Legislature(1997 - 1998)

09/24/1997 09:00 AM Senate RLS

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= 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             
 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             
 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."                      
 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,             
 WITNESS REGISTER                                                              
 Representative Terry Martin, Vice Chairman                                    
 Legislative Budget & Audit Committee                                          
 State Capitol                                                                 
 Juneau, AK 99801-1182                                                         
 Jeff Cook, Vice President, External Affairs and                               
 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                
 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                
 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                    
 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                 
 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               
 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            
 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                
 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.                                 

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