LIO saga continues with third-party analysis sought by Stevens
And the beat goes on.
Legislative Council chair Sen. Gary Stevens directed the Legislative Affairs Agency on Feb. 11 to hire a third-party for an independent analysis of dueling financial conclusions as to whether the Legislature should stay in the Anchorage Legislative Information Office or move to the Atwood Building that houses executive branch agencies including the governor’s office.
The meeting was anticipated to bring some sort of resolution to the at times ugly dispute over the $3.3 million annual lease the Legislature has for the year-old space, but Stevens said more information is still needed with contradictory cost-savings proposals for moving versus staying.
“This has all been political to this point,” Stevens said. “There’s been political advice and we need financial.”
The Legislature’s lease of the building has drawn intense scrutiny from many legislators and the public as the state faces an annual budget deficit approaching $4 billion.
Stevens said he has already discussed hiring a third-party consultant with the council’s outside attorneys who have been in contact with potential independent finance experts.
A proposal submitted Jan. 29 by 716 West Avenue LLC, the building owner group, argues the State of Alaska should purchase the building for $37.9 million to accrue maximum savings that would outpace projected savings of moving legislators into the Atwood Building.
However, in a Feb. 5 memo to Stevens, Pam Varni, executive director of the Legislative Affairs Agency that handles business for the Legislative Council, disputed cost-saving figures for staying at the LIO compared to Atwood.
A spokeswoman for the LIO’s owner group said in a statement that the group will gladly provide all necessary information for a third-party financial review and also will continue to work with the Legislature to find the best way forward for the State of Alaska.
Stevens acknowledged the need to have the financial review complete in time for the Legislature to fund, or not, its current Anchorage LIO lease in the state operating budget, which is usually finalized in late April.
The current year’s rent is paid through May 31.
On Dec. 19, 2015, the council recommended to the full Legislature via a unanimous vote not to fund the lease in fiscal year 2017 if a solution to stay in the LIO that is cost-competitive with moving the legislative offices to the nearby state-owned Atwood Building could not be reached.
During the brief Feb. 11 meeting the council voted to remove the lease funds from its 2017 budget to bring its actions in compliance with the December motion.
The full Legislature could add the lease payment appropriation back into the state operating budget if the current Anchorage LIO is retained.
The Legislature could also terminate the lease seemingly without legal ramification because of a clause in nearly all government contracts stating fulfillment of the agreement is “subject to appropriation,” in this case, by the Legislature. If the Legislature doesn’t fund it, for any reason, the lease or contract falls apart.
Mark Pfeffer, the managing partner of 716 West Fourth Avenue LLC has indicated an intention to sue if the Legislature walks away from its obligation.
Proposal vs. proposal
In the LIO owners’ proposal, tax-exempt financing to purchase the building would be “considerably less” than the current lease payments of $281,000 per month the Legislature currently pays, and the equity in the building would serve as an accrued savings account for the state.
Varni wrote to Stevens that the proposal overstates the costs of moving to the Atwood Building by $11 million over 10 years and by $16.3 million over 30 years by including costs for debt service that is currently set to expire in March 2017.
She concludes that purchasing outright or financing a purchase of the building would cost the state from $22.5 million to $94.4 million over 30 years compared to moving to the Atwood Building.
The 716 proposal creates a “statistical misperception,” according to Varni.
“The purpose of statistics is to make something easier to understand; however, when used in a misleading fashion, may trick the casual observer into believing something other than what the actual data show,” she wrote. “In this instance, 715 West Fourth Ave LLC, asserts it is less expensive to stay at 716 W. 4th Avenue than the Atwood Building, based on unrealistic and erroneous debt service data.”
716 West Avenue spokeswoman Amy Slinker said in a statement that Varni’s memo lacks third party analysis.
“The Department of Revenue’s professional review shows the ability for clear savings,” Slinker said.
The 716 West Fourth Avenue proposal also states the building owners have secured a settlement to dismiss a lawsuit brought by Jim Gottstein, owner of the adjacent Alaska Building, against the LIO owner group and the Legislative Affairs Agency.
Gottstein’s complaint alleges the LIO lease is illegal because it is neither an extension of an existing lease, nor 10 percent below market value, as statute requires for a long-term extension.
To fully settle the suit the Legislative Affairs Agency must agree to waive potential claims to recoup legal fees, according to the proposal document. Last month, the judge in the suit denied Gottstein’s petition to receive a “whistleblower” award of 10 percent of any money saved if the lease is ruled illegal.
Trial in the case is currently scheduled for March. The proposal stated that the suit could be settled Feb. 12, a deadline that passed after the Legislative Council meeting, but Slinker said the settlement offer is still on the table.
The Department of Revenue analysis of the Legislature’s options based on figures provided by 716 West Fourth Avenue — buying the building outright, having another state agency purchase it, break the 10-year lease and move to the Atwood or keep the status quo — found a potential savings of more than 55 percent over the existing lease if another state entity finances the purchase for the Legislature.
Another stopgap solution offered to lower the existing rent by 5 percent, or $169,000 per year, beginning July 1 until a purchase could be executed. A rent reduction would require lender approval.
The owner group also notes it has approval to waive earthquake insurance on the building, which could save another $59,600 per year from the Legislature’s $3.3 million annual bill.
Revenue’s examination of the options put the upfront cost to move out of the LIO and remodel 30,000 square feet of the Atwood at $3.5 million to $5.5 million, with an annual building operating cost of $664,000.
Purchasing the LIO in some fashion would require the initial payment and then operating payments of $269,000 per year for 45,000 square feet of usable space.
Legislative Affairs concludes the Atwood’s annual operating cost to be $613,000, based on Varni’s memo.
State ownership would also save $231,000 per year in municipal property taxes; however, taking the building off the city’s tax roll has been a reason cited by legislators for why the council did not purchase it initially.
The building houses off-season offices for 25 Anchorage legislators and is the de-facto home to much of the general Legislature’s out-of-session activity.
The Legislative Council, then led by Rep. Mike Hawker, R-Anchorage, decided to rebuild on the old LIO building site in 2013 after numerous attempts to find existing suitable space that meets the unique needs of a public government body in Anchorage failed.
The Legislature contributed $7.5 million towards the construction cost, so Pfeffer and his company ultimately funded $37 million, about $28 million of which is long-term debt and $9 million is Pfeffer’s cash equity position in the property, he has said.
Appraisals of the six-story building plus its underground parking facility have been as high as $48 million, but numerous estimates put its value at $44 million. The customized office space cost $44.5 million to build in 2014, according to Pfeffer.
His group first drafted and submitted terms for the state to purchase the building for $37 million plus closing costs Oct. 9; a proposal requested by the Legislative Affairs Agency.
The original terms agreed to by Legislative Affairs attorneys set a Jan. 31 deadline to act on the sale option, according to correspondence between attorneys for both sides. 716 waived the deadline in its Jan. 29 letter on conditions that the council either vote to buy the LIO by Feb. 5 or appropriate funds for fiscal year 2017 rent in the state budget.
Elwood Brehmer can be reached at [email protected].