COMMISSION ON PRIVATIZATION AND DELIVERY OF GOVERNMENT SERVICES Anchorage, Alaska November 30, 1999 9:06 a.m. COMMISSION MEMBERS PRESENT Representative Cowdery, Co-Chair Senator Ward, Co-Chair Representative Brice (via teleconference) Senator Al Adams (via teleconference) Tom Fink, Former Mayor of Anchorage Emil Notti Mike Harper, President, Kuskokwim Corporation Kathryn Thomas, Former Chair of Alaska State Chamber of Commerce Don Valesko, Business Manager of Public Employees Local 71 George Wuerch, Alaska Municipal League COMMISSION MEMBERS ABSENT Bill Allen, Former Mayor of Fairbanks COMMITTEE CALENDAR Reports from the following Privatization Subcommittees: Department of Revenue: Alaska Housing Finance Corporation (AHFC) Department of Community and Economic Development: Alaska Industrial Development and Export Authority (AIDEA) Department of Military and Veterans Affairs Department of Community and Economic Development, Alaska Railroad Corporation (ARRC) Department of Community and Economic Development, Alaska Energy Authority: Hydro-Electric Projects PREVIOUS ACTION See Commission on Privatization minutes dated 7/20/99, 8/16/99, 9/20/99, 10/28/99, 11/04/99, 11/10/99, 11/18/99 and 11/24/99. WITNESS REGISTER MARY ANN PEASE, Chairman Department of Revenue Subcommittee POSITION STATEMENT: Presented the subcommittee's recommendations regarding the Alaska Housing Finance Corporation (AHFC). MARCO PIGNALBERI, Commission Director and Legislative Assistant to Representative John Cowdery POSITION STATEMENT: Answered questions and presented information on behalf of the commission and various subcommittees. RANDY SIMMONS, Executive Director Alaska Industrial Development and Export Authority (AIDEA) Department of Community and Economic Development POSITION STATEMENT: Answered questions and provided information on AIDEA. JOHN BITNEY, Legislative Liaison Alaska Housing Finance Corporation (AHFC) Department of Revenue POSITION STATEMENT: Answered questions and provided information on AHFC. CHRIS NELSON, Chairman Department of Military and Veterans Affairs (DMVA) Subcommittee POSITION STATEMENT: Presented the subcommittee's recommendations regarding the DMVA. JIM CHASE, Deputy Commissioner/Chief of Staff Department of Military and Veterans Affairs POSITION STATEMENT: Presented the subcommittee's recommendations and answered questions regarding the DMVA. LEE WAREHAM, Chairman Alaska Railroad Corporation Subcommittee POSITION STATEMENT: Presented the subcommittee's recommendations and answered questions regarding the Alaska Railroad Corporation. ERIC YOULD, Member Hydro-Electric Projects Subcommittee POSITION STATEMENT: Presented the subcommittee's recommendations and answered questions regarding the Hydro-Electric Projects Subcommittee. KEITH LAUFER, Development and Finance Manager Alaska Industrial Development and Export Authority (AIDEA) Department of Community and Economic Development POSITION STATEMENT: Answered questions regarding the agreement between the Alaska Energy Authority and all the utilities that participate in the intertie. ACTION NARRATIVE TAPE 99-19, SIDE A CO-CHAIR WARD called the Commission on Privatization and Delivery of Government Services meeting to order at 9:06 a.m. Members present at the call to order were Representatives Cowdery and Brice; Senators Ward and Adams; and Commissioners Fink, Thomas, Harper, Notti, Valesko and Wuerch. Marco Pignalberi, Commission Director, was also present. Commissioner Allen was not in attendance. APPROVAL OF PREVIOUS MINUTES CO-CHAIR WARD noted that members should have copies of the minutes dated November 18, 1999. COMMISSIONER WUERCH moved that the commission approve the minutes dated November 18, 1999. He pointed out that at the November 18 meeting a departmental representative had offered to provide a report regarding the costs that would be incurred with the Department of Natural Resources (DNR) taking on a data processing task that Motznick Computer Services has been providing for free. There being no objection, the minutes were approved. OLD BUSINESS CO-CHAIR WARD noted that pending were comments from the DNR; the Alaska Industrial Development and Export Authority's (AIDEA's) response; the Governor's response; the Department of Law's comments on performance measures and the management information system; and the Attorney General's comments. Therefore, no action was necessary. Co-Chair Ward requested that those responses, as well as the Motznick report, be provided as soon as possible. NEW BUSINESS - Reports by Subcommittees [Most of the information contained in subcommittee reports will be available at the commission's web site at www.privatizealaska.org.] Subcommittee Report on the Department of Revenue: AHFC & AIDEA MARY ANN PEASE, Chairman, Department of Revenue Subcommittee, noted that the full commission had requested that the subcommittee perform a more in-depth review, focusing on AHFC's participation in the secondary mortgage market. She said this report encompasses those recommendations. Currently AHFC holds $2.3 billion in mortgages and approximately $1.8 billion in cash and short-term investments; almost all of this financing has occurred through the issuance of bonds. Two-thirds to three- fourths of AHFC's mortgage portfolio consists of mortgages backed by tax-exempt bonds. Some of the loan programs, which are not currently focused on by the private sector, are loans to veterans, first-time home buyers, and developers of multifamily housing. Conversely, about one-quarter of the portfolio is backed by taxable bonds. Although AHFC's taxable programs are primarily designed to provide financing in areas poorly served by the secondary market, AHFC has not had a great deal of interest over the last ten years. MS. PEASE noted that the subcommittee did not conduct an in-depth review of all of Alaska's private lenders. However, they had spoken with various people such as Jim Crawford of City Mortgage and Dick Dolman of Seattle Mortgage, and she had spoken with Jan Seifert (ph) of National Bank of Alaska; all said AHFC is doing a good job, not crowding out the private sector, and is significantly contributing to Alaska's economy. It was suggested that significant changes to AHFC would have a detrimental effect on Alaska's housing market and the economy as a whole. Furthermore, revenue from AHFC's secondary market provides important benefits to the state. For example, revenues subsidize [AHFC] public programs, which would otherwise require about a $40 to $50 million cash infusion from the state. There is also the ability to lower mortgage programs through the use of arbitrage funds. MS. PEASE said AHFC currently has a very good bond rating and a large cash balance, $1.8 billion. The subcommittee recommends that a capital requirement study be performed by an independent expert such as a credit rate agency. Such a study would determine how much cash is actually needed to maintain AHFC's strong market position; any additional cash freed up could be used for other purposes. The subcommittee highly recommends combining other bonding entities with AHFC for the aforementioned reason, supporting the prior recommendation. The subcommittee believes that AIDEA and possibly the postsecondary loan program and the Municipal Bond Bank should be combined under one umbrella, freeing up additional capital. For example, AIDEA has approximately $850 million that could be freed up for other purposes if it were to rely on AHFC's cash balances. Other alternatives could be reviewed, including segregating AHFC under a state charter; that would require (indisc.--coughing) to provide the public services provided by AHFC and pay a dividend back to the state. MS. PEASE informed members that the subcommittee had broken down the numerous ways that AHFC could be privatized into two conceptual categories. The first treated AHFC as a public corporation with its shares being held by the State of Alaska. Under such a scenario, the state would continue to receive dividends back into the treasury, and the state would be entitled to appoint AHFC's board of directors. In all other respects, AHFC would operate as a private corporation in a manner similar to the operation of the Alaska Railroad Corporation - with the exemption from the provisions of the Executive Budget Act. The second alternative is to fully privatize AHFC, resulting in an extremely large, one-time benefit to the state treasury. There are a number of ways to achieve the sale of the entire corporation, and "Fannie Mae" would be an example of how such privatization could occur; a key to this alternative is ensuring that the state housing market will continue to have access to a secondary market that continues to offer tax-exempt financing program. Of some concern to her, Ms. Pease indicated, is that the secondary mortgage lenders contacted were not extremely interested in this scenario because they felt AHFC serves that purpose. MS. PEASE suggested that the state may also consider distributing shares of AHFC to all Alaskan residents. The report reviewed privatization of AHFC under two approaches, and the subcommittee also reviewed the combination of AHFC with AIDEA and the other bonding agencies within the state. Ms. Pease emphasized that real savings would occur if AHFC, AIDEA and the Municipal Bond Bank were combined, freeing up capital now specifically marked for each of these organizations. She reiterated that review by credit-rating agencies and the underwriters may also be helpful. LEONARD STEINBERG, Member, Department of Revenue Subcommittee, agreed that AHFC appears to serve a purpose that would not otherwise be fulfilled, and the private sector working with AHFC is pleased with the service and the product. He said the real question is whether some capital set aside could be freed up for other uses. Mr. Steinberg questioned whether $1.8 billion is necessary to maintain AHFC's good credit rating; he suggested that experts could determine the necessary amount to set aside. He also echoed the notion of combining other bonding agencies with AHFC so as to have only one capital requirement, which would cover several agencies and again free up capital. MS. PEASE mentioned the presence of Jim Crawford, whom she believed to be the largest lender on the secondary market in Alaska. COMMISSIONER FINK inquired as to Mr. Steinberg's livelihood and asked whether Mr. Steinberg is associated with AHFC or the three people contacted by the subcommittee. MR. STEINBERG first noted that he is an attorney, then answered that he has never had any professional dealings with them. COMMISSIONER FINK said he interpreted the subcommittee report to say that without AHFC, something would be lacking. He offered his impression that no other state has such a program, however. MS. PEASE agreed, specifying that AHFC, a subsidized home program, offers something not found in other states. MR. STEINBERG pointed out that historically it appears there was some discrimination by national lenders for providing home loans to Alaskans, for a number of reasons. Those people contacted by the subcommittee felt such discrimination would continue absent AHFC. CO-CHAIR WARD noted that six other states have lending programs, although not on the order of AHFC. COMMISSIONER WUERCH called attention to page 2 of the subcommittee's report, which refers to Mr. Crawford's comment that AHFC is not crowding out the private sector and significantly contributes to Alaska's economy; the report also notes Mr. Crawford's belief that major changes to AHFC may result in a detrimental effect. Mentioning the notion of combining the liquid reserves to protect the bond rating, he asked if combining AHFC with the Alaska Postsecondary Loan Program, AIDEA, the Municipal Bond Bank, and others would have a detrimental effect. Furthermore, would such a combination change the way in which AHFC would operate in its mortgage area? JIM CRAWFORD, Member, Community and Regional Development Subcommittee, noted that the Community and Regional Development Subcommittee had reviewed AIDEA among other functions; that subcommittee recommends that AHFC and AIDEA be merged, as had occurred successfully - with a monetary savings - several years ago with the Alaska State Housing Authority (ASHA) and AHFC. He said the $1.8 billion net worth of AHFC is sufficient to meet the needs of AIDEA plus the housing market. Mr. Crawford commented that AHFC has a unique function performed in all 50 states and territories: tax-exempt financing. He recommended having a capital adequacy study performed by a credible third party. Short of that, Mr. Crawford suggested that $850 million could be recovered in the next legislative session by liquidating AIDEA. He clarified that the recommendation specifies that the functions of AIDEA should not be affected, although there would be some staff consolidation. UNIDENTIFIED COMMISSIONER asked whether there is any negative aspect to this that the commission should be aware of. MR. CRAWFORD answered that he did not see a downside so long as the functions continue. He does not believe the bond buyers care whether the bond is an AHFC bond or an AIDEA bond. He emphasized that the tax-exempt function must continue, which is a federal Act. Prior to AHFC, he noted, each municipality issued its own tax-exempt bonds for housing. That method was very inefficient, not to mention the favoritism that occurred during that time. The AHFC program has been a well run program. CO-CHAIR WARD, noting that he is a licensed real estate agent, asked what would happen if AHFC were liquidated 100 percent and its assets placed in the general treasury. MS. PEASE indicated the difficulty of the market absorbing such a large entity as AHFC. Who would take over the existing program? And is there a secondary market willing to absorb that? Although the subcommittee had a limited review, Ms. Pease said she would have had a different view if one of the three contacted would have said that [AHFC's] activity could be picked up. She agreed that no other state subsidizes home loans to the extent performed in Alaska. MR. STEINBERG suggested that liquidation of AHFC would result in an immediate decline in statewide real estate property values. Furthermore, some individuals who could currently purchase homes would probably be excluded from the market. That seemed to be the consensus from those contacted by the subcommittee. MR. CRAWFORD stated that the primary impact of the closure of AHFC would be in the new construction market, which would be cut in half. About 70 to 80 percent of new construction is funded under the First Time Homebuyer tax-exempt program, which amounts to $200 million a year. Taking $200 million from the housing market would create a huge impact. The other major function is the veterans' tax-exempt program. There are a tremendous number of veterans in Alaska. Furthermore, the veterans' tax-exempt program is a federal program; it takes the ability of a nonprofit or government entity to issue the taxes and bonds to pass along the savings of the tax-exemption to the veteran. Those important functions should be preserved, but would not without AHFC. Although AHFC has some subsidies, they are targeted subsidies. Therefore, he did not know if it would be fair to consider the tax-exempt bond capability of $200 million a year as a subsidy because it is available to every citizen in the United States. The uniqueness of AHFC is that some mixing of programs can occur. MR. CRAWFORD noted that he has been in the mortgage business since starting City Mortgage in 1981. He pointed out that a number of markets will not purchase mortgages from Alaska; for example, Nationwide Funding refuses to buy mortgages from Alaska. He suggests preserving AHFC's functions in order to access the capital markets. CO-CHAIR WARD informed members that he would be asking questions posed by other legislators, as was the case with his previous question. He asked whether the subcommittee had considered submitting inquiries or a request for proposals (RFP) to national mortgage investors to determine interest in purchasing and operating AHFC. This would release equities to the state, but [AHFC] would remain in existence. MS. PEASE restated that the subcommittee had discussed fully privatizing AHFC. One of the keys that they wanted addressed is whether the function currently performed by AHFC is necessary. She believed that people interested in taking over the operation for profit might be different from what is set in statute under AHFC's current requirements. For example, if the function of AHFC is to remain in place, somebody else won't have the capability because of the inability to offer tax-exempt financing. MR. CRAWFORD added that the functions of AHFC include those functions previously held under ASHA; that entity operates approximately 3,500 rental units owned by the state, as well as the Section 8 programs for the U.S. Department of Housing and Urban Development (HUD), with HUD money, which doesn't cost the state money. The functions of AHFC would have to be broken up in order to sell it. REPRESENTATIVE BRICE asked whether whoever takes over the functions of AHFC would follow up and continue those programs; he cited as examples weatherization, emergency housing grants and addressing the needs of the homeless. MS. PEASE replied that the subcommittee didn't make specific recommendations on the programs currently performed by AHFC and whether they would continue under any entity that would take it over. CO-CHAIR WARD indicated some of those functions could be transferred. REPRESENTATIVE BRICE stated that if the legislature were to take action, a lot of off-budget numbers would come on-budget. Transferring AHFC fund expenditures to general fund expenditures would cause a lot of concern. CO-CHAIR WARD said some legislators like everything to be on one budget sheet. UNIDENTIFIED SPEAKER stated, "That's one of the reasons I want to get out of the AHFC. It is a cash cow for finance committees in the legislature - a hidden." REPRESENTATIVE BRICE emphasized that it helps a lot of people as well. He noted the need, if moving along those lines, to ensure that those responsibilities are picked up by the organization. It is a cost that must be kept in mind. COMMISSIONER VALESKO referred to the comment that getting rid of AHFC altogether would cause property values to drop, but noted that Mr. Crawford (of City Mortgage) had said there would be less new construction, which would seemingly increase property values. He requested an explanation of the logic. MR. STEINBERG said this information had led the subcommittee to believe there would be fewer individuals able to obtain mortgages, which would reduce demand and lead to a drop in prices. UNIDENTIFIED SPEAKER indicated increased mortgage rates would dramatically increase the cost of housing for new construction; many people would drop out, and fewer people would be able to buy. It would reduce the number of people who could buy housing, which may affect the rest of the market. Not having the $200 million active in the first-time home buyer market would drive those costs up and diminish the number of buyers. COMMISSIONER VALESKO asked if the subcommittee had looked into AHFC executive salaries. MS. PEASE replied no, the big savings realized in this would not be with the salaries. Rather, it would be with either the program elimination or the capital freed up for other purposes. RANDY SIMMONS, Executive Director, Alaska Industrial Development and Export Authority (AIDEA), Department of Community and Economic Development, stated that the numbers are incorrect and that he would not be speaking against or in support of the recommendations. As it relates to AIDEA and the $847 million (indisc.), that is the net equity of AIDEA as of June 30, 1999, not cash available. He explained that it includes AIDEA's development projects, loans, investments and cash. Approximately $457 million is cash, as of that date, and it would not be easy to liquidate the development projects. For example, holding Red Dog (Mine) basically means they would not be able to do tax- exempt financing for that project; there is tax-exempt financing because the state or governmental entity owns the project. CO-CHAIR WARD said they would not be able to do tax-exempt financing through AIDEA. MR. SIMMONS said they could do it through AHFC for someone else. He emphasized that they can't liquidate it and get cash out of it. CO-CHAIR WARD asked whether that is for all of it. MR. SIMMONS indicated it is for any of the Red Dog (Mine), if they want it to stay structured the way it is, regarding where they are getting financing. CO-CHAIR WARD indicated there are ways to do it, if that's something the legislature decides to do. MR. SIMMONS emphasized that it doesn't free up any cash. CO-CHAIR WARD asked if it would free up any bonding capabilities or liabilities to the state. MR. SIMMONS pointed out that it would not free up any capabilities or liabilities to the state. He reiterated that there is not even $50 million. CO-CHAIR WARD asked how much is there. MR. SIMMONS responded that the cash and securities are $450-some million as of June 30. For instance, if one were going to restructure AIDEA, some bonds would have to be defeased; cash would have to be taken to defease the bonds. CO-CHAIR WARD indicated the possibility of some other revenue stream to make it defease its fund. MR. SIMMONS agreed. CO-CHAIR WARD reiterated that there are ways to do this if, in fact, the legislature sets out to do it. MR. SIMMONS specified that he was not arguing about that. Rather, one needs to be careful because there are ramifications. It is not as easy as just merging an entity into another entity when there are $300 billion worth of outstanding bonds. It won't free up the type of cash that Co-Chair Ward was talking about. MR. SIMMONS added that AIDEA is much unlike AHFC. He explained that they operate two corporations, AIDEA and the Alaska Energy Authority, a billion-dollar corporation in itself. When the subcommittee talked about the $5 million operating budget, half of that could be saved; that is the operating budget of both AIDEA and the Alaska Energy Authority, and it is a double counting of $300,000. For AIDEA, the personnel service is less than $2 million. And duplicative positions in both agencies are few because of AIDEA's other responsibilities. Furthermore, the bonding that does (indisc.) is not pass-through, although the Red Dog (Mine) was a pass-through. AIDEA does pass-throughs, and it does make a difference as to the entities and the ownerships of those projects. Mr. Simmons suggested that someone look at the contract of bond covenants (indisc.) because a lot of those aren't easy to do away with. He said it is not impossible, but it is just not a simple process. COMMISSIONER WUERCH mentioned there are three recommendations by the subcommittee; most of Mr. Simmons comments seemed to be focused on the third, which presumes that the agency is done away with. Recommendations include a capital requirement study and the combining of bonding entities, he noted, which still preserves the functions of the combined entities. He asked Mr. Simmons what he sees as a problem with the latter. MR. SIMMONS replied (indisc.--noise) that he thought the capital requirement study would be best because the other issues would be looked at before doing something like that. It is not the rating agency's job to do that. Mr. Simmons further stated, "The last thing I'd be doing is talking to bond rating agencies right now about what this recommendation -- maybe because I know what their answer is already. You may not talk to underwriters, but there are other financial people out there that you would talk to." As for the combination, one must look at ramifications involving things such as the existing contractual relationships, he said. For example, AIDEA has lease agreements with Cominco and Federal Express. They also have bond agreements with bond holders and bond insurers (indisc.--noise). MR. SIMMONS said an example of what the commission should look at is that AIDEA was able to sell AAA-rated bonds for the first time on the last Red Dog (Mine) issuance of $150 million, in part because the legislature and governor reached an agreement and put a dividend program in effect in AIDEA; that basically creates a statutory dividend program which says so much money can be made available from a dividend from AIDEA earnings. And AIDEA was able to sell AAA-rated bonds because they would get insurance partly because of that. Mr. Simmons stated, "If for some reason that was changed in the merger, there's a question as to whether we have to defease those bonds ... because they relied on that." Although he couldn't say what the downsides are, Mr. Simmons concluded, he could caution commissioners to look at this closely before going forward. UNIDENTIFIED SPEAKER mentioned combining bonds and entities, saying the same analysis would need to be done with some of AHFC's obligations as were suggested to be done with AIDEA. MR. SIMMONS agreed. UNIDENTIFIED SPEAKER referred to Mr. Simmons' comment that it's only a small portion, roughly half. TAPE 99-19, SIDE B UNIDENTIFIED SPEAKER continued, suggesting outside capital analysts could look at the totals. He said he believes the outcome could be a sizeable amount of cash freed up if the commission had a decent study. He also hoped that when the commission comes back to this issue they could again look at the requirement study, the potential for gain for the state. He suggested that hundreds of millions of dollars is too much to ignore. JOHN BITNEY, Legislative Liaison, Alaska Housing Finance Corporation, Department of Revenue, said he believes Mr. Simmons gave a good synopsis of AHFC's reports and assets as well. He informed the members that he would give just a little bit of a sense to some of the issues that will be looked at when trying to put the "billion dollar eight number" on the table. For example, approximately a billion of that is held by a trustee that has already pledged for bonds which are already outstanding, and $205 million of it is already spent by the legislature. Mr. Bitney said it is his understanding that when one goes to defease bonds, one has to actually purchase U.S. government security for treasury notes as collateral to redeem those bonds. This generally means one is probably going to pay a higher coupon rate for those than probably the bonds that one is defeasing. He stated: So, to get into a situation like that, you're going to be pulling down some of the value as you go through this process. In addition to the fact that you've generally announced to the world that you're in a buyer-sale mode, a prudent investor is going to look at you and they're going to negotiate the best deal for themselves at that point in time. So, understand that once you actually go down that road, that sometimes these numbers don't come out the end in terms of the cash, that you're going to receive that. You're actually seeing on a balance sheet in a financial statement when you get started into some of this stuff. ... I'm not here to say that that's not a valid discussion to have, but it's just to make folks aware that there are other issues that come into this table once you get into these things, that it's not just a straight-up math question. MR. BITNEY expressed his understanding that all states do have a housing finance function, or a housing authority function, which makes available to the residents tax-exempt financing or is a pass-through for federal programs, grants, tax credits, et cetera, where there will be multifamily financing. In some cases, it may be an authority for a city, county or entire state. For example, Chicago or Denver may have its own function or housing authority. With the merger done in 1992, however, Alaska has the public housing function, and basically all the state housing functions are under one umbrella within the corporation at AHFC. While not entirely unique, it is a little above what most states do. MR. BITNEY said Alaska is viewed as the model, that the merger is viewed as very successful. For example, ASHA, at the time that it was merged, was performing according to HUD's evaluation in the low-70-percent range in terms of its annual management assessment report. However, over the last four years Alaska received perfect scores of 100 percent each year in its management of public housing. By bringing AHFC's resources into the public housing management, it has become a better managed, successful program. It gives a little more flexibility in the eyes of HUD in terms of the management of public housing programs, and it makes AHFC more competitive regarding federal grants. He indicated HUD is receptive to doing things a little differently if a community wants that. MR. BITNEY referred to Commissioner Fink's comment regarding the off-budget items and stated that all of AHFC is subject to the Executive Budget Act at this point, so all the expenditures that do occur, that AHFC pays for, are within the budget. They are there for all the world to see, and the fact that AHFC is picking up the tab of $103 million in expenditures annually is, again, a tribute to the corporation's success and its ability to generate profits. COMMISSIONER FINK said he thought Mr. Bitney had indicated agencies like AHFC exists in other states for tax-exempt financing. He asked if they exist in other states for taxable financing. MR. BITNEY replied that apparently they do. He relayed the chief executive officer's (CEO's) statement that AHFC is not interested in getting back into being the player in the taxable market nearly to the extent that it was in the 1980s - which was not a good thing. COMMISSIONER FINK asked, in reference to public housing, if one reason AHFC is able to do a lot, and to do a good job, is because of the income produced on the other side of the corporation. MR. BITNEY replied that absolutely AHFC is able to better maintain the facilities. He indicated management, oversight and accountability are all improved. COMMISSIONER FINK commented that AHFC doesn't have to go over direct appropriations, that the legislature appropriates money. MR. BITNEY agreed, explaining that AHFC currently has an agreement with the State of Alaska whereby it makes available $103 million a year. That money gets chopped for all the programs that were alluded to earlier, in terms of what is considered the off-budget. In other words, AHFC legislative approval for getting a portion of those dollars back for its own public housing functions. It is not a general fund expenditure but what some may call an off-budget item. That is where the fiscal gap is, but they are in same budget documents. The AHFC goes through the same process as all state agencies go through. MR. PIGNALBERI referred to Mr. Simmons' indication that there was a belief that a recommendation was made to eliminate or abolish the AIDEA program. He emphasized that that is not part of the recommendation. MS. PEASE further explained that the subcommittee didn't review that. Rather, they had reviewed AHFC and looked at the combination of the two entities. Under the third recommendation, if they were interested in going forward with privatization, are two alternatives under that. COMMISSIONER FINK, in response to a question from Mr. Pignalberi, confirmed that the third recommendation is from the other subcommittee. MR. PIGNALBERI reiterated that this is not part of this proposal. CO-CHAIR WARD said the commission will have to merge several of the subcommittee's reports for their full consideration. MS. PEASE summarized the subcommittee's recommendations: (1) Perform a capital requirement study and review the balances in AHFC of $1.8 billion; (2) look at the possibilities of combining AHFC with AIDEA, the postsecondary loan program and perhaps the Municipal Bond Banks - and that combination is one of their recommendations as well; (3) pursue privatization of the two alternatives that could be taken for that approach. COMMISSIONER VALESKO asked how much has to be appropriated by the legislature for the capital requirement study. MS. PEASE said the subcommittee had not looked into that, but it would be far less than looking at the amount of money that may be held too much in excess in each of these entities. CO-CHAIR WARD said he doesn't believe that because of the current financial market. He mentioned the existence of a level acceptable by major lenders and bonding capabilities, and the need to not cause a ruckus in the bond market. He suggested there are rules that apply currently, however. Subcommittee Report on the Department of Military and Veterans Affairs CHRIS NELSON, Chairman, Department of Military and Veterans Affairs (DMVA) Subcommittee, who is also staff director for the Alaska State Legislature's Joint Armed Services Committee, told commission members that the DMVA is a unique combination of federal and state programs. It makes exemplary use of volunteer resources in both its veterans' programs and in the naval militia and state defense forces. He emphasized that there are no opportunities to privatize the National Guard, and the subcommittee has no intention of recommending that. MR. NELSON reported that the subcommittee came up with two recommendations on programs run through the department. First is the federally funded Youth [Corps] ChalleNGe Program. Begun in 1993, it targets at-risk youth, high school dropouts between the ages of 16 and 18. When established, it was entirely federally funded and administered in each state by the National Guard. The program has had a very high success rate in reaching these youths and helping them turn their lives around. Although the program has been renewed, the federal government now requires a state match that is increasing yearly. In the next couple of years, the state match will go up to 40 percent, with 60 percent coming from the federal government. Currently, the state match comes from the DMVA, which doesn't think that is appropriate because these young people are not members of the National Guard and most are too young to become members of the military. They are, in fact, receiving vocational training and assistance in completing their high school equivalency diplomas. The subcommittee views them as students, and funding for the state match should be shifted from DMVA to the Educational Foundation Formula. House Bill 403 was introduced late in the session last year to accomplish this, Mr. Nelson noted; it will receive a full hearing in the House Special Committee on Military and Veterans' Affairs next session. COMMISSIONER FINK indicated the program has worked better than the educational system as a whole because it is a military- disciplined life with problem children. He asked whether the recommendation is transfer to the Department of Education and Early Development. MR. NELSON replied no. He clarified that the subcommittee is recommending that the funding come from that department but that the program continue to be run by the National Guard; otherwise, the state cannot get the federal funds. It is a budgetary change. The youths need drill sergeants, which is what they are getting and responding to very well. COMMISSIONER VALESKO asked if the recommendation was a matter of ease of getting money into the program. MR. NELSON acknowledged that getting money into the program is not going to be easy. Currently, the National Guard is making up that amount, and taking it out-of-hide. He further stated: We can do it two ways: number one, we can increase the funding for DMVA and give them general fund money to do that. But these young people, if they were in the schools, would be receiving Educational Foundation Funding Formula because they're students. They are in a program, a highly structured disciplined program, unlike any other education program (indisc.) things. But if you look at what they're really doing, they're learning there, they're students, and that's the appropriate place we're saying to put it, is the funding formula. SENATOR ADAMS asked what the per-student cost is. MR. NELSON deferred to Deputy Commissioner Chase. JIM CHASE, Deputy Commissioner/Chief of Staff, Department of Military and Veterans Affairs, said the cost per student varies each year. It is based upon the number of students and what percentage of the match the state is offering. Currently it is approximately $17,000 to $19,000 dollars per session. UNIDENTIFIED SPEAKER inquired about the length of a session. MR. CHASE said 22 residential weeks, 24 hours a day. SENATOR ADAMS suggested it is much cheaper to send those youths to Mt. Edgecumbe High School, which perhaps has the same curriculum and discipline as well. MR. CHASE responded that it is also cheaper than putting them in McLaughlin [Youth Center] for a year, or else the Department of Corrections is where they are headed. COMMISSIONER VALESKO asked where the program takes place. MR. NELSON said Camp Carroll, a single residential location on an army base. Youths from all over the state are housed in the barracks. COMMISSIONER HARPER asked whether information is available regarding the cost per student versus that for adolescents held in Alaska's correctional institutions. CO-CHAIR WARD replied that his staff will try to pull that information together for the following meeting. REPRESENTATIVE BRICE said he assumes the recommendation is to take the $4,000 per student and have the state make up the rest of the funding. The school education formula counts each child, approximately $3,800 a head; however, there is still a fairly large gap between the program costs and what the Department of Education and Early Development will provide. He asked if the legislature would come up with the general funds to make up the difference. MR. NELSON said that is one option. The program has been 100 percent federally funded, but the renewed program requires an increasing state match year by year. Currently the DMVA is using funds appropriated to make up that state match. The subcommittee is asking the foundation formula to start picking up the portion of the state match. If the foundation formula amount per student is not sufficient to cover the amount for the state match, then [the legislature] will have to look at either general funds or again making an increased appropriation to the DMVA to do it. MR. NELSON emphasized that the program is a national program run with a federal appropriation through the National Guard, with a requirement that it be administered by the National Guard. If the youths were sent to Mt. Edgecumbe, the federal funding would be lost. CO-CHAIR COWDERY reemphasized the 24-hour-a-day cost. MR. NELSON reiterated that the Youth Corps ChalleNGE Program is a residential program where these youth are on a military reservation under supervision and are disciplined in a highly structured program. Its response rate has been wonderful. Youths that no one else has been able to reach have responded to this program at a very high success rate. CO-CHAIR WARD asked what the percentage is from the federal government for this year. MR. CHASE specified that last year it was 70-30, this coming year it will be 65-35, and the following year will be 60-40. CO-CHAIR WARD remarked that the Finance Committee will have to look into this because it is becoming very expensive for the state. COMMISSIONER NOTTI asked if the program is at capacity and if students are being turned away. MR. CHASE reported that there is a waiting list; as the waiting list ages, they do lose them. They are trying to turn away as few as possible. This program is supposed to graduate 100 youth for each class. The last class held 153. Because the first couple of weeks are the toughest, however, the count has already dropped to 96. COMMISSIONER NOTTI asked what the future plan is for this program. Has the federal government set a funding level, for example, and is it going to stop at 50 percent? MR. CHASE said the government is funding 60 percent and the state 40. However, that number is a little soft because the National Guard is doing this on a basis of other states, not Alaska, (indisc.--noise) underfunded by the federal government the whole time. The state has tried to come in with a bigger-than-required match to make up the difference, but they've never been adequately funded. CO-CHAIR WARD noted that the BIA (Bureau of Indian Affairs) picked up matching funds for the Navajo Nation's program. He asked if this had been discussed as part of the cost for Alaska Native students that may be participating. MR. CHASE indicated he was unable to answer that question. CO-CHAIR COWDERY indicated he supported this program. MR. PIGNALBERI remarked that he didn't see a mention of the Alaska Defense Force. He requested information that would describe what the role is of the defense force and what their budget requirements are. He mentioned that he is a member of the defense force and that he believes their membership is more than 250. CO-CHAIR WARD suggested Mr. Nelson and Chase submit this information in writing; both agreed to do so. COMMISSIONER VALESKO referred to the various service contracts and asked if the National Guard needs additional security. He also asked if the subcommittee had looked into the contracts and savings that they might make if they were not privatized. MR. NELSON responded: First of all, the dual nature of the National Guard, it's a major reserve component in the Armed Forces of the United States. As such, it's under the Department of Defense directives on privatizations. And facilities management is on all military installations, including the National Guard. And reserve installations are required by the federal government, under Office of Management and Budget circular ... A- 76, to be privatized. So the guard really doesn't quite have the options as part of Army and part of the Air Force; they're under the A-76 requirements to let contracts out of the facilities management. So their facilities management is privatized. The second thing to remember about the Alaska Guard is that it operates ... 76 facilities around the state, not just the (indisc.) headquarters here in Anchorage, and armories, but out in villages and scattered throughout the state - a total of 76 facilities in that. The third thing is that most members of the guard are part-time people rather than full-time. The full-time unit support of the guard is actually very low. The ratio of full-timers and part-timers in the guard is such that if you were going to have full-time guard security people, for example, doing site security on these things, you'd have to bring them on active duty. You'd have created more full-time slots within the guard. The general feeling is that you wanted the guard, like the Army and the Air Force, to be organized in units that meet tactical missions that can be mobilized, employed and fight. And if you're degrading those units by requiring their members to perform additional duties, you're not really getting a whole lot of bang for your buck on the combat end of this. That was the whole purpose behind the A-76 initiatives. MR. NELSON referred to his basic training at Fort Dix, New Jersey. He said the reason the program took nine weeks is that every Friday they worked on various maintenance facilities. When they reduced the training cycle to seven and one-half weeks, and when they eliminated post duty days and hired KPs, grounds maintenance and security people achieved a great savings in time in being able to train solders faster and move them out into their units. That is basically the purpose behind the privatization, and the guard follows those initiatives required by the Department of Defense. SENATOR ADAMS asked what the DMVA is doing about recruitment efforts both in urban and rural Alaska. He pointed out that if Alaska obtains more recruits, the state can receive sixteen federal dollars for each state dollar. MR. CHASE pointed out that the guard has an active recruiting program and has been trying to put performance measures on those recruiting efforts. However, it is one of the hardest things to do. The guard is attempting to figure out how much more effort it has to put in. One issue is standardization of education, which will become more standardized in the next couple of years. The second issue is substance abuse. If one cannot read above the ninth grade level or state that it has been six months since the last joint [marijuana] was smoked, one cannot pass the test. CO-CHAIR WARD commented, "That's one of the underlining factors of our social ills, including the smoking of marijuana or the ninth grade education - the lack of ability to work is causing a tremendous problem in all of Alaska,and it's going to continue." Subcommittee Report on the Alaska Railroad Corporation LEE WAREHAM, Chairman, Alaska Railroad Subcommittee, reported that the subcommittee didn't say to sell the railroad because there was a feeling that it was premature. There might be a way that it could attract large amounts of outside capital and play a significant role in the state. Recommendations ask the policy makers to look at the role of the railroad to see if what the state is doing with it is optimal. The first recommendation is that the legislature shall cause to be issued an RFP for the purchase or operating lease of the Alaska Railroad. Based on advice from people in the business, they had looked at the railroad as an operating entity, as opposed to the way it is currently constituted with real estate and other pertinencies. The subcommittee's concern was that if the railroad were offered as a package, it would be clouded by real estate interests or an agenda other than the railroad's operating. CO-CHAIR COWDERY said he believes that the private sector is more interested in the railroad than in the real estate because there is so much vacant real estate. CO-CHAIR WARD asked if the subcommittee had addressed separating the two. Real estate is not necessary for the operation of the railroad as compared to a total package, he said, indicating it is secondary. MR. WAREHAM said he didn't think there was disagreement with what Co-Chair Ward had expressed. As the subcommittee was told, a legitimate operating railroad might look at the Alaska Railroad as something that they could fold into its business. They had discussed the issue of an eventual extension of the Alaska Railroad to meet the Canadian Railroad, which presently terminates at Fort Nelson; this would require a lot of money. One possibility is if someone with access to large amounts of capital were to acquire the Alaska Railroad, they might put together with their Canadian counterparts some kind of a project to connect with each other. But that is an economic issue, and the subcommittee wasn't competent to pass judgment on whether that is realistic. CO-CHAIR WARD reconfirmed that one consideration of the subcommittee was to take the Alaska Railroad and divest the state's interest in it to a private entity, with one of the parts of that selling or divesting to hook up to the Canadian line. MR. WAREHAM said the subcommittee had discussed that but were not confident to recommend to the commission, "You go out and buy." CO-CHAIR WARD remarked, "You own it, so you're very confident to say it." MR. WAREHAM reiterated that the subcommittee is confident to wish but not to judge its practicality. The subcommittee had tried, in their recommendations with regard to the RFP, to have the RFP be prepared, presented and reviewed in such a way that it would be an objective process and not a particular agenda. It was not the subcommittee's intention to be critical of anyone. They had tried to focus the collective wisdom of the participants in this process - the legislature, the executive branch and, insofar as possible, the private sector. So what they came up with was truly a reflection of the subcommittee's collective wisdom and aspirations about the railroad. MR. WAREHAM relayed the subcommittee's second recommendation that the Alaska Railroad shall offer to sell land presently leased to leaseholders to the leaseholders for fair market value. He mentioned private individuals coming forward and said it would be beneficial in terms of economic development of certain parts of the railroad's real estate if the underlying land itself were owned by the leaseholders. MR. WAREHAM read the third recommendation, "The Alaska Railroad shall offer to sell for fair market value all land that is nonessential to railroad operations and is non-revenue- generating." He said the subcommittee had made that recommendation with the knowledge that historically in the United States railroads have been large real estate owners. For example, when the Transcontinental Railroad was built, every other section along the right-of-way was given to the railroad; they got a square mile on this side and a square mile on that side. In the early 1900s the U.S. government transferred to railroads, as incentives to build railroads where they were not economically viable, 139 million acres. When the subcommittee made this recommendation, they were aware that historically real estate has been an incentive for railroads in areas where the population or geography didn't generate enough revenue to support them. CO-CHAIR COWDERY noted that it was at the startup of the railroad. TAPE 99-20, SIDE A CO-CHAIR COWDERY made reference to the owners of rails that run through Nebraska that only haul freight; he said he believes they don't pay a dividend. He asked whether there was a recommendation that the Alaska Railroad pay the state a dividend. MR. WAREHAM responded that the subcommittee had discussed that. However, the Alaska Railroad has plowed every nickel earned back into capital improvements. An authoritative organization had recommended they should be spending approximately $17 million to $20 million a year on capital improvements, and they haven't met that yet because they haven't generated enough money to plow back into it. CO-CHAIR WARD asked if federal funds brought it up to that amount. MR. WAREHAM said that wasn't clear to him. CO-CHAIR WARD remarked that they have had the federal funds to bring it up to that amount. MR. WAREHAM noted they had approximately $20 million a year. COMMISSIONER THOMAS, who is also a member of Alaska Railroad Corporation Subcommittee, said she thought that if they moved the depreciation dollars around, they were getting close to that number. She also thought the Mercer Report addressed that. MR. WAREHAM said it appeared that if the railroad were required to pay a dividend, it would come out of their "seed-corn" in that if they're already short of the capital requirement, and this is an ongoing capital requirement, this isn't a catch-up. This specifically was a number that they said was valid over time for a railroad. CO-CHAIR COWDERY asked Mr. Wareham whether he was privy to the personnel costs of operating the railroad. MR. WAREHAM replied that they had the railroad's financial report that showed gross expenditures. An engineer will probably make a little more than $100,000 a year with overtime, which isn't out of line with other railroads. CO-CHAIR COWDERY indicated executives hide behind the fact that they are in a private corporation on some things, and then come forward for government assistance on other things. Furthermore, they can't disclose detailed cost in a financial statement like other departments do. MR. WAREHAM responded that the subcommittee didn't discuss individual or senior executive salaries. They had addressed in a general way the appropriateness of the relationship between the wage levels for the Alaska Railroad and other railroads. And based on what the subcommittee was told, they aren't out of line. MR. WAREHAM read the fourth recommendation, "The Alaska Railroad shall implement a vegetation control program, including the use of herbicides." He explained that probably more than $1 million can be saved a year by using herbicides for vegetation control in the roadbed itself, not along the right-of-way. All other railroads in the U.S. - with the possible exception of those in Vermont - use herbicides in the roadbed itself. Furthermore, willows and alders are not killed with the current system, and they displace the roadbed. It only takes 75 gallons of herbicide a year ; according to railroad employees, in one summer weekend Home Depot sells more of this herbicide than would be used on the railroad in a year. And modern herbicides are not poisons in the sense that they were 20 years ago. The chemical compounds fool the plants into "thinking" they can use it as a nutrient: they take it up and basically starve to death. Noting that the railroad only clears, after expenses, $10 million a year, he suggested that without having this $1 million savings, 10 percent is being wasted. CO-CHAIR WARD asked Mr. Wareham if the subcommittee had discussed the railroad coming under the Executive Budget Act. MR. WAREHAM replied no. COMMISSIONER FINK said he totally agrees with the report but thinks (indisc.) too critical. He referred to the following subcommittee statement: "Criteria for mandatory acceptance of a respondent's proposal shall be included in the RFP to ensure that a proposal will be accepted if it meets the prescribed criteria." He asked how one can have a mandatory acceptance and an RFP if it is subject to legislative ratification. He said people had tried to buy the railroad before, but the state changed its mind. MR. WAREHAM indicated this step would precede legislative ratification. UNIDENTIFIED SPEAKER added that the "executive department" would have to accept (indisc.) standards but the legislature still would have the right .... MR. WAREHAM interjected that absolutely, the legislature always has the last word. COMMISSIONER FINK directed attention to another recommendation: "The RFP shall stipulate that if the purchaser ceases operation of the railroad, then ownership and control shall revert to the State of Alaska." He asked whether, if Mr. A bought the railroad, operated it, then wanted to sell it to Mr. B, he could do that without its reverting to the state. UNIDENTIFIED SPEAKER said the only reversion would be if someone ceased operating the railroad. MR. WAREHAM explained that if somebody bought the railroad and then, for whatever reason, didn't want to do it anymore, the subcommittee didn't want them to have to shut down and go through bankruptcy, which is different because it is done with federal oversight and so forth. The subcommittee had agreed that the railroad is important to Alaska, and they didn't want to have it knocked off the (indisc.--noise). MR. PIGNALBERI read the following statement from the subcommittee: "Proposers must stipulate that railroad employee pension benefits will be maintained on par with existing plans." He asked whether it would meet the stipulation if the current employees would never have their retirement benefits diminished or whether Mr. Wareham believed the plan was so good that it ought to be imposed upon. MR. WAREHAM noted that the subcommittee had changed the draft to reflect that if the railroad would be sold, it would be sold with the existing labor contracts in place. The intent was that one cannot bind the parties afterwards, but it was intended to ensure employees that the intent wasn't to sell it to somebody who would cut their wages in half. MR. PIGNALBERI asked Mr. Wareham if he was trying to protect the current pension plan for the current employees. MR. WAREHAM emphasized his knowledge about this because he was on the Teamster Pension Trust for 10 years and worked for Alascom. He pointed out that one cannot retroactively diminish somebody's benefits. One can prospectively diminish the rate of accrual of new benefits. He concluded that this was meant as reassurance so as not to send up a red flag to the employees. CO-CHAIR WARD asked Mr. Pignalberi to make that change for the member's packets. COMMISSIONER THOMAS informed Commissioner Fink that she had sat in on that [subcommittee] meeting, and concern was expressed by the subcommittee regarding the ownership and control reverting back to the State of Alaska. They also had a lot of concern about a certain segment of the railroad being shut down and somehow having the ability to keep that route open for the state to go back in and deal with that. UNIDENTIFIED SPEAKER remarked that as long as one operated the railroad, there would be no reversion. The buyer would have the opportunity to sell it if he wanted to. COMMISSIONER THOMAS agreed. COMMISSIONER VALESKO referred to the recommendation to put an RFP out for selling the Alaska Railroad. He asked Mr. Wareham if the subcommittee had done an analysis to save the state money. MR. WAREHAM responded no, they didn't have the resources nor did they believe they had the competence to make a recommendation like that. The subcommittee had tried to structure their recommendation so that it would come out of the process that they had initiated. COMMISSIONER VALESKO expressed his understanding that the subcommittee is not saying that selling the railroad would be cheaper for the state. UNIDENTIFIED SPEAKER replied no. COMMISSIONER THOMAS mentioned that she had sat in on the subcommittee meeting that included an interview with Gill Carmichael (ph), who participated in several publicly owned railroads going private. She said he actually thought the railroad was worth a tremendous amount of money and that we'd be surprised at what we might get. So part of the answer to the question is that it may put some money in our bank account if we sold the railroad. There was also a concern regarding some of the potential liabilities that we may have: the lack-of- maintenance question, the number of derailments on a consistent basis, and if we had potential liabilities with a state-owned entity that would be derailing cars full of tourists, including at what point our responsibilities and liabilities step in versus the amount of maintenance being done. She asked if that is correct. UNIDENTIFIED SPEAKER replied that it is a good characterization. SENATOR ADAMS noted that five years ago he was one of the proponents that wanted to sell the Alaska Railroad; however, his views have changed. He indicated political reality says that one would not be able to, from this session, get the legislature to pass an RFP or piece of legislation with those recommendations. He said he is saying that because many members would look at the loss of federal funds, capital money on keeping the maintenance, whether it is between $17 million and $20 million. There are also legislators who would worry about the federal funds for the Anchorage spur expansion, because they would like to see that completed so people getting off the tour ships in Seward can board the train and go directly to the airport. Other concerns are government-versus-private funds for future Canadian spur expansions, or perhaps the north and south Prudhoe Bay Transportation Study. Senator Adams reiterated that he thinks it would be difficult at this particular point to get passage from this legislature for an RFP. REPRESENTATIVE BRICE asked Mr. Wareham if the subcommittee had considered environmental liabilities and who would be responsible for cleaning up the railroad land. He added that he believes there is a great concern about how that liability would transfer. MR. WAREHAM noted that the subcommittee had met at some length with representatives of the railroad, who were very helpful. Under the statute transferring the Alaska Railroad from the federal government to the state government, there was an indemnification of the state for environmental damage, hazards or whatever happened on the federal watch. However, of concern is that as more time passes, it gets more difficult to establish that something happened on the federal watch. He indicated that it was obvious that when and if the railroad were to be transferred to a private owner there would probably be some kind of an indemnification similar to what "we" got because that is a wild card that scares people. CO-CHAIR COWDERY said he believes one cannot sell railroad land that is contaminated and get rid of the liability if one created the liability. He added that he thinks that is in federal law. COMMISSIONER VALESKO referred to the comment that it would take 75 gallons of herbicide to cover the roadbed. (Indisc.-- telephone interruption). UNIDENTIFIED SPEAKER said it was from Anchorage to Seward. UNIDENTIFIED SPEAKER explained that one would have to mix the herbicide with so many gallons of water. It is not the total amount of liquid but the total amount of chemicals. COMMISSIONER VALESKO said he understands that. He was wondering how powerful the herbicide might be and what damage a drop of that herbicide could have. UNIDENTIFIED SPEAKER noted that the subcommittee had discussed that. However, this is not a poison but something that looks to a plant like a plant food; when the plant takes it up into its system, it stops the normal life process. It doesn't causes people who get it on their hands to fall over dead. CO-CHAIR WARD announced that the railroad will include that issue when it submits its written response. UNIDENTIFIED SPEAKER added that the subcommittee had asked what they do in Scandinavian countries because the issue of soil temperature came up. He noted that as environmentally conscientious as the Scandinavians are, they use the same chemicals that the subcommittee is proposing to use. Subcommittee Report on the Hydro-Electric Projects Subcommittee Alaska Intertie Recommendation: ERIC YOULD, Member, Hydro-Electric Projects Subcommittee, presented the subcommittee's recommendations. He noted that the group was formed to consider the state's divestiture of three projects: the Four Dam Pool, the intertie between Anchorage and Fairbanks, and the Bradley Lake Hydroelectric Project. All three were constructed by the Alaska Power Authority, which became the Alaska Energy Authority. In 1993, through legislative action, the agency was basically split in two, and the name Alaska Energy Authority - along with certain staff and certain operational responsibilities - was transferred to AIDEA. MR. YOULD pointed out that the intertie, completely funded by the state, went online around 1983/1984. A $124 million project that transfers power up and down the Railbelt, it has been very successful. In fact, Golden Valley Electric in Fairbanks likes to boast to consumers that it hasn't had a rate increase since 1982. The Anchorage area also benefited because of the ability to spread some overhead by sending secondary power north. The recommendation of the subcommittee is that the intertie should remain status quo, in the sponsorship and ownership of the State of Alaska. Presently it is costing the state nothing, and the utilities plus the rate payers in the Railbelt area are paying for the operation of the line. There is no payment to the state for any of the $124 million originally put into the project in its initial construction. That was put forward as a direct equity investment by the state. UNIDENTIFIED SPEAKER asked whether, if the state were to put the intertie up for sale, somebody would buy it. MR. YOULD responded that if the state at the same time made it clear that rates for consumers could go up, the answer is yes. UNIDENTIFIED SPEAKER asked whether, if it were sold without any conditions, somebody would buy it. Does he know what it is worth? MR. YOULD responded that it would depend on whether that entity could make money and if the Regulatory Commission for Alaska would allow them to make money. He further explained that an existing agreement would have to be abrogated. UNIDENTIFIED SPEAKER asked what the agreement is. MR. YOULD said it is an agreement between the state and the utilities that actually operate and receive power over the lines. SENATOR ADAMS asked Mr. Yould, with regard to the change in federal law to deregulate interties, how that would affect this particular line. And would there be more competition for other utilities to get involved? MR. YOULD answered that deregulation has not come to Alaska but it could very well. In other states, transmission in distribution line systems is remaining regulated, so that all users can transfer power over those lines without the operator of those lines being able to essentially gouge. It is the same situation with a pipeline. The pipelines are regulated, but the actual sale of gas is not. The same is also true with the transmission line. What is happening in the Lower 48, however, is the creation of independent system operators. UNIDENTIFIED SPEAKER interjected "distribution." MR. YOULD replied that transmission is correct. He further stated that such a line could be included in a statewide network, if one wants to call it that, as an independent system operator under a deregulated system. Currently, however, the state is considering whether deregulation will actually bring benefits to the state, and it is an open question as to whether or not there will be deregulation in the state. COMMISSIONER FINK asked whether, if the state sold the railroad and (indisc.) the buyer would be part of a regulator utility, it is conceivable that somebody could bid the $124 million or a multiple or a division of that. MR. YOULD indicated nobody would buy it for that amount, nor probably for half or a third of that, because one would have to recapture one's investment, and the only way to do that is to raise the rates for people in the Railbelt. So somebody will have to pay for it. COMMISSIONER FINK said if they are regulated, somebody would pay for it. MR. YOULD replied that it is up to the state - a policy decision - as to whether power costs should go up in the Railbelt. COMMISSIONER FINK said the policy decision to him is whether they want the rates to go up, whether they want to sell it, and then whether they want to allow somebody to get a return on whatever they've invested, which is the normal American way. To him, Mr. Yould's premise seemed to be that the current operation is the most efficient possible, and a private enterprise could not come in and operate it more cheaply. MR. YOULD said he didn't think private enterprise could operate the transmission line more cheaply or efficiently. Furthermore, it is a very small cost now anyway, but any debt service to be picked up and paid for is going to have to be picked up by the rate payers. MR. WAREHAM suggested they were back to the public policy issue. What has happened, he said, is there is an asset that has no capital service requirement. In other words, it was a grant by the state. The state said, as a matter of public policy, that they had put it in place, and it is being operated at cost, which is passed on to the rate payers in the Railbelt who are served by the intertie. For someone to buy it, it would require a way of paying down and earning profit, and that would be added to the cost of electricity to the people in the Railbelt area. COMMISSIONER FINK suggested that it may very well be that it could be sold if it were part of a regulated utility - as Mr. Yould said exist in the Lower 48. If it were put up for sale and someone knew it was going to be regulated, that means they will be entitled to a return on their investment, and if they were to operate more efficiently from a maintenance and operation standpoint, they could very well offset the increase to the consumer. COMMISSIONER WUERCH said it is troubling. Once again we see the state entering into a business transaction. In fact, we give that entity the investment. And there really is a cost to that even if we don't charge that operating enterprise with it, because there is an opportunity cost. Furthermore, we could have taken that $124 million and put it into something else that would have yielded a dividend. So without getting into the debate of the business practices here, we're caught up in this case where previous legislators had decided that, "There's no cost to capital, we'll just give it to the intertie, in this case, and forget about it." He said that is unfortunate because it is not reality. COMMISSIONER WUERCH requested elaboration from the subcommittee. He emphasized that throughout the greater part of the U.S. there is a trend to separate: generation and transmission from distribution and billing. In other words, Chugach Electric and Municipal Light and Power (ML&P) both generate, transmit and then distribute to consumers electricity. In the Lower 48, that industry is beginning to separate where distribution and retail sales are one thing, and the sale or generation of transmission is another. Commissioner Wuerch asked whether the subcommittee had discussed the trends in Alaska of following this economic model or the business practices in the Lower 48. UNIDENTIFIED SPEAKER affirmed that the subcommittee had discussed the trends and setting up a transmission entity. They also looked at the issue of the overhead. He further stated: I'm a rabid "free-enterpriser," ... but we, the people, have a deal here that's going to be awfully hard to beat. ... In terms of "is there overhead that could be reduced?" the maintenance is done ... by the entities, by GVEA in their area and by the various power utilities in their area, and that's done at cost. And within the state we specifically asked people in the department how many people would go away if we eliminated this. UNIDENTIFIED SPEAKER, in response to mention of "half a person," said the overhead within the state for the intertie specifically is de minimis. UNIDENTIFIED SPEAKER said he believes that is rolled into the cost of the project. He noted that deregulation is being debated by the legislature. SECOND UNIDENTIFIED SPEAKER remarked "many legislatures." UNIDENTIFIED SPEAKER emphasized that investor-owned utilities have had the opportunity ever since Alaska became a state. In the Railbelt, there isn't a single investor-owned utility. It is all municipalities and co-ops because the "investor-owneds" couldn't figure out how to come to Alaska and make money, and they have a totally different philosophy and need. The co-ops and municipalities have a singular purpose, which is to keep the cost of power low for those that own the line - the consumers themselves. That is the situation in the Railbelt. Yes, this was directly invested in by the State of Alaska, but everybody in the Railbelt participates and enjoys the return from it, just like the permanent fund. Rural Alaska receives the benefit of Power Cost Equalization, and the people in the Four Dam Pool communities receive the benefit. "We" too receive some equity contribution from the state on the Bradley Lake Hydroelectric Project. He concluded: So I guess I'm not too sympathetic to the idea,"Well, let's just give it to the private section." Frankly, I don't think they can do it cheaper than our utilities can. And, frankly, they have never chosen to come to the state of Alaska and do it in the first place. Seventy percent of the power in the state of Alaska comes from co-ops, 20 percent from municipals and only 10 percent from investor-owned utilities. I might add that they're very good. In terms of the template of deregulation, once again, look at us. We have a very weak transmission line between Homer and Fairbanks - a system that I can tell you is not near the myriad of interconnections that you have in the Lower 48. We only have three providers - Golden Valley, Chugach and ML&P - and we don't have this myriad of providers, we don't have (indisc.-- tapping noise) utilities up here, we just don't have the same template that you have in the Lower 48 that's going to make it work down there. It might work up here, but we're still trying to figure that out. COMMISSIONER NOTTI asked how the contract would affect the sale price. MR. YOULD deferred to AIDEA for the specifics of that contract. COMMISSIONER FINK emphasized that he didn't have any intention of giving the railroad to private enterprise, and that he wouldn't object if they paid $124 million for it. MR. YOULD indicated people would be paying for it in their electric bills. COMMISSIONER FINK said maybe, maybe not, but that possibility is there. MR. YOULD interjected that one would have to pay debt service. COMMISSIONER FINK added that one may get sufficient reductions elsewhere to offset that. It is not the way co-ops work, but that is the way private enterprise works. KEITH LAUFER, Development and Finance Manager, Alaska Industrial Development and Export Authority (AIDEA), Department of Community and Economic Development, came forward to answer Commissioner Notti's question regarding how the contract would affect the sale price. He pointed out that the existing long-term agreement between the Alaska Energy Authority and all utilities that participate in the intertie does not allow the state to terminate that agreement unless there is some sort of danger to the line. That agreement provides that the utilities cover all the operating, maintenance, renewal and replacement costs for the line, but they are not required to pay anything to the state. Furthermore, if the state were to transfer the projects, assuming it was not willing to breach the existing agreements, there would be no return to an investor who purchased the line because there is no return currently to the state in its ownership position. So if the state sold it with the agreements in place, there would be no return to the investor. Mr. Laufer said his sense is that the purchase price would be zero with the existing agreements in place. CO-CHAIR WARD asked him to provide his opinion in writing. Four Dam Pool Divestiture Recommendation: MR. YOULD pointed out the Four Dam Pool is a project that the subcommittee recommends the state divest to the utilities that presently operate the four projects: Solomon Gulch, Swan Lake, Terror Lake and Tyee Lake. These projects were built by the state with a 100 percent equity contribution by the state of $483 million. There currently is a payment to the state of debt service of 6.8 cents per kilowatt hour, 2.8 cents per kilowatt hour of which goes to the operation of the projects. The other 4.0 cents per kilowatt hour is basically dedicated to two funds - Power Cost Equalization and the Southeast Energy Fund - with a split of 60-40 percent to those two funds. MR. YOULD said there is also in place a power sales agreement between the state and the utilities themselves. It is very favorable to the utilities in that it requires that any costs for maintenance not conducted by the state can be paid for by the utilities by deferring the debt service for that operation of maintenance; that is called the self-help clause. Basically, the combination of the outstanding debt and the self-help clause are such that the communities have been advocating that the projects be divested to them. The legislature has somewhat agreed and has continued to urge AIDEA to divest the projects. The subcommittee also felt that the projects should be divested, and the state should receive fair market value for the projects, recognizing the risk associated with the power sales agreement. However, in the event the projects are divested, because the projects provide significant funds to Power Cost Equalization, the subcommittee feels that that needs to be taken into account as well, because Power Cost Equalization is important to keeping the cost of power in rural Alaska low. COMMISSIONER FINK asked if the subcommittee had considered selling the Four Dam Pool. MR. YOULD deferred to AIDEA. He noted, however, that this was debated in the legislature last year, and the general feeling was that the utilities themselves, given that the power sales agreement was in place, would be able to come in cheaper than any private sector bidder could. Furthermore, if a private sector entity came in and the community did not want the projects to go to the private sector, they could refuse to abrogate the power sales agreement. Hence the sale could never go forward. Mr. Yould indicated it is a very entangled situation, especially with the power sales agreement that favors ownership by the communities and by the utilities themselves. COMMISSIONER FINK asked: Wasn't there a conversation about selling this before, and the utilities didn't want to pay what the state entity thought it was worth? MR. YOULD said he would defer to AIDEA. CO-CHAIR WARD noted that four communities, one of which was Petersburg, didn't want to pay what the state was asking. He also mentioned that there were private people who wanted to purchase it, but it definitely was going to raise utilities. So the legislators at that time decided to do nothing; however, it is different now. COMMISSIONER VALESKO expressed concern about requests to put reports in writing. CO-CHAIR WARD explained that the commission needs to know that it is an official opinion from AIDEA. CO-CHAIR COWDERY added that the legislature will want to be able to review this information. TAPE 99-20, SIDE B Bradley Lake Hydroelectric Project Recommendation: UNIDENTIFIED SPEAKER informed the commission that the Bradley Lake Hydroelectric Project went online in 1990. He indicated that of He pointed out that $328 million, $163 million was a direct equity contribution by the state and the balance was funded by a general obligation (GO) bond, a tax-exempt bond, from the [Alaska] Energy Authority. Presently, the utilities pay all of the debt service on the outstanding bonds as well as all of the operation/maintenance costs. There is a provision that at the end of the payout of the bonds, the utilities will continue to pay at the same rate that they were paying on the bonds, and those funds shall be used for future capital investments in energy projects. The subcommittee recommended that the Bradley Lake Project ownership remain status quo with the state. There are a lot of tax implications associated with defeasing the state bonds and the favorable interest rate that is out there, which led to the decision of the subcommittee. COMMISSIONER COMMENTS CO-CHAIR WARD announced that Mr. Pignalberi would compile the recommendations from all the subcommittees to present to the commissioners. After they are reviewed, if there are any items that any commissioner wants to be placed on the agenda for consideration, those will be presented to the full commission. There will also be individual commissioner recommendations. MR. PIGNALBERI distributed a recommendation master list and noted that an updated version was being e-mailed. He said some recommendations are policy and others are legislative. Although the executive branch could do a lot of these of their own volition, the legislature could require it by statute. Mr. Pignalberi added, "But we're putting in the legislative pile more of those things that are readily apparent and would need legislative action." CO-CHAIR WARD again requested that recommendations and written reports from agencies be submitted to the commissioners as soon as possible. COMMISSIONER THOMAS said she was not sure that the commission was ready to do it that fast. She would like to see the commission spend time looking at privatization as an overall issue, and how it may best be implemented, and how the consideration process may go forward. She mentioned that some suggestions from different subcommittees may not fall within the departments; that may be an overall issue that the commission may want to have recommendations on. CO-CHAIR WARD agreed with that suggestion. COMMISSIONER FINK asked whether the commission was through taking testimony. CO-CHAIR WARD affirmed that. COMMISSIONER FINK asked whether the order of business for the following day would be the Department of Education and Early Development, the Department of Environmental Conservation, the Department of Administration, the Office of the Governor and the Alaska Court System. CO-CHAIR WARD affirmed that as well. MR. PIGNALBERI announced that the departments had been notified and that the commission will be looking at adopting certain recommendations. CO-CHAIR WARD added that the commission is obligated to go through the recommendations as to which ones will be recommended by a vote of six. MR. PIGNALBERI mentioned that departments which have not responded with written comments are listed under "old business." He also noted that the audit reports from the Department of Health and Social Services are available. CO-CHAIR WARD, responding to an inquiry, said a written reaction regarding the combining with AHFC is forthcoming. There being no further discussion or business before the Commission on Privatization and Delivery of Government Services, Co-Chair Ward adjourned the meeting at 11:05 a.m.