SENATE BILL NO. 148 An Act relating to the Alaska Railroad Corporation; and providing for an effective date. Co-chair Pearce directed that SB 148 be brought on for discussion. She noted that it was introduced by committee in the first session of the current legislature, and she referenced 1993 adoption of work draft CSSB 148 (Fin) (8- LS0583\X, Utermohle 4/12/93) and Amendments 1 through 3. Co-chair Pearce next directed attention to an updated work draft (8-LS0583\I, Utermohle 3/11/94) which she explained incorporates the previously adopted amendments. Co-chair Frank MOVED for adoption of CSSB 148 (Fin), "I" version in place of the previously adopted "X" version. No objection having been raised, CSSB 148 (Fin), "I" version, was ADOPTED. Co-chair Pearce referenced a pending Amendment No. 4 and a March 11, 1994, memorandum (copy on file) thereto. DAVID SKIDMORE, aide to Senator Frank, came before committee. He explained that the proposed bill would bar the chief executive officer of the Alaska Railroad Corporation from serving as the member of the railroad board of directors required by statute to have certain types of railroad experience. If the bill were to become effective immediately, it would render Mr. Hatfield's position on the board illegal. Amendment No. 4 creates a transition period to delay the effective date of that provision of the bill until the Governor appoints a board member who fills the railroad experience qualification. The Amendment states that the Governor is to appoint an individual with the necessary qualifications, this fall, should either Mr. Chapados or Mr. Lounsbury fail to continue to serve on the board. Co-chair Pearce noted that Amendment No. 4 was drafted for incorporation within the previously adopted version "X" which has since been replaced by version "I." She then voiced need to conceptually adopt the amendment for inclusion in the proper place within CSSB 148 (Fin), "I" version. Co-chair Frank MOVED for adoption of Amendment No. 4. No objection having been raised, Amendment No. 4 was CONCEPTUALLY ADOPTED into CSSB 148 (Fin). MARK HICKEY, next testified on behalf of the Alaska Railroad Corporation. He remarked that the newly-adopted draft addresses a number of concerns raised by the railroad, but three areas of concern remain: 1. Sec. 7, page 3, contains language allowing participation by board members by teleconference. This is current practice. Sec. 7 may not be necessary. 2. Sec. 8, page 4, lines 8 through 12, raises concern regarding the debt limit, particularly in light of SB 338. There appears to be a problem between these two pieces of legislation. Although non- recourse revenue bonds are proposed, debt of the railroad will be issued and the railroad will already have exceeded "the total aggregate limit." A possible fix might involve exemption of non- recourse revenue bonds from this language. The language was included as a way to deal with equity participation in non-transportation activities. Since that is addressed by subsection (6), another means of curing the problem would be deletion of subsection (3) (lines 8 through 12). 3. Sec. 8, page 4, line 18, contains a limitation to prevent the railroad from obtaining an equity position in a non-transportation activity. The board of directors adopted a policy that the railroad would not enter such an arrangement. That policy remains in effect. Placing this language in statute may create potential for litigation. Mr. Hickey next referenced provisions relating to the Nenana land fill and informed members that the railroad is no longer pursuing the project. Parties involved found that it was not financially feasible, and there was local opposition. Speaking to the above-noted limitation on debt, Co-chair Frank explained that it arose from the fact that statutes presently require that the railroad receive legislative approval prior to issuance of bonds. The Senator acknowledged numerous methods of issuing debt. It was the intent of the legislature, when it authorized acquisition of the railroad from the federal government, to include the legislature "in the loop" when the railroad issued debt. Mr. Hickey noted that the original bill required that debt exceeding $1 million be approved by the legislature. Discussion followed between Co-chair Frank and Mr. Hickey regarding language associated with issuance of debt rather than bonds. The Co-chair said he would not support allowing the railroad to issue debt of any kind while maintaining a limitation on bonds. Senator Rieger advised of his preference for incorporation of the railroad as a stock corporation and issuance of all shares of common stock to the state. That represents a step toward independence and eventual privatization of the railroad. He observed that the proposed bill provides a good vehicle for development of that structure. Chapter 40 would then become the by-laws of the corporation, instead of statute. Mr. Hickey explained that, at the time of purchase, there was discussion of a similar arrangement. One of the principal concepts involved the permanent fund, and that raised many concerns. That approach was subsequently dismissed, and the state conducted a "straight purchase." The railroad board has not devoted time to this issue. The approach raises many questions "about how this would ultimately work down stream." Senator Kelly voiced his understanding that selling the railroad would be in direct conflict with the intent of the proposed bill. He suggested that entities seeking to purchase the railroad would not buy it "to run trains" but to develop railroad land. That is where the value is. Co-chair Frank observed that "that would be fine" if the entities were private. Senator Rieger concurred, advising that if the railroad was private, the legislature would not be adjudicating endless issues relating to competition with truckers, land developers, etc. Privatization would relieve 20 to 40 hours of finance committee time per session. He suggested that that effort be set in motion. End: SFC-94, #32, Side 1 Begin: SFC-94, #32, Side 2 Mr. Hickey stressed need to consider transportation services provided by the railroad and the importance of that service. He concurred that private entities would be "very interested in portions of the real estate . . . ." A mechanism has yet to be developed that would ensure continuation of transportation services under privatization. That is what precipitated purchase of the railroad by the state. The transportation services save the state considerable moneys in terms of what moves on the railroad versus on the highway system. Real estate assets are key to continuance of the transportation role. Freight was an overall loss during the past year. That service, even when well run, in marginal. Senator Rieger commented on inability to secure tariff charges to evaluate the economics of railroad freight service with respect to the private sector. Senator Kelly suggested that lack of competition to railroad transportation would result in problems were the railroad privatized. He pointed to lack of airline competition between Juneau and Anchorage as an example. Co-chair Pearce referenced page 4, line 9, noted provisions precluding aggregated debt exceeding $50 million, and concurred that passage of SB 338 would "arguable put them over that limit." Senator Kelly suggested that addition of "excluding non-recourse revenue bonds" would cure the problem. Co-chair Pearce voiced her understanding that the proposed language would preclude the railroad from issuing bonds of more than $50 million for its own use, but the current "federal window of opportunity" could be exploited. In response to a question from Senator Kelly, Mr. Hickey explained that the state wrote the majority of the transfer act. It sought to ensure that the railroad would have a wide range of authority, equal to public entities elsewhere, to engage in railroad related projects to support the goals and viability of the railroad without a state subsidy. Co-chair Frank advised that his staff had been working with legal services on issues relating to legislative approval. Mr. Utermohle has said, and will provide written confirmation, that subsection (3) ceilings set forth at page 4, lines 8 through 12, would not apply to debt specifically authorized by the legislature. Co-chair Frank suggested that language offered by Senator Kelly would provide an exclusion from legislative approval for all non-recourse bonds. Both Co-chair Pearce and Senator Kelly noted language within Sec. 8 (2) requiring legislative approval prior to issuing bonds. Co-chair Frank raised concern that another form of debt would be utilized. Co-chair Frank stressed need to work with legislative attorneys on development of workable language. Senator Kelly voiced committee intent to ensure that if the railroad issues the $55 million in non- recourse revenue bonds, the issue is excluded from the debt cap. Senator Rieger voiced his belief that draft "I" language is sufficient to accomplish committee intent, and no amendment would be necessary. Co-chair Pearce asked that Mr. Utermohole provide a written opinion. Senator Rieger inquired concerning the net profit for the railroad over the past year. Mr. Hickey advised of a net loss of $2.6 million comprised of $800.0 in freight and a one-time write down of $1.8 based on reorganization and early-out retirement payments to reduce the work force. Senator Rieger remarked that the railroad should pay a dividend similar to AHFC. Mr. Hickey spoke briefly to continued losses in passenger services. Since that service returns a considerable dividend to the state, the railroad has covered the loss from operating moneys rather than seeking a subsidy. Senator Sharp voiced his understanding that the transfer act provided tax exempt status for financing of railroad upgrades and railroad related activities. He then suggested that the tax exempt benefit might be lost if it is used for other financing. Mr. Hickey noted that railroad real estate (and flexibility in its development) was critical to purchase of the railroad and its viability. Senator Sharp voiced need for testimony from the chief executive officer and railroad board of directors on both SB 148 and SB 338. Discussion of the relationship of the two bills and the railroad's position on them followed. Co-chair Frank directed attention to Sec. 10 provisions relating to the regional land fill at Nenana and noted earlier comments that it could be removed from the bill. He expressed reluctance to do so without consultation with legislators from that area. Mr. Hickey voiced his understanding that there is a possibility discussion of the landfill will resume in the near term, at the proposed site. There is potential over the next two to five years that the project might make sense. Senator Rieger pointed to information from the railroad charting the corporation's real estate revenue plan projected for 1993 through 1998 and cautioned that until the railroad is privatized, the legislature will "have many more hours at this table discussing the equity of each of those projects . . . ."