Legislature(1997 - 1998)
09/24/1997 09:00 AM Senate RLS
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SENATE RULES COMMITTEE Fairbanks, AK September 24, 1997 9:00 a.m. MEMBERS PRESENT Senator Tim Kelly, Chairman (Participated via teleconference from Anchorage) Senator Loren Leman, Vice Chairman Senator Robin Taylor Senator John Torgerson Senator Jim Duncan MEMBERS ABSENT All members in attendance ALSO IN ATTENDANCE Representative Jeannette James Representative John Cowdery (Participated via teleconference from Anchorage) COMMITTEE CALENDAR SENATE BILL NO. 42 "An Act relating to the fiscal operations of the Alaska Railroad Corporation and to land acquired by the State of Alaska under the Alaska Railroad Transfer Act of 1982 or otherwise acquired for railroad purposes; and providing for an effective date." --PROFESSIONAL SERVICES CONTRACT AMENDMENT FOR JAMES JOHNSON PREVIOUS SENATE COMMITTEE ACTION SB 42 - See Senate Transportation Committee minutes dated 2/20/97 and Senate State Affairs Committee minutes dated 3/25/97, 3/27/97. WITNESS REGISTER Representative Terry Martin, Vice Chairman Legislative Budget & Audit Committee State Capitol Juneau, AK 99801-1182 Jeff Cook, Vice President, External Affairs and Administration Mapco Alaska Petroleum 1150 H & H Lane North Pole, AK 99705 Randy Welker, Legislative Auditor Legislative Audit Division P.O. Box 113300 Juneau, AK 99811-3300 Bill Sheffield, President & CEO Alaska Railroad Corporation P.O. Box 107500 Anchorage, AK 99510-7500 Representative Jeannette James P.O. Box 56622 North Pole, AK 99705 Kevin Bergsrud, State Legislative Director United Transportation Union 5325 E. 41st Ave. Anchorage, AK 99508 John Simms, Vice President of Marketing Usibelli Coal Mine 122 1st Ave. Suite 302 Fairbanks, AK Jerry Burnett, Staff to Senator Randy Phillips State Capitol Juneau, AK 99801-1182 Tim Benintendi, Staff to Senate Rules Committee State Capitol Juneau, AK 99801-1182 ACTION NARRATIVE TAPE 97-8, SIDE A Number 001 SB 42 ALASKA RR BUDGET AND LAND VICE CHAIRMAN LEMAN called the Senate Rules Committee meeting to order in the Fairbanks LIO at 9:00 a.m. and noted the presence of Senators Taylor, Duncan, Torgerson and Leman. Chairman Kelly participated in the meeting via teleconference from Anchorage. REPRESENTATIVE TERRY MARTIN, Vice Chairman, Legislative Budget and Audit Committee (LB&A), testified via teleconference from the Anchorage LIO. Representative Martin noted that over the years the LB&A Committee has received numerous requests for audits on the Alaska Railroad, much of it having to do with the land and how the railroad was using the land. As a result, it was suggested by LB&A that the railroad be put under the Executive Budget Act so that the Legislature has some oversight over the corporation. Representative Martin said it is real problem when the Legislature and the public do not know what is happening to this land, if the state is getting fair value out of the land. etc. He emphasized that placing the railroad under the Executive Budget Act is the Legislature's constitutional responsibility. Number 065 SENATOR TAYLOR asked if any legal research has been done on the question of previous transactions by the railroad, and if, in fact, those transactions are voidable . REPRESENTATIVE MARTIN responded that as yet, the issue has not been addressed. SENATOR TAYLOR expressed his concern that anyone dealing in good faith with the railroad in one these transactions could find out that because it violated the constitutional concerns that have been raised that the contract is voidable. Number 110 JEFF COOK, Vice President of External Affairs and Administration, Mapco Alaska Petroleum, said Mapco has the distinction of being the largest customer of the Alaska Railroad, accounting for about 32 percent of their freight volume and paying about $23 million in freight revenues during 1996. Mapco is currently doing a major expansion of their refinery and they will increase their shipping volumes by the fourth quarter of 1998 by 50 percent. In addition, Mapco is one of the larger tenants of the railroad in leasing from them at the Port of Anchorage. Mr. Cook related that in the last few years Mapco's relationship with the railroad has improved immensely, that the railroad is an excellent landlord, and that they are doing a good job and getting value for their leases. Mr. Cook believes that the Legislature and the state have every right to know what is going on with the railroad, that there should be periodic reports and access to financial reports and audits. However, he cautioned against passage of SB 42 because Mapco feels that the railroad needs to be flexible to meet uncertain changes that may come along in the future. Number 165 SENATOR TAYLOR questioned to what extent he believes the current good working relationship with the railroad is based on current personnel as opposed to previous personnel, and could that change. MR. COOK responded that Mapco's long-term contract with the railroad requires both parties to adhere to certain operational principles, and they have set up the mechanism with this contract to ensure that no matter who is there, they are going to have the kind of relationship that they require or they are going to be able to exit that contract. SENATOR TAYLOR said the state owns the railroad but has very little oversight as to the specific day-to-day management of it. He expressed his concern that in the real world there are always concessions granted and agreements made, etc., and he thinks it is that concern that is the basis for the legislation before the committee. MR. COOK responded that Mapco has external auditors that audit them very carefully and the railroad has auditors as well. He said business is very competitive out there, but he believes business ethics are at an all time high in this country. He emphasized that Mapco has a code of ethics in their company that is abided by and they have a very excellent relationship in that manner with the railroad. VICE CHAIRMAN LEMAN commented that part of his district is the Government Hill area, and he has been to a number of the community council meetings and other neighborhood meetings in which members have expressed some concerns about the relationship with the railroad. He said these concerns, all together, help create an environment for why something like this legislation comes into play. Number 265 RANDY WELKER, Legislative Auditor, Legislative Audit Division, testifying via teleconference from Juneau, said he thinks the bill before the committee should be looked at in two pieces: one is the bill itself that brings the Alaska Railroad under the Executive Budget Act, and the other piece is the appropriation itself to accomplish the constitutional requirement. The intent is to accomplish one very simple thing, which is to bring the railroad under the Legislature's well established process of oversight and review of state government. He added that the railroad is the only entity of state government that does not participate in that oversight process. Mr. Welker said the only contact the division has had with the railroad in recent past primarily has been through the audit process. Usually something has already happened, there is concern about something, and the audit division is called in after the fact. The budget process, an annual oversight process, puts the railroad in front of the Legislature and provides a forum for discussing not only past concerns but future concerns as well. He said that is all LB&A is looking for in trying to bring the railroad before the Legislature. Mr. Welker stated he disagrees with the railroad's testimony that putting them under the Executive Budget Act will impair their ability to do business. He pointed out that language vetoed by the governor in last year's budget bill provided that the amount necessary to operate the railroad would be appropriated to the railroad. He said there were no limitations in that language, and this process isn't envisioned to be one where the Legislature tells the railroad how much they can spend on travel, or how much they can spend on new railroad cars, etc. It is a process just to have an open discussion, and the end result of that discussion is general appropriation language in front of the appropriation bill that says what they need for their operations is appropriated to them. He said that kind of appropriation language allows the railroad to operate the same way it always has. Number 300 CHAIRMAN KELLY questioned what affect adding the railroad's operating and capital expenditures to the budget appropriation bill would have on the majority's efforts to hold down state spending totals. He asked how much money this would mean in FY 2000, which would be the first year this would come into effect. MR. WELKER responded that he guessed it depends on what is considered the state's budget. In reality, he would consider the operations of the railroad as part of state expenditure right now and this would not be increasing state spending. He told Senator Kelly that he didn't have the actual numbers on the railroad's operating and capital budgets. Number 315 SENATOR DUNCAN made reference to Mr. Welker's statement that in the last budget bill there was language providing that whatever the railroad needed to operate would be appropriated. However, he is concerned that by bringing the railroad under Executive Budget Act, the Legislature can go a lot further than that in looking at their level of travel, the level of supplies, equipment purchases, etc. There are no assurances that that general language will continue. MR. WELKER agreed that the capability is always there, but it is not anything that he envisions in supporting this bill or in supporting this process. He is not concerned that the Legislature will get to the point where it begins micro managing the railroad. Number 355 FORMER GOVERNOR BILL SHEFFIELD, President and CEO, Alaska Railroad Corporation, assured the committee that the Alaska Railroad has high business morals and high ethics in its operation, and it is professionally run with good business people. The railroad has internal auditors, external auditors, and performance audits on the railroad itself. Mr. Sheffield said the railroad is running at a profit and is on budget, in fact, they are little bit above budget as far as their profit is concerned. Their passenger service and freight service have been strong this year. The barge service into Whittier from Seattle and Prince Rupert has seen a major turn around and has been very successful. The railroad is currently in the process of finalizing its negotiations with Crowley to continue to be the operator of the barge service. Mr. Sheffield related that the railroad grosses and spends between $75 million - $80 million. During the year 1999 that gross will go to about $100 billion, or a little higher. All the money the railroad makes goes back into the railroad. This year the railroad has ordered eight new locomotives, which it will take delivery of in late 1998 and early 1999. TAPE 97-8, SIDE B Number 001 Mr. Sheffield said the corporation has been doing a lot of planning for the land owned by the railroad. They are going out and marketing their property, planning for the communities on what the highest and best use for that property will be. The Mercer Group has just completed a performance on the railroad as required by state law. He said each year they single out one area, whether it be mechanical, or engineering, passenger service, etc. He pointed out that the railroad cooperates in every way with the auditors. He said they realize that the railroad and land is owned by the state of Alaska, and while they are charged with the responsibility of doing things for the railroad to make it profitable, they also look at how their decisions affect the people of the state. Mr. Sheffield said the railroad is a government operation, but working with the private sector continually. He stressed it needs to remain flexible in order to respond to the needs of the businesses it serves. If the railroad should have to go out and borrow money, they could not obligate one legislature to the next if they were under the Executive Budget Act. He also questioned their ability to negotiate good contracts with the businesses they serve it those businesses can't be assured that the railroad is going to honor those contracts. Mr. Sheffield expressed the corporation's willingness to have a forum with the Senate and House every year to explain its business, and he said they need more of those opportunities. He believes the railroad is doing what it set out to do, and they are doing their best to run it profitably and safe for the people of the state. Mr. Sheffield also expressed concern with transferring or selling railroad land. He cautioned that with control of those lands comes more liabilities for the state of Alaska, which the state doesn't have right now because of the way the corporation has been set up. Mr. Sheffield stressed that the auditors who audit the corporation are professional auditors hired by the state of Alaska and they show them everything they want to see, and the railroad is proud of the way they have conducted their business. Number 120 VICE CHAIRMAN LEMAN said he has had present and former railroad employees tell him that the Legislature is on the right track in suggesting that the railroad needs more scrutiny, etc., and he asked Mr. Sheffield if he was aware of this and if the railroad has some way for employees to voice their concerns where they would be protected from exposure. MR. SHEFFIELD acknowledged this is a concern, and he related a private hotline has been established where any employee can relate problems. He said he also has an open door policy to employees at all times and they can relate any concerns or suggestions. In the past there has been a lack of communication, but that has been improved upon this year. He also pointed out that railroad employees are covered by five unions and it took two years to negotiate the new contracts that were signed last December. Number 151 CHAIRMAN KELLY asked Mr. Sheffield the current status of the Ship Creek Development Project and any future plans the railroad might be looking at. MR. SHEFFIELD explained that as far as the railroad is concerned, Mr. LoPatin has no status as a master leaseholder of the Ship Creek development property. Mr. LoPatin thinks he has the right to develop four parcels of land, and the railroad is in the process of negotiating with him on the master lease, which they believe has disappeared for lack of development. He is hopeful this will be settled by the end of the year, and at that point they will be able to plan more on how they want to go forward. A Ship Creek task force has been appointed and the railroad is working with the task force on recommendations for that area. After that a master plan will be formulated for the development of that area. Number 190 VICE CHAIRMAN LEMAN said Mr. Sheffield had expressed concern that if the railroad was under the Executive Budget Act, it would impair their ability to negotiate long-term contracts because these people who would be contracting with the railroad would not be able to rely on repayment as well as they do now. However, he pointed out the state has entered into many long-term contracts, such as the sale of royalty oil, and he is not aware of any cases where the state is defaulting on paying off its obligations. He said he understands the concept of not binding a future legislature, but on the other hand, he has found that the legislature has been firm about honoring the commitments of the state even if they have made under past administrations or approved by past legislatures. MR. SHEFFIELD reiterated his concern on what might be done by a future legislature or a future administration. If the railroad were to get pinned down to a line-item budget, they would have not the flexibility to move within that budget system to do the things they have to do. As the economy of Alaska increases, the railroad increases, and he believes to have that disrupted could be dangerous. Number 230 SENATOR TAYLOR commented that what happened with the four dam pool contract is a prime example of why he thinks Mr. Sheffield and the railroad don't want the government to be intimately involved in its affairs. He said the railroad should be operated and owned as other railroads are operated and owned, which is by shareholders who then elect a board of directors. He added that he didn't know if any of the current board of directors or Mr. Sheffield as CEO would be there if this were so because they would probably bring to the table people who had lengthy experience and background in running a railroad. He questioned why not do that or send a share of stock out to all 600,000 Alaskans and see how they want the railroad to run without any meddling by the Legislature. MR. SHEFFIELD said that idea has been discussed and there might well be a way to do something like that. However, he believes the state should hold on to the railroad until it gets its transportation corridors and infrastructure established because it is easier for the state and federal governments to do that then it would be for the private sector. SENATOR TAYLOR said his main concern is that as long as there is an illusion of state ownership and state responsibility, there comes a requirement for some level of oversight and that somehow the Legislature be involved in the process. Number 345 REPRESENTATIVE COWDERY asked if it was correct that under the federal ownership of the railroad, it had general accounting office oversight on their funding, etc. MR. SHEFFIELD said he thought was probably right, but he would get him more information on that question. CHAIRMAN KELLY noted that Mr. Sheffield indicated the railroad's total spending will approach $100 million in 1999, and he asked Mr. Welker what percentage increase that would be if that amount was added to the FY 2000 budget. MR. WELKER responded it would be approximately 4.5 percent, but he thought it would be a policy call of how that's added into the spending plan. It is not a general fund expenditure, but also, if it is recognized that it is already an existing cost of state government, one could argue that it isn't an increment at all. Number 370 REPRESENTATIVE JEANNETTE JAMES said the Usabelli Coal Mine and Mapco Petroleum as well as an air force base are all in her district, so she has most of the Alaska Railroad customers in her district. She has always been a supporter of rail transportation because it is one of the most environmentally sound and safest ways to move people and materials. However, when she first became acquainted with the Alaska Railroad in 1993, as a freshman legislator, she was distressed with its involvement in the Comfort Inn in Anchorage, Eventually the regulations were changed so that the railroad could not get involved in that type of transaction again. TAPE 97-9 SIDE A Representative James said as a critic and a supporter of the Alaska Railroad she has attended as many board meetings as she can. She said she understands the railroad, and she cautioned against government interference in their budgeting process. She pointed out the railroad is on a calendar year, not a fiscal year, and every single contract that they would negotiate would have to have the caveat at the end "subject to legislative appropriation." She said the railroad is different and customers will shy away if they don't know if there is any kind of a stability, and the only way it can be done is the way it is being done now. In her closing comments, Representative James said she would be in favor of privatizing the railroad. Number 055 KEVIN BERGSRUD, State Legislative Director, United Transportation Union, testifying via teleconference from Anchorage, said it his understanding that all the corporations that are under the Executive Budget Act mainly only deal with money or money transactions whereas the Alaska Railroad needs more flexibility. He believes that putting the railroad under the Executive Budget Act will be setting up something like the Alaska Maritime System which is a burden to the state and its people. Number 070 JOHN SIMMS, Vice President of Marketing, Usibelli Coal Mine, said his company's viewpoint is very close to the initial remarks Mr. Cook made on behalf of Mapco, However, Usibelli's relationship with the railroad is a little different because the 80 percent of their product that moves across the railroad is not directly contracted, instead they operate under a tariff basis. Usibelli contracts for the leasing of land from the railroad on which they will be producing coal in the future. Mr. Simms said at one time Usibelli had significant operational concerns as well as concerns regarding the responsiveness of the railroad to upgrading its equipment. On both counts, from an operational point of view and from an equipment point of view, things have changed dramatically. Mr. Simms said he agrees with previous speakers that there is inherent danger about dickering with the status quo, and while Usibelli believes the railroad has a responsibility to the Legislature and the people of Alaska, he cautioned not to rock the boat. Number 115 SENATOR TAYLOR, speaking to Mr. Simms reference to future coal production by Usibelli on land leased from the railroad, said in the past there has been discussion and debate within the Legislature about the manner in which DNR lets coal leases or oil leases. He questioned if there is any jeopardy or concern about the firmness of contracts entered into by the railroad or its board if, in fact, those are appropriations of a state-owned resource, whether it is the sale of coal leasing rights, or the sale of a used engine. He suggested questions that need to be resolved quickly are whether or not there is a true state ownership, and if the playing field will be the same as if it were a DNR lease, or will it be different because the land is being leased to Usibelli by the railroad. Number 150 MR. SHEFFIELD pointed out for the record that the railroad gets the market rate for the leases on its land. REPRESENTATIVE JAMES added that railroad land that is being leased gets on the locality's property tax role. Number 160 JERRY BURNETT, staff to Senator Randy Phillips, Chairman of the Budget and Audit Committee, stated Senator Phillips supports SB 42 because it would open another line of communication between the railroad and the Legislature, and it would clear up any constitutional questions on the appropriation language for the railroad. SENATOR TAYLOR suggested that before the legislation moves out of committee the constitutional issues relating to the delegation of authority and whether or not expenditures made by employees of the railroad or acquisitions by them fall within the appropriation process of the Legislature are issues that should be addressed. CHAIRMAN KELLY agreed that answers to those questions would be provided before the bill is scheduled for further action. There being no further testimony on SB 42, VICE CHAIRMAN LEMAN stated the bill would be set aside. VICE CHAIRMAN LEMAN stated the final order of business would be consideration of an amendment to the James M. Johnson professional services contract in the amount of $3,258.36. CHAIRMAN KELLY moved approval of the amendment to the James M. Johnson professional services contract. SENATOR DUNCAN objected. CHAIRMAN KELLY explained it is a correction to a contract that was entered into by the previous Legislature. TIM BENINTENDI added that the work under the contract was performed, but it just went beyond the contract provisions and was not addressed by the previous Senate Rules Committee. VICE CHAIRMAN LEMAN noted he has expressed the concern in the past about the Legislature's management of legal contracts and the relative inability to stay on top of them; however, the amendment to this contract does not fit into that category. SENATOR DUNCAN maintained his objection to the adoption of the amendment to the James M. Johnson contract. There being no other objections to the motion, VICE CHAIRMAN LEMAN stated the motion carried on a 4-1 vote. There being no further business to come before the committee, the meeting adjourned at approximately 11:00 a.m.