Elwood Brehmer

Arctic Commission delivers first report to Legislature

Sen. Lesil McGuire said she wants 2014 to be the “year of the Arctic” across Alaska during a meeting with other legislators Feb. 4. McGuire, R-Anchorage, and Rep. Bob Herron, D-Bethel, are co-chairs of the Alaska Arctic Policy Commission, which released its preliminary report to the Legislature Jan. 30 following nearly a year of work. “We are, have been and are going to play a key role in Arctic policy as the Arctic is our future,” Herron said to the joint House Economic Development, Trade and Tourism and Senate World Trade committees. The 26-member commission comprised of 10 legislators, federal officials and industry stakeholders was formed out of the Northern Waters Task Force last March. White House officials also released their “Implementation Plan for the National Strategy for the Arctic Region” Jan. 30. The administration’s report follows the May 2013 release of an Arctic strategy report that Arctic Policy Commission members have criticized for not including more about economic development and potential community benefits in the region. “Every paragraph” of a comparable Canadian report references Arctic residents and their role in the country’s regional goals, McGuire said, while a draft of the May 2013 White House report focused mainly on security concerns and national interests. The guidelines to the latest federal plan call for an Arctic strategy that can “advance United States Security interests, pursue responsible Arctic region stewardship and strengthen international cooperation.” The 130-page preliminary state report contains a vision statement with four points. Those are that “the State of Alaska envisions an Arctic that: values community sustainability and thriving cultures; advances economic development and a healthy environment; ensures public safety and security; (and) incorporates transparency and inclusion into decision making.” It also contains 16 policy recommendations that emphasize striking a balance between resource development and wildlife and fisheries management. Additionally, the commission calls for new ways of dealing with a changing Arctic climate, strengthening relationships with Canada and Russia, and increasing maritime and emergency response infrastructure in the region. Specifically to resource development, the report requests the creation of a revenue-sharing mechanism for communities impacted by resource development — “perpetual trust funds (where lacking) to finance community needs beyond the life of non-renewable resources” are suggested. McGuire said Alaska can “arrive on time” to the Arctic discussion and influence federal policy by making its objectives heard by the federal government. A final report from the Arctic Policy Commission is due Jan. 30 2015, after the Legislature and other leaders across the state review the current draft. The final report will be key as the U.S. takes the chair position for two years at the eight-member international Arctic Council next year, McGuire predicted. To that end, federal officials are going to hold public meetings across the state in the coming year to hear what Alaskans think the country should do as the Arctic Council chair, Herron said. He encouraged legislators to attend the listening sessions in their respective jurisdictions in a further attempt to have the state’s interests heard. In terms of policy, the Arctic Alaska is demarcated as the area north and west of a line roughly following the paths of the Yukon and Kuskokwim rivers across the state and south to include Bristol Bay and the Aleutian Islands, according to the state report. The Bering Sea is included because the Bering Strait is likely to be a major travel corridor for ships traveling the Northern Sea Route if Arctic sea ice recedes as projected in the coming years, Herron said. McGuire and Herron are working on an Arctic legislation package to help prepare the state for investment in the region, the pair said in a Jan. 16 release. Last session Herron introduced House Bill 165 that would establish an Arctic Port Authority and McGuire is drafting a bill to establish a state fund that could serve as a financing mechanism for future infrastructure development. A piece of infrastructure that is already in the works is a deepwater port somewhere on the Seward Peninsula. The design stage of the project is being led by the U.S. Army Corps of Engineers, which has selected Nome and Point Spencer, or a combination, as most suitable to hold a deep-water port. Cape Riley, northwest of Nome, is also being investigated as an option for additional shallow-draft infrastructure, Corps of Engineers project manager Lorraine Cordova told the Joint Transportation Committee Jan. 30. Cordova said the intent was to have the project narrowed down to a single preferred alternative by March. That isn’t likely to happen, she said, as Corps of Engineers leadership has asked for investigation into 23 possible combinations of development involving all three sites. That could push the timeline for a completed plan ready to be taken to Congress for funding back from an original goal of early 2015, Cordova said. A port in the region capable of holding large vessels would serve as a base of operations for vessels supporting Outer Continental Shelf oil and gas exploration and freight vessels traversing the Arctic sea routes. Major infrastructure such as dredging and dock and causeway extensions would be 65 percent funded by the federal government with state and local matches, she said. Local service features would receive no direct federal money. When asked what her best guess was as to when the project would be completed, Cordova said “the stars would really have to align for 2020 to occur,” and 2030 would be a more likely timeline. Elwood Brehmer can be reached at [email protected]

Saving cash, better communication top DOT aviation priorities

In-step with Gov. Sean Parnell’s message of fiscal restraint, Department of Transportation and Public Facilities Deputy Commissioner John Binder said the Statewide Aviation division is returning to its basic responsibilities. “Along the line of the governor’s State of the State address (Jan. 25) is a focus a lot on our core competencies and our core mission — making sure we’re providing that rural access, fix and maintain the things we have and finishing everything we’ve started without a whole lot of emphasis on going out and looking for new projects,” Binder said. After joining DOT in June 2013 as aviation operations manager, Binder took over for former deputy commissioner and head of state aviation Steve Hatter Jan. 7. He will address the Alaska Air Carriers Association Feb. 18 at its annual convention in Anchorage. Winters with several freeze-thaw cycles, such as the one the state is experiencing now, strain localized airport operations budgets by forcing additional resources and money towards sanding, de-icing and surface maintenance, Binder said. The funds not used in winter typically go towards reconstruction and deferred maintenance after breakup and until the new fiscal year that begins each July 1. In his fiscal year 2015 capital budget proposal, Parnell appropriates $209.5 million towards the state Airport Improvement Program. Of that, $170.9 million is project-specific funding from the Federal Aviation Administration. The current 2014 fiscal year budget has $217.8 million for airport projects, of which $206.1 is federal money. While the proposed state contribution increased by $28.6 million year-over-year, the dollars going into state-run general aviation airports could fall by $8.3 million. Ted Stevens Anchorage International Airport and the Fairbanks International Airport — the Alaska International Airport System — have separate budgets. There are several major airport rehabilitation and improvement projects across the state scheduled for the upcoming construction season in the effort to maintain existing infrastructure. Runway 7L-25R in Anchorage will enter a rehab project this spring that will last through 2015. That project is expected to cost $62.1 million, according to the DOT’s 2013 aviation report released last month. Phase two of the taxiway reconstruction at Anchorage will be an additional $9.5 million. At Fairbanks, construction of the $21.9 million Airport Rescue and Firefighting Building — started in September 2013 — will continue into 2015. Stage three of an $11.3 million expansion of the runway safety area at the Kotzebue Airport should be completed this year, the report states. Also in Northwest Alaska, a $15 million rehab and extension project of both runways at the Ambler Airport will commence when the weather allows. Projects that began last year in Western Alaska will continue this year. Work totaling $27 million to expand the runway safety area and resurface the runway in Unalaska will resume; and a $30 million project to relocate the Tununak Airport will continue. One of the things Binder has seen improve in his short time with the department is its exchange with the aviation industry and operators at small airports, he said. “We’ve really worked hard in the last year to reinvigorate our communications with the air carriers, primarily because they’re the ones that are seeing the conditions of our airports on a daily basis,” Binder said. The pilots flying in and out of small airports across the state are often the “first line of defense,” he said, against potential hazards such as uneven runway pavement, washed out gravel and missing lights, that might otherwise go unnoticed. “All the carriers now — and we update it regularly — all have key points of contact for every airport out there with alternates and backups,” to relay safety concerns, Binder said. If the contacts cannot be reached, carriers are encouraged to contact the regional DOT directors, he said. Alaska Airports Association Executive Director Jane Dale said she would still like to see quicker response and issuance of Notices to Airmen, or NOTAMs, at smaller airports, but that the department’s efforts are noticeable. “Communication with Binder as well as (former deputy commissioner) Hatter is greatly improved,” Dale said. DOT is in the midst of an eight-month process to develop an airport needs directory in conjunction with the Alaska Air Carriers Association, according to Binder. The directory will be a record of all the infrastructure maintenance and improvement needs at every airport in the state, he said, and represent billions of dollars worth of work. Binder referred to it as a “wish list” of projects over the next 20 years. Part of improving rural airport maintenance will include continuing operator training with heavy equipment at the Pipeline Training Center in Fairbanks, Binder said. Numerous village airports are run by groups contracted with DOT to maintain the facilities. Last year the department trained contractors from 14 rural airports on lighting system maintenance, equipment operation and maintenance and safety procedures in two courses. The training was funded through a Denali Commission grant. Binder said plans are to have three more courses in 2014. Training the contractors saves significant resources, department officials have said, by eliminating the need to send individuals out to remote locations for issues the contractors can now resolve. Elwood Brehmer can be reached at [email protected]

FAA backs off 2012 rule restricting night approaches

The Federal Aviation Administration has “backed way off” on a rule implemented in October 2012 that could have restricted night operations at more than 100 airports across Alaska, Transportation Department deputy commissioner John Binder said. The change in FAA policy sparked a nationwide review of aeronautical surveys of airports to determine if obstructions penetrate the 20-1 ratio approach minimum standard at a given runway. FAA regulations require a clear approach path extending up to 10,000 feet beyond the end of a runway in some situations. A 20-1 approach ratio refers to the slope of an airplane’s descent as it approaches the runway. Common obstructions include trees, buildings and radio or cell phone towers. Previous to a relaxing of the contested regulation, the FAA could close airports to night and instrument flight rules, or IFR, landings on runways with obstructions, or those without up-to-date aeronautical survey data — potentially impacting more than a third of the state’s 254 airports, according to the Alaska Air Carriers Association. As of mid-December, the FAA has granted affected sites a “pretty significant grace period,” Binder said, allowing for up to a year for some obstructions to be cleared and surveys to be completed. “Now, when FAA identifies an obstruction, rather than saying, ‘no access,’ what they’ve said is, ‘You have 30 days to verify what we think is true is actually true, also to deal with that obstruction in that 30 days if you can,’” Binder said. Obstructions penetrating the 20-1 approach angle by more than 11 feet must be dealt with within 30 days of discovery, according to the revised rule. Alaska Airports Association Executive Director Jane Dale said the change came quickly after a meeting with Alaska Transportation Department and aviation industry officials. “We are very appreciative of the local FAA on this issue with support to resolve the schedule issues,” Dale wrote,” We are also very pleased with (state DOT) taking the lead on developing protocols to become proactive in regards to care of 20-1 approach slope and becoming more aware of the flatter precision approach slopes of 43-1 and 50-1.” DOT is in discussion with the FAA on ways to conduct revised and cheaper airport surveys that would satisfy the new requirement, Binder said. One survey can cost more than $250,000 he said, something the state cannot afford to do for every airport in need. He said the department is trying to get runway ends surveyed for roughly $20,000 to $30,000 and capture the information necessary, rather than surveying the entire area surrounding a given airport. Elwood Brehmer can be reached at [email protected]

Private spending to grow $1.2B in '14

Investments in North Slope oil and gas projects will be the main driver behind statewide construction spending growth in the coming year, according to a report by the University of Alaska Anchorage Institute of Social and Economic Research. The annual forecast projects oil and gas spending on construction work in the state to total $4.3 billion in 2014, up 34 percent from $3.2 billion last year. That sector accounts for 46 percent of all construction spending in the state, estimated to be about $9.2 billion. Last year’s initial projection of $8.4 billion was revised to $7.8 billion after oil and gas spending lagged behind expectations in 2013, setting up an even larger increase in anticipated spending this year. The overall construction spending forecast of $9.2 billion is an 18 percent increase versus 2013. “An 18 percent increase over last year — it’s pretty amazing. I think we can attribute most of that to SB 21,” the oil tax reform legislation signed by Gov. Sean Parnell last spring, Associated General Contractors of Alaska Executive Director John MacKinnon said. The “More Alaska Production Act,” touted by Parnell and Republican legislators as a way to spur investment in the state by oil producers, went into effect Jan. 1. Opponents to the tax structure change got Proposition 1, a referendum to repeal the law, on the August primary ballot after a successful petition campaign. MacKinnon said the “rosy” forecast, as he called it, extends beyond the oil and gas industry. Construction employment peaked last year in August at 21,600 jobs across the state, according to Labor Department figures. It marked the most construction jobs in Alaska since September 2005. Combined private spending in other areas is expected to increase in 2014 as well, by about 5 percent, to about $2 billion. Despite a $1.7 billion cut in the 2014 fiscal year state capital budget — excluding federal appropriations — public construction spending is projected to grow slightly more than 7 percent, from $2.7 billion in 2013 to $2.9 billion this year. That is due in large part to the record state capital spend of $2.8 billion in fiscal 2013, which ended last June 30, when the $453 million construction bond package approved by voters in the timeframe is included. It can often take multiple years for money allocated to public construction projects to be dispersed, as large projects usually are not “shovel ready.” Likewise, it will probably be several years before the impact of the 2015 fiscal year capital budget — proposed by Parnell at a $600 million state spend — will be felt across Alaska, MacKinnon has said. Along that line, activity at the state-funded Port MacKenzie and Tanana River rail projects will continue as expected this year, officials familiar with the projects have stated. The oil and gas spending on the North Slope will come from ConocoPhillips drill work at Kuparuk, its Greater Moose’s Tooth prospect in the National Petroleum Reserve-Alaska, and development of the CD-5 project west of the Colville River, according to the report. Additionally, BP will concentrate on well workovers in its existing fields. The company is expected to increase capital spending “by several billion (dollars) over the next five years,” the report states. ExxonMobil will continue developing its Point Thomson field east of Prudhoe Bay, which ExxonMobil says requires up to 1,200 workers during the peak winter season. Major Cook Inlet player Hilcorp announced in December it planned on spending about $300 million on capital projects in the basin in 2014, similar to its expenditure last year, and drill about 10 new wells. Alaska mines will likely hold back in 2014. The $205 million projection is about $125 million less than the 2013 forecast, largely due to a drop in the price of gold, the report states. It forecasts $110 million being spent to run the six large operating mines in the state and less exploration work being done at the Livengood and Donlin Creek gold prospects, along with Pebble. A combination of public and private dollars, spending by energy utilities should remain fairly flat at about $850 million, ISER predicts. Construction of new power plants by Matanuska Electric Association and Municipal Light and Power, along with infrastructure expansion by Enstar Natural Gas around Homer will drive spending in Southcentral. Golden Valley Electric Association’s acquisition and subsequent emissions retrofit of a coal-fired power plant in Healy will be big in the Interior. Verizon’s push into the Alaska market will be a boost for telecom spending as well, the report projects. Construction activity at the state’s military installations “will take a big jump this year” to $103 million, the report states. Military construction work totaled $33 million last year. The 2014 budget includes seven projects at Fort Wainwright, the largest of which is a $36 million warm-storage hangar. Defense officials have warned that the spike may be short-lived, however, as uncertainty looms over future federal budgets and President Barack Obama’s directive to cut defense spending continues. Spending on health care facilities was down in 2013 as hospitals in Barrow, Nome and Fairbanks opened their doors and it is expected to remain steady at about $230 million this year. The largest project will be construction of state-financed patient housing and an associated parking garage at the Alaska Native Medical Center in Anchorage. The state contribution to ANMC work is $35 million. Smaller projects around the state including hospital expansions in Ketchikan and on the Kenai Peninsula, along with a veterans’ long-term care facility in Haines will collectively make up the bulk of health care construction in the coming year. Residential and commercial building will combine to account for $650 million worth of construction activity. While the Cabela’s and Bass Pro Shops superstore projects in Anchorage will wrap up, work on large office complexes in the city, including the new Cook Inlet Region Inc. headquarters and the 100,000 square-foot JL Properties project in Midtown Anchorage, will pick up the slack. The tight Southcentral housing market did not lead to increased building in 2013, and “market pressure will result in a modest increase in new housing starts this year,” there and in Southeast, the report states. Elwood Brehmer can be reached at [email protected]

Alaska Air Group ends 2013 with another record quarter, year

Alaska Air Group Inc. continued to set profitability records in 2013. The parent to Alaska Airlines and Horizon Air reported a net income of $383 million for 2013 in its Jan. 23 earnings report, up nearly 13 percent from a then-record $339 million for 2012. The company’s fourth quarter alone may be more impressive. Alaska Air Group improved on a record $50 million net income in the last months of 2012 with $77 million in profit for the fourth quarter of 2013, or 54 percent growth. For the year, only the 2013 second quarter didn’t result in a record profit for Alaska Air Group. The latest period extended its run of profitable quarters to 19 in a row. The yearly net income equates to $5.40 per share, up from $4.73 per share in 2012. “Our operational performance continues to lead the industry,” Alaska Air Group President and CEO Brad Tilden told company investors Jan. 23. The company held $1.3 billion in unrestricted cash and securities at the end of 2013. After-tax return on invested capital, or ROIC, was 13.6 percent for the year, up from 13 percent in 2012. Fourth quarter revenue of $78 million was up 7 percent on a 5 percent increase in capacity year-over-year. Full-year operating revenue was up 11 percent at $5.15 billion, according to Alaska Air Group’s financial statement. Unit costs were down slightly in 2013, which Tilden said he expects to grow by about 1 percent in 2014. Investments in IT infrastructure — a transition from Windows XP to Windows 7 operating systems and an outsourcing of the company’s data center — will push operating costs higher in the first quarter, Air Group Vice President Glenn Johnson said. Those costs are expected to flatten later in the year. Increased bag and change fees — announced last summer — are expected to provide additional income in the coming year, Tilden said. The strong returns have allowed the company to contribute to its employee pension plans to the point where they were fully funded by the end of last year, Tilden said. “We believe this is unique in the airline industry and we’re glad our financial success has provided retirement security for our employees,” he said. Additionally, employees earned $105 million in incentive pay in 2013, meaning each employee could expect a check equal to nearly 5 weeks of pay, Alaska Air Group Vice President and Chief Financial Officer Brandon Pedersen said in an interview with the Journal. He said the management team puts an emphasis on paying high wages and expecting quality employee performance in return. “I think this industry has a pretty crummy track record of how we collectively work with labor, how the employees have been treated. That manifests itself in a crummy on-board experience,” for passengers, Pedersen said. To that, Alaska Airlines led all major U.S. airlines in on-time performance in the year ending in November 2013, according to the U.S. Department of Transportation. Alaska Air Group also inked five-year deals with Alaska Airlines pilots and Horizon flight attendants and reached a tentative agreement with Alaska Airlines flight attendants in the last year. The company continued its stock buyback program in 2013, repurchasing nearly 2.5 million shares for $159 million, bringing the buyback total since 2007 to $478 million, the report states. Alaska Air Group stock was trading at $79.75 per share on the New York Stock Exchange as of late Jan. 28. Pedersen said that the company’s management team looks at itself as more than just an airline. “We want not to have the reputation of being a high quality airline with a good balance sheet; we want to be known as a high quality industrial company and have a balance sheet that looks more like a regular company, not like a regular airline,” Pedersen said. That philosophy is born out in Alaska Air Group’s debt-to-capital ratio. In early 2009 its “debt-to-cap” ratio was 81 percent, Pedersen said. By the end of 2013 it was down to 35 percent. The push towards lowering company debt is something unusual in an industry where borrowing money is easy. “People are often eager to loan to airlines because the collateral is mobile. That’s something that differentiates our industry from others,” Pedersen said. “If we default on an airplane, somebody can literally come and fly it away and resell it or re-lease it to another operator.” Lower interest payments on less debt have contributed significantly to recent higher profits, he added. Not coincidentally, Standard and Poor’s upgraded Alaska Air Group’s credit rating to “BB+” in the past year. Pedersen said emphasizing fuel efficiency and flying one aircraft — Boeing 737s at Alaska Airlines and Bombardier Q400s at Horizon — have helped Air Group’s bottom line. “The industry standard measures for cost is unit cost excluding fuel, or the cost to fly one seat one mile excluding fuel,” he said. “We certainly report that, but we also like to talk about cost per available seat-mile including fuel because fuel is a third of our cost structure and to the extent that we can burn less than the other guy it is a competitive advantage.” An International Council on Clean Transportation report released in September found Alaska Airlines to be the most fuel-efficient major airline in the country, based on Bureau of Transportation Statistics data. Alaska Airlines is also in the midst of a delivery program with Boeing for 38 new 737-900ERs through 2017. The 900ER is the latest and most fuel-efficient adaptation of the 737 and will gradually replace the airline’s 737-400s, company officials have said. Flying a single aircraft type is a model used by successful airlines around the world, and was started domestically by Southwest Airlines, Pedersen said. Not only does it eliminate redundancy for mechanic and pilot training, he said the model improves operational efficiency by allowing planes to be swapped on routes when issues arise and gives customers a recognizable look and feel every time they board an Alaska Air Group plane. Elwood Brehmer can be reached at [email protected]

Housing, commercial markets near capacity around state

The largest real estate markets in the state remained strong in 2013, largely due to lean inventory. Brandon Walker with Pacific Tower Properties told members of the Building Owners and Managers Association Anchorage Jan. 10 that the commercial real estate market in Anchorage is “extremely healthy” across its subsets. Class A office space was running at about 4.3 percent vacancy in the city at the end of 2013, and 5.7 percent of Class B offices were empty, according to Walker. Both office class vacancy rates dropped about 0.9 percent over the year, he said, after a fairly flat 2012. “The drop in vacancy seems to be kind of a byproduct of growth in certain industries like oil and gas and legal services,” Walker said. He added that Anchorage office tenants are hesitant to move right now — choosing to stay put and renew their leases unless they’re displaced. “There was a little bit of a pause in new Class A deliveries in 2013 and I think this allowed for some absorption,” of vacant properties, Walker said. When a couple new major office complexes open late this year or early in 2015, Walker predicted the Class A market could see a 2 percent upswing in vacancy. He said that even if his forecast is correct the office market would still be on solid footing. The 100,000 square-foot JL Properties office building under construction at the intersection of C Street and International Airport Road in Midtown Anchorage is about 20 percent pre-leased and available space in the future 110,000 square-foot, eight-story Cook Inlet Region Inc. headquarter complex is about 40 percent early-occupied, according to Walker. CIRI has said corporate operations would take up slightly more than half of the building space at Fireweed Lane and the Seward Highway, leaving the remaining space to be leased out. Overall retail vacancy in the Anchorage Bowl is at 4 percent, Walker said, near half the national average of 7.7 percent. Enclosed, or mall space ended 2013 at 3.9 percent vacancy, down from 4.2 percent at the beginning of last year. Simon Property Group officials at the Fifth Avenue Mall have said their space is almost completely occupied. Available power center space disappeared quickly in 2013, from 4.6 percent at the start of the year to 2.7 percent vacancy now as remaining spaces filled in the Tikahtnu Commons shopping center. Inline, or general retail vacancy increased somewhat to 5.7 percent in 2013 due to “attrition” to power centers, Walker said. Roughly 300,000 square feet of new retail space is on its way to South Anchorage in the next few years. The Gallo Center near C Street and Dimond Boulevard will open late this year with 40,000 square feet of available shop space. Renovations to the Dimond Center Mall and a new traffic pattern inside the mall will add another 40,000 square feet of retail space to the existing structure. “I think the key word at the Dimond Center right now is experience,” Walker said. “They really want to generate a new shopping experience, so look for some new concepts and merchandising strategies.” JL Properties is developing the 220,000 square-foot Outlets of Alaska on 27 acres south of Dimond Boulevard on C Street. That mall is currently about 65 percent pre-leased, Walker said. Industrial vacancy in Anchorage is very low, at 1.7 percent. Walker said industrial space rent stayed in the $1.10 per square-foot range in 2013 and didn’t correspond with the tight market. He suggested there might be some vacant properties not on the market that are skewing those figures. Residential The home market in Southcentral grew slower in 2013, while the length of time single-family homes remained on the market continued to shrink. In Anchorage, the average residential sale price for the year was $346,000, up 2.6 percent from 2012, when sale prices increased 4.7 percent, according to Alaska Multiple Listing Service Inc. data. The average property was on the market a mere 47 days, down from 71 days in 2011, which was the last of five years that saw houses for sale for more than two months, on average. The market time was a return to peak the market years of 2004-06. In the Matanuska-Susitna Valley, average home prices rose 2.6 percent to $238,000 in 2013. In 2012, prices rose 2.9 percent. Mat-Su home prices are up 27 percent since 2004, when the average sale price was $187,000. Listings in the area were on the market for an average of 73 days, down from recent 80-plus day highs from 2008-2011, but not yet back to the 60-day average listings of 2004. Statewide, home sales averaged $304,000 through the second quarter of 2013 — up 2.3 percent year-over-year, according to the most recent Alaska Housing Finance Corp. data available. Year-to-date loan activity in the state for single-family purchases was up 1.2 percent over the first half of 2012. In Fairbanks, loan activity was down 15 percent year-to-date for the first half of the year and the average sale price was $252,000. There was a modest relaxation of rental vacancy rates across much of the state, as rental prices increased slightly. In Anchorage, the tightest rental market in the state, overall vacancies increased from 2.6 percent in 2012 to 3.3 percent last year, according to AHFC. The average rental price per month across all subsets rose 3.9 percent to $1,119 in the city. The Kodiak Island Borough had the highest average monthly rental prices at $1,230 with 4.5 percent vacancy, up from $1,193 per month and 2.3 percent vacancy in 2012. Residential vacancy rates increased from 8.3 in 2012 percent to 9.2 percent last year in the Fairbanks North Star Borough. Prices rose from $1,013 to $1,036 per month. Elwood Brehmer can be reached at [email protected]

Bed tax numbers, 2014 visitor outlook strong

Hotels, lodges, and bed and breakfasts in the state’s major destinations had a healthy year in 2013 based on preliminary bed tax results. When the final numbers are tallied, Anchorage is expected to have generated approximately $23.5 million through its bed tax for the year, up 3.9 percent from 2012. If the prediction made by Jan. 16 by Visit Anchorage President and CEO Julie Saupe at the marketing agency’s annual community report, it would be a growth of more than 22 percent from the $18.3 million the city collected in 2009. The $23.5 million bed tax figure would also be a record for Anchorage. Saupe said she expects the strong numbers to continue in the coming year with “moderate” growth in 2014. “We now have four consecutive years of travel growth and we expect that trend to continue,” she said. Anchorage’s bed tax revenue is split evenly between the municipality’s general fund, paying down bond debt on the Dena’ina and Egan convention centers, and Visit Anchorage’s marketing campaigns. While Alaska’s economy was largely spared from the “Great Recession” as the housing market in the state remained robust and the unemployment rate has been less than the national average for more than five years, visitors from Outside with shrinking disposable incomes stayed home more and spent less when they did travel. As a result, tourism was one of the hardest-hit industries in the state and is just now fully recovering. More than 1 million cruisers visited the state last year for the first time since 2009. Saupe said bookings at the venues are outpacing projections made when the Dena’ina Civic and Convention Center opened roughly five years ago. In addition to the Alaska Federation of Natives Convention, which will return to Anchorage in October, several national and international meetings will be held in the city in the coming year, Saupe said. The National Indian Education Association Convention will dovetail with AFN, she said, and bring with it about 2,000 attendees. Roughly 1,800 people will come to Anchorage for the Council of State Governments meeting in August. Another 1,400 are expected for the International Epidemiological Society meeting the same month and the National Congress of American Indians in June. Holland America Lines’ cruise ship the ms Amsterdam will return to Anchorage and call on the city four times four times from May to August, as well. In Fairbanks, bed tax collections were $2.53 million through November, nearly equaling the full-year total of $2.54 million for 2012, according to data available from the city. The collection total for 2011 was $2.47 million. Last year was the first that the AFN Convention was held in Fairbanks since 2010. Fairbanks Convention and Visitors Bureau President and CEO Deb Hickok said 2014 is off to a good start with Asian charter flights arriving for Aurora viewing tours. The city will have a particularly busy March in 2014. Along with the Open North American Championship mushing race and month-long World Ice Art Championships traditionally held in the city, the Tanana Chief’s Conference annual convention begins March 10 and the city will play host to the 2014 Arctic Winter Games March 16-22. Fairbanks Host Society President Jeff Jacobson said the Games are expected to draw up to 2,000 youth athletes and up to 4,000 people total to Interior for the week. A push to expand Alaska’s presence in the international tourism market — projected to outpace domestic market growth in coming years — sent Visit Anchorage representatives to Australia, New Zealand, Germany, South Africa and India, Saupe said. “While international vacations make up about 10 percent of visitors to Alaska, we know that travelers from overseas tend to stay longer and spend more,” she said. Elwood Brehmer can be reached at [email protected]

LNG export deal would end AGIA in-state transport limit

The agreement Gov. Sean Parnell’s administration signed for a large commercial liquefied natural gas project could have a major impact on the state’s separate push to develop a smaller gas project, Alaska Gasline Development Corp. President Dan Fauske said during a Jan. 24 presentation. Senate Bill 138, which Parnell’s office introduced to the Legislature the same day, not only outlines the state’s share of an LNG export project with the “big three” North Slope producers and TransCanada, but would also terminate the Alaska Gasline Inducement Act license the state has had with TransCanada since 2009. Ending AGIA would lift the 500 million cubic feet per day transport limit on Alaska Stand Alone Pipeline that AGDC is working on, Fauske said. Originally designed as a 24-inch, high-pressure line from the North Slope to Enstar Natural Gas Co.’s Beluga Southcentral distribution facility, the $7.7 billion, in-state pipeline project has morphed to a 36-inch, low-pressure line. “The design that we’re continuing to work on is at 500 million cubic feet per day. The pipeline can certainly haul more gas than that,” Fauske said. Current peak demand in the state is for about 240 million cubic feet, or mmcf, of gas per day. Numerous options remain for surplus gas, even with the 500 mmcf daily cap, Fauske said. Agrium Inc. has begun a long process to restart its fertilizer plant on the Kenai Peninsula, a possible large gas consumer. Additionally, Donlin Gold’s mine plan calls for a 300-mile gas pipeline from Cook Inlet to its Donlin Creek mine site where a natural gas-fired power plant would be built to power the mine. Even if the AGIA transport limit remains in place, Fauske noted that it is for gas produced north of the 68th parallel. Gas produced south of the line delineating the North Slope from the rest of the state could be added to the pipeline to exceed the 500 mmcf limit. Outside of Cook Inlet, Doyon Ltd. is exploring for oil and gas in the Interior near Nenana. Fauske said SB 138 is a “double-edged sword” for AGDC, as Parnell has urged the state corporation to align the small and large projects, adding to the goal of “getting gas to Alaskans.” Under the “Heads of Agreement” statement signed by the commercial gas players Jan. 14, an AGDC subsidiary would finance the state’s share of an LNG facility near Nikiski. TransCanada would finance the state share of the pipeline and the Slope processing plant. In addition to using a larger diameter line, the stand-alone project has changed from an enriched gas to lean gas design, Fauske said. “Lean gas is energy rated for delivery to and consumption by consumers,” he said. The lean gas design means two gas separation facilities — at roughly $250 million apiece — wouldn’t be needed to separate out liquids from the methane that largely comprises natural gas. While the liquids would offer a wider range of commercial possibilities, Fauske said studies by AGDC concluded that LNG offers the most reliable commercial market when compared with natural gas liquids or gas-to-liquid options. The state’s contribution in the stand-alone project would likely be in the $400 million range, about 5 percent of the total cost, Fauske said. The rest would be financed through bonds. He said putting additional state money into the project wouldn’t impact the final price of gas significantly. AGDC calculated that for every additional $1 billion the state spent, the gas tariffs would drop only about 50 cents per thousand cubic feet, or mcf, of gas. According to AGDC estimates, gas would be delivered to Fairbanks consumers in the $9 range per mcf and to Anchorage at around $10 per mcf. The Fairbanks estimate is less than earlier projections because a separation plant at the 30-mile Fairbanks spur takeoff point is no longer needed. “We’ve always had a mantra that if you can’t beat the price of imported LNG it’s a fools errand,” Fauske said. He emphasized that every year the project is delayed the $7.7 billion cost estimate — in 2012 dollars — grows by $210 million. That added cost would be carried into the final gas tariffs. The current design also includes about 1.5 percent propane in the gas mixture, he said, about 4,000 barrels per day. Propane could be used as an easily transportable energy option for rural communities currently relying on fuel oil outside of the natural gas pipeline corridor. To make it all go, a two train, $2.8 billion gas conditioning facility would be built at the head of the 727-mile pipeline at Prudhoe Bay. First gas would reach Fairbanks in 2020 on AGDC’s current project timeline. Fauske said a recourse tariff should be filed with the Regulatory Commission of Alaska in August. Shortly after, AGDC plans to complete its Section 404 wetlands application with the U.S. Army Corps of Engineers, he said. If those steps are reached in the coming year, the corporation will go to an open season in 2015 to solicit bids from prospective partners and gas customers, according to Fauske. Construction would then begin in 2017 on a three-year, winter-summer build cycle. Elwood Brehmer can be reached at [email protected]

AEA recommends 26 projects for seventh round of grants

The Alaska Energy Authority is recommending the Legislature fund 26 heat and power projects through round seven of the state Renewable Energy Fund. If legislators choose to match Gov. Sean Parnell’s fiscal year 2015 proposal for the grant program, the projects would receive a total of $20 million when the money is disbursed in July. The 26 projects were deemed to be highest priority by AEA staff. The authority found that 64 projects — totaling $41.5 million — of the 86 that submitted completed applications by the late September deadline warranted funding recommendations, however there isn’t always enough money to go around, said Sean Skaling, AEA’s deputy director for alternative energy and energy efficiency. “(The Legislature) has generally respected the opinion of AEA, and it’s generally a matter of how far down the list down the list they go before drawing the line,” Skaling said to the AEA board Jan. 14. “That’s the ultimate funding decision.” This year 17 heating and nine electric projects comprise the top 26. Of those, the funding recommended would complete 20, with four in the feasibility phase and two in design, according to AEA. The emphasis on heating is somewhat of a departure from previous years that saw a higher number of electrical generation projects chosen for funding. Skaling said the change is an attempt to help mitigate heating costs in areas of the state where electricity is disproportionately cheaper. Such is the case in much of Southeast Alaska where cheap hydropower is prevalent, but residents primarily use fuel oil for heat. Skaling said his team has seen a “huge” improvement in the quality of applications since the first submittal period, while the number of applications has decreased over the years. “I think (AEA) has become a lot more educated about what works and what doesn’t, and our evaluation is much more sophisticated,” he said. “At the same time the applicants, I believe, have gotten a sense of what works and what doesn’t — what we’re looking for.” Established in 2008, the Alaska Renewable Energy Grant Recommendation Program supports the development of renewable energy projects primarily in rural communities to offset often high energy costs. It was initially meant to provide a total of $250 million in renewable energy development grants over five years, but the Legislature renewed the program in 2012 for an additional 10 years. The state put $25 million towards the program in the current fiscal 2014. To date, $227 million has been appropriated to the Renewable Energy Fund. An October 2012 report evaluating the program done by the Vermont Energy Investment Corp. and the Alaska Center for Energy and Power found that the $96 million invested in operational projects at the time had produced a net benefit of $114 million to participating communities — with a 1.73-to-1 benefit-to-cost ratio. Those projects had also produced more than 23,000 megawatts of power and displaced more than 1.75 million gallons of diesel fuel. After going through technical and economic evaluations by AEA with the help of the Department of Natural Resources and independent economists to ensure their feasibility, the projects are ranked based on weighted criteria, Skaling said. The current cost of energy in the given area is the largest factor, followed by a project’s economic and technical feasibility and the matching funds a community or company can offer. The communities with the top three ranked projects this year — Atka, Chignik and Venetie — all have power costs between 69 cents and 90 cents per kilowatt-hour, according to AEA. Once money is awarded to a project, Skaling said each grantee is required to report to AEA on their progress, monthly during construction and quarterly after a project is completed. Further, he said AEA tracks the energy generation and operation of each project and tabulates those numbers against preconstruction statistics. This allows the authority to measure the net benefit of a project and better calculate its viability, he said. If the Legislature adds to Parnell’s $20 million allocation for the program, two partially funded projects will get full funding, Skaling said, per a Renewable Energy Fund Advisory Committee request. “Their primary recommendation was to take two rather large dollar-figure projects that are in lower cost areas, specifically Stetson Creek and Allison Creek in the Railbelt and Chugach regions, and partially fund those in order to fit in six more projects,” he said. Stetson Creek is a $21.9 million diversion project being done by Chugach Electric Association, which pipes water from Stetson Creek into Cooper Lake on the Kenai Peninsula to increase power production at the site’s hydroelectric facility. AEA recommended a total of more than $3.4 million go to Stetson Creek work. Chugach Electric is expected to complete the project in late 2014. Allison Creek is a run-of-the-river project near Valdez that Copper Valley Electric Association has said it hopes to have in production sometime in 2015. If fully funded, it will receive about $5.9 million from the state in fiscal 2015 and has a total cost estimated of around $22 million. The full list of Round VII Renewable Energy Fund recommendations can be viewed on AEA’s website at akenergyauthority.org/refund7.html. Elwood Brehmer can be reached at [email protected]

Arctic issues will be hot topic as Legislature convenes

The Arctic will be a hot topic in the months ahead for state legislators. Co-chairs of the state Arctic Policy Commission, Sen. Lesil McGuire, R-Anchorage, and Rep. Bob Herron, D-Bethel, said Jan. 16 that they have plans to enter the 2014 legislative session “armed with an Arctic legislation package,” according to a commission release. In addition to the bill Herron introduced last session to establish an Arctic Port Authority and Development, House Bill 165, McGuire is drafting legislation that could serve as a foundation to fund the estimated $100 billion worth of Arctic infrastructure in need of private investment, the release states. “The Alaskan Arctic is in great need of investment in infrastructure, to improve the lives of those who live there, and for responsible resource development. Our two infrastructure bills are designed to help kick-start that investment,” Herron said in a formal statement. McGuire’s Arctic funding mechanism would resemble the Sustainable Energy Transmission and Supply, or SETS, fund and give the Alaska Industrial Development and Export Authority the ability to form partnerships between the state and private investors. It was McGuire, who is running for the Republican nomination for lieutenant governor against Anchorage Mayor Dan Sullivan, who first introduced SETS legislation in early 2011. The state energy fund was formed in 2012 and is an integral part of AIDEA’s effort to get North Slope natural gas to the Interior, providing low-interest state loans to multiple project partners. “The next important step in the evolving Arctic arena is infrastructure development in the region,” McGuire said. “With increased activity in the Arctic, it will be paramount that Alaska is prepared not only to deal with the activity, but also to capitalize on it. In order to do that, Alaska must have the capacity to respond to emergencies, lend logistical expertise, harbor ships, and monitor changing weather and ice conditions. This requires not only a deep draft Arctic port and roads, but also increased telecommunications and energy infrastructure. We need to ensure that our natural resources are developed in a responsible way, but also that tourism can flourish and that local economies can take advantage of the new Arctic.” On Jan. 30, the Arctic Policy Commission is slated to release its report to the Legislature with advice on what the state should do to prepare for and foster Arctic development. The 26-member commission was formed out of the Alaska Northern Waters Task Force and has been convening stakeholder meetings about Arctic issues to generate its report since March 2013. The report is expected to highlight management strategies for offshore oil and gas development and mining in the region as well as ways to secure shipping lanes as melting ice continues to open the Northern Sea Route. U.S. Army Corps of Engineers officials have said their report recommending a plan for deep-water port infrastructure on the Seward Peninsula near Nome should be ready in March. Last March the Corps of Engineers released a study that preferred several Seward Peninsula locations for a deep-water port to serve as a hub for Arctic maritime operations out of 14 sites along Alaska’s Northern and Western coasts. The report cited existing onshore infrastructure and proximity to deep water as primary reasons for selecting the Seward Peninsula options. Additionally, Herron and McGuire have plans introduce a resolution to promote the state’s priorities when the U.S. begins its two-year term as chair of the Arctic Council in 2015. Canada currently heads the eight-nation international policy coalition. The resolution would also request the State Department to hear Alaska’s voice when the time comes to choose an individual to represent the country in the council’s head seat. State Arctic Policy Commission member Sen. Cathy Giessel, R-Anchorage, said at a December Commonwealth North forum that an Alaskan should lead the U.S. Arctic contingent. Herron shared Giessel’s sentiment and that of Alaska’s congressional delegation in his statement. “We’ve said it 735,000 times: Alaska is America’s Arctic and as such we must have a large say in Arctic Council Priorities when the United States is chair,” he said. In the state Legislature, McGuire is expected to introduce a mirror bill to Herron’s HB 165 in the Senate. The House bill is awaiting action in the Labor and Commerce Committee. Elwood Brehmer can be reached at [email protected]

Arctic activity, tight funding for transportation in 2014

The coming year will likely see an ongoing discussion between the feds and the State of Alaska as to how an increasingly-active Arctic will be managed going forward. Sen. Cathy Giessel, R-Anchorage, previewed a draft version of the report the state Arctic Policy Commission is set to release to the Legislature Jan. 30 at a December Commonwealth North meeting. The 26-member commission consists of 10 legislators; representatives from the fishing, mining, oil and gas industries; officials from Arctic region communities and Alaska Native corporations; and Interior Department Special Assistant for Alaska Affairs Pat Pourchot, among others. Giessel said one of the state commission’s top priorities is ensuring an Alaskan heads the U.S. delegation of the international Arctic Council. The U.S. will chair the eight-nation policy forum for two years beginning in 2015. Getting an Alaskan in the prominent position would be a big step towards making the state’s Arctic priorities heard, she said. Giessel noted her view of the federal government’s view of Arctic issues by echoing a sentiment often heard from Alaska’s congressional delegation. “Our federal government has only recently realized that we’re an Arctic nation,” she said. The White House and Defense Department each released Arctic policy guidelines in 2013, but the documents lacked specifics in many areas. Giessel added that the 16-page Defense Department report mentions Alaska a total of five times. While final numbers are waiting to be tallied, Defense Secretary Chuck Hagel said in November that Northern Route shipping traffic was expected to have increased tenfold in 2013 over the previous year. In meetings with Northern Route community leaders, Giessel said the Arctic Policy Commission heard that the state should work to establish a form of revenue sharing between development operations and villages. Assuring villages have proper infrastructure and the public safety capacity to handle more traffic needs to be addressed as well, she said. “One of the things we heard from communities is, ‘We’ve got resource development going on but we as a community don’t benefit from that,’” Giessel said. Throughout the commission’s roughly 10 months of work to date, the top priorities from potential Alaskan stakeholders in an Arctic future were environmental protection and economic growth, she said. The commission worked out four guiding principles for the federal government’s Arctic policy in a two-day mid-December work session, she said. The guidelines from the draft state that Alaska envisions an Arctic that values community sustainability and thriving culture, economic development in a healthy environment, public safety and security, and transparency and inclusion in decision making. After making its recommendations to the Legislature in later this month the Arctic Policy Commission will continue its work until it expires in 2015, unless further legislative action extends the commission’s duties. Infrastructure Funding might be hard to come by for a number of state transportation projects. In his budget proposal released Dec. 12, 2013, Gov. Sean Parnell cut unrestricted general fund spending 66 percent from the current capital budget. He appropriated $55 million for the Knik Arm Bridge and Toll Authority to continue its work on the Knik Arm Crossing. If the state can figure out a funding mechanism for the bridge, KABATA officials have said construction could begin sometime in 2015. Final right-of-way acquisitions on the Point MacKenzie side of the project should be made this year. Near where a Knik Arm Bridge would land across from Anchorage, the Matanuska-Susitna Borough’s Port MacKenzie Rail Extension project will continue. The 32-mile rail line to the deepwater commodity port needs about $100 million to be finished on schedule in 2016, according to borough officials. Parnell appropriated $5 million for it in his budget. A 7 million-gallon fuel storage facility built by Central Alaska Energy LLC is set for construction at Port MacKenzie this year. The Northern Rail Extension and bridge across the Tanana River east of Fairbanks should be completed on time later this year, Alaska Railroad Corp. officials have said. Federally, the Army Corps of Engineers will continue work on its plan for a deepwater port in Western Alaska, according to Lorraine Cordova, project manager for the Corps. The port would serve as a base of operations for maritime emergency response in the Arctic and potentially as a hub for offshore oil and gas exploration in the region. After starting with 14 possible port sites along the state’s Northern and Western coasts, the Corps of Engineers has narrowed its options to a handful of locations on the Seward Peninsula. A final port design is expected to move to Washington, D.C. for approval by Corps of Engineer leadership late this year and possibly on to Congress for budgeting in early 2015. Elwood Brehmer can be reached at [email protected]

Labor Department program recognizes workplace safety

Workplace safety is a topic that can rear its head for all the wrong reasons — typically after an accident. A partnership between the State of Alaska and the federal Occupational Health and Safety Administration tries to make workplace safety a positive subject matter. The Department of Labor and Workforce Development Voluntary Protection Program, or VPP, certifies companies with exemplary safety records. The latest to be recertified was BP’s Exploration Alaska Central Power Station facility in Prudhoe Bay. “The VPP Star recertification is a testament to our team’s proactive commitment to safety. We have embedded this culture into the fabric of our facility and the team members are very proud of their accomplishment,” station managers Art Milan and Michael Dobesh said in a formal statement. VPP Star-rated sites are exempt from random workplace inspections for five years, program coordinator Dave Guinn said. Merit-rated sites are exempt from such inspections for three years. Companies still need to file annual reports with the department, he said. “We don’t just walk away for five years,” he said. The program is a “partnership” between the employer and the state that can improve already strong safety programs, Guinn said. “The whole ideas is to focus on hazard prevention and control,” he said. According to the state Division of Labor Standards and Safety, VPP certified companies average 52 percent fewer jobsite accidents than their industry counterparts. The State of Alaska adopted the OSHA-supported program in 1997. The federal program was started in 1982. To qualify, an employer must first maintain injury and illness rates below Bureau of Labor Statistics standards for their industry, Guinn said. A Labor Department team then reviews the applicant’s workplace safety program and conducts a site visit prior to ruling on the application. Guinn said full company commitment from management through every employee is required to meet VPP standards, along with an effective safety policy. “VPP is no small thing. The kind of things we’re asking for involve quite the commitment,” he said. Currently, 12 companies are certified at the Star level, the majority of which are ancillary groups of oil and gas companies. Guinn said the reason for that is twofold: The inherent dangers of the oil and gas industry require a strong safety culture and formal safety guidelines, and the typically large companies in the industry have the resources to devote to safety programs that meet VPP standards. Other VPP Star certified organizations include Air Logistics of Alaska Inc.; environmental services firm Alaska Clean Seas; Insulfoam Inc; Fairbanks Memorial Hospital; and seafood processor UniSea Inc. Elwood Brehmer can be reached at [email protected]

State, small businesses weigh in on health care strategies

While the battle over the Affordable Care Act had the federal government shut down, health care industry experts and affected groups gathered in Anchorage Oct. 4 to the future of discuss health care in Alaska. The State of Reform health policy conference began with an overview of the state’s AlaskaCare and Union Health Trust insurance plans for its employees by Department of Administration Commissioner Becky Hultberg. In total, Hultberg said the State of Alaska has spent approximately $700 million annually to fund health insurance plans for its active and retired workers in recent years. The cost of providing coverage to the state’s roughly 17,000 active employees and their families has more than doubled over the past decade from $117 million in fiscal year 2003 to $256 million in 2012, she said. In fiscal year 2014, which began July 1, Hultberg said the state is expected to spend $16,600 per employee on health care. Part of that cost, she said, is due to the benefits some state workers receive under their insurance plans. Nationwide, private employers pick up about 70 percent of the health insurance cost burden for their employees. For public employers the number is near 80 percent, according to health insurance studier and nonprofit the Kaiser Family Foundation. For some State of Alaska employees, it’s even higher. “Our employees on a basic plan have no premium share,” Hultberg said. As Baby Boomers continue to retire the cost to Alaska will grow as well. The number of retirees insured by the state is expected to increase 50 percent from 40,000 to nearly 60,000 over the next 10 years. Hultberg said the final tally for the state’s retiree insurance bill this calendar year will likely exceed the half-billion dollar mark for the first time. That cost multiplies over time. “(Alaska) has a $12 billion — that is billion with a ‘B’ — unfunded pension and health insurance liability for our retiree pension and health plans,” she said. “Of that $12 billion liability, $4 billion is related to our health plan.” The state is looking at ways to curb those costs down the road, Hultberg said, by revamping portions of the health plans it provides. Beginning in January 2014, the state will be working wellness and disease management programs into its health insurance plans in an effort to reduce high-cost claimants and those individuals who need extensive medical care. Hultberg said the state experienced a roughly 20 percent spike in claims in the thousands of dollars in 2012, and with an aging population, that is not viewed as a fluke. The wellness program will encourage healthy lifestyle choices for plan participants common to such programs. Ending tobacco use, well-rounded diets and stress and weight management, among other areas of health will be emphasized, Hultberg said. Wellness is seen as a form of preventative care, she said. The disease management program will offer help in dealing with 42 long-term conditions, including prolific types of cancer, arthritis and other health challenges often incurred later in life. To further educate state plan participants on how to best spend their health care dollars, Hultberg said the health insurance call center’s role would gradually be expanded to a “concierge services approach.” The goal is to help callers make cost-effective decisions regarding their medical care providers by having trained staff with easy access to participants’ profiles, she said. “We want to transform our call center from just being a place where you call and get answers to questions to really a decision support tool,” Hultberg said. Also in January, the state will offer use of the iTriage smartphone app to its health coverage participants. Hultberg said the app provides information that can help users identify symptoms and take the appropriate treatment measures, as well as highlighting in-network doctors and medical facilities. By providing individuals with as much information as possible, iTriage will help those with questions make the most informed, cost-conscious decision they can, she said. “We need members to have really good tools right at the point where they’re making that decision about what care to seek,” Hultberg said. Looking ahead, the state wants to offer a consumer-driven health plan, or CDHP, by early 2015, she said. The hope is that by changing health plan designs and giving plan participants more direct control over their health care dollars individuals will be more aware of the money they’re spending at the doctor, according to Hultberg. While the details are still in flux, she said the outline of the plan comes with a higher deductible, but allows plan-provider money to be “banked” by participants in health savings accounts. “We’re going to give (participants) the resources to pay for a higher deductible, but then we’re going to ask them to be accountable because those dollars can carry over,” Hultberg said. “Those dollars are in their hands and those dollars can be saved.” According to the Department of Administration, the “Economy” health care plan offered by the state for the 2013 fiscal year, which ended June 30, had a $500 deductible for an individual plan and a $1,000 deductible for families. Hultberg said Alaska may look to model its CDHP after one Indiana first implemented in 2006. Per Indiana’s plan, the state contributed 45 percent of a $2,500 deductible for individuals and $5,000 deductible for families to a health savings account. By 2010, she said Indiana’s yearly savings averaged 10.7 percent, employees were collectively saving up to $10 million, and health savings accounts had an average balance of about $2,000. Small business strategies As the Jan. 1, 2014, full-implementation date for the Affordable Care Act draws closer, Josh Lewis, senior manager for the Seattle-based accounting firm Moss Adams, said there are opportunities for small employers to take advantage of the complex law. Some small business owners may try to save money by actually dropping insurance and incurring the subsequent penalty, he said. “If you currently have health insurance and you decide to drop it, you will likely save money, whether that’s the right decision or not,” he said. Employers with 50 or more full-time equivalent employees, those that work an average of 30 hours or more per week, are mandated to provide health care to full-time workers under the law, although that requirement has been delayed until 2015. The penalty for not buying a group health plan often calculates out to be less than the insurance, Lewis said. The tax for not offering coverage for up 95 percent or more of a qualified workforce is $2,000 per full-time employee, minus the first 30 employees. For instance, a business with 100 employees and no insurance plan on Jan. 2 would incur a $2,000 penalty for 70 employees totaling $140,000. While the penalty is $2,000 per employee, the national average employer premium contribution for a basic family health insurance plan in 2012 was $10,700, according to The Kaiser Family Foundation. The charge is similar for non-qualifying health plans where the employer covers less than 60 percent of the premium or an employee must pay at least 9.5 percent of their income towards their health insurance premium. Under the non-qualifying plan penalty, the per employee charge increases to $3,000 for every worker that receives a subsidy through a state or federal exchange. Terry Allard, a senior advisor for the benefits consulting firm The Wilson Agency said some employers who are choosing not to enroll in a health plan may rather offer a stipend to employees for purchasing individual insurance. In most cases, the money would be a portion of the difference saved by not offering health insurance and instead incurring a penalty. In January, “you don’t have the risk as an employer of having someone with a preexisting condition that can’t get coverage,” Allard said. Not offering coverage may be a money-saver in 2014, but increasing penalty charges could change that in future years, Lewis said. Very small businesses could benefit from a tax credit that is already in place, but will be adjusted after the New Year. The small business tax credit has been available since 2010 and offers up to a 35 percent credit this year on health insurance costs for employers with less than 25 full-time equivalent employees. In 2014, the available credit increases to 50 percent. Further, those employees must have an average salary of no more than $50,000 and half of the insurance premium must be paid by the business. Also, next year a health plan must be purchased through the federal small business health option, or SHOP exchange to qualify for the tax credit. Elwood Brehmer can be reached at [email protected]

Interior Department pilot payment system a success so far

A revised payment system implemented in May for Department of the Interior vendor pilots in Alaska seems to have done its job — it’s kept the pilots paid and flying. “Most of the vendors were paid within 72 to 96 hours from the time we got the invoice,” during this flying season, said Mark Vaughn, a National Park Service contract administrator in Anchorage. Vaughn said it was a rare exception for a vendor pilot to wait up to 15 days to be paid after the Park Service received an invoice for work. Last year, a complex electronic payment system within the department largely failed and left some small Alaska flight services being owed upwards of $250,000 by Interior Department agencies. Alaska Air Carriers Association Executive Director Joy Journeay said at the peak of the problem the number of vendors owed thousands of dollars was in the “dozens.” Changes in the payment system cut out procedures that sent paperwork and money to the Interior Department offices in Denver and Boise, Idaho. With money for Alaska operations being kept in state, Vaughn said Interior agency staff that handle the transactions, such as himself, were able to be more responsive to their vendors’ needs. Additionally, Vaughn said a big improvement in the system was allowing work invoices to be flexible, rather than for specific flight times, as had been done in the past. “We stopped going day-of-flight and started doing timeframes, which was better for the vendors and much better for us,” Vaughn said. “That way we could say we need to fly sometime ‘in here’ and when we had a weather break we could fly rather than saying we need to fly on the 25th, for instance.” Some flight services changed their business practices and stopped flying for the department prior to having office work completed after what happened last year, a move that also helped remove confusion from the system, Vaughn said. Journeay said she spoke recently with the officials in the Alaska Region office of Interior’s Office of Aviation Services and was told that the department had no long-term outstanding payments. After performing an informal survey of Association members, Journey wrote in an email that there are lingering issues with entering data into the electronic payment system, but vendors are getting paid in a timely fashion. The changes to the payment system were made specifically in Alaska after Interior agency directors in the state sent a letter in September 2012 to Interior Business Center officials in Denver requesting a procedural changes similar to the ones made. The letter stated that the “Alaska DOI bureaus spend $29 million annually, or approximately 47 percent of all DOI aviation expenditures nationwide.” At the time it noted that some vendor payments were as much as two years behind. Further, the letter noted that some pilots had flown in “good faith on verbal approval” that they would get paid when the payment system went awry and that the blanket system had damaged Interior’s credibility in Alaska. The high demand for aircraft services, combined with unpredictable Alaska weather prompted the Alaska-specific trial program. By “Alaskanizing” the system, Vaughn said everyone involved is now on the same page. After learning of the payment delays last fall, Sen. Mark Begich wrote a letter to then-Interior Secretary Ken Salazar requesting prompt action to get Alaska pilots paid. After involvement from the state’s whole congressional delegation on the issue, the department reported it was caught up on payments in April.  Vaughn said money had been appropriated to pay vendors for late summer work in preparation for the federal government shutdown that began Oct. 1. The next step is to determine whether the program becomes moves from trial status to standard procedure in Alaska. When the government restarts and Interior officials get back to work he said they would meet and discuss the 2013 flying season and how the system can be further improved. He hopes it stays in place, Vaughn said, and he’s encouraged by the positive responses his agency has received from vendors this year. “One of the measures is kind of how much do you get yelled at and this year I didn’t get yelled at at all so that’s good,” he said. “Last year I couldn’t say the same thing.” Elwood Brehmer can be reached at [email protected]

Material cost, limited land makes tight commercial market

The demand for commercial real estate in Anchorage is high and the availability is low was commercial broker Brandon Spoerhase’s message to the Anchorage Chamber of Commerce at its Aug. 5 Make It Monday forum. Spoerhase, a broker for Jack White Commercial, told the chamber that the current vacancy rate for large industrial space is at 3 percent, with about 580,000 square feet available for lease in the city. “Industrial (space) is by far the tightest product on the market, and it’s a direct result of the fact that it’s difficult to find quality clear-span, clear-height space for tenants,” Spoerhase said. He said new industrial developments are slow to materialize because of a lack of available land in the Anchorage Bowl and the cost of building materials. For building new industrial space to be feasible, a property owner would generally have to charge more than $1.50 per square foot on a triple net lease, or an agreement where the tenant pays the facility’s taxes, insurance and maintenance in addition to standard rent and utility costs. Class A office space is running at 5.3 percent vacancy and Class B is harder to come by with 3.5 percent of the market space available, Spoerhase said. “There are very few options left in excess of 10,000 square feet (of office space),” he said. Nearly 750,000 square feet of “flex” office and warehouse space is available in Anchorage, Spoerhase said, meaning that market is at 4.3 percent vacancy. Citywide there is about 930,000 square feet worth of office space in various stages of development, but not all of it will be available for lease, he said. Cook Inlet Region Inc., which recently announced it would be moving its corporate headquarters to a new office complex on the corner of Fireweed Lane and the Seward Highway in Anchorage’s Midtown, will occupy about 40,000 square feet of the 60,000 square feet available. The remaining space will be leased out, Spoerhase said. With the movement of wholesale retailer Sam’s Club from its Penland Parkway location to the Tikahtnu Commons development in Northeast Anchorage, the former Sam’s Club building on Penland has been purchased by the State of Alaska for $16.1 million, he said. When revamped, the property will house the state Geological Materials Center and provide 30,000 square feet of office space. The total project cost is estimated at $24 million, Spoerhase said, and Wal-Mart Stores Inc., Sam’s Club’s parent company, donated $2.5 million to the project. Despite a squeeze on easily developable land, Spoerhase predicted growth in commercial development. “I think we’re going to see a big commercial bounce from oil tax reform in the next two years. There are several groups looking to develop six to eight-acre sights as a direct result of the tax reform,” he said. Adding quality fill to sites with marginal soil is becoming an increasingly common way to expand developable acreage in the city, he said. Replacing poor, highly organic soil with buildable fill averages about $1.35 per square foot, Spoerhase said. Retail The market for existing retail space is running about $1.50 per square foot triple net, Spoerhase said. New retail is commonly being leased for $2.65 per square foot triple net and space in Tikahtnu Commons is going for upwards of $3 per square foot, he said. Spoerhase announced that Walgreens pharmacy company has plans to open a fourth Anchorage location on the corner of Lake Otis Parkway and 88th Street and that national restaurant chain Texas Roadhouse will be opening its first Alaska location in Tikahtnu Commons around the end of the year. Construction of sporting goods giant Cabela’s new 100,000 square-foot store on C Street in South Anchorage has spurred nearby projects. According to Spoerhase, the 27-acre parcel of undeveloped land on the west side of C Street, across from the Cabela’s location, is in the early planning stages for retail development. The Cabela’s store is set to open in the spring of 2014, according to the company. Bass Pro Shop’s, which is opening its first Alaska store in Northeast Anchorage’s Glenn Square, has moved its opening date back again, Spoerhase said. The store was original planned opening in June of this year was first revised to this coming October. “(Cabela’s) main competitor Bass Pro is pushing back their opening at Glenn Square until early 2014 as their construction schedule of opening this fall was, I think, a little aggressive for construction in Alaska,” he said. Elwood Brehmer can be reached at [email protected]

FAA radio rules in area of 2011 crash nearly standardized

Uncertainty amongst pilots over proper radio frequencies west of the Susitna River is being resolved more than two years after a midair collision involving aircraft using different frequencies killed a family of four. “The confusion over (Common Traffic Advisory Frequencies) CTAFs has been that small airports west of the Susitna were given different frequencies about five years ago, and the areas of differing frequencies overlap,” Alaska Air Carriers Association Executive Director Joy Journeay said. The issue had tragic consequences July 30, 2011, over Sister Lake, near Trapper Creek when a Cessna 206 taking off from Sister Lake Collided with a Cessna 180. The Cessna 180 crashed and all four onboard were killed. The pilot of the Cessna 206 was able to fly to Anchorage for help after radioing to report the collision. A May 2013 National Transportation Safety Board report on the incident found that the pilot of the 206 was on CTAF 122.8, while the 180 pilot was using CTAF 122.9. The report does not assign fault to either pilot. Both were headed to land on Amber Lake, less than a mile from the crash. A review of the Federal Aviation Administration’s Supplement Alaska handbook and official chart for the area show conflicting instructions as to the correct radio frequency to use. The handbook and charts are both required to be onboard an aircraft during flight to comply with FAA regulations. The chart calls for CTAF 122.9 to be used over much of the flat west of the Susitna and specifies the frequency to be used May 15 to July 15 around the Deshka River Recreation Area, a popular flight path during king salmon season. Several private airports in the area are assigned CTAF 122.8, according to the chart. Page 402 of the Supplement Alaska reads as follows for the Matanuska-Susitna Borough: “CTAF assignment generally is accomplished according to the following: Airports south and west of the Parks Highway are assigned 122.8. Airports north and east of the Parks Highway are assigned 122.9.” Journeay said she’s been told by FAA officials that page 402 of the handbook, which is updated quarterly, will be removed in future printings and that future charts will be corrected. Until then, the discrepancy will still exist. FAA officials did not respond to requests for comment in time for this story. Air Carriers board member Danny Davidson said for years the area was understood to be a 122.9 area. Davidson operates his flight service, Davidson Aviation, out of Anchorage and lives near Trapper Creek. “The confusion, today, is still in effect. Pick a number,” Davidson said. Journeay said the Air Carriers Association brought the issue to the FAA’s attention shortly after the 2011 crash, and began taking action again this spring when association members said it had not been resolved. She added that the association’s members have been in consensus for two years that the area west of the Susitna River should be a 122.9 area. When it was brought to the attention of Anchorage FAA officials in the Airports and Flight Service divisions this spring that nothing had been done regarding the CTAFs, Journeay said action began immediately. She attributed the lack of response to “red-tape and inner-government process.” Elwood Brehmer can be reached at [email protected]

Pitch-on-a-Train brings entrepreneurs, investors together

The summer scenery of Turnagain Arm, plus the nostalgia of a train ride, plus lunch at a world-renowned resort equals what? Undoubtedly the perfect setting for conducting business. The Anchorage Economic Development Corp. team combined those elements with investors and some of Alaska’s most promising entrepreneurs to form the first annual Pitch-On-A-Train business competition. The Aug. 1 event was the third leg of the group’s four-part Alaska Entrepreneurship Week, which ran from July 25 to Aug. 4. Five emerging startups were invited to present their ideas to a panel of eight Alaska business leaders and investors in the friendly competition as the Alaska Railroad train headed from Anchorage to Portage. Each person or pair was allotted five minutes to make their pitch. Altogether, 80 people gathered to take a train ride and do a little networking. Anchorage’s Brian McKinnon, with his company Aknuna Technologies and patent-pending design for a sealed high volume industrial fueling system, won the Pitch. In addition to the $5,000 business startup package, which included internet and phone plans and free advertising consulting, McKinnon said he came away with something even more valuable — dozens of business connections. “I think every single person that was involved is going to make it,” McKinnon said. “There were no losers (in the competition).” Other participants had beginning ventures in ranging fields. ArXotica is a Bethel-based is a company with skin-care products that incorporate salmon oils and extracts from native Alaska plants. Airlite Inflatable Snowshoes of Anchorage offers a patented inflatable snowshoe designed to be packed away for backcountry emergency situations. GearSpoke is an online gear rental startup that provides individuals with outdoor gear with a marketplace to rent their canoes, tents or skis when they aren’t in use. Finally, RLB Productions presented an idea for a reality TV show centered on what Alaska bed and breakfasts and resorts prepare for their guests. McKinnon said he had several contacts that could help his fellow participants and that their connections circled around. “We’re all going to be supportive of each other,” he said. AEDC Vice President John Bittner said the goal of the morning-long event was to enable the participants and spectators alike to make new connections. “What we were hoping would come out of this was, with putting the participants in the room with that collection of investors and business leaders and bankers — that they would really be able to hone in on, ‘OK, here’s what I’m good at, here’s where I need a little work and here are the people who can help me.’ And I think that is really what came out of this,” Bittner said. The format, with each pitch being made in front of the investor group gathered around a long table, mimicked an investor meeting or sales pitch to a large company, McKinnon said. After being the keynote speaker at AEDC’s economic forecast luncheon the day prior, Gallup Inc. CEO Jim Clifton rode the train to Portage and hopped the bus to Girdwood for lunch at Alyeska Resort with the rest of the group. Clifton said he has no doubt all five ideas can be successful, it’s whether or not the entrepreneurs are able to survive the tough beginning, or “winter season,” as he called it, that every business faces. He noted that AEDC’s encouragement of startup businesses could go a long way towards their eventual success. “I think what you see here is what every city’s got to do,” Clifton said. “It’s more about the energy and the engagement of the leaders because what you’re really trying to do is grow the entrepreneurial spirit.” Longtime Alaskan entrepreneur and head of angel investment firm Alaska Venture Partners, John Wanamaker was one of the panel of eight that judged the Pitch participants. Simply meeting and brainstorming with like-minded individuals is extremely beneficial for early-stage entrepreneurs, he said. “(The train) was a good environment. People were mixing and that in and of itself creates an environment for collaboration,” Wanamaker said. The participants were chosen because they had won or finished high in local or state emerging business competitions, Bittner said. McKinnon won the 2013 Alaska Business Plan competition in April with Aknuna Technologies. The ArXotica team recently received a $5,000 investment from Kiva, a crowdfunding website. His next step is finding investors that fit with his vision, McKinnon said. If he can raise the $400,000 he estimates he needs to start producing the fueling system, McKinnon hopes to be selling them to North Slope producers within six months, he said. “It’s a matter of finding the correct investors,” he said. “I’m going to spend the rest of my life with these people. I’d really like to find the right ones.” Wanamaker said he applauds what AEDC has done to showcase Alaska’s innovative and daring entrepreneurs. “I think (AEDC has) done more for entrepreneurs in the last year, year-and-a-half in particularly technology fields — they’ve brought a certain velocity to the environment that hadn’t existed before,” Wanamaker said. Elwood Brehmer can be reached at [email protected] 

Zender wins environmental training grant for rural cleanup

June 20, 2013 A $200,000 Environmental Protection Agency grant will allow Zender Environmental Health and Research Group continue its environmental technician training program for unemployed rural Alaskans. Lynn Zender is the founder and executive director of the Anchorage-based nonprofit. “We recruit residents from rural Alaska villages to train them as environmental technicians to work within their communities,” Zender said. The training is focused on protecting local environmental health, she said. Trainees are instructed in proper contaminated site cleanup procedures, oil spill response and home and bulk fuel tank inspection. A large portion of the training is centered on solid waste disposal and landfill compliance. Zender said the isolation of many rural communities presents challenges for proper trash handling. “Rural Alaska villages deal with landfill issues not found anywhere else in the country,” she said. The 32 students are chosen after completing a detailed written application and a phone interview, Zender said. From there the applicants’ files are reviewed by a panel of EPA and Zender officials for final approval. “It’s a pretty arduous (application) process,” Zender said. A thorough application process is needed to assure those selected will complete the training, which can get challenging. The training consists of two intense two-week periods conducted over six weeks with a two-week break during which students can return home or stay in Anchorage where the courses are held. Zender said to get 168 hours of training into four weeks courses are conducted for up to 10 hours a day, six days a week if necessary. The application process for this round of training will begin in fall and courses will start in February 2014, Zender said. The group was awarded a similar grant in 2012 and conducted two rounds of training in 2012 and early this spring, she said. “Part of our program is to follow-up with our graduates for a year afterwards and help them with job placement,” Zender said. Most graduates gain employment with local governments or regional corporations, she added, in jobs with an average wage of about $18 per hour. Travel expenses for the students covered through the state Department of Labor and Workforce Development’s State Training and Employment Program, or STEP. Zender Environmental was officially awarded the grant on June 13 as a part of more than $3.2 million in EPA Environmental Workforce Development and Job Training grants awarded nationwide, according to an EPA press release. Zender was one of 16 groups throughout the country to receive such a grant, part of the agency’s larger Brownfields Grant Program. “These grants are provided to local community job training organizations that have demonstrated partnerships with employers who have expressed a willingness to interview and hire graduates,” EPA Assistant Administrator Mathy Stanislaus said in a release. “I am happy to continue to support this important and tremendously successful EPA program that has successfully placed more than 71 percent of program graduates in environmental careers since the program’s inception in 1998.” Mary Goolie, EPA project officer for Zender Environmental, said Zender’s job placement rate is higher still, at 88 percent for the program about to enter its third year. She added that such a high percentage of the 35 graduates from the two previous training courses found work because Zender Environmental did its homework ahead of time. “(Zender Environmental) surveyed Alaska employers as to what kind of training they needed to hire people in their communities,” Goolie said. She added that the preparation helped the organization win what she called a “highly competitive” grant. Elwood Brehmer can be reached at [email protected]  

Insurance rates drive high costs for state workers' comp

June 23, 2013 A team from the Alaska Workers’ Compensation Board traveled the state June 17 to 20 holding public meetings to discuss rising medical costs associated with on-the-job injuries. “At our main meeting our board decided it wanted to get out in the community and get feedback from employers, employees, from doctors, from attorneys — from the stakeholders in the workers’ compensation system,” state Division of Workers’ Compensation Director Mike Monagle said at the June 18 Anchorage meeting. Other meetings were held in Fairbanks, Kenai and Juneau. Alaska’s total workers’ compensation system costs were $270 million last year, according to division statistics. A biannual study done by the state of Oregon found that Alaska carries the highest workers’ compensation insurance premium rates in the country, despite a 3 percent drop in premiums in 2012. In 2000, Alaska ranked 28th in workers’ compensation premium rates, but by 2006 it was the most expensive state in the country. Since then, Alaska has been first or second. Monagle said rising insurance costs are not related to incident rates, which have dropped from more than 30,000 reported workplace incidents in 1994 to less than 20,000 last year. Over the same period employment grew by nearly 90,000 jobs to roughly 320,000 statewide, he said. “Employment’s going up, (incident) frequency rate is going down. This frequency rate is really important because it’s the only thing that has been keeping Alaska’s premium rates in check,” Monagle said. The Oregon study found Alaska’s premiums to be 160 percent of the national median. Premium rates for workers’ compensation insurance tend to be cyclical, Monagle said, and nationally rates have increased over the last two years. So the 3 percent in-state decline may not become a trend. Despite being cyclical, rates never return to their previous bottom, he said. Monagle reported that nearly 75 percent of “total lost costs” in 2012 associated with benefit claims were medical costs. Of the $260.7 million paid out in Alaska during 2011, $160.4 million, or 62 percent, was for medical benefits. Nationwide, medical benefits make up 59 percent of total costs, with indemnity, or lost work time accounting for the remainder, Monagle said. He called the annual 8 percent-plus increase in premiums nationwide “unsustainable.” “Today, in all states, medical is the big cost driver,” he said. Monagle broke medical costs down into three categories: fees, over-utilization and prescription drugs. He said specialty medicine costs are disproportionately high in Alaska. This includes treatments such as physical therapy and chiropractor visits. Some states have mitigated medical fees by implementing fee schedules, which help regulate what clinics and hospitals charge. Most states that have fee schedules are on the lower end of the cost spectrum, Monagle said. Alaska, which has a fee schedule, doesn’t follow the trend. He likened a fee schedule to car shopping. “You don’t go into a car dealership and offer to pay full retail, nobody does,” Monagle said. High treatment cost and high insurance premiums go hand-in-hand, he said. He declined to offer specific suggestions for further regulatory measures to curb premium costs but said Montana, which had been battling Alaska for the highest workers’ compensation costs in the country, recently instituted legislation that dropped it in the rankings. In 2010, Montana was first in total cost and by last year it had dropped to eighth, according to the Oregon study. Other states have also looked at ways to mitigate the over-use of expensive treatments to mitigate medical costs, Monagle said. “Most states are moving towards utilization guidelines,” he said. “For example, ‘for this diagnosis, this is the recommended treatment.’” He added that many of the doctors his division consults with do not receive workplace injury treatment training, thus they don’t view workplace injuries differently. Monagle gave the example of an individual with a broken ankle being told to stay home for several weeks to allow the injury to heal. While that may be an effective treatment, he said, it is possible someone in that situation could receive a boot or air cast and return to work in some capacity “off their feet” and save thousands of dollars in indemnity costs. Monagle said costs associated with prescription drugs account for 20 percent of medical benefits paid in compensation claims. He said strong, opioid painkillers such as Oxycodone can have a debilitating effect on injured workers prescribed them for intense pain. Monagle said the drugs were never intended for general use, rather they were designed as “end of life” treatment. The drugs are of particular concern in workers’ compensation cases because patients are highly susceptible to dependency and subsequent depression and other mental health issues, Monagle said. While a worker may be physically healed, they are then mentally unfit for work, he said. Monagle noted programs that require patients who have been on opioids for more than 60 days without signs of physical improvement to enter treatment programs to prevent dependency. On the flipside, several states have also instituted drug testing to assure patients prescribed powerful painkillers are actually taking them and not selling them “on the street for $100 a pill,” Monagle said. Alaska does not have such programs. He cited state figures that estimate prescription painkillers account for 40 percent of all drug costs in Alaska. Elwood Brehmer can be reached at [email protected]

Qualified mortgage rule still worries lenders after revisions

Despite federal agencies taking steps to tweak and adopt the qualified mortgage and ability-to-repay rules set to go into effect in January 2014, private industry officials are nervous about the impact they will have. Fannie Mae and Freddie Mac, the Federal Housing Finance Agency-run mortgage buyers announced in a May 6 agency statement that they will only purchase loans that meet the requirements for a qualified mortgage, or QM, when the rule is implemented. The pending regulatory changes are part of the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 in response to the housing market crash of 2008. To meet general QM requirements loans must be fully amortizing, or have a set pay-off timeline; have a term of 30 years or less; and have borrower fees less than 3 percent of the total loan amounts. Under nearly all circumstances “balloon loans,” or loans that must be paid off or refinanced before the loan term ends, do not meet QM requirements. “Adoption of these new limitations by Fannie Mae and Freddie Mac is in keeping with FHFA’s goal of gradually contracting their market footprint and protecting borrowers and taxpayers,” the Housing Finance Agency stated May 6. Denali Alaskan Federal Credit Union Vice President of Home Loans Jim Picard said some of the finer points of the regulations have changed after the Consumer Financial Protection Bureau, or CFPB, the regulatory agency in charge, put them out for public comment in late April. “What just changed, or was reinterpreted was the elimination of counting certain fees twice in the 3 percent (borrower fee) cap,” Picard said. “That seems pretty intuitive and pretty obvious, but we’re talking about a federal agency that’s making rules and putting them out for comment and seeing these rules aren’t practical and don’t work.” While lenders will not be required to issue loans under QM guidelines, loans that meet the requirements are referred to as “safe harbor” loans, which all but insulate lenders from possible predatory lending accusations. The rules will further constrict an already conservative lending market, Picard said. Changes could be coming to the ability-to-repay requirements as well. As the future regulation is currently comprised a borrower must prove a debt-to-income ratio of no greater than 43 percent. The basis of the requirement will still stand. The CFPB’s proposed revisions awaiting confirmation include removing requirements forcing creditors to determine the probability of a borrower’s continued employment. Rather, a creditor would just need to examine past and current employment status. A rule limiting income in-residence, or “roommate” rental income counted towards the 43 percent ratio to roommates “related by blood, marriage, or law” is also up for elimination, according to CFPB amendment documents. When the QM rules initially go into effect, a loan approved using Fannie Mae or Freddie Mac’s delegated underwriting may exceed the 43 percent debt-to-income cap, Picard said. However, that exemption is set to expire in 2021 and is an issue he called a “sleeping giant down the road.” “I don’t think a lot of people are getting concerned about something that will be taken away from us in seven years,” Picard said. Officials on the real estate side of the housing market have said the QM and debt-ratio rules will be devastating to a slowly rebounding but still fickle housing market. Picard said the reduced volumes of loans being handled now compared with several years ago will only diminish further with QM. The announcement that Fannie Mae and Freddie Mac will only accept QM loans adds to the challenge for individuals with good credit looking for loans that fall outside the debt or QM limitations. “If the demand is out there for QM loans, why would you stick your neck out there and do a non-QM loans that are going to challenge by the regulatory agency and the borrowers if they run into trouble down the road,” Picard said. He added that all of the private mortgage purchasers Denali Alaskan deals with have indicated they will not service non-QM loans in the near future. Some credit unions, such as Denali Alaskan, may continue offering portfolio loans, but those will be “few and far between,” he said. A portfolio loan is one that is kept on the originator’s books and not sold to a mortgage investment firm. The current low-interest rate climate makes issuing portfolio loans even more difficult, Picard noted. “We have to do what we can to lessen the impact of (QM) so we can still give loans to people with credit of good quality that may go over the 43 percent ratio,” Picard said. He estimated that about 10 percent of loans issued industry-wide currently don’t meet QM guidelines — something that will change and affect first-time homebuyers the most, Picard said. The 10 percent non-QM figure represents about 40 people per year not getting home loans through Denali Alaskan that would have previously, he said. At larger institutions the number of loan applications turned away could be in the hundreds to thousands a year, he said. “Ten percent is a big number given the fact that we’re nationally still trying to recover our housing market,” Picard said. “Another 10 percent is a few more nails in the coffin, so to speak.” Elwood Brehmer can be reached at [email protected]


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