HB 357-AK RAILROAD CORP. LAND SALES  1:25:27 PM CHAIR P. WILSON announced that the next order of business would be HOUSE BILL NO. 357, "An Act relating to the sale of land owned by the Alaska Railroad that is not needed for railroad purposes." 1:25:43 PM REPRESENTATIVE BILL STOLTZE, Alaska State Legislature, introduced his staff. JOHN COAN, Staff, Representative Bill Stoltze, Alaska State Legislature, on behalf of the prime sponsor, related that two questions arose at the last hearing: whether the ARRC land is considered state land and if it is, whether any legal ramifications to in stating a right of first refusal on the land. He stated that the Alaska Railroad Corporation (ARRC) land is state land and the legislature approves any land sales and disposals. Thus, a right of first refusal is fine, he stated. 1:27:12 PM REPRESENTATIVE STOLTZE offered that this bill really represents a policy call for the legislature. The purpose of the bill is captured by the letter from the Alliance in members' packets. The Alliance called the bill a "pro-business, pro-private sector, pro-investment, pro-jobs, and pro-Alaska Railroad" bill. He said he said he stumbled into this "unrest." He bill has spurred lots of discussion from the business community. Without the ability to have the opportunity to own the land, the business owners do not have the confidence to make the business investments. He remarked on the breadth of letters he received on this matter. 1:29:44 PM REPRESENTATIVE T. WILSON asked whether the bill would give the Alaska Railroad Corporation (ARRC) the option to sell land. REPRESENTATIVE STOLTZE answered that the bill provides the permission to do so. He remarked on what he termed as "arrogance" that the ARRC has shown to private businesses. He offered that the ARRC properties are taxable properties, which will likely only increase in value. He anticipated that lessees would be more likely to improve the property if they owned it, similar to how homeowners versus renters are more apt to invest and care for property. 1:32:21 PM REPRESENTATIVE GRUENBERG referred to the sponsor statement, which read: To spur economic development throughout the state, House Bill 357 adds a fourth clause to the existing language governing how the Alaska Railroad Corporation may dispose of land. House Bill 357 will enable the railroad to sell land that is not needed for essential railroad purposes. This bill does not ask for any irresponsible disposal of land, as the sale must be initiated by the board of directors on two conditions. The first condition is that the land is not essential to railroad operations, and the second condition is that the sale is in the best interest of the state of Alaska. As support has shown, current leaseholders are very unhappy with the inability to purchase their leased properties from the railroad. In general real estate dealings, private purchases are made in mutually beneficial sales. House Bill 357 encourages these sales after determination by the board of directors of the railroad looks at each sale with the overall benefit to the state of Alaska as the key driver. Not only will the private sector benefit from this addition to state law, the railroad will also have increased ability to make decisions regarding their overall real estate portfolio. The sale and relationship of private and public lands are vital to the economic growth of the state of Alaska. I ask for your consideration and support of House Bill 357 to promote Alaskan growth through the diversification of land ownership, increasing the tax base of the state, and encouraging responsible development of Alaskan land. REPRESENTATIVE GRUENBERG stated that the sponsor statement outlines the first condition for sale would be that "the land is not essential to railroad operations..." He referred to page 1, lines 11-12, which read, "the land is not necessary for essential railroad purposes,..." He pointed out the language is not the same. 1:33:09 PM REPRESENTATIVE STOLTZE asked members to refer to the bill and not his letter for the true meaning. 1:33:28 PM REPRESENTATIVE GRUENBERG offered his belief that the bill would provide the Alaska Railroad Corporation (ARRC) a little more flexibility. REPRESENTATIVE STOLTZE agreed that is his intent. He said he hoped the ARRC would not abuse the business owner's trust by being inflexible. 1:33:51 PM REPRESENTATIVE MUNOZ asked whether the leases generate more money at eight percent interest than the ARRC would earn through investments, in practical terms if the ARRC would have a compelling case to sell the land. REPRESENTATIVE STOLTZE again noted that this is a policy call. He suggested that the bill is not just about enhancing the state's revenue, but is about the ARRC's impact on jobs in the private sector. He characterized the provisions in the bill as "a balancing act" that the legislature must weigh in on. In terms of pure revenue, he considered that it is probably a better deal for the ARRC "to have a hammer over lessee," but the correspondence he received reflects that HB 357 may promote business and "spur" more activity. 1:35:25 PM REPRESENTATIVE MUNOZ supported fostering business growth and opportunities for business. She wondered whether the language is strong enough. She asked whether the sponsor believes that HB 357 will lead to opportunities for individual businesses to acquire the properties. REPRESENTATIVE STOLTZE said he hoped the bill would alert the ARRC that the legislature is interested in the ARRC developing a better working relationship with businesses operating on railroad property. He recalled anecdotal comments from lessees who would like to make investments but cannot due to the uncertainty of "dealing with the railroad." This is not just about the financial aspect but is also about how the ARRC will react to lessees in five years. He recalled the terms "arbitrary and capricious" have been used in relation to the ARRC. He related his understanding that lease terms are erratic. He has observed this first hand when working with the ARRC on other issues. He believed that fiscal certainty and right of first refusal is important to lessees, he stated. 1:37:39 PM REPRESENTATIVE GRUENBERG referred to page 1, line 12, to the word "essential" yet the language on page 2, line 3 does not refer to "essential." He asked whether the sponsor would consider deleting "essential" from the provision on the first page. 1:38:20 PM REPRESENTATIVE STOLTZE responded that the change may read better, although he would probably prefer adding "essential" to the language on page 2. REPRESENTATIVE GRUENBERG suggested that he would prefer not to say "essential" in order to give ARRC more leeway. REPRESENTATIVE STOLTZE offered his belief that the ARRC already has a lot of flexibility. He stated that "essential" was to protect the ARRC. REPRESENTATIVE GRUENBERG asked whether the language was discretionary. REPRESENTATIVE STOLTZE stated that he would leave the punctuation and grammar to Representative Gruenberg to consider. 1:39:26 PM REPRESENTATIVE GRUENBERG referred to page 2, lines 8-11 to subsection (c). He asked whether the funds are deposited to general fund (GF) or to a separate account. REPRESENTATIVE STOLTZE stated that the funds are not deposited to the GF, but are retained by the ARRC. Thus, the land proceeds are not used for the general ARRC operations. 1:40:33 PM REPRESENTATIVE GRUENBERG referred to page 2, lines 10-11, which read, "Money in the account may be appropriated in accordance with 45 U.S.C. 1207(a) (5)(Alaska Railroad Transfer Act of 1982)." He inquired as to whether the legislature appropriates these funds. REPRESENTATIVE STOLTZE did not recall. He stated that the state must comply with the Alaska Railroad Transfer Act of 1982. He explained that the ARRC does not appear in the state budget. He thought the language referred to activities within the ARRC. REPRESENTATIVE GRUENBERG asked whether "appropriated" is the correct term since that is generally reserved for legislative bodies. REPRESENTATIVE STOLTZE responded that the legislature is at a disadvantage since the ARRC does not fall under the Executive Budget Act. 1:42:48 PM JIM KUBITZ, Vice President, Real Estate and Facilities, Alaska Railroad Corporation (ARRC), introduced himself. He explained that "appropriated" is not likely the best term. He suggested that the ARRC's legal counsel is on-line. REPRESENTATIVE GRUENBERG also asked the ARRC to comment on the word "essential" that he previously mentioned. CHAIR P. WILSON opened up public testimony on HB 357. PHYLISS JOHNSON, Vice President & General Counsel, Alaska Railroad Corporation (ARRC) introduced herself. In response to Representative Gruenberg, said she thought that deleting "essential" on page 1 would give the ARRC more flexibility. REPRESENTATIVE GRUENBERG referred to page 2, line 10, and asked whether some other language than "appropriated" should be used. She recommended that "expended" be used. 1:45:25 PM MS. JOHNSON, in further response to Representative Gruenberg, stated that she did not have any other recommended changes to the bill. In response to Chair P. Wilson, she responded that having the reference to the Alaska Railroad Transfer Act was a good to have in the bill, since "railroad funds be used for railroad and related purposes." She also recalled similar language in the state transfer act, as well. She stated that this language helps to clarify the continued use of railroad funds for railroad purposes. 1:46:49 PM REPRESENTATIVE GRUENBERG referred to two fiscal notes. He pointed out that one fiscal note was approved on 3/23/10. He assumed that the fiscal note supersedes the one with an earlier signature date. MR. KUBITZ answered yes. He believed that was correct. 1:47:37 PM MR. KUBITZ referred to page 1, line 12, and read: "...(2) the sale of the land is in the best interest of the state." He explained that the determination must be made by the ARRC's Board of Directors in order to sell land. He offered his belief that what is in the best interest of the state may not mesh with what is in the best interest of the ARRC, since economic development and self-sufficiency are listed in the ARRC's mission statement. The state's historic properties group may have a best interest statement that may be contrary to the ARRC. He suggested that this may not be a huge problem but he related that this language would require the ARRC's Board to consider what is in the best interest of the state. 1:49:07 PM REPRESENTATIVE GRUENBERG offered his belief that this is "the heart of the bill." The ARRC's board must make a finding. He Normally, when a court makes a finding it is not usually reviewable by a higher court unless it is clearly erroneous. That term means the court is left with a definite and firm conviction that the facts the lower body found were wrong or else the court misapplied the law. This forms the twin basis for determining an erroneous decision. He said he does not know whether that applies to a finding of the board, but the sponsor says that this is discretionary. Further, the use of the term "may" on line ll makes it discretionary. He asked Ms. Johnson if she thought he was correct in his assessment. 1:49:51 PM MS. JOHNSON said, "Certainly it's discretionary with the use of the word 'may.'" She agreed with Mr. Kubitz, that the ARRC Board's has a lack of familiarity in applying the state's best interest standard. She said to use this standard casts us "a little bit adrift in an area of expertise that previously the ARRC has not been called upon to consider. She offered that the best interest of the ARRC is more economically based than the state's best interest. She recalled that if the Department of Natural Resources (DNR) was considering whether to lease land, the department must consider other things such as fish habitat or game management since the state is comprised of multi-use agencies. She suggested that the standard of appeal would generally be determined by the Superior Court. 1:52:10 PM REPRESENTATIVE GRUENBERG related that the ARRC may tactfully be suggesting that on page 1, line 13 and on page 2, line 4, that the committee consider changing "state" to "railroad." MS. JOHNSON answered yes. She thought the language would be more satisfactory. REPRESENTATIVE MUNOZ asked to hear from the sponsor. She asked whether the sponsor intended that this language would apply to the best interest of the economic vitality of the area. 1:53:11 PM JOHN COAN, Staff, Representative Bill Stoltze, Alaska State Legislature, on behalf of the prime sponsor, offered his belief that the intent of the specific language "in the best interest of the state" was multi-faceted. He suggested that the language would provide another vehicle for responsible sale of land, and for the ARRC to take a greater role in community development instead of being a hindrance. He further thought that the ARRC should facilitate a better level of contact between the quasi- public agency and the private sector. He related his understanding that replacing "state" with "railroad" might change the focus of the bill. 1:54:28 PM MARK STEARNS, Owner, Alaska Wood Molding, stated that he has a business located at the Port of Anchorage. He said that he is a nine-year leaseholder and the ARRC has generally been supportive. He stated that one source of frustration that many have is the issue of uncertainty. He explained that the terms of his lease went from $790 per month in 2001 to over $1600 over a three-year period and then increased to $3000 per month. He related that the terms contained in leases typically restrict any increases to 135 percent of the lease payment over a five year period. He pointed out that his business was not afforded similar terms or any official notification process. Changes to the terms of his lease have created a climate of uncertainty and makes it difficult for him to consider any improvements. He recapped that having lease terms dramatically increase by nearly 400 percent over nine years without an explanation clearly created uncertainty. He described the situation as "random" and "a scary situation." 1:58:17 PM MR. STEARNS explained that lessees do not have any process for relief. The ARRC "pretty much does what the railroad would like to do." He urged members to support HB 357 to afford businesses an opportunity to have some certainty. 1:58:57 PM CHAIR P. WILSON asked for the length of his lease. MR. STEARNS responded that he is in the process of extending their lease to 35 years, but he has not yet heard back from the ARRC. He said he hopes the lease will not allow the ARRC to increase payments more than 35 percent over a five-year period. In further response to Chair P. Wilson, he explained that he has read his lease but some question remains as to which is the valid lease. He pointed out that the potential to own the property would afford him greater flexibility to make investments. CHAIR P. WILSON commented that the newer ARRC leases contain the language. MR. STEARNS agreed that the provision limiting the increase is in the new lease. 2:01:35 PM PAT GAMBLE, President and CEO, Alaska Railroad Corporation (ARRC), offered his belief that the dialogue is healthy. He referred to page 2, line 2, to the public notice, best interest of the state, and to the first right of refusal. He described a scenario in which a parcel is for sale and the current leaseholder makes an offer to purchase the property. If a member of the public makes a higher offer, he wondered if that would be considered as acquiring the best interest for the state or if some other determination would be made. He acknowledged that if the scenario arose that he would recommend the ARRC board take the higher offer. However, he was not certain how that would "square with the first right of refusal" or obtains the best return for the state. He concluded that practical issues like this arise, but overall the discussion has been large healthy discussion. 2:03:30 PM CHAIR P. WILSON asked whether first right of refusal refers to paying the "going rate" and when another offer is made that the "going rate" would prevail. 2:03:46 PM REPRESENTATIVE GRUENBERG clarified that this raises issues that are addressed in the memorandum from the Division of Legal Services. He asked whether Ms. Johnson has reviewed the March 20, 2010 memo. MS. JOHNSON answered no. REPRESENTATIVE GRUENBERG suggested that the ARRC's lawyers should review the memo. MS. JOHNSON agreed to do so. REPRESENTATIVE GRUENBERG referred to a letter August 25, 2004, from Steve Van Sant, State Assessor, to Marty McGee, the Municipality of Anchorage's Assessor, and asked for its relevance to the bill. MR. KUBITZ replied that he made copies of the letter for the committee. He explained the contention was that selling railroad land would increase local tax revenue. He acknowledged tenants are taxed following a somewhat complicated formula. Basically as the lease approaches the termination date, the actual value goes down. The letter of August 25, 2004 informed the MOA that it needed to tax the tenants as though they owned the land. Thus, this letter provided the justification for the lessee's taxes on ARRC leased land and the reason that the taxes will not go up. 2:07:15 PM MR. KUBITZ, in response to Representative Gruenberg, related that the tenants understood the reason the leased property was being tax. He said that represents one reason that some tenants believe they "may as well" own the land since they must pay taxes on the land. In further response to Representative Gruenberg, he agreed that the assessed amount is reduced as the lease draws closer to the end of the term. REPRESENTATIVE GRUENBERG remarked that the property tax amount is less at the end of the lease than it would be if the lessee was a fee simple owner. MR. KUBITZ agreed. 2:07:59 PM CHAIR P. WILSON related that the committee must consider the reason the ARRC does not request state funding, which is that as a quasi-independent agency it owns land and has the ability to earn income. MR. KUBITZ, in response to Representative T. Wilson, explained that the appraisal and appeal process is up to the tenants. Typically, tenants often appeal tax assessments and that is a relationship with the taxing agency. Some tenants are successful in their appeals and others are not. 2:09:40 PM REPRESENTATIVE T. WILSON related a scenario in which the ARRC appraisal is set at $500,000, but the borough assessment is set at $400,000. She asked whether the tenant could appeal by furnishing the borough assessment. MR. KUBITZ answered that the tenant has the right to obtain a third party appraisal and can present that to the ARRC for consideration. Per a mechanism in the lease, if the tenant and the ARRC cannot reach an agreement, the matter would go to binding arbitration for a decision. A third party appraisal must be performed by a "Member of the Appraisal (MAI)" appraiser. 2:10:39 PM MR. KUBITZ, in response to Representative T. Wilson, he explained that the ARRC appraises its property every five years. He pointed out that Mr. Stearns will be operating under a new lease, which provides adequate protection. Previously, Mr. Stearns was operating under a 50-year old federal lease that did not contain any cap. Thus, any time an appraisal increased the property value, the lease also increased accordingly, as per the lease terms. He pointed out that the ARRC's leases limit the term increases to 135 percent over a five-year period. 2:11:34 PM CHAIR P. WILSON asked whether the amount of the lease increases applied to all tenants. MR. KUBITZ explained that not all the leases are ARRC leases and a few leases remain that date back to the 60s, although little time remains on those leases. The old leases did not even contain environmental language. He assured Chair P. Wilson that the ARRC strives to have everyone under the new leases for everyone's benefit. 2:12:13 PM CHAIR P. WILSON, after first determining no one else wished to testify, closed public testimony on HB 357. 2:12:33 PM REPRESENTATIVE GRUENBERG made a motion to adopt Conceptual Amendment 1, on page 1, line 12 to delete "essential." REPRESENTATIVE T. WILSON objected for purpose of discussion. REPRESENTATIVE GRUENBERG expanded Conceptual Amendment 1, on page 1, line 10 to delete "essential." He explained that removing the two references to "essential would conform to the language on page 2, line 3. This would give the corporation more flexibility and would lower the standard in instances in which the ARRC board determines the land is necessary for ARRC purposes. He offered that this would avoid the discussion of deciding the whether the land is essential for railroad purposes. He commented that the sponsor does not oppose Conceptual Amendment 1 and the ARRC supports Conceptual Amendment 1. REPRESENTATIVE T. WILSON removed her objection. There being no objection, Conceptual Amendment 1 was adopted. 2:14:28 PM REPRESENTATIVE GRUENBERG made a motion to adopt Conceptual Amendment 2, on page 1, line 1, in the title, to replace "needed" with "necessary". REPRESENTATIVE T. WILSON objected for purpose of objection. REPRESENTATIVE GRUENBERG offered his belief that this change would be grammatically correct. MR. COAN suggested that pending the legal drafter's consent that the change should be fine. REPRESENTATIVE T. WILSON removed her objected. There being no further objection, Conceptual Amendment 2 was adopted. 2:15:46 PM REPRESENTATIVE GRUENBERG made a motion to adopt Conceptual Amendment 3, on page 2, line 10, to remove "appropriated" and insert "expended." REPRESENTATIVE T. WILSON objected. She asked whether funds could be deposited so the ARRC could spend the interest instead of spending the principal. REPRESENTATIVE GRUENBERG explained that Conceptual Amendment 3 provides a grammatical change, which is that the ARRC can "expend" only in accordance with federal law. REPRESENTATIVE PETERSEN recalled that the federal definition in 45 U.S.C. 1207(a) (5) (Alaska Railroad Transfer Act of 1982) required that the funds be used for railroad purposes. Thus, the funds would be "expended" for railroad purposes. He agreed the term "appropriate" referred to legislative action. REPRESENTATIVE MUNOZ suggested that "expend" means to spend so she thought it may be clearer to use "budgeted." She explained that the ARRC may want to invest the funds. MS. JOHNSON offered that her first response is that using "may be expended" would also give the ARRC the latitude to save the funds in an account. She pointed out reference to "45 U.S.C. 1207 (a) (5) (Alaska Railroad Transfer Act of 1982)" was to ensure the funds are spent for railroad and related purposes. She recalled when another committee member summarized the federal law that the member left out "related purposes" which could be significant. 2:19:00 PM REPRESENTATIVE T. WILSON stated that she preferred "invested" for the intent it implies since she would rather see the funds invested and "to send the ARRC a better message." MR. COAN pointed out that he not an attorney, but he believed the drafter used the term "appropriated" since it is the term used in Alaska Railroad Act of 1982. He said, 45 U.S.C. 1207 (a) (5) reads, "Revenues generated by the state-owned railroad, including any amount appropriated or otherwise made available to the state-owned railroad should be retained and managed by the state-owned railroad for railroad and related purposes." 2:20:18 PM MR. COAN, in response to Representative Gruenberg, re-read the federal law. CHAIR P. WILSON said she thought that the language referred to an appropriation made to the legislature. REPRESENTATIVE GRUENBERG agreed. He said this language seems to be just the opposite of the language in the bill. MR. COAN related his understanding that the specific section in federal law references "appropriation" so using "appropriation" in the bill is correct. 2:21:14 PM REPRESENTATIVE GRUENBERG offered his belief that the federal language the sponsor's staff read is correct, but he opined that it is not correct to use "appropriated" in the bill. He said he believes that a person can "budget money without spending it." He said he prefers not to use the term "budget" and that "expended" is the legal term. CHAIR P. WILSON preferred the use of "expended." REPRESENTATIVE T. WILSON disagreed, stating that the language "expended" sends the wrong message to the ARRC. 2:22:14 PM REPRESENTATIVE GRUENBERG related that this provision sets out a limitation, which is that the funds could only be expended in accordance with the federal law. He asked Ms. Johnson for clarification. MS. JOHNSON answered yes, that Representative Gruenberg is correct. REPRESENTATIVE PETERSEN asked whether "money in account may be used" is a possible clarification. MS. JOHNSON stated that "used" is acceptable. REPRESENTATIVE GRUENBERG explained that a person does not "use" money in an account, but "spends it." He offered his belief that "spend" or "expended" is the normal legal term. 2:24:37 PM REPRESENTATIVE PETERSEN made a motion to amend Conceptual Amendment 3, to delete "appropriated" and insert "used." There being no objection, the amendment to Conceptual Amendment 3 was adopted. 2:25:01 PM REPRESENTATIVE T. WILSON removed her objection. There being no further objection, Conceptual Amendment 3, as amended, was adopted. Thus, subsection (c) read: (c) The corporation shall separately account for the proceeds from the sale of land under this section and shall report the earnings and balance in the account in the annual report required by AS 42.40.260. Money in the account may be used in accordance with 45 U.S.C. 1207(a)(5) (Alaska Railroad Transfer Act of 1982). 2:25:25 PM REPRESENTATIVE T. WILSON moved to report HB 357, as amended, out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, the CSHB 357(TRA) was reported from the House Transportation Standing Committee. 2:25:40 PM