authority for a city, county or entire state.
For example, Chicago or Denver may have its own function or
housing authority. With the merger done in 1992, however, Alaska
has the public housing function, and basically all the state
housing functions are under one umbrella within the corporation
at AHFC. While not entirely unique, it is a little above what
most states do.
MR. BITNEY said Alaska is viewed as the model, that the merger is
viewed as very successful. For example, ASHA, at the time that
it was merged, was performing according to HUD's evaluation in
the low-70-percent range in terms of its annual management
assessment report. However, over the last four years Alaska
received perfect scores of 100 percent each year in its
management of public housing. By bringing AHFC's resources into
the public housing management, it has become a better managed,
successful program. It gives a little more flexibility in the
eyes of HUD in terms of the management of public housing
programs, and it makes AHFC more competitive regarding federal
grants. He indicated HUD is receptive to doing things a little
differently if a community wants that.
MR. BITNEY referred to Commissioner Fink's comment regarding the
off-budget items and stated that all of AHFC is subject to the
Executive Budget Act at this point, so all the expenditures that
do occur, that AHFC pays for, are within the budget. They are
there for all the world to see, and the fact that AHFC is picking
up the tab of $103 million in expenditures annually is, again, a
tribute to the corporation's success and its ability to generate
profits.
COMMISSIONER FINK said he thought Mr. Bitney had indicated
agencies like AHFC exists in other states for tax-exempt
financing. He asked if they exist in other states for taxable
financing.
MR. BITNEY replied that apparently they do. He relayed the chief
executive officer's (CEO's) statement that AHFC is not interested
in getting back into being the player in the taxable market
nearly to the extent that it was in the 1980s - which was not a
good thing.
COMMISSIONER FINK asked, in reference to public housing, if one
reason AHFC is able to do a lot, and to do a good job, is because
of the income produced on the other side of the corporation.
MR. BITNEY replied that absolutely AHFC is able to better
maintain the facilities. He indicated management, oversight and
accountability are all improved.
COMMISSIONER FINK commented that AHFC doesn't have to go over
direct appropriations, that the legislature appropriates money.
MR. BITNEY agreed, explaining that AHFC currently has an
agreement with the State of Alaska whereby it makes available
$103 million a year. That money gets chopped for all the
programs that were alluded to earlier, in terms of what is
considered the off-budget. In other words, AHFC legislative
approval for getting a portion of those dollars back for its own
public housing functions. It is not a general fund expenditure
but what some may call an off-budget item. That is where the
fiscal gap is, but they are in same budget documents. The AHFC
goes through the same process as all state agencies go through.
MR. PIGNALBERI referred to Mr. Simmons' indication that there was
a belief that a recommendation was made to eliminate or abolish
the AIDEA program. He emphasized that that is not part of the
recommendation.
MS. PEASE further explained that the subcommittee didn't review
that. Rather, they had reviewed AHFC and looked at the
combination of the two entities. Under the third recommendation,
if they were interested in going forward with privatization, are
two alternatives under that.
COMMISSIONER FINK, in response to a question from Mr. Pignalberi,
confirmed that the third recommendation is from the other
subcommittee.
MR. PIGNALBERI reiterated that this is not part of this proposal.
CO-CHAIR WARD said the commission will have to merge several of
the subcommittee's reports for their full consideration.
MS. PEASE summarized the subcommittee's recommendations: (1)
Perform a capital requirement study and review the balances in
AHFC of $1.8 billion; (2) look at the possibilities of combining
AHFC with AIDEA, the postsecondary loan program and perhaps the
Municipal Bond Banks - and that combination is one of their
recommendations as well; (3) pursue privatization of the two
alternatives that could be taken for that approach.
COMMISSIONER VALESKO asked how much has to be appropriated by the
legislature for the capital requirement study.
MS. PEASE said the subcommittee had not looked into that, but it
would be far less than looking at the amount of money that may be
held too much in excess in each of these entities.
CO-CHAIR WARD said he doesn't believe that because of the current
financial market. He mentioned the existence of a level
acceptable by major lenders and bonding capabilities, and the
need to not cause a ruckus in the bond market. He suggested
there are rules that apply currently, however.
Subcommittee Report on the Department of Military and Veterans
Affairs
CHRIS NELSON, Chairman, Department of Military and Veterans
Affairs (DMVA) Subcommittee, who is also staff director for the
Alaska State Legislature's Joint Armed Services Committee, told
commission members that the DMVA is a unique combination of
federal and state programs. It makes exemplary use of volunteer
resources in both its veterans' programs and in the naval militia
and state defense forces. He emphasized that there are no
opportunities to privatize the National Guard, and the
subcommittee has no intention of recommending that.
MR. NELSON reported that the subcommittee came up with two
recommendations on programs run through the department. First is
the federally funded Youth [Corps] ChalleNGe Program. Begun in
1993, it targets at-risk youth, high school dropouts between the
ages of 16 and 18. When established, it was entirely federally
funded and administered in each state by the National Guard. The
program has had a very high success rate in reaching these youths
and helping them turn their lives around. Although the program
has been renewed, the federal government now requires a state
match that is increasing yearly. In the next couple of years,
the state match will go up to 40 percent, with 60 percent coming
from the federal government. Currently, the state match comes
from the DMVA, which doesn't think that is appropriate because
these young people are not members of the National Guard and most
are too young to become members of the military. They are, in
fact, receiving vocational training and assistance in completing
their high school equivalency diplomas. The subcommittee views
them as students, and funding for the state match should be
shifted from DMVA to the Educational Foundation Formula. House
Bill 403 was introduced late in the session last year to
accomplish this, Mr. Nelson noted; it will receive a full hearing
in the House Special Committee on Military and Veterans' Affairs
next session.
COMMISSIONER FINK indicated the program has worked better than
the educational system as a whole because it is a military-
disciplined life with problem children. He asked whether the
recommendation is transfer to the Department of Education and
Early Development.
MR. NELSON replied no. He clarified that the subcommittee is
recommending that the funding come from that department but that
the program continue to be run by the National Guard; otherwise,
the state cannot get the federal funds. It is a budgetary
change. The youths need drill sergeants, which is what they are
getting and responding to very well.
COMMISSIONER VALESKO asked if the recommendation was a matter of
ease of getting money into the program.
MR. NELSON acknowledged that getting money into the program is
not going to be easy. Currently, the National Guard is making up
that amount, and taking it out-of-hide. He further stated:
We can do it two ways: number one, we can increase the
funding for DMVA and give them general fund money to do
that. But these young people, if they were in the
schools, would be receiving Educational Foundation
Funding Formula because they're students. They are in
a program, a highly structured disciplined program,
unlike any other education program (indisc.) things.
But if you look at what they're really doing, they're
learning there, they're students, and that's the
appropriate place we're saying to put it, is the
funding formula.
SENATOR ADAMS asked what the per-student cost is.
MR. NELSON deferred to Deputy Commissioner Chase.
JIM CHASE, Deputy Commissioner/Chief of Staff, Department of
Military and Veterans Affairs, said the cost per student varies
each year. It is based upon the number of students and what
percentage of the match the state is offering. Currently it is
approximately $17,000 to $19,000 dollars per session.
UNIDENTIFIED SPEAKER inquired about the length of a session.
MR. CHASE said 22 residential weeks, 24 hours a day.
SENATOR ADAMS suggested it is much cheaper to send those youths
to Mt. Edgecumbe High School, which perhaps has the same
curriculum and discipline as well.
MR. CHASE responded that it is also cheaper than putting them in
McLaughlin [Youth Center] for a year, or else the Department of
Corrections is where they are headed.
COMMISSIONER VALESKO asked where the program takes place.
MR. NELSON said Camp Carroll, a single residential location on an
army base. Youths from all over the state are housed in the
barracks.
COMMISSIONER HARPER asked whether information is available
regarding the cost per student versus that for adolescents held
in Alaska's correctional institutions.
CO-CHAIR WARD replied that his staff will try to pull that
information together for the following meeting.
REPRESENTATIVE BRICE said he assumes the recommendation is to
take the $4,000 per student and have the state make up the rest
of the funding. The school education formula counts each child,
approximately $3,800 a head; however, there is still a fairly
large gap between the program costs and what the Department of
Education and Early Development will provide. He asked if the
legislature would come up with the general funds to make up the
difference.
MR. NELSON said that is one option. The program has been 100
percent federally funded, but the renewed program requires an
increasing state match year by year. Currently the DMVA is using
funds appropriated to make up that state match. The subcommittee
is asking the foundation formula to start picking up the portion
of the state match. If the foundation formula amount per student
is not sufficient to cover the amount for the state match, then
[the legislature] will have to look at either general funds or
again making an increased appropriation to the DMVA to do it.
MR. NELSON emphasized that the program is a national program run
with a federal appropriation through the National Guard, with a
requirement that it be administered by the National Guard. If
the youths were sent to Mt. Edgecumbe, the federal funding would
be lost.
CO-CHAIR COWDERY reemphasized the 24-hour-a-day cost.
MR. NELSON reiterated that the Youth Corps ChalleNGE Program is a
residential program where these youth are on a military
reservation under supervision and are disciplined in a highly
structured program. Its response rate has been wonderful.
Youths that no one else has been able to reach have responded to
this program at a very high success rate.
CO-CHAIR WARD asked what the percentage is from the federal
government for this year.
MR. CHASE specified that last year it was 70-30, this coming year
it will be 65-35, and the following year will be 60-40.
CO-CHAIR WARD remarked that the Finance Committee will have to
look into this because it is becoming very expensive for the
state.
COMMISSIONER NOTTI asked if the program is at capacity and if
students are being turned away.
MR. CHASE reported that there is a waiting list; as the waiting
list ages, they do lose them. They are trying to turn away as
few as possible. This program is supposed to graduate 100 youth
for each class. The last class held 153. Because the first
couple of weeks are the toughest, however, the count has already
dropped to 96.
COMMISSIONER NOTTI asked what the future plan is for this
program. Has the federal government set a funding level, for
example, and is it going to stop at 50 percent?
MR. CHASE said the government is funding 60 percent and the state
40. However, that number is a little soft because the National
Guard is doing this on a basis of other states, not Alaska,
(indisc.--noise) underfunded by the federal government the whole
time. The state has tried to come in with a bigger-than-required
match to make up the difference, but they've never been
adequately funded.
CO-CHAIR WARD noted that the BIA (Bureau of Indian Affairs)
picked up matching funds for the Navajo Nation's program. He
asked if this had been discussed as part of the cost for Alaska
Native students that may be participating.
MR. CHASE indicated he was unable to answer that question.
CO-CHAIR COWDERY indicated he supported this program.
MR. PIGNALBERI remarked that he didn't see a mention of the
Alaska Defense Force. He requested information that would
describe what the role is of the defense force and what their
budget requirements are. He mentioned that he is a member of the
defense force and that he believes their membership is more than
250.
CO-CHAIR WARD suggested Mr. Nelson and Chase submit this
information in writing; both agreed to do so.
COMMISSIONER VALESKO referred to the various service contracts
and asked if the National Guard needs additional security. He
also asked if the subcommittee had looked into the contracts and
savings that they might make if they were not privatized.
MR. NELSON responded:
First of all, the dual nature of the National Guard,
it's a major reserve component in the Armed Forces of
the United States. As such, it's under the Department
of Defense directives on privatizations. And
facilities management is on all military installations,
including the National Guard. And reserve
installations are required by the federal government,
under Office of Management and Budget circular ... A-
76, to be privatized. So the guard really doesn't
quite have the options as part of Army and part of the
Air Force; they're under the A-76 requirements to let
contracts out of the facilities management. So their
facilities management is privatized.
The second thing to remember about the Alaska Guard is
that it operates ... 76 facilities around the state,
not just the (indisc.) headquarters here in Anchorage,
and armories, but out in villages and scattered
throughout the state - a total of 76 facilities in
that. The third thing is that most members of the
guard are part-time people rather than full-time. The
full-time unit support of the guard is actually very
low. The ratio of full-timers and part-timers in the
guard is such that if you were going to have full-time
guard security people, for example, doing site security
on these things, you'd have to bring them on active
duty. You'd have created more full-time slots within
the guard.
The general feeling is that you wanted the guard, like
the Army and the Air Force, to be organized in units
that meet tactical missions that can be mobilized,
employed and fight. And if you're degrading those
units by requiring their members to perform additional
duties, you're not really getting a whole lot of bang
for your buck on the combat end of this. That was the
whole purpose behind the A-76 initiatives.
MR. NELSON referred to his basic training at Fort Dix, New
Jersey. He said the reason the program took nine weeks is that
every Friday they worked on various maintenance facilities. When
they reduced the training cycle to seven and one-half weeks, and
when they eliminated post duty days and hired KPs, grounds
maintenance and security people achieved a great savings in time
in being able to train solders faster and move them out into
their units. That is basically the purpose behind the
privatization, and the guard follows those initiatives required
by the Department of Defense.
SENATOR ADAMS asked what the DMVA is doing about recruitment
efforts both in urban and rural Alaska. He pointed out that if
Alaska obtains more recruits, the state can receive sixteen
federal dollars for each state dollar.
MR. CHASE pointed out that the guard has an active recruiting
program and has been trying to put performance measures on those
recruiting efforts. However, it is one of the hardest things to
do. The guard is attempting to figure out how much more effort
it has to put in. One issue is standardization of education,
which will become more standardized in the next couple of years.
The second issue is substance abuse. If one cannot read above
the ninth grade level or state that it has been six months since
the last joint [marijuana] was smoked, one cannot pass the test.
CO-CHAIR WARD commented, "That's one of the underlining factors
of our social ills, including the smoking of marijuana or the
ninth grade education - the lack of ability to work is causing a
tremendous problem in all of Alaska,and it's going to continue."
Subcommittee Report on the Alaska Railroad Corporation
LEE WAREHAM, Chairman, Alaska Railroad Subcommittee, reported
that the subcommittee didn't say to sell the railroad because
there was a feeling that it was premature. There might be a way
that it could attract large amounts of outside capital and play a
significant role in the state. Recommendations ask the policy
makers to look at the role of the railroad to see if what the
state is doing with it is optimal. The first recommendation is
that the legislature shall cause to be issued an RFP for the
purchase or operating lease of the Alaska Railroad. Based on
advice from people in the business, they had looked at the
railroad as an operating entity, as opposed to the way it is
currently constituted with real estate and other pertinencies.
The subcommittee's concern was that if the railroad were offered
as a package, it would be clouded by real estate interests or an
agenda other than the railroad's operating.
CO-CHAIR COWDERY said he believes that the private sector is more
interested in the railroad than in the real estate because there
is so much vacant real estate.
CO-CHAIR WARD asked if the subcommittee had addressed separating
the two. Real estate is not necessary for the operation of the
railroad as compared to a total package, he said, indicating it
is secondary.
MR. WAREHAM said he didn't think there was disagreement with what
Co-Chair Ward had expressed. As the subcommittee was told, a
legitimate operating railroad might look at the Alaska Railroad
as something that they could fold into its business. They had
discussed the issue of an eventual extension of the Alaska
Railroad to meet the Canadian Railroad, which presently
terminates at Fort Nelson; this would require a lot of money.
One possibility is if someone with access to large amounts of
capital were to acquire the Alaska Railroad, they might put
together with their Canadian counterparts some kind of a project
to connect with each other. But that is an economic issue, and
the subcommittee wasn't competent to pass judgment on whether
that is realistic.
CO-CHAIR WARD reconfirmed that one consideration of the
subcommittee was to take the Alaska Railroad and divest the
state's interest in it to a private entity, with one of the parts
of that selling or divesting to hook up to the Canadian line.
MR. WAREHAM said the subcommittee had discussed that but were not
confident to recommend to the commission, "You go out and buy."
CO-CHAIR WARD remarked, "You own it, so you're very confident to
say it."
MR. WAREHAM reiterated that the subcommittee is confident to wish
but not to judge its practicality. The subcommittee had tried,
in their recommendations with regard to the RFP, to have the RFP
be prepared, presented and reviewed in such a way that it would
be an objective process and not a particular agenda. It was not
the subcommittee's intention to be critical of anyone. They had
tried to focus the collective wisdom of the participants in this
process - the legislature, the executive branch and, insofar as
possible, the private sector. So what they came up with was
truly a reflection of the subcommittee's collective wisdom and
aspirations about the railroad.
MR. WAREHAM relayed the subcommittee's second recommendation that
the Alaska Railroad shall offer to sell land presently leased to
leaseholders to the leaseholders for fair market value. He
mentioned private individuals coming forward and said it would be
beneficial in terms of economic development of certain parts of
the railroad's real estate if the underlying land itself were
owned by the leaseholders.
MR. WAREHAM read the third recommendation, "The Alaska Railroad
shall offer to sell for fair market value all land that is
nonessential to railroad operations and is non-revenue-
generating." He said the subcommittee had made that
recommendation with the knowledge that historically in the United
States railroads have been large real estate owners. For
example, when the Transcontinental Railroad was built, every
other section along the right-of-way was given to the railroad;
they got a square mile on this side and a square mile on that
side. In the early 1900s the U.S. government transferred to
railroads, as incentives to build railroads where they were not
economically viable, 139 million acres. When the subcommittee
made this recommendation, they were aware that historically real
estate has been an incentive for railroads in areas where the
population or geography didn't generate enough revenue to support
them.
CO-CHAIR COWDERY noted that it was at the startup of the
railroad.
TAPE 99-20, SIDE A
CO-CHAIR COWDERY made reference to the owners of rails that run
through Nebraska that only haul freight; he said he believes they
don't pay a dividend. He asked whether there was a
recommendation that the Alaska Railroad pay the state a dividend.
MR. WAREHAM responded that the subcommittee had discussed that.
However, the Alaska Railroad has plowed every nickel earned back
into capital improvements. An authoritative organization had
recommended they should be spending approximately $17 million to
$20 million a year on capital improvements, and they haven't met
that yet because they haven't generated enough money to plow back
into it.
CO-CHAIR WARD asked if federal funds brought it up to that
amount.
MR. WAREHAM said that wasn't clear to him.
CO-CHAIR WARD remarked that they have had the federal funds to
bring it up to that amount.
MR. WAREHAM noted they had approximately $20 million a year.
COMMISSIONER THOMAS, who is also a member of Alaska Railroad
Corporation Subcommittee, said she thought that if they moved the
depreciation dollars around, they were getting close to that
number. She also thought the Mercer Report addressed that.
MR. WAREHAM said it appeared that if the railroad were required
to pay a dividend, it would come out of their "seed-corn" in that
if they're already short of the capital requirement, and this is
an ongoing capital requirement, this isn't a catch-up. This
specifically was a number that they said was valid over time for
a railroad.
CO-CHAIR COWDERY asked Mr. Wareham whether he was privy to the
personnel costs of operating the railroad.
MR. WAREHAM replied that they had the railroad's financial report
that showed gross expenditures. An engineer will probably make a
little more than $100,000 a year with overtime, which isn't out
of line with other railroads.
CO-CHAIR COWDERY indicated executives hide behind the fact that
they are in a private corporation on some things, and then come
forward for government assistance on other things. Furthermore,
they can't disclose detailed cost in a financial statement like
other departments do.
MR. WAREHAM responded that the subcommittee didn't discuss
individual or senior executive salaries. They had addressed in a
general way the appropriateness of the relationship between the
wage levels for the Alaska Railroad and other railroads. And
based on what the subcommittee was told, they aren't out of line.
MR. WAREHAM read the fourth recommendation, "The Alaska Railroad
shall implement a vegetation control program, including the use
of herbicides." He explained that probably more than $1 million
can be saved a year by using herbicides for vegetation control in
the roadbed itself, not along the right-of-way. All other
railroads in the U.S. - with the possible exception of those in
Vermont - use herbicides in the roadbed itself. Furthermore,
willows and alders are not killed with the current system, and
they displace the roadbed. It only takes 75 gallons of herbicide
a year ; according to railroad employees, in one summer weekend
Home Depot sells more of this herbicide than would be used on the
railroad in a year. And modern herbicides are not poisons in the
sense that they were 20 years ago. The chemical compounds fool
the plants into "thinking" they can use it as a nutrient: they
take it up and basically starve to death. Noting that the
railroad only clears, after expenses, $10 million a year, he
suggested that without having this $1 million savings, 10 percent
is being wasted.
CO-CHAIR WARD asked Mr. Wareham if the subcommittee had discussed
the railroad coming under the Executive Budget Act.
MR. WAREHAM replied no.
COMMISSIONER FINK said he totally agrees with the report but
thinks (indisc.) too critical. He referred to the following
subcommittee statement: "Criteria for mandatory acceptance of a
respondent's proposal shall be included in the RFP to ensure that
a proposal will be accepted if it meets the prescribed criteria."
He asked how one can have a mandatory acceptance and an RFP if it
is subject to legislative ratification. He said people had tried
to buy the railroad before, but the state changed its mind.
MR. WAREHAM indicated this step would precede legislative
ratification.
UNIDENTIFIED SPEAKER added that the "executive department" would
have to accept (indisc.) standards but the legislature still
would have the right ....
MR. WAREHAM interjected that absolutely, the legislature always
has the last word.
COMMISSIONER FINK directed attention to another recommendation:
"The RFP shall stipulate that if the purchaser ceases operation
of the railroad, then ownership and control shall revert to the
State of Alaska." He asked whether, if Mr. A bought the
railroad, operated it, then wanted to sell it to Mr. B, he could
do that without its reverting to the state.
UNIDENTIFIED SPEAKER said the only reversion would be if someone
ceased operating the railroad.
MR. WAREHAM explained that if somebody bought the railroad and
then, for whatever reason, didn't want to do it anymore, the
subcommittee didn't want them to have to shut down and go through
bankruptcy, which is different because it is done with federal
oversight and so forth. The subcommittee had agreed that the
railroad is important to Alaska, and they didn't want to have it
knocked off the (indisc.--noise).
MR. PIGNALBERI read the following statement from the
subcommittee: "Proposers must stipulate that railroad employee
pension benefits will be maintained on par with existing plans."
He asked whether it would meet the stipulation if the current
employees would never have their retirement benefits diminished
or whether Mr. Wareham believed the plan was so good that it
ought to be imposed upon.
MR. WAREHAM noted that the subcommittee had changed the draft to
reflect that if the railroad would be sold, it would be sold with
the existing labor contracts in place. The intent was that one
cannot bind the parties afterwards, but it was intended to ensure
employees that the intent wasn't to sell it to somebody who would
cut their wages in half.
MR. PIGNALBERI asked Mr. Wareham if he was trying to protect the
current pension plan for the current employees.
MR. WAREHAM emphasized his knowledge about this because he was on
the Teamster Pension Trust for 10 years and worked for Alascom.
He pointed out that one cannot retroactively diminish somebody's
benefits. One can prospectively diminish the rate of accrual of
new benefits. He concluded that this was meant as reassurance so
as not to send up a red flag to the employees.
CO-CHAIR WARD asked Mr. Pignalberi to make that change for the
member's packets.
COMMISSIONER THOMAS informed Commissioner Fink that she had sat
in on that [subcommittee] meeting, and concern was expressed by
the subcommittee regarding the ownership and control reverting
back to the State of Alaska. They also had a lot of concern
about a certain segment of the railroad being shut down and
somehow having the ability to keep that route open for the state
to go back in and deal with that.
UNIDENTIFIED SPEAKER remarked that as long as one operated the
railroad, there would be no reversion. The buyer would have the
opportunity to sell it if he wanted to.
COMMISSIONER THOMAS agreed.
COMMISSIONER VALESKO referred to the recommendation to put an RFP
out for selling the Alaska Railroad. He asked Mr. Wareham if the
subcommittee had done an analysis to save the state money.
MR. WAREHAM responded no, they didn't have the resources nor did
they believe they had the competence to make a recommendation
like that. The subcommittee had tried to structure their
recommendation so that it would come out of the process that they
had initiated.
COMMISSIONER VALESKO expressed his understanding that the
subcommittee is not saying that selling the railroad would be
cheaper for the state.
UNIDENTIFIED SPEAKER replied no.
COMMISSIONER THOMAS mentioned that she had sat in on the
subcommittee meeting that included an interview with Gill
Carmichael (ph), who participated in several publicly owned
railroads going private. She said he actually thought the
railroad was worth a tremendous amount of money and that we'd be
surprised at what we might get. So part of the answer to the
question is that it may put some money in our bank account if we
sold the railroad. There was also a concern regarding some of
the potential liabilities that we may have: the lack-of-
maintenance question, the number of derailments on a consistent
basis, and if we had potential liabilities with a state-owned
entity that would be derailing cars full of tourists, including
at what point our responsibilities and liabilities step in versus
the amount of maintenance being done. She asked if that is
correct.
UNIDENTIFIED SPEAKER replied that it is a good characterization.
SENATOR ADAMS noted that five years ago he was one of the
proponents that wanted to sell the Alaska Railroad; however, his
views have changed. He indicated political reality says that one
would not be able to, from this session, get the legislature to
pass an RFP or piece of legislation with those recommendations.
He said he is saying that because many members would look at the
loss of federal funds, capital money on keeping the maintenance,
whether it is between $17 million and $20 million. There are
also legislators who would worry about the federal funds for the
Anchorage spur expansion, because they would like to see that
completed so people getting off the tour ships in Seward can
board the train and go directly to the airport. Other concerns
are government-versus-private funds for future Canadian spur
expansions, or perhaps the north and south Prudhoe Bay
Transportation Study. Senator Adams reiterated that he thinks it
would be difficult at this particular point to get passage from
this legislature for an RFP.
REPRESENTATIVE BRICE asked Mr. Wareham if the subcommittee had
considered environmental liabilities and who would be responsible
for cleaning up the railroad land. He added that he believes
there is a great concern about how that liability would transfer.
MR. WAREHAM noted that the subcommittee had met at some length
with representatives of the railroad, who were very helpful.
Under the statute transferring the Alaska Railroad from the
federal government to the state government, there was an
indemnification of the state for environmental damage, hazards or
whatever happened on the federal watch. However, of concern is
that as more time passes, it gets more difficult to establish
that something happened on the federal watch. He indicated that
it was obvious that when and if the railroad were to be
transferred to a private owner there would probably be some kind
of an indemnification similar to what "we" got because that is a
wild card that scares people.
CO-CHAIR COWDERY said he believes one cannot sell railroad land
that is contaminated and get rid of the liability if one created
the liability. He added that he thinks that is in federal law.
COMMISSIONER VALESKO referred to the comment that it would take
75 gallons of herbicide to cover the roadbed. (Indisc.--
telephone interruption).
UNIDENTIFIED SPEAKER said it was from Anchorage to Seward.
UNIDENTIFIED SPEAKER explained that one would have to mix the
herbicide with so many gallons of water. It is not the total
amount of liquid but the total amount of chemicals.
COMMISSIONER VALESKO said he understands that. He was wondering
how powerful the herbicide might be and what damage a drop of
that herbicide could have.
UNIDENTIFIED SPEAKER noted that the subcommittee had discussed
that. However, this is not a poison but something that looks to
a plant like a plant food; when the plant takes it up into its
system, it stops the normal life process. It doesn't causes
people who get it on their hands to fall over dead.
CO-CHAIR WARD announced that the railroad will include that issue
when it submits its written response.
UNIDENTIFIED SPEAKER added that the subcommittee had asked what
they do in Scandinavian countries because the issue of soil
temperature came up. He noted that as environmentally
conscientious as the Scandinavians are, they use the same
chemicals that the subcommittee is proposing to use.
Subcommittee Report on the Hydro-Electric Projects Subcommittee
Alaska Intertie Recommendation:
ERIC YOULD, Member, Hydro-Electric Projects Subcommittee,
presented the subcommittee's recommendations. He noted that the
group was formed to consider the state's divestiture of three
projects: the Four Dam Pool, the intertie between Anchorage and
Fairbanks, and the Bradley Lake Hydroelectric Project. All three
were constructed by the Alaska Power Authority, which became the
Alaska Energy Authority. In 1993, through legislative action,
the agency was basically split in two, and the name Alaska Energy
Authority - along with certain staff and certain operational
responsibilities - was transferred to AIDEA.
MR. YOULD pointed out that the intertie, completely funded by the
state, went online around 1983/1984. A $124 million project that
transfers power up and down the Railbelt, it has been very
successful. In fact, Golden Valley Electric in Fairbanks likes
to boast to consumers that it hasn't had a rate increase since
1982. The Anchorage area also benefited because of the ability
to spread some overhead by sending secondary power north. The
recommendation of the subcommittee is that the intertie should
remain status quo, in the sponsorship and ownership of the State
of Alaska. Presently it is costing the state nothing, and the
utilities plus the rate payers in the Railbelt area are paying
for the operation of the line. There is no payment to the state
for any of the $124 million originally put into the project in
its initial construction. That was put forward as a direct
equity investment by the state.
UNIDENTIFIED SPEAKER asked whether, if the state were to put the
intertie up for sale, somebody would buy it.
MR. YOULD responded that if the state at the same time made it
clear that rates for consumers could go up, the answer is yes.
UNIDENTIFIED SPEAKER asked whether, if it were sold without any
conditions, somebody would buy it. Does he know what it is
worth?
MR. YOULD responded that it would depend on whether that entity
could make money and if the Regulatory Commission for Alaska
would allow them to make money. He further explained that an
existing agreement would have to be abrogated.
UNIDENTIFIED SPEAKER asked what the agreement is.
MR. YOULD said it is an agreement between the state and the
utilities that actually operate and receive power over the lines.
SENATOR ADAMS asked Mr. Yould, with regard to the change in
federal law to deregulate interties, how that would affect this
particular line. And would there be more competition for other
utilities to get involved?
MR. YOULD answered that deregulation has not come to Alaska but
it could very well. In other states, transmission in
distribution line systems is remaining regulated, so that all
users can transfer power over those lines without the operator of
those lines being able to essentially gouge. It is the same
situation with a pipeline. The pipelines are regulated, but the
actual sale of gas is not. The same is also true with the
transmission line. What is happening in the Lower 48, however,
is the creation of independent system operators.
UNIDENTIFIED SPEAKER interjected "distribution."
MR. YOULD replied that transmission is correct. He further
stated that such a line could be included in a statewide network,
if one wants to call it that, as an independent system operator
under a deregulated system. Currently, however, the state is
considering whether deregulation will actually bring benefits to
the state, and it is an open question as to whether or not there
will be deregulation in the state.
COMMISSIONER FINK asked whether, if the state sold the railroad
and (indisc.) the buyer would be part of a regulator utility, it
is conceivable that somebody could bid the $124 million or a
multiple or a division of that.
MR. YOULD indicated nobody would buy it for that amount, nor
probably for half or a third of that, because one would have to
recapture one's investment, and the only way to do that is to
raise the rates for people in the Railbelt. So somebody will
have to pay for it.
COMMISSIONER FINK said if they are regulated, somebody would pay
for it.
MR. YOULD replied that it is up to the state - a policy decision
- as to whether power costs should go up in the Railbelt.
COMMISSIONER FINK said the policy decision to him is whether they
want the rates to go up, whether they want to sell it, and then
whether they want to allow somebody to get a return on whatever
they've invested, which is the normal American way. To him, Mr.
Yould's premise seemed to be that the current operation is the
most efficient possible, and a private enterprise could not come
in and operate it more cheaply.
MR. YOULD said he didn't think private enterprise could operate
the transmission line more cheaply or efficiently. Furthermore,
it is a very small cost now anyway, but any debt service to be
picked up and paid for is going to have to be picked up by the
rate payers.
MR. WAREHAM suggested they were back to the public policy issue.
What has happened, he said, is there is an asset that has no
capital service requirement. In other words, it was a grant by
the state. The state said, as a matter of public policy, that
they had put it in place, and it is being operated at cost, which
is passed on to the rate payers in the Railbelt who are served by
the intertie. For someone to buy it, it would require a way of
paying down and earning profit, and that would be added to the
cost of electricity to the people in the Railbelt area.
COMMISSIONER FINK suggested that it may very well be that it
could be sold if it were part of a regulated utility - as Mr.
Yould said exist in the Lower 48. If it were put up for sale and
someone knew it was going to be regulated, that means they will
be entitled to a return on their investment, and if they were to
operate more efficiently from a maintenance and operation
standpoint, they could very well offset the increase to the
consumer.
COMMISSIONER WUERCH said it is troubling. Once again we see the
state entering into a business transaction. In fact, we give
that entity the investment. And there really is a cost to that
even if we don't charge that operating enterprise with it,
because there is an opportunity cost. Furthermore, we could have
taken that $124 million and put it into something else that would
have yielded a dividend. So without getting into the debate of
the business practices here, we're caught up in this case where
previous legislators had decided that, "There's no cost to
capital, we'll just give it to the intertie, in this case, and
forget about it." He said that is unfortunate because it is not
reality.
COMMISSIONER WUERCH requested elaboration from the subcommittee.
He emphasized that throughout the greater part of the U.S. there
is a trend to separate: generation and transmission from
distribution and billing. In other words, Chugach Electric and
Municipal Light and Power (ML&P) both generate, transmit and then
distribute to consumers electricity. In the Lower 48, that
industry is beginning to separate where distribution and retail
sales are one thing, and the sale or generation of transmission
is another. Commissioner Wuerch asked whether the subcommittee
had discussed the trends in Alaska of following this economic
model or the business practices in the Lower 48.
UNIDENTIFIED SPEAKER affirmed that the subcommittee had discussed
the trends and setting up a transmission entity. They also
looked at the issue of the overhead. He further stated:
I'm a rabid "free-enterpriser," ... but we, the people,
have a deal here that's going to be awfully hard to
beat. ... In terms of "is there overhead that could be
reduced?" the maintenance is done ... by the entities,
by GVEA in their area and by the various power
utilities in their area, and that's done at cost. And
within the state we specifically asked people in the
department how many people would go away if we
eliminated this.
UNIDENTIFIED SPEAKER, in response to mention of "half a person,"
said the overhead within the state for the intertie specifically
is de minimis.
UNIDENTIFIED SPEAKER said he believes that is rolled into the
cost of the project. He noted that deregulation is being debated
by the legislature.
SECOND UNIDENTIFIED SPEAKER remarked "many legislatures."
UNIDENTIFIED SPEAKER emphasized that investor-owned utilities
have had the opportunity ever since Alaska became a state. In
the Railbelt, there isn't a single investor-owned utility. It is
all municipalities and co-ops because the "investor-owneds"
couldn't figure out how to come to Alaska and make money, and
they have a totally different philosophy and need. The co-ops
and municipalities have a singular purpose, which is to keep the
cost of power low for those that own the line - the consumers
themselves. That is the situation in the Railbelt. Yes, this
was directly invested in by the State of Alaska, but everybody in
the Railbelt participates and enjoys the return from it, just
like the permanent fund. Rural Alaska receives the benefit of
Power Cost Equalization, and the people in the Four Dam Pool
communities receive the benefit. "We" too receive some equity
contribution from the state on the Bradley Lake Hydroelectric
Project. He concluded:
So I guess I'm not too sympathetic to the idea,"Well,
let's just give it to the private section." Frankly, I
don't think they can do it cheaper than our utilities
can. And, frankly, they have never chosen to come to
the state of Alaska and do it in the first place.
Seventy percent of the power in the state of Alaska
comes from co-ops, 20 percent from municipals and only
10 percent from investor-owned utilities. I might add
that they're very good.
In terms of the template of deregulation, once again,
look at us. We have a very weak transmission line
between Homer and Fairbanks - a system that I can tell
you is not near the myriad of interconnections that you
have in the Lower 48. We only have three providers -
Golden Valley, Chugach and ML&P - and we don't have
this myriad of providers, we don't have (indisc.--
tapping noise) utilities up here, we just don't have
the same template that you have in the Lower 48 that's
going to make it work down there. It might work up
here, but we're still trying to figure that out.
COMMISSIONER NOTTI asked how the contract would affect the sale
price.
MR. YOULD deferred to AIDEA for the specifics of that contract.
COMMISSIONER FINK emphasized that he didn't have any intention of
giving the railroad to private enterprise, and that he wouldn't
object if they paid $124 million for it.
MR. YOULD indicated people would be paying for it in their
electric bills.
COMMISSIONER FINK said maybe, maybe not, but that possibility is
there.
MR. YOULD interjected that one would have to pay debt service.
COMMISSIONER FINK added that one may get sufficient reductions
elsewhere to offset that. It is not the way co-ops work, but
that is the way private enterprise works.
KEITH LAUFER, Development and Finance Manager, Alaska Industrial
Development and Export Authority (AIDEA), Department of Community
and Economic Development, came forward to answer Commissioner
Notti's question regarding how the contract would affect the sale
price. He pointed out that the existing long-term agreement
between the Alaska Energy Authority and all utilities that
participate in the intertie does not allow the state to terminate
that agreement unless there is some sort of danger to the line.
That agreement provides that the utilities cover all the
operating, maintenance, renewal and replacement costs for the
line, but they are not required to pay anything to the state.
Furthermore, if the state were to transfer the projects, assuming
it was not willing to breach the existing agreements, there would
be no return to an investor who purchased the line because there
is no return currently to the state in its ownership position.
So if the state sold it with the agreements in place, there would
be no return to the investor. Mr. Laufer said his sense is that
the purchase price would be zero with the existing agreements in
place.
CO-CHAIR WARD asked him to provide his opinion in writing.
Four Dam Pool Divestiture Recommendation:
MR. YOULD pointed out the Four Dam Pool is a project that the
subcommittee recommends the state divest to the utilities that
presently operate the four projects: Solomon Gulch, Swan Lake,
Terror Lake and Tyee Lake. These projects were built by the
state with a 100 percent equity contribution by the state of $483
million. There currently is a payment to the state of debt
service of 6.8 cents per kilowatt hour, 2.8 cents per kilowatt
hour of which goes to the operation of the projects. The other
4.0 cents per kilowatt hour is basically dedicated to two funds -
Power Cost Equalization and the Southeast Energy Fund - with a
split of 60-40 percent to those two funds.
MR. YOULD said there is also in place a power sales agreement
between the state and the utilities themselves. It is very
favorable to the utilities in that it requires that any costs for
maintenance not conducted by the state can be paid for by the
utilities by deferring the debt service for that operation of
maintenance; that is called the self-help clause. Basically, the
combination of the outstanding debt and the self-help clause are
such that the communities have been advocating that the projects
be divested to them. The legislature has somewhat agreed and has
continued to urge AIDEA to divest the projects. The subcommittee
also felt that the projects should be divested, and the state
should receive fair market value for the projects, recognizing
the risk associated with the power sales agreement. However, in
the event the projects are divested, because the projects provide
significant funds to Power Cost Equalization, the subcommittee
feels that that needs to be taken into account as well, because
Power Cost Equalization is important to keeping the cost of power
in rural Alaska low.
COMMISSIONER FINK asked if the subcommittee had considered
selling the Four Dam Pool.
MR. YOULD deferred to AIDEA. He noted, however, that this was
debated in the legislature last year, and the general feeling was
that the utilities themselves, given that the power sales
agreement was in place, would be able to come in cheaper than any
private sector bidder could. Furthermore, if a private sector
entity came in and the community did not want the projects to go
to the private sector, they could refuse to abrogate the power
sales agreement. Hence the sale could never go forward. Mr.
Yould indicated it is a very entangled situation, especially with
the power sales agreement that favors ownership by the
communities and by the utilities themselves.
COMMISSIONER FINK asked: Wasn't there a conversation about
selling this before, and the utilities didn't want to pay what
the state entity thought it was worth?
MR. YOULD said he would defer to AIDEA.
CO-CHAIR WARD noted that four communities, one of which was
Petersburg, didn't want to pay what the state was asking. He
also mentioned that there were private people who wanted to
purchase it, but it definitely was going to raise utilities. So
the legislators at that time decided to do nothing; however, it
is different now.
COMMISSIONER VALESKO expressed concern about requests to put
reports in writing.
CO-CHAIR WARD explained that the commission needs to know that it
is an official opinion from AIDEA.
CO-CHAIR COWDERY added that the legislature will want to be able
to review this information.
TAPE 99-20, SIDE B
Bradley Lake Hydroelectric Project Recommendation:
UNIDENTIFIED SPEAKER informed the commission that the Bradley
Lake Hydroelectric Project went online in 1990. He indicated
that of He pointed out that $328 million, $163 million was a
direct equity contribution by the state and the balance was
funded by a general obligation (GO) bond, a tax-exempt bond, from
the [Alaska] Energy Authority. Presently, the utilities pay all
of the debt service on the outstanding bonds as well as all of
the operation/maintenance costs. There is a provision that at
the end of the payout of the bonds, the utilities will continue
to pay at the same rate that they were paying on the bonds, and
those funds shall be used for future capital investments in
energy projects. The subcommittee recommended that the Bradley
Lake Project ownership remain status quo with the state. There
are a lot of tax implications associated with defeasing the state
bonds and the favorable interest rate that is out there, which
led to the decision of the subcommittee.
COMMISSIONER COMMENTS
CO-CHAIR WARD announced that Mr. Pignalberi would compile the
recommendations from all the subcommittees to present to the
commissioners. After they are reviewed, if there are any items
that any commissioner wants to be placed on the agenda for
consideration, those will be presented to the full commission.
There will also be individual commissioner recommendations.
MR. PIGNALBERI distributed a recommendation master list and noted
that an updated version was being e-mailed. He said some
recommendations are policy and others are legislative. Although
the executive branch could do a lot of these of their own
volition, the legislature could require it by statute. Mr.
Pignalberi added, "But we're putting in the legislative pile more
of those things that are readily apparent and would need
legislative action."
CO-CHAIR WARD again requested that recommendations and written
reports from agencies be submitted to the commissioners as soon
as possible.
COMMISSIONER THOMAS said she was not sure that the commission was
ready to do it that fast. She would like to see the commission
spend time looking at privatization as an overall issue, and how
it may best be implemented, and how the consideration process may
go forward. She mentioned that some suggestions from different
subcommittees may not fall within the departments; that may be an
overall issue that the commission may want to have
recommendations on.
CO-CHAIR WARD agreed with that suggestion.
COMMISSIONER FINK asked whether the commission was through taking
testimony.
CO-CHAIR WARD affirmed that.
COMMISSIONER FINK asked whether the order of business for the
following day would be the Department of Education and Early
Development, the Department of Environmental Conservation, the
Department of Administration, the Office of the Governor and the
Alaska Court System.
CO-CHAIR WARD affirmed that as well.
MR. PIGNALBERI announced that the departments had been notified
and that the commission will be looking at adopting certain
recommendations.
CO-CHAIR WARD added that the commission is obligated to go
through the recommendations as to which ones will be recommended
by a vote of six.
MR. PIGNALBERI mentioned that departments which have not
responded with written comments are listed under "old business."
He also noted that the audit reports from the Department of
Health and Social Services are available.
CO-CHAIR WARD, responding to an inquiry, said a written reaction
regarding the combining with AHFC is forthcoming.
There being no further discussion or business before the
Commission on Privatization and Delivery of Government Services,
Co-Chair Ward adjourned the meeting at 11:05 a.m.
| Document Name | Date/Time | Subjects |
|---|