MINUTES SENATE FINANCE COMMITTEE February 10, 1993 TAPES SFC-93, #16, Side 1 (561-001) SFC-93, #18, Side 1 (001-561) SFC-93, #18, Side 2 (561-001) SFC-93, #20, Side 1 (001-450) CALL TO ORDER Senator Drue Pearce, Co-chair, convened the meeting at approximately 8:03 a.m. PRESENT In addition to Co-chairs Frank and Pearce, Senators Kelly, Kerttula, Rieger, and Sharp were present. Senator Jacko arrived while the meeting was in progress. ALSO ATTENDING: Charlot Thickstun, Director, Division of Elections; Chip Thoma, representing himself; Max Gifford, staff for Senator Kelly; Juanita Hensley, Chief, and Jay N. Dulany, Director, Department of Motor Vehicles, Division of Public Safety; Mr. Robert S. Hatfield, Jr., President and CEO, ARRC; Mr. Loren Lounsbury, Chairman of the Board, ARRC; Commissioners Paul Fuhs, DOC&ED; Frank Turpin, DOT/PF, Mike Greany, Director, and Karen Rehfeld, Fiscal Analyst, Legislative Finance Division; and aides to committee members. SUMMARY INFORMATION Alaska Railroad and Railroad Board Overview Co-chair Pearce and the committee invited members of the ARRC Board to speak to unanswered questions raised during an interview with Commissioner Turpin during a budget overview of DOT/PF. *CSHB 68(FIN) - An Act making a supplemental appropriation for certain elections for regional educational attendance area school boards and coastal resource service area boards; and providing for an effective date. Testimony was presented by Charlotte Thicksten, Director, Division of Elections. The appropriation bill ($90.0) was REPORTED OUT of committee with a "do pass" recommendation. SB 30 - An Act extending the termination date of the Alaska Minerals Commission. The bill was REPORTED OUT of committee with a "do pass" recommendation and a zero fiscal note from the Department of Commerce and Economic Development. SSSB 47 - An Act relating to equipment, registration, and identification of custom collector vehicles; and providing for an effective date. Testimony was presented by Max Gifford, staff to Senator Kelly; Jay N. Dulany, Director, DMV; and Juanita Hensley, Chief, Department of Public Safety. The bill was REPORTED OUT of committee with a "do pass" recommendation and a $10.9 fiscal note from the Department of Public Safety. *First Senate hearing CS FOR HOUSE BILL NO. 68(FIN): An Act making a supplemental appropriation for certain elections for regional educational attendance area school boards and coastal resource service area boards; and providing for an effective date. CO-CHAIR DRUE PEARCE directed that CSHB 68(FIN) be brought before the committee and that the committee had received a like bill, SB 48. She invited Charlot Thickstun, Director, Division of Elections, to testify on behalf of CSHB 68(FIN). CHARLOT THICKSTUN directed attention to a memo (copy on file) dated February 4, 1993, from the Division of Elections explaining Regional Education Attendance Area (REAA) and Coastal Resource Service Area (CRSA) elections. She said the reapportionment and related litigation had caused unexpected expense to the division. She said the division needed $90.0 additional funds in order to pay for the cost of REAA and CRSA elections. CO-CHAIR STEVE FRANK confirmed that money had been appropriated to the Division of Election's original budget to cover the expenses of the REAA and CRSA elections but the money was spent to cover other expenses. Ms. Thickstun agreed that was the case. She said the there was enough money in the budget to fund the division until February 15, 1993, and the division had been using the Governor's contingency fund of $25.0. She said cutbacks had been done wherever possible. SENATOR JAY KERTTULA alleged that the Division of Elections had misused appropriated funds allocated for the REAA and CRSA elections, and now the state was asked to make up the difference. SENATOR STEVE RIEGER asked how advertising money had been spent. Ms. Thickstun said in rural communities the division advertised when and where the election was going to be held. The division also advertises to let candidates know when to file for seats. She explained this was required by law. Senator Rieger asked if the $23.5 was for upcoming election newspaper ads or were there unpaid invoices that needed to be paid. Ms. Thickstun admitted there were existing unpaid invoices. CHIP THOMA, representing himself, wanted to clarify that the expense of the recall had not caused the overruns in the Division of Elections. He said that 50,000 names and signatures collected by the recall organization had been checked before they were submitted to the Division of Elections. A calculation showed that it took approximately one minute to look up each name. This would amount to approximately 800 hours, or less than $10,000 of expenses, to check the recall signatures. SENATOR TIM KELLY asked the status of the recall. Mr. Thoma indicated approximately half of the 50,000 signatures needed for the second stage of the recall had been collected. Senator Kelly MOVED for passage of CSHB 68(FIN) with individual recommendations. Co-chair Pearce called for a show of hands on passage of the bill, and the bill was MOVED on a vote of 5 to 1 (Senators Pearce, Frank, Kelly, Sharp and Rieger were in favor, Senator Kerttula was opposed). Co-chair Frank commented that he would like to have a better understanding of authorizations to spend and supplemental appropriations that came before the committee. Senator Kerttula said a report was due from legislative audit regarding this issue. SENATE BILL NO. 30: An Act extending the termination date of the Alaska Minerals Commission. Co-chair Pearce directed that SB 30 be brought on for discussion. She informed the committee that a revised zero fiscal note for the Department of Commerce & Economic Development had been provided. She explained that the cost had already been appropriated in the department's budget. Co-Chair Frank MOVED and asked for unanimous consent that SB 30 pass from committee with individual recommendations and the revised fiscal note. No objection being raised, SB 30 was REPORTED OUT of committee with a zero fiscal note for the Dept. of Commerce and Economic Development. Co-chairs Frank, Pearce, Senators Kelly, Rieger, and Sharp signed the committee report with a "do pass" recommendation. Senator Kerttula signed the committee report with a "no rec." Senator Jacko was absent and did not sign. SPONSOR SUBSTITUTE FOR SENATE BILL NO. 47: An Act relating to equipment, registration, and identification of custom collector vehicles; and providing for an effective date. Co-chair Pearce directed that SSSB 47 be brought on for discussion. Senator Kelly, sponsor for SSSB 47, commented that the bill was not a significant bill but had to do with improving the quality of life. End SFC-93 #16, Side 2 Begin SFC-93 #18, Side 1 MAX GIFFORD, legislative assistant to Senator Kelly, testified that SSSB 47 provided that owners of custom collector vehicles must equip their vehicles with several safety devices, and provided for an exemption for bumpers, hoods and fenders. The owner may register with the Department, pay a $50 fee, and if they qualify, obtain a vehicle identification number and special license plate. He estimated that there were approximately 200 to 250 custom cars in Alaska. He directed attention to a letter from the Midnight Sun Street Rod Association dated January 25, 1993 (copy on file), in support of SSSB 47. He explained the fiscal note was in the amount of $10.9 for plate production and estimated income from the $50 registration fee to be $10.0. Co-chair Pearce invited Juanita Hensley, Chief, and Jay N. Dulany, Director, Division of Motor Vehicles, Department of Public Safety, to testify regarding SSSB 47. JAY DULANY, in answer to Senator Kerttula's question, replied that the bill meant almost a break-even cost for the division. Discussion followed between Senators Rieger and Kelly, Max Gifford, and Mr. Dulany regarding safety regulations for older cars. Senator Kelly MOVED and asked for unanimous consent that SSSB 47 pass from committee with individual recommendations and the attached fiscal note. No objection being raised, SSSB 47 was REPORTED OUT of committee with a fiscal note in the amount of $10.9 for the Dept. of Public Safety. Co- chairs Pearce and Frank, Senators Kelly, Rieger, Kerttula and Sharp signed the committee report with a "do pass" recommendation. Senator Jacko was absent and did not sign. Recess 8:25am Reconvene 9:03am Alaska Railroad and Railroad Board Overview Co-chair Pearce invited members of the Alaska Railroad Corp. (ARRC) Board, Mr. Robert S. Hatfield, Jr., President and CEO, ARRC, Mr. Loren Lounsbury, Chairman of the Board, ARRC, and Commissioners Paul Fuhs, DOC&ED and Frank Turpin, DOT/PF, to join the members at the committee table. She indicated that the board members had been invited to speak in regard to unanswered questions previously raised, regarding ARRC, during an overview for DOC&ED's budget. She asked Mr. Hatfield to present an overview of ARRC, and then asked members to present their questions. ROBERT HATFIELD said that in 1992, ARRC achieved gross revenues of $68M. He itemized the revenue as follows: $52M from freight, $8.5M from passenger, $4M from real estate, and the remainder from the sale of used materials. Last year, $13M was spent on capital improvement projects including $114.0 of new rail, $14.0 of right-of-way wooden and steel cross ties, 65,000 cubic yards of ballast, and the resurfacing of 164 miles of property. He stated the railroad had improved its safety record by about 30 percent and an approximate 90 percent "on time" had been achieved for the freight trains. He explained that in June 1992, ARRC entered a joint venture and opened the Comfort Inn in Anchorage. It had also exercised a master lease for the 120-acre Ship Creek Redevelopment project. Overall, the railroad showed a growth in passenger business. Mr. Hatfield projected ARRC's emphasis for the next year to be about the same. He pointed out that the railroad business was in a very competitive situation. It hauled about 500 million gallons of petroleum products annually from the North Pole to Fairbanks. The possibility of the construction of a pipeline would certainly impact the railroad's revenue. In addition, the railroad hauls about 12,000 trailers a year, 4,000 from the lower 48, and is in direct competition with barge lines and the highway between Anchorage and Fairbanks. He said other areas of business that were competitive were hauling logs and coal. He said that ARRC was unable to move its tracks to another area to take advantage of other markets. It must use the present tools available to become an asset for the state. Discussion followed between Senator Rieger and Mr. Hatfield on how ARRC, Suneel Coal and Usibelli would share equally in the projected revenue decreases and increases. Co-chair Frank asked Mr. Hatfield if ARRC was planning to open a hotel in Fairbanks and use the same scenario as the Comfort Inn in Anchorage. He voiced his disagreement with the railroad taking an equity ownership in a hotel or any other non-transportation business. He felt ARRC was a public corporation, owned by the state, and felt it was not appropriate for it to be in competition with the private sector. Mr. Hatfield said that all decisions were made by the board and the board had agreed not to enter into any business unless it related directly to the railroad's core of business. He felt increasing passenger business, and the availability of hotel rooms were directly related. He said, regarding a similar proposed hotel project in Fairbanks, ARRC had asked for input from the public and private sector. He did not know if the board would approve a hotel project in Fairbanks, but said there was no formal hotel proposal before the railroad at this time. In Anchorage, Mr. Hatfield explained, the Hospitality Associates had come to the railroad with a proposal making the builder, operator, and land holder all partners. The board felt by putting up the fair market value of the railroad-owned land as equity for a loan, ARRC could receive a far greater value as a partner than by leasing the land. He agreed there was some risk involved but the projections from two outside sources showed it to be a good business decision. He pointed out that in Seward, the railroad had scheduled a meeting for public input, and no one had attended. The board than made its decision to join the partnership. He observed it had been said that ARRC could compete unfairly in the hotel marketplace. He stated that the railroad paid property and bed taxes. Hospitality Associates was a larger company than the Alaska Railroad Corp. and could guarantee any shortfalls in revenue. ARRC was responsible for 40 percent of losses or gains of the project. He felt any other land owner in Alaska could have accomplished the same partnership if they had chosen to do so. LOREN LOUNSBURY, Chairman of the Board, wanted to emphasize that there had been unanimous instruction from the board to the administration that ARRC would not enter any joint venture unless everything was treated fairly with the general public and no advantage was taken by tax repositioning or by the ability to borrow money at less than commercial rates. Co-chair Frank observed that in a report by LBA (copy on file) dated May 1, 1992, that ARRC was 100 percent liable for the whole debt if a loss should occur, not just 40 percent. Mr. Hatfield and Mr. Lounsbury agreed but reiterated that ARRC felt that the Comfort Inn project was a good risk. Co-chair Frank also said that the same report stated that a $250.0 cash call by a partner was not received and was renegotiated to zero. Mr. Hatfield said he did not have the specific documents with him to address this question but negotiations had taken place in a typical business atmosphere. To charge fees to the partnership did not make sense and that was why a development fee had not been paid to the builder or operator. He said that the hotel was now open, a loan had been obtained, and all cash calls had been reimbursed. End SFC-93 18#, Side 1 Begin SFC-93 18#, Side 2 Co-chair Frank asked if one of the four husband and wife teams that were partners in this project, was also the builder. Mr. Lounsbury answered one of the partners was the builder and no fees were paid to him for building the project. In answer to Co-chair Frank's inquiry, Mr. Hatfield agreed to find out the book value of the other partners for the committee. Mr. Lounsbury asked to respond to Co-chair Frank's negative position regarding ARRC's partnership in the hotel business. He pointed out that this was the only partnership, perceived as a non-transportation business, that ARRC was involved in. He said on behalf of the board, ARRC did not have any intention of entering the grocery, hardware, or any business unrelated to transportation. Because of the possible diminishing freight business, the railroad was trying to expand passenger service, especially in the area of tourism. Because of cruise ships into Seward, passenger service was expected to increase. The Ship Creek Redevelopment project targeted tourism related activities and hoped to hold people over in Anchorage longer. He added tourists staying even an extra day could mean a big difference to the economy of the community. He felt the railroad was looking into the sale of passenger packages, such as cruise ships use, combining hotel rooms, meals, etc. to enhance revenues. He felt the board had never attempted to unfairly compete with anyone in the private sector. He said that if it hadn't been for its real estate holdings, not including the hotel in Anchorage, the railroad would have been in the negative $2M. Co-chair Frank said a problem did not exist when ARRC leased its real estate to businesses. Mr. Lounsbury said, in the case of the Comfort Inn project, the project had been proposed to the railroad. Co-chair Frank felt his concerns were two fold; the actual impact in the event of a loss, and the philosophical problem of the state competing with the private sector. He said these two concerns were related. For example, if the hotel was losing money, room rates could be reduced by ARRC to gain more business, and this would directly impact the private sector. He also felt the state should not take on the potential risk of this project. Mr. Lounsbury agreed that the Comfort Inn could be perceived as competition for the private sector but said the hotel was unique in that it had no bar or food service which also reduced operating costs substantially. He felt the partners in this hotel had a great track record and all of their other hotels were making money. He also felt the Comfort Inn did not compete with such hotels as the Captain Cook because of its location and lack of amenities. The board felt the decision to go into this partnership was a good investment decision for ARRC. He said the railroad would continue to look at opportunities to help its bottom line. Senator Sharp asked if one of the partners was the operator of the hotel and were they paid a management fee. Mr. Hatfield said operating expenses but no management fee was paid. Senator Sharp asked if the board had examined the cost of the hotel construction and was any profit made by the contractor in constructing the building. Mr. Hatfield and Mr. Lounsbury agreed that there had been no profit made by the partner who built the hotel. In answer to Senator Sharp's question, Mr. Hatfield said the total debt for the 150-room hotel was $4.4M, but was unable to name all the partners in the project. Senator Sharp felt that tourism was a consideration for revenue in this hotel project. He wanted to know if the law authorized the railroad to invest in logging or coal businesses. Mr. Hatfield indicated those kind of businesses, for example a sawmill, were traditional railroad business. He felt one of the charges of the railroad was to help create economic development in the state. Discussion followed between Senator Sharp and Mr. Hatfield regarding the lease of railroad land. Senator Kelly asked if the railroad was able to create bed space and was that one of the reasons the hotel would make money. Mr. Hatfield agreed that the location of the hotel near the railroad was one of the main reasons ARRC decided it was a related business and that it would be profitable. Senator Kelly said that ARRC was authorized to bond through the legislature and asked if ARRC had done that. Mr. Lounsbury said, to his knowledge, ARRC had never gone to the legislature for any available exemptions. Senator Kelly asked how much money had been spent on improvements since the state acquired the railroad. Mr. Hatfield said he did not know the exact amount but over $100M had been spent on capital improvements since state ownership. Mr. Lounsbury said the number was available but he knew the railroad had spent $50M on road bed improvements alone. Senator Kelly asked about ARRC's pension plan and its safeguards. Mr. Hatfield said ARRC's plan was separate from the state's and was over-funded at this time with year to year growth at about 8 percent. It was managed by a committee made up of members of management, leaders of the labor organization, and a consultant. In answer to Senator Kelly's question, Mr. Hatfield answered that the board did not have access to the pension funds. COMMISSIONER TURPIN said that ARRC's pension plan was less expensive than the state's. Senator Rieger asked how much lease obligation the railroad had on the books at present. Mr. Hatfield said the railroad had over one thousand pieces of land leased but a list or their worth was not available. Senator Rieger said he was inquiring as to any railroad indebtedness to leases that the railroad held. Mr. Hatfield said the railroad leased one building in Anchorage, and also leased-to-own some equipment. He said the long term debt level of ARRC was constant at about $20M which did not include long term equipment leases. Mr. Hatfield said that information was available in their annual report. Discussion followed between Senator Rieger, Mr. Hatfield, Commissioner Fuhs regarding Senator Rieger's suggestion of converting ARRC to a stock company owned 100 percent by the state. Co-chair Pearce asked if ARRC could provide a written mission for the railroad. Mr. Hatfield said the railroad mission statement said that the ARRC would provide high quality freight, passenger and real estate services for its customers. Those he felt were the railroad's core businesses. Co-Chair Pearce asked Mr. Hatfield if any of the other board members had seen his letter dated July 1, 1992 (copy on file), in response to Mr. Welker, Legislative Auditor, on the Ship Creek redevelopment, before it was sent. Mr. Hatfield answered negatively. Co-chair Pearce asked Mr. Hatfield to provide a list of all lawsuits that the railroad was involved in and their status. Mr. Hatfield said he would provide the list but strategy regarding the lawsuits was confidential. Co-chair Pearce emphasized that she was requesting status only, and if the committee needed further information, it could be handled in an executive session. Co-chair Pearce said that in past years, passenger service on the railroad had always been subsidized. She asked if proposed packages for tourists would include subsidized passenger service, or would the railroad not subsidize the passenger service in the packages so they might be fair in their competition with private entities. Mr. Hatfield said at the present the railroad was not receiving any subsidy to cover passenger service. Co-chair Pearce said she understood that but internally the passenger service historically did not pay for itself. Mr. Hatfield said that passenger service was about $.5M short of meeting costs. He said that the railroad was negotiating with a cruise line, and in those type of packages, the passenger costs would be fully covered. End SFC-93 18#, Side 2 Begin SFC-93 20#, Side 1 Commissioner Turpin pointed out that when the state purchased the railroad, the federal government was being paid by the state $.75M per year in passenger subsidy. The legislature had expected to pay $2M a year to the railroad. He said, instead the railroad introduced new routes and services to improve the operation of the passenger service. Co-chair Frank asked whose idea it was to build the hotel, the railroad or the partners in the hotel. Mr. Hatfield and other board members agreed it was the partners that came to the railroad with the hotel proposal. In answer to Co-chair Frank's question regarding the financial statements of partners not being available to the auditor, Mr. Hatfield said that it was not up to the railroad to release personal financial information of the partners. Mr. Hatfield said that partnership financial statements were available but not the partners' personal financial statements. Discussion followed between Co-chair Frank and Mr. Hatfield regarding the philosophy of public and private businesses and how they are run. Senator Kelly asked how the Whittier road would affect the railroad financially. Mr. Hatfield said at the present time the railroad handled 175,000 passengers in and out of Whittier each year, some being duplicates. He said the road into Whittier would cause a decrease in this passenger traffic. He said because the overall operation was losing money, it would mean a net benefit to the railroad. The Whittier shuttle does generate cash in the summer because passengers pay in advance and freight customers do not. COMMISSIONER FUHS said the hydrotrain runs out of Whittier and that was a profitable operation. He explained that the hydrotrain is an operation that enables the transfer of railroad cars from the barge to the train. He said that the railroad would rethink the whole operation in light of the new road to Whittier. Senator Kelly confirmed that the railroad lost money each year on freight and passenger service but was subsidized by its real estate holdings. Mr. Hatfield affirmed that the loss each year was approximately $2M and any net profit was received from its real estate operation. Mr. Hatfield pointed out that 70 percent of the railroad business was with Usibelli and Mapco. If a pipeline was installed between the refinery and Anchorage, the railroad would lose a significant amount of revenue. He said, in addition, the export coal business may not exist in the next few years. The gas pipeline that may go through Fairbanks would also have a negative effect on the railroad's revenue. Mr. Hatfield reiterated that passenger and tourist business was an important aspect in developing new revenue. Discussion followed between Senator Kelly, Mr. Hatfield and Commissioner Turpin regarding the sale of the Alaska railroad. The point was made that railroad real estate holdings were the only reason any individual or company would be interested in buying the railroad. Commissioner Fuhs felt that if the railroad was privately owned, the public would lose a lot of services. Co-chair Pearce directed attention to a letter dated February 1, 1993 (copy on file), from the City of Nenana. She said that Representative Jeannette James could not attend the meeting but asked the board for comments regarding the proposed ARRC's landfill that could compete with the City of Nenana's proposed landfill. Commissioner Fuhs said that in the past few years, the board had discussed the potential of building a waste disposal site in a remote area along the railroad. He said the board discussed the high cost of toxic and hazardous waste disposal, and how hauling and disposal of it could provide a source of revenue for the railroad. The construction and licensing of these disposal sites would be under the auspices of different governmental agencies. He said there had been discussions with Fairbanks and with Nenana regarding their disposal problems. He said a potential site had been chosen, and management had met with DEC to discuss the ramifications of such a facility. Mr. Hatfield directed attention to a newspaper article dated October 29, 1991 (copy on file), titled "Waste becomes opportunity." He agreed discussions had been going on for some time regarding a proposed disposal site. He said that the railroad had discussed with the City of Nenana their proposed operation. He felt the letter from Nenana made an allegation that the railroad had obtained competitive information from Nenana. He stated the railroad had been looking at building such a disposal site since February 1991. He said the City of Nenana's project would take a lot of money to get started but the railroad did not intend to stand in the way of their proposal. He said the railroad could handle hazardous waste from Nenana since their proposed site would only handle solid waste. Co-chair Pearce asked that the committee receive a copy of the railroad's response to the City of Nenana. Mr. Lounsbury said that the administration was planning on meeting with Nenana and Fairbanks to discuss the waste disposal situation in February 1993. Senator Kelly asked if it was Nenana's plan to draw solid waste from Anchorage and Fairbanks. Mr. Lounsbury said he did not know but suspected from Fairbanks. Mr. Hatfield added that Nenana may have proposed to handle waste barged down the river from the bush communities as well as other contracts. He said bridges that needed to be built and other expenses, if not funded, would stand in the way of Nenana's project. Co-chair Frank asked if greater earnings would be projected if the railroad owned the disposal site themselves, and what, if any, was the difference of owning a disposal site compared to a hotel. Mr Hatfield said a decision had not been made about ownership. He felt that a company would be contracted to operate the disposal site who had expertise in that area. Mr. Lounsbury said the railroad had been looking at toxic hazardous waste disposal, not solid waste. The railroad planned to have a licensed and highly trained contractor or train employees to handle such waste. He said the railroad had not come close to making those kinds of decisions or conclusions. He said the toxic waste business was costly to get into, complex, but could produce income and provide a service to the state. Co-chair Frank cited Sec. 42.40.280 of the Alaska Statutes that said, "The board shall provide a state oversight report to the governor and the legislature before undertaking (1) expansion, reduction, or diversification of services..." Mr. Lounsbury said that ARRC would certainly comply with any section of the law that was required. Co-chair Frank asked if ARRC went into a partnership with the hazardous waste project on railroad land, would it be approved by the legislature. Mr. Lounsbury said that he did not think ARRC would be required to come before the legislature for that particular project but reminded the committee that ARRC provided the legislature with a annual report and a 5-year projected plan. Discussion followed between Co-chair Frank and Mr. Lounsbury regarding the meaning of the words in the statute "expansion of services." Senator Kelly asked that the board have Phyllis Johnson, legal counsel to ARRC, review Sec. 42.40.280. Senator Kelly asked who else was on the board of ARRC. Mr. Hatfield answered that Frank Chapados of Fairbanks, Dale Lindsey of Seward, and Michael Olson representing labor, were the other board members. Co-chair Frank noted that in a recent conversation, Mr. Chapados had agreed that the railroad should lease the land and not get into the operation of a business. Commissioner Fuhs felt that Mr. Chapados was in agreement with the hotel project. Discussion followed between Commissioner Turpin and Fuhs, Co-chair Frank, and Mr. Hatfield regarding different variations on lease and business investments by ARRC. ADJOURNMENT The meeting was adjourned at approximately 11:00 a.m.