Legislature(2021 - 2022)BELTZ 105 (TSBldg)

03/24/2022 01:30 PM Senate TRANSPORTATION

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**Streamed live on AKL.tv**
            SB 231-AK RAILROAD CORP; EXEC BUDGET ACT                                                                        
2:23:42 PM                                                                                                                    
CHAIR MYERS  announced the consideration  of SENATE BILL  NO. 231                                                               
"An  Act  providing  that  the  Alaska  Railroad  Corporation  is                                                               
subject to the Executive Budget  Act; providing that expenditures                                                               
of the Alaska Railroad Corporation  are subject to appropriation;                                                               
and providing for an effective date."                                                                                           
2:24:04 PM                                                                                                                    
NEIL  STEININGER,  Director,  Office of  Management  and  Budget,                                                               
Office of the Governor, Juneau,  Alaska, stated that the governor                                                               
introduced SB 231  to ensure that the expenditure  of state funds                                                               
was  subject  to  legislative   appropriation.  This  bill  would                                                               
require  the Alaska  Railroad Corporation  (ARRC) to  comply with                                                               
the  Executive  Budget Act,  similar  to  other corporations  and                                                               
state  agencies.   ARRC  is  a  public   corporation  within  the                                                               
Department of  Commerce, Community, and Economic  Development but                                                               
currently is  not included in  the department's  annual operating                                                               
2:25:21 PM                                                                                                                    
SENATOR KIEHL stated  that ARRC had operated this way  for a long                                                               
time. He  related his understanding  that the audit did  not make                                                               
any significant  findings. He  asked the  reason for  making this                                                               
MR.  STEININGER  responded  that   this  bill  does  not  address                                                               
specific audit findings. It considers  whether state funds should                                                               
be expended  without legislative appropriation control.  He noted                                                               
that   there   were   limited   instances   without   legislative                                                               
appropriation control. He highlighted that  the only one he could                                                               
recall  was  grants  the Alaska  Mental  Health  Trust  Authority                                                               
(AMHTA)received. He noted  that these grants were  required by an                                                               
Alaska Supreme Court  case. He explained that in  this case there                                                               
is  not any  indication  of  how ARRC  spends  money outside  the                                                               
Executive Budget Act or legislative  appropriation control or why                                                               
they shouldn't be  subject to that scrutiny.  The legislature and                                                               
Alaskans have the right to  review the budget process and changes                                                               
to the  operational spending plans to  provide accountability and                                                               
2:27:40 PM                                                                                                                    
SENATOR KIEHL  pointed out that  other state  corporations expend                                                               
funds the  legislature does not  appropriate, such as  the Alaska                                                               
Industrial   Development  and   Export  Authority   (AIDEA).  The                                                               
legislature  does  not  oversee  any of  AIDEA's  investments  or                                                               
authorize  most  of  the  Alaska  Housing  Finance  Corporation's                                                               
housing investments  even though they are  state corporations. He                                                               
asked whether  the state should  initiate comparable  reforms for                                                               
those corporations.                                                                                                             
MR.  STEININGER  responded that  the  operating  costs for  those                                                               
corporations are  in the  annual operating  budget. The  loans or                                                               
investments  made  are  from funds  capitalized  via  legislative                                                               
appropriation, so the legislature  had appropriation control. The                                                               
legislature  has  appropriation  control  over the  funds  via  a                                                               
section in the operating budget  that grants broad authority over                                                               
AHFC's  programs and  subjects  them to  scrutiny. However,  ARRC                                                               
does not appear  in the appropriation bill. The  public should be                                                               
able to  access the  Office of  Management Budget  or Legislative                                                               
Finance websites  and review ARRC's expenditures  and legislative                                                               
approval for them.                                                                                                              
2:30:16 PM                                                                                                                    
CHAIR MYERS referred to Section 5  of SB 231, which would require                                                               
ARRC to report on the use of its assets.                                                                                        
MR. STEININGER responded that the  administration would like ARRC                                                               
to  provide an  accounting of  the existing  assets and  how they                                                               
will be used. The  administration included reporting requirements                                                               
that would benefit ARRC's transition  to fall under the Executive                                                               
Budget  Act. He  opined it  would be  helpful to  the legislature                                                               
during  the  appropriation  approval  process.  He  characterized                                                               
becoming  familiar  with ARRC  as  potentially  a steep  learning                                                               
curve for committees.                                                                                                           
2:31:35 PM                                                                                                                    
CHAIR MYERS asked whether the  other corporations prepare similar                                                               
MR. STEININGER acknowledged  that he was not  familiar with every                                                               
report work required, but many  of them have annual financial and                                                               
other reporting requirements.                                                                                                   
2:32:00 PM                                                                                                                    
SENATOR MICCICHE asked how long ARRC  had not been subject to the                                                               
Executive Budget Act (EBA).                                                                                                     
MR.  STEININGER responded  that he  was unsure  when the  federal                                                               
government transferred ARRC to the state.                                                                                       
CHAIR MYERS noted that Mr. O'Leary would be testifying later.                                                                   
2:32:34 PM                                                                                                                    
SENATOR MICCICHE stated that for the  last 40 years, ARRC had not                                                               
been subject  to EBA. He  wondered what problem arose  because if                                                               
it was  valid, the legislature  might support SB  231; otherwise,                                                               
it seemed arbitrary.                                                                                                            
MR.  STEININGER explained  that  the  governor's office  received                                                               
constituent  questions that  led  policymakers  to review  ARRC's                                                               
operations more closely. After noting  ARRC was not in the budget                                                               
but  the corporation  expends  public  funds, the  administration                                                               
took steps to resolve it in SB 231.                                                                                             
2:34:42 PM                                                                                                                    
SENATOR MICCICHE  offered his belief  that the  state establishes                                                               
corporations  to  provide them  with  the  flexibility to  employ                                                               
private sector principles and let  experts run organizations in a                                                               
manner that  is typically far  more efficient than  public sector                                                               
organizations. He  said it  seems like this  bill is  moving ARRC                                                               
backward.  He said  he would  listen, but  it seems  strange that                                                               
ARRC  had operated  without it  being an  issue for  so long.  He                                                               
wondered if OMB was having problems obtaining answers from ARRC.                                                                
MR.  STEININGER responded  that he  was not  aware of  OMB having                                                               
issues  obtaining any  answers from  ARRC. However,  it might  be                                                               
because ARRC  does not fall under  the EBA, so OMB  does not have                                                               
an opportunity  to ask questions.  Since ARRC is exempt  from the                                                               
Executive  Budget Act,  OMB  does not  receive  any financial  or                                                               
operational  plans  that  OMB receives  from  every  other  state                                                               
corporation  or  state entity,  which  could  lead to  questions.                                                               
Throughout  the interim,  OMB works  with corporations  and other                                                               
entities to prepare  the following year's budget,  which leads to                                                               
questions  about operations  and  management that  could lead  to                                                               
2:37:32 PM                                                                                                                    
BILL  O'LEARY, President  and  CEO,  Alaska Railroad  Corporation                                                               
(ARRC), Anchorage, Alaska, stated  that the Alaska Railroad Board                                                               
has not  met since this bill  was introduced, so he  cannot offer                                                               
the board's  position on  the bill. He  offered to  highlight any                                                               
impacts of SB 231 on the railroad.                                                                                              
MR.  O'LEARY highlighted  an essential  distinction between  ARRC                                                               
and other state  corporations. He stated that the  railroad is an                                                               
operating entity, not an investment  company or one that provides                                                               
mortgages,  such  as  AIDEA  and  AHFC. It  operates  in  a  very                                                               
competitive,  dynamic marketplace.  The  model  selected for  the                                                               
Alaska  Railroad came  from a  series of  studies. He  provided a                                                               
brief  history,  noting that  the  federal  government owned  the                                                               
railroad until the  early 1980s, when the state  purchased it. At                                                               
that time, the 13th legislature  considered what model to use for                                                               
the   railroad.  Before   state  ownership,   the  railroad   had                                                               
significant  financial issues  and  was in  deep disrepair.  Some                                                               
members felt  that many of  the railroad's problems  stemmed from                                                               
the  railroad being  subject to  the federal  budget process.  He                                                               
characterized  the railroad  as  being "starved"  by the  federal                                                               
process. Many studies, including  the Harvard Business Review and                                                               
the  University  of Alaska's  Institute  of  Social and  Economic                                                               
Research (ISER), considered  the best model for  the railroad and                                                               
determined  that  the  railroad  should operate  similarly  to  a                                                               
private corporation with oversight.                                                                                             
2:40:25 PM                                                                                                                    
MR.  O'LEARY stated  that this  would  allow the  railroad to  be                                                               
nimble  enough   to  consider  opportunities   from  dissatisfied                                                               
customers and  the marketplace and  solve the issues. He  said he                                                               
was unsure how that would work under the Executive Budget Act.                                                                  
2:41:30 PM                                                                                                                    
MR. O'LEARY provided  several examples. He related  that 2020 was                                                               
a financial  bloodbath regarding  ARRC's passenger  service. ARRC                                                               
has three  primary revenue sources: passenger  services, freight,                                                               
and real estate  activity. In 2020, the railroad  moved about six                                                               
percent  of  the  passengers  it  moved in  2019.  He  noted  the                                                               
railroad operates on a calendar  year, so it was very challenging                                                               
to  build the  2021  budget. It  did so  by  consulting with  its                                                               
customers  and  groups  and   considering  the  general  economic                                                               
situation. ARRC's  seven-member board  appointed by  the governor                                                               
approved  the  budget. Shortly  after  that,  things changed.  It                                                               
became  clear  in  March  and  April  2021  that  the  plans  for                                                               
passenger service  were markedly  inadequate. With the  advent of                                                               
vaccines  and Europe  still  closed,  many independent  travelers                                                               
traveled to Alaska, but the  railroad could not move them without                                                               
making  significant  changes.  ARRC management  worked  with  the                                                               
Alaska  Railroad  Corporations   Board of  Directors  to  quickly                                                               
develop a revised  plan that allowed them to add  sixty new train                                                               
starts to support the additional travelers.                                                                                     
2:44:31 PM                                                                                                                    
MR. O'LEARY  indicated that ARRC  had significant  freight growth                                                               
during  this time.  He  estimated  that ARRC  had  a $20  million                                                               
opportunity,  but  to  capture  it  would  require  spending  $10                                                               
million, which was not included in the original budget.                                                                         
2:44:52 PM                                                                                                                    
MR.  O'LEARY   characterized  the  2021  tourism   growth  as  an                                                               
opportunity to be nimble and move  quickly. He stated that it was                                                               
similar to  ARRC's work with  the military. He said  the railroad                                                               
frequently moves  military equipment between Fort  Wainwright and                                                               
the  Port of  Anchorage. He  indicated that  the notice  is often                                                               
unsuitable for a  long-range budget plan. However,  ARRC can look                                                               
at the  opportunity and  work with its  military partners.  It is                                                               
not an  appropriate answer in  terms of national defense  to tell                                                               
the military that  ARRC cannot accommodate them  because it lacks                                                               
the budget  to do so.  He indicated that  these are the  types of                                                               
concerns that ARRC has about SB 231.                                                                                            
MR. O'LEARY related  examples on ARRC's capital  side. He related                                                               
that customers might approach the  railroad with a proposition to                                                               
move  pipe   if  ARRC  is   willing  to  partner   in  purchasing                                                               
specialized equipment  to offload the  pipe. In such  cases, ARRC                                                               
can put  together a  business case  and call  a board  meeting to                                                               
acquire  the authority  to purchase  the equipment  expeditiously                                                               
due to the  nature of the railroad's model.  He expressed concern                                                               
that the Executive Budget Act may  not allow the railroad to move                                                               
at the speed necessary to accommodate its customers.                                                                            
2:46:33 PM                                                                                                                    
MR. O'LEARY  indicated that there  were other impacts  related to                                                               
ARRC's outstanding  debt, and the  railroad is not  entirely sure                                                               
how  SB  231  would  impact  federal  law,  but  these  were  the                                                               
immediate first blush impacts that came to mind.                                                                                
2:46:55 PM                                                                                                                    
CHAIR MYERS asked what impacts SB  231 would have on ARRC's labor                                                               
contracts and negotiations.                                                                                                     
MR. O'LEARY responded that the  railroad was trying to understand                                                               
the impacts, partly  due to its unfamiliarity  with the Executive                                                               
Budget  Act.  He related  that  roughly  75 percent  of  railroad                                                               
employees are  members of  one of its  five unions.  He explained                                                               
the process, such  that ARRC negotiates with  its unions, reaches                                                               
an  agreement, and  brings it  to their  board for  approval. The                                                               
unions bring  the agreement to  its membership  for ratification,                                                               
which becomes  incorporated into  the budget.  He stated  that it                                                               
does not  run on a  static timeframe. For  instance, negotiations                                                               
may  take three  days, which  recently happened,  while it  might                                                               
take one union six years  to ratify its contract. He acknowledged                                                               
that it could be challenging, but  they plan for it through their                                                               
budgetary process.                                                                                                              
2:48:14 PM                                                                                                                    
SENATOR SHOWER  stated that  it did  not seem  that SB  231 would                                                               
take  away   the  railroad's  authority   to  operate   once  the                                                               
legislature  appropriated the  funding. He  asked whether  SB 231                                                               
would prevent  the railroad from  making decisions like  the ones                                                               
he just  illustrated. He envisioned  that if the  legislature had                                                               
approved funding,  the railroad  could make  subsequent decisions                                                               
without going  back to  the legislature since  it would  have the                                                               
board's authority to  make decisions. He wondered  if there would                                                               
be any issues.                                                                                                                  
2:49:35 PM                                                                                                                    
MR.  O'LEARY acknowledged  that  he was  not completely  familiar                                                               
with the Executive Budget Act.  He related his understanding that                                                               
the  railroad's  operating  expense  budget would  be  set  at  a                                                               
specific  amount,  for  example,  $150 million,  and  ARRC  would                                                               
expend  funds  based  on  the plan  the  railroad  put  together.                                                               
However,  if  the railroad  had  an  opportunity to  capture  $20                                                               
million  but needed  to expend  $10  million, he  was unsure  the                                                               
railroad could do so. He  surmised that there might be mechanisms                                                               
between  Legislative  Budget  and  Audit and  OMB.  Still,  those                                                               
mechanisms may  not provide sufficient  speed needed for  ARRC to                                                               
take advantage of the opportunities.                                                                                            
2:51:04 PM                                                                                                                    
SENATOR  SHOWER recalled  that  some  Whittier constituents  have                                                               
complained  about  dealing  with   the  railroad  concerning  its                                                               
property.  He related  his understanding  that ARRC  assumes that                                                               
the land  is theirs and they  won't negotiate. He wondered  if SB
231 might  alleviate some  of the  concerns because  the railroad                                                               
would  need to  be  more accommodating  to  people, entities,  or                                                               
municipalities. Some  people might like  SB 231 to  influence how                                                               
the railroad  operates in Alaska.  He indicated that  some people                                                               
had expressed concern about how  ARRC has handled its property in                                                               
Alaska. He said  he was interested in having  ARRC working better                                                               
within that context rather than  having to tell constituents that                                                               
the state doesn't have any oversight over the railroad.                                                                         
2:53:10 PM                                                                                                                    
MR.  O'LEARY  responded  that the  railroad  runs  heavy,  noisy,                                                               
smelly equipment through people's back  yards. He stated that the                                                               
vast  majority  of  issues  the railroad  faces  relate  to  land                                                               
because the railroad bisects part  of the state. He reported that                                                               
ARRC  owns  36,000 acres  of  land,  of  which 18,000  acres  are                                                               
associated   with  ARRC's   right-of-way.  Although   significant                                                               
discussions have arisen over the  use and ownership of the right-                                                               
of-way, it is  likely beyond the scope of  today's discussion. He                                                               
stated that ARRC walks a  fine line when working with communities                                                               
and individuals because the railroad  is charged with the need to                                                               
be self-sustaining  and an agent for  economic development. While                                                               
he would  not state that ARRC  does it perfectly every  time, the                                                               
railroad held successful discussions  with Whittier about leasing                                                               
its land  for economic  development activities  related to  a new                                                               
passenger cruise  dock. The dock  will be on  railroad-owned land                                                               
and has  gone before the board  and was approved by  the Whittier                                                               
City Council. He acknowledged that  the railroad sometimes "butts                                                               
heads" with people, but ARRC's goal  is to be reasonable and fair                                                               
while trying to walk that fine line.                                                                                            
2:55:20 PM                                                                                                                    
MR. STEININGER  offered to respond to  Senator Shower's questions                                                               
about processes  for flexibility to discuss  inherent operational                                                               
challenges in the annual budget  cycle. He highlighted that other                                                               
state agencies  with similarly dynamic operations  are subject to                                                               
the  Executive Budget  Act,  including  the Alaska  International                                                               
Airport System. He stated that  OMB employs some tools to provide                                                               
it with  the ability to  respond to emerging events  and changing                                                               
operational  conditions. He  noted that  Mr. O'Leary  referred to                                                               
the  Legislative   Budget  and  Audit  process   through  revised                                                               
programs,  an option  an entity  could use  to access  additional                                                               
receipts  from  a  public   corporation  that  weren't  otherwise                                                               
appropriated. OMB  can send notice  to the committee,  and within                                                               
45 days or sooner, the agency  could begin expending the funds if                                                               
the committee grants it. Further,  the budget might build in some                                                               
contingency  funding to  address some  of those  concerns in  the                                                               
2:57:15 PM                                                                                                                    
CHAIR MYERS recalled that about  12 years ago, ARRC increased the                                                               
rent on  the land leased by  the Fairbanks Ice Park,  so the park                                                               
had  to  leave.  The  railroad argued  that  it  was  statutorily                                                               
required to  get the market rate  for its land. He  asked whether                                                               
anyone had leased the land in the last dozen years.                                                                             
MR.  O'LEARY  responded  that  he  was  referring  to  the  Chena                                                               
Landings Subdivision.  He recalled that the  legislature passed a                                                               
bill in 2018 that allowed the  railroad to subdivide the land and                                                               
it has sold a significant number of housing lots.                                                                               
2:58:34 PM                                                                                                                    
CHAIR  MYERS   recalled  that  the   Alaska  Railroad   owns  the                                                               
waterfront in Nenana. He related  his understanding that the city                                                               
leased the railroad's land and  built up some infrastructure. The                                                               
City of Nenana was subleasing  some portions to Crowley Shipping.                                                               
The barge  lines ended  operating in about  2016. He  stated that                                                               
the City  of Nenana  indicated that the  Alaska Railroad  had not                                                               
lowered its lease payments.                                                                                                     
MR. O'LEARY responded  that he was unaware of any  changes to the                                                               
lease rate.  He stated  that some  of the  financial difficulties                                                               
that the  City of Nenana  has faced may have  affected collecting                                                               
revenue.  He said  the Alaska  Railroad discussed  some solutions                                                               
with the city last year. He  acknowledged that the City of Nenana                                                               
was interested in  owning those lands. Although he  was unsure of                                                               
the  status, he  recalled  that the  Alaska  Railroad ordered  an                                                               
appraisal.  He  further recalled  that  the  City of  Nenana  was                                                               
considering  grant  funding  to  pay any  arrearage  and  perhaps                                                               
purchase the lands.                                                                                                             
3:00:31 PM                                                                                                                    
SENATOR  KIEHL  stated  that  he  was  unsure  why  the  governor                                                               
introduced the bill since the governor appoints the whole board.                                                                
MR. O'LEARY understood  the concept of wanting ARRC  to look like                                                               
other  state  corporations. He  offered  his  view that  ARRC  is                                                               
different.  He  said  he  previously   served  as  the  financial                                                               
controller  for the  Alaska International  Airport System  (AIAS)                                                               
for several  years. He characterized  it as a facility,  which is                                                               
different  than an  operating entity,  which would  be more  like                                                               
being  an  airline and  an  airport.  He  stated that  there  are                                                               
differences with ARRC due to  the competitive marketplace and the                                                               
need for  rapid responses. He  noted that ARRC  shares everything                                                               
other than  highly proprietary  information with  the legislature                                                               
if asked  to do so.  He stated that ARRC  sends a copy  of ARRC's                                                               
board-approved operating and capital  budgets and five-year plans                                                               
to  the legislature  and the  state. The  Alaska Railroad  has an                                                               
annual financial  audit by an  external private  certified public                                                               
accountancy firm  that will be  released on March 31,  2022. ARRC                                                               
provides   updates  for   briefings  to   the  legislature   when                                                               
requested. He  stated that  substantial accountability  is vested                                                               
with ARRC's seven-member Board of Directors.                                                                                    
3:03:54 PM                                                                                                                    
SENATOR  KIEHL  related  that  the  Alaska  Railroad  Corporation                                                               
(ARRC) had been given authority to  bond and build a rail line to                                                               
Port McKenzie and for a  Kenai Gasification Project. He asked why                                                               
it had not done so.                                                                                                             
MR. O'LEARY answered that the  Alaska Railroad Corporation (ARRC)                                                               
walks  a  fine  line  between  self-sustaining  and  an  economic                                                               
development  agent. He  related that  the Alaska  Railroad worked                                                               
closely  with both  groups to  get the  bonding authority  put in                                                               
place,  understanding that  there would  need to  be a  source of                                                               
repayment  for  those funds.  He  characterized  it as  making  a                                                               
business case  for the projects.  However, the business  case has                                                               
not  materialized that  would  permit ARRC  to  issue the  bonds,                                                               
which would need to be repaid.                                                                                                  
3:05:29 PM                                                                                                                    
SENATOR KIEHL remarked that the  state could not force the Alaska                                                               
Railroad  to make  decisions that  would lead  to insolvency.  He                                                               
stated that he knows very  little about the federal Railroad Act.                                                               
He  asked whether  the  Department  of Law  vetted  this bill  to                                                               
determine if there were any  potential conflicts with the federal                                                               
3:06:06 PM                                                                                                                    
MR. STEININGER deferred to the Department of Law.                                                                               
3:06:32 PM                                                                                                                    
CHAIR MYERS held SB 231 in committee.                                                                                           

Document Name Date/Time Subjects
SB 170 Research Document_Fleet Status 3.1.2022.pdf STRA 3/24/2022 1:30:00 PM
SB 170
SB 170 Research Document_Vessel Information Table by AMHS DOT.pdf STRA 3/24/2022 1:30:00 PM
SB 170
SB 170_Research_AMHS Procurement Fact Sheet.pdf STRA 3/24/2022 1:30:00 PM
SB 170
SB 170_Research_Current AMHS Operating Plan 1.24.2022.pdf STRA 3/24/2022 1:30:00 PM
SB 170
SB 170_Research_Tariff Impacts_Section 42.50.570.pdf STRA 3/24/2022 1:30:00 PM
SB 170
SB 231 DCCED Fiscal Note.PDF STRA 3/24/2022 1:30:00 PM
SB 231
SB 231 Sectional Analysis 03.24.2022.pdf STRA 3/24/2022 1:30:00 PM
SB 231
Transmittal Letter HB 231 AKRR 03.11.22.pdf STRA 3/24/2022 1:30:00 PM
HB 231
S TRA - AMHS Routes and Service (03-24-2022).pdf STRA 3/24/2022 1:30:00 PM
SB 170