Elwood Brehmer

Dunleavy budget includes $225 million cut to Alaska’s state share of Medicaid

Gov. Mike Dunleavy’s plan to cut upwards of $225 million from the state’s Medicaid budget would drastically reshape the overall health care system in Alaska, according to the leader of the state hospital and nursing home association. In his fiscal year 2020 budget released Wednesday morning, Dunleavy is proposing to reduce the state’s portion of Medicaid funding, which is expected to be $677 million in the current 2019 fiscal year, by more than 33 percent. Dunleavy has pledged to eliminate the state’s $1.6 billion budget deficit without new taxes while restoring Permanent Fund dividend payments to their statutory calculation. The PFD payment for the upcoming budget year is expected to be about $3,000 per Alaskan for a total appropriation of roughly $1.9 billion. “This budget is going to impact all Alaskans; it’s too big not to,” Dunleavy said during a news conference to announce his budget plan. Dunleavy has repeatedly said he wants to reduce state spending on Medicaid to a sustainable level. As of October, 210,276 Alaskans were enrolled in Medicaid or the Children’s Health Insurance Program, also known as CHIP, according to the Centers for Medicare and Medicaid Services. Office of Management and Budget policy director Mike Barnhill said in a press briefing following the release of the budget that most of the Medicaid cuts would come through reducing provider reimbursement rates. Barnhill emphasized that the administration is not proposing to eliminate coverage for anyone currently enrolled in the state’s Medicaid program. Instead, it’s working with the federal Centers for Medicaid and Medicare Services on new ways of providing Medicaid coverage at a reduced cost to the state. “Alaska reimburses providers under the Medicaid program at a higher rate than any other state in the country so we’re taking a close look at that and then we’re looking at different ways of treating and providing access to the expansion (Medicaid) population for medical care,” Barnhill said. State budget director Donna Arduin said Department of Health and Social Services Commissioner Adam Crum is also working on legislation “to revise our entire Medicaid program.” However, state Medicaid funds are tied to large sums of federal money. The federal government covers at least 50 percent of the costs generated by each Medicaid enrollee. Costs from traditional Medicaid recipients are covered 50-50 by the state and the federal government, while Medicaid expansion recipients are covered 93 percent by the federal government and 7 percent by the state this year. The Medicaid expansion cost share will shift to 90 percent federal and 10 percent state for 2020 and beyond. Alaska Native Medicaid claims are paid 100 percent by the federal Indian Health Service for care provided at a tribal health facility. According to the Legislative Finance Division, overall spending on Medicaid in Alaska has increased from $1.7 billion to more than $2.3 billion since fiscal year 2015, but the state’s portion of that has actually gone down from $724 million in 2015 to $677 million, which includes a $15 million supplemental budget request, in the current fiscal year. Those state savings have largely been attributed to shifting state costs to the federal government through Medicaid expansion and the Medicaid reform package the Legislature passed in 2016 with broad bipartisan support. Arduin said it’s unclear at this point exactly how much federal money the state would forgo with a roughly $225 million cut to the Medicaid program because the underlying details of the state’s plan are still being worked out. The overall DHSS budget would be cut by $364 million, or 30 percent, from current levels, according to budget documents. Alaska State Hospital and Nursing Home Association CEO Becky Hultberg said in an interview that people reviewing the governor’s proposal in her office would expect a total of at least $700 million in overall cuts to Medicaid based on a $225 million state cut. Hultberg was a former commissioner of the Department of Administration under former Gov. Sean Parnell. Pulling that much money out of Alaska’s health care system would “fundamentally restructure” it, she stressed. While the proposed cuts may improve the state’s bottom line, they would be extremely damaging to hospitals, particularly rural hospitals, if they are implemented through provider reimbursement rate reductions, according to Hultberg. “We had several small hospitals with less than 10 days’ cash on hand last year. They cannot sustain significant provider cuts without closing their doors,” she said. Alaska health care providers are reimbursed by Medicaid at some of the highest rates in the country because the state’s reimbursement rates are set to cover the cost of the service provided while other states pay less than the cost to cover individual services, Hultberg said. A study released Monday and commissioned by the Hospital and Nursing Home Association concluded that pulling roughly $420 million in Medicaid funding out of Alaska’s health care industry would result in nearly 3,700 jobs lost statewide; about 1,800 of those would come out of hospitals, private practice offices and other health care providers. That study looked specifically at Medicaid expansion funding, which many political observers thought Dunleavy would attempt to repeal. The state reduced Medicaid payment rates for professional services and hospitals by 5 percent to 8 percent in 2017. Further drastic reductions to provider payment rates would also result in fewer physicians and health care facilities accepting Medicaid patients, Hultberg added. “I think there’s either a lack of understanding of reality (by the Dunleavy administration) or a willingness just to make Alaska a poorer and less safe place,” Hultberg said. Alaska Primary Care Association Policy Director Jon Zasada said his organization is focused on the apparent consolidation — based on budget documents — of behavioral health, senior and disability services into the general Medicaid Services classification. APCA officials want to know if it is simply a budget reporting technique or an attempt to change or repeal the services. A spokesman for DHSS referred a request to interview Crum on potential Medicaid policy changes to a phone line in OMB dedicated to press inquiries about the budget. The phone line was unattended. Zasada noted that Medicaid reimbursement rates for the federally qualified health care centers the APCA represents are calculated differently than rates for hospitals or private practice physicians; however, those rates have been frozen for four years, he added. APCA officials are also concerned about a prospective $27 million cut to optional adult dental care coverage detailed in a supplemental budget document provided by the administration. Zasada said eliminating coverage for a preventative care program often just leads to more costly emergency care, which would then be covered by emergency service Medicaid funding. Critics of Alaska’s Medicaid program have often highlighted the fact that the state provides coverage for more optional services than nearly every other state as well. “To give you an order of magnitude, all of the services on the optional services list, which includes behavioral health, pharmacy, emergency department services, are about $100 million in general fund dollars,” Hultberg said. “So how you get to $225 million by cutting provider rates — I just shake my head.”   Elwood Brehmer can be reached at [email protected]

UA braces for budget cuts

University of Alaska President Jim Johnsen is preparing for the worst when Gov. Michael J. Dunleavy releases his budget plan Feb. 13. While budget specifics were not discussed, Johnsen said after several discussions with Dunleavy and his Budget Director Donna Arduin that he expects the university’s proposed budget cut to be “big.” “I would say it’s going to be a capital ‘B’ big,” Johnsen said during a Feb. 8 meeting with the Journal and the Anchorage Daily News. Dunleavy, Arduin and other administration officials have spent much of their first two-plus months in office preparing Alaskans for what their budget will look like without roughly $1.6 billion. They are committed to balancing the state’s budget — currently with an anticipated 2020 fiscal year deficit of about $1.6 billion — without tax hikes or changing the Permanent Fund dividend calculation, which were two pillars of Dunleavy’s campaign. Johnsen expects the state universities to be one of the areas that will take the brunt of the budget cuts because the university system is the state’s third- or fourth-largest budget item, depending on whether one lumps PFD payments with other state spending. “It’s going to be K-12, health and us to get to $1.6 (billion in cuts),” he said. The University of Alaska System is also one of the easiest places lawmakers to cut spending. Despite having three separate universities and 13 community campuses under its umbrella, the university system’s general fund budget support comes in one lump sum and it is up to Johnsen and the UA Board of Regents to allocate funding and implement the cuts. The state’s university funding also is not tied to any other statutory mandates — outside of the constitutional mandate to have a university — or funding formulas that would need to be changed to make cuts legal or workable within the Capitol. Whatever cuts Dunleavy proposes to the UA budget will come on top of significant cuts already. The state’s general fund support for its university system has fallen from $378 million in fiscal 2014 to $327 million currently. University funding bottomed out at $317 million in 2018 but last spring legislators agreed to add $10 million back in; at the time former Gov. Bill Walker was proposing flat funding but agreed to the one-time increase. Johnsen considers the budget cuts to total $195 million in overall forgone state support since 2014, which doesn’t account for inflation since then. Unrestricted state money accounts for roughly 40 percent of the total UA budget. The rest of the system’s funding comes from federal sources, tuition and student fees and other sources such as research grants. “For us, even the word, even the news of a significant budget cut has negative implications for us. It has negative enrollment implications, which takes away our ability to serve our mission for the state,” Johnsen said. “With enrollment comes tuition.” To that end, enrollment has fallen along with the budget in recent years. The total student headcount across the system was down 15 percent from fall 2013 to fall 2017, according to university figures. The university system has cut its workforce by 1,283 over the past four years and statewide administration has been cut by 38 percent over that time, according to Johnsen. Much of that was done under Johnsen’s multi-year “Strategic Pathways” initiative to reform the system’s operations and focus on strengthening the programs and other things it does best. He characterizes the state funding as the “seed corn” that allows the university system to carry out its multiple missions. “We’ve already taken $195 million in cumulative cuts but if this year-over-year cut is big then it’s, to quote Donna Arduin, ‘it’s doing less with less,’” Johnsen said. “Then it’s saying, really seriously folks, this campus, this college, this school, this service, this team — sorry, it’s going to need to go away.” He and the regents will do everything the can to avoid closing branch campuses that are often in remote parts of the state, but the concept of using them as “nodes” where students use content developed at the main campuses through distance learning has been discussed, Johnsen added. He has avoided talk about eliminating specific programs to avoid unnecessary worry among students as well as potentially deterring future students from enrolling. However, he now says, “if indeed the sky is falling I am going to yell and I’m going to say, this is what athletics costs; this is what KUAC (UAF public radio) costs; this is what Mat-Su College costs; this is on down the list and talk about it.” What cuts come will not be pro-rated among the three main campuses; they will be evaluated at a statewide level, Johnsen emphasized. One thing administrators will prioritize is the system’s research budget, which is weighted to Arctic research at UAF. Fairbanks is generally recognized as the world’s leading Arctic research institution. UAF’s Geophysical Institute has also served as primary testing ground for the Federal Aviation Administration’s work to integrate small, unmanned aircraft into the national airspace and allow the private sector to realize the advantages of the new and evolving technology. The drone work at UAF has also helped attract business startups in that realm to Alaska. UA leaders often stress that state research support returns $6 to Alaska for every $1 invested. “If you have a revenue generator like that, that actually adds to your international reputation and the quality of what happens in your classrooms and your labs you’re going to try to reduce the impact there,” Johnsen said of research funding. While the expected magnitude of Dunleavy’s proposed cuts have many across the state waiting anxiously for the release of the budget — and many others waiting eagerly — legislators will also have their say as to what future state spending will look like. In conversations with legislators Johnsen said there are naturally those who are opposed to the governor’s plan. Others, even some who he characterized as “fiscal hawks,” are skeptical that the administration can find another $1.6 billion to cut from a budget that has already been reduced about 40 percent from its peak. Others exude “resignation,” Johnsen said, given Alaska’s governor has the authority to line item veto appropriations. That authority could mean that Dunleavy vetoes appropriations back to his proposed level regardless of what the Legislature does. Dunleavy has said he wants to work with the Legislature to rebuild the state’s budget. A final group of lawmakers is resigned for a different reason, according to Johnsen. “Maybe the average citizen in Alaska needs to experience what likely would come from a $1.6 billion cut to get it, to understand — maybe it’s too big a role — but to understand the very important role that government plays in Alaska’s economy,” he described. “so that was interesting to hear.” Dunleavy and Arduin discussed possibilities for supporting the university with Johnsen through fulfilling its land grant entitlement or tying funding to performance outcomes, the latter of which California did when Arduin worked there. He is supportive of those concepts, but they are very long-term, Johnsen said. He did note that legislators and administration officials don’t seem to be holding the UAA School of Education accreditation issues against the system overall. “There were serious issues there; the leadership issues have been addressed; the curricular issues are being addressed,” Johnsen said of UAA losing its initial education licensing accreditation. “The primary concern right now is taking care of those students and making sure each and every one of them has a path to licensure from an approved program.” UAA’s advanced and specialized education licensing programs, such as those for a principal license or special education certification have not been impacted, he added. Whether or not UAA will go through the multi-year process of reapplying for its lost accreditation is unclear at this point. Administrators are still gathering information to answer that question. If the decision is ultimately not to reapply, undergraduate education students at UAA could get degrees through UAF or UAS from Anchorage in much the same way the system runs its nursing school. “If you’re sitting in a nursing class in Fairbanks, the faculty member and the students are UAA students, the same in Juneau; so nursing education is done across the state by UAA, so we know how to do this,” Johnsen described. Regardless of what the answer is to that question, it would undoubtedly be made more difficult by another significant budget cut. Johnsen acknowledged his frustration regarding what he sees as a “culture of complacency” in Alaska and a corresponding feeling of entitlement, which other prominent leaders in the state have expressed recently as well. “It is frustrating there’s no doubt about it when the dominant thinking in the state is ‘me, now’ as opposed to ‘us, later,’ which is sort of our business, right?” he said in reference to Dunleavy’s pledge to pay $1.9 billion in PFDs while cutting $1.6 billion elsewhere. “We’re in the business of preparing people to create the future of our state.” Still, he said the university will ramp up marketing for its college savings fund around PFD time next fall. And when the politics and bureaucracy and other challenges of his job start to strain his nerves, Johnsen goes back to the root of the issue. “When I get sort of to the end of my rope I’ll ask my assistant to get me into a class somewhere here at UAA, or UAS or a rural campus or up in Fairbanks and then you get why we’re here,” he described. “Or you meet with some researchers and they start talking about what they’re doing with drones or with sea ice or with you name it; and you just go ‘Wow, this is cool stuff. This is exciting; we need to keep fighting for this.’” Elwood Brehmer can be reached at [email protected]

Murkowski leads major lands bill through Senate

Sen. Lisa Murkowski was happy to talk with reporters after shepherding the first omnibus lands bill package through the Senate in years with overwhelming support. The U.S. Senate passed the Natural Resources Management Act Feb. 12 on a 92-8 vote. The legislation addresses a plethora of “small matters that in local communities can really make a significant difference,” Murkowski said in a conference call with Alaska reporters. “When we can come together on a bipartisan basis — move something out of the Senate 92-8 — it is a pretty significant win,” she said. “I think it’s a pretty historic day really when it comes to our public lands.” The Natural Resources Management Act is a compilation of about 120 individual lands bills dealing with issues nationwide. It’s the first public lands package to pass the Senate in five years, according to Murkowski. While much of what it deals with are “small, parochial” matters, as Murkowski characterized them, it also permanently reauthorizes the popular Land and Water Conservation Fund and declares an “open unless closed” policy for recreation activities on most federal lands. Murkowski, who chairs the Senate Energy and Natural Resources Committee, introduced the legislation Jan. 9. Using military training exercises on Bureau of Land Management tracts in the Interior as an example, she said areas that need to be closed to hunting and other activities for such a reason will only have access restricted for specific periods and not without explanation. The process for notifying the public about a given federal lands closure will be spelled out in regulations. “Our public lands are going to be designated as open for public use unless specifically closed, so this is significant in that regard,” Murkowski said. The bill also reforms and makes permanent the longstanding and popular Land and Water Conservation Fund. Congress established the LWCF in 1964 as a way to offset impacts from oil and gas development. Revenue from federal offshore oil and gas leases in the Gulf of Mexico is allocated to the fund and used for land and water restoration, parks, trails and other conservation projects across the country. The LWCF has funneled approximately $3.9 billion to support more than 40,000 projects covering nearly 2.4 million acres in every county in the country since its inception, according to the Interior Department. The National Geologic Mapping program, run by the U.S. Geological Survey, is also reauthorized for five years under the bill. Specifically to Alaska, the Natural Resources Management Act is an attempt to resolve several long unresolved issues. Notably, it would allow for Alaska Native veterans of the Vietnam War to finally receive the allotment entitlements they missed out on selecting when Native lands claims were settled in the early 1970s and they were serving overseas. Murkowski said the issue applies to roughly 300 individuals and the bill lays out a specific course by which they can select their 160-acre allotments. “Now our Alaska veterans will be able to submit their selections in a very considered process, but one that will allow them to move forward,” she said. It provides a way for eligible family members of deceased veterans to select allotments as well. The provisions in that portion of the Natural Resources Management Act were largely introduced by Sen. Dan Sullivan in the Alaska Native Veterans Land Allotment Equity Act he introduced in the last Congress. Sullivan thanked Murkowski and former Interior Secretary Ryan Zinke for working on the issue and Rep. Don Young for gaining support to resolve it in the House in a Feb 12 statement from his office. “For decades, a group of special Alaska veterans have suffered an injustice due to their service during the Vietnam War. My colleagues and I today took a significant step towards righting this wrong and ensuring Alaska Native vets have an opportunity to finally receive the land allotment they’ve previously been denied,” Sullivan said. The bill additionally includes provisions to provide flexibility for securing a natural gasline right-of-way through the eastern edge of Denali National Park and Preserve and requires the Interior Department and the U.S. Forest Service to study the impacts federal land acquisitions have had on Chugach Alaska Corp.’s ability to develop its land and come up with options for potential land exchanges with the Alaska Native regional corporation. It also repeals a federal prohibition on exporting unprocessed timber from lands conveyed to the Kake Tribal Corp, among other things. Today, much of the timber harvested in Southeast is exported directly to China. Murkowski said she and former ranking Energy and Natural Resources Democrat Sen. Maria Cantwell of Washington started working with Natural Resource Committee leaders in the House last year to gain support for the omnibus bill and make sure it gets to President Donald Trump’s desk. “Because of the way we handled this process — working again across the aisle and across the chambers — I’m feeling very good about its prospects on the House side,” Murkowski said.

Report touts benefits of Medicaid expansion; legislative lawyers conclude no rollback without statutory change

Repealing Medicaid expansion would pull more than a half-billion dollars out of Alaska’s economy and likely extend what is already the longest recession in the history of the state, according to an analysis commissioned by one of the state’s leading health care groups. The report for the Alaska State Hospital and Nursing Home Association concludes that repealing Medicaid services for the expanded class of eligible recipients from Alaska’s Medicaid program would have a negative economic impact of $556 million. In turn, Alaska would lose 3,690 jobs, according to the report done by Halcyon Consulting released Feb 11. More than 1,800 of those jobs would come out of hospitals, private practice offices, outpatient centers and other health care providers. Dental offices would lose an estimated 174 jobs, according to the report, while smaller, secondary impacts would be felt through job losses in the real estate, air transportation and other sectors. The next day, on Feb. 12, House Democrats released an analysis from Legislative Legal Services that concludes it would take a statutory change for Gov. Michael J. Dunleavy to roll back Medicaid expansion. According to the Legislative Finance Division, overall spending on Medicaid in Alaska has increased from $1.7 billion to more than $2.3 billion since fiscal year 2015, but the state’s portion of that has actually gone down from $724 million in 2015 to $677 million, which includes a $15 million supplemental budget request, in the current fiscal year. Economists generally expect Alaska will come out of the current recession, which started in late 2015, towards the end of this year. The state Labor Department is officially forecasting Alaska will add approximately 1,400 jobs this year after losing roughly 12,000 over the last three-plus years. However, if and when Alaska’s economy rebounds will largely depend on how legislators and Dunleavy resolve the state’s roughly $1.6 billion budget deficit projected for the 2020 fiscal year that begins July 1. The health care sector — partly driven by new Medicaid expansion funding started in fall 2015 — has defied overall state economic trends and added roughly 3,700 jobs, for about 11 percent growth, since 2015, according to Labor statistics. The longstanding policy debate over whether the State of Alaska should offer Medicaid to individuals who now qualify for it under the expanded eligibility guidelines of the Affordable Care Act has been at the forefront of state politics since former Govs. Sean Parnell first rejected Medicaid expansion in November 2013 and Bill Walker accepted it in 2015. The federal Affordable Care Act allows states to expand Medicaid coverage to cover uninsured low-income adults up to 138 percent of the federal poverty level. A 2012 U.S. Supreme Court decision struck down the ACA language requiring states to expand Medicaid and left it to each to decide whether to expand eligibility. Proponents highlight the fact that procedures and other costs for expanded-class Medicaid recipients are covered by at least 90 percent federal funding with a corresponding 10 percent state general fund match; a matching rate similar to federal transportation funding programs Alaska routinely attempts to maximize. Costs for more traditional Medicaid recipients are covered 50-50 by the feds and the state, while Medicaid coverage for Alaska Natives is paid 100 percent by the federal Indian Health Service. Expansion detractors argue the program simply adds to overall government health care costs for individuals — low-income, working-age adults — who were never intended to be covered by Medicaid when it began. There also are no assurances the federal expansion-class support won’t be arbitrarily reduced at some point, then leaving the state to pay more, they contend as well. Halcyon Consulting founder and longtime Alaska economist Jonathan King said in a formal statement that the projected negative impact of repealing Medicaid expansion would mostly be a result of lost federal funds. In the 2018 fiscal year the State of Alaska spent $15.6 million to match $404.5 million in federal funds to cover more than 50,500 Medicaid recipients under the expanded program. The federal funding rate has gone from 100 percent in 2016 to 93 percent in calendar 2019 and in 2020 will level out at 90 percent per year. Expanded-class enrollment estimates from before Walker unilaterally accepted federal Medicaid expansion funds in September 2015 ranged from roughly 43,000 more than 64,000. Economy and health care analysts also believe the ongoing recession has added individuals once covered by employee-sponsored health care to the state’s Medicaid rolls. “Elected officials can debate the politics of the issue, but not the numbers; economic analysis shows how rejecting these federal dollars would hurt Alaska’s economy,” King said. “Our economy is too fragile (to) absorb this size hit without extending the recession.” According to the report, strictly cutting Medicaid expansion would pull, based on fiscal 2018 figures, $420 million from the state budget, result in $283 million in lost wages from 4,041 fewer jobs across the state and have a cumulative negative economic impact of $627 million. However, the report presumes that a small portion of the expansion population would then find health insurance through another means, thereby lessening the net negative impact. Alaska State Hospital and Nursing Home Association CEO Becky Hultberg said she has not heard of any specific plans from the Dunleavy administration to repeal Medicaid expansion or make other wholesale changes to the state’s program, which includes many optionally covered services and procedures, but noted administration officials have stressed that everything is “on the table.” A spokesman for Dunleavy did not return a request for comment in time for this story. In addition to Walker accepting federal funding for Medicaid expansion in 2015 — then 100 percent federally funded — despite attempts by the Republican-controlled Legislature to stop him in court, in 2016 the Legislature passed a Medicaid reform package aimed at reducing the state’s annual bill. The state’s savings in that bill were estimated at the time to total more than $365 million over six years, with most of that coming from targeted efforts to and maximize the value of the state’s Medicaid matching funds shift state costs to the federal government. The state has also reduced its Medicaid reimbursement rates paid to providers. “I think the question for not just our state but for our country is: How do we take care of people and do it in a fiscally sustainable way?” Hultberg said. “We have lots of conversations about how we do one or the other but the reality is that we have an obligation to do both.” She added that the U.S. already provides health care to people who can’t afford it but that care usually comes via emergency departments; often the least effective and most expensive way it can be provided. Legislative Legal: Gov must accept expansion funds While the federal money for expanding Medicaid services was accepted with executive authority, the governor cannot selectively reject Medicaid funding without a change to state law, at least according to an opinion offered by the nonpartisan Division of Legislative Legal Services. The House Democrat-led coalition released a memo on Feb. 12 from Legislative Legal Director Megan Wallace that states, “given the precedent in Alaska, without a substantive law change, if the governor refused to accept all or part of the federal funding for Medicaid expansion, that act alone would not be enough to reverse Medicaid expansion.” The memo is dated Dec. 6 and addressed to then Rep.-elect Zack Fields, D-Anchorage. House Democrats emphasized the economic boost the federal money — nearly $1 billion so far — offers the state in formal statements. “Medicaid expansion has reduced the cost of uncompensated care at hospitals, which saves money for Alaskans who are covered by private health insurance,” Fields said. “Alaska’s leading business organizations advocated for Medicaid expansion based on a need to reduce uncompensated care and bring new investment to the state.” Gov. Walker in 2015 accepted the expansion money by invoking state statutes that call for all Alaskans who are eligible for federal Medicaid coverage to be offered that coverage and allow the governor to accept federal program recipients in excess of what the Legislature appropriated for as long as the appropriation was made in the budget. In other words, the governor can authorize the state to spend more federal money than the Legislature planned for as long as the new money is going to an existing appropriation. An Alaska Superior Court ruling upheld that authority in a subsequent lawsuit led by Republican legislators against Walker over the issue. However, according to Wallace, the governor cannot parse out and reject the Medicaid expansion funds — or any other subset of federal Medicaid funding for that matter — because all Medicaid funds are lumped together in a single $2 billion-plus “Medicaid Services” appropriation in the budget. “Medicaid expansion cannot be stopped through the failure to accept or appropriate full funding, it would instead impact all Medicaid services,” Wallace wrote. As a result, any restrictions on how Medicaid funding can be spent must come through a law change, according to Wallace. Officials in the Dunleavy administration have said a suite of separate but related bills will accompany their much-anticipated budget release Feb. 13 to address formula funded programs and other issues. ^ Elwood Brehmer can be reached at [email protected]

Fund value drops 3.19% in first half of FY19

The managers of Alaska’s Permanent Fund did their best to mitigate losses from volatile financial markets in the second half of 2018 as the fund ended the year with a balance of $60.4 billion. Permanent Fund investments lost 3.19 percent of their value in the second half of 2018 — also the first half of the State of Alaska 2019 fiscal year, which began July 1. The Permanent Fund ended the 2018 fiscal year last June 30 with a balance of $64.8 billion, from which the state appropriated roughly $2.7 billion to pay out Permanent Fund dividends and support government services. Alaska Permanent Fund Corp. CEO Angela Rodell emphasized in a formal statement that the fund is invested to meet long-range goals. “Within a long-term investment horizon, it is anticipated that the global markets will go up and down; it is a part of the buying, selling, trading process of the portfolio’s holdings,” Rodell said. “And while we invest with the intent that they will go up more than they go down, there are going to be dips. Our team is poised to take advantage of those dips.” Despite the negative returns, the fund outperformed the corporation’s passive investment index benchmark, which comparably measured losses of 6.54 percent in the first half of fiscal 2019, according to a Feb. 4 APFC release. The Permanent Fund Earnings Reserve Account, which holds income and is the spendable portion of the fund, had a Dec. 31 balance of $16.6 billion, according to an APFC report. The challenging first half to fiscal 2019 is in stark contrast to 2018 when the corporation achieved returns of 10.74 percent. Most recently, APFC reported the fund had rebounded to a balance of more than $63.9 billion as of Jan. 31. However, corporation executives noted the day-to-day value can vary widely and the $63.9 billion includes more than $1 billion in liabilities — most of which is the remaining state appropriation amount that has yet to be transferred to the General Fund. Calculated as 5.25 percent of the fund’s five-year average value, the fiscal 2020 percent of market value, or POMV, appropriation is expected to be roughly $2.9 billion. Gov. Michael J. Dunleavy has demanded the Legislature pay a statutorily calculated dividend, meaning about $1.9 billion from the 2020 POMV draw would go to PFDs. He has also proposed separate legislation to repay forgone PFD amounts over the past three years as former Gov. Bill Walker and the Legislature reduced dividends while debating how to resolve multibillion-dollar annual budget deficits. The PFD repayments would total another nearly $2 billion draw from the Earnings Reserve over three years; the 2020 supplemental PFD draw, which would be made later this year, would be $565 million, according to the Revenue Department. The first half 2019 losses were driven by a decline of 10.9 percent in the fund’s $23.2 billion public equities portfolio made up of stocks. At about 38 percent of the overall asset allocation, public equities make up the largest portion of Permanent Fund investments. For comparison, the Dow Jones Industrial Average lost roughly 4 percent of its value during the period. An APFC release states that public equity managers were “positioned for better than feared economic fundamentals,” and as a result “turned in relatively weak performance versus their benchmarks.” Private investments did much better. The $8.2 billion invested in private equity and special opportunities returned 11.86 percent during the period, while the infrastructure portion of the fund’s $5.2 billion in private income investments returned 9.75 percent. The fund’s $14.7 billion fixed income portfolio lost 0.15 percent in the first half of 2019 as listed infrastructure and real estate investment trusts fell in concurrence with equity markets. Direct real estate investments, totaling $3.9 billion, lost 2.05 percent as a result of recent property valuations, according to APFC. Elwood Brehmer can be reached at [email protected]

BP aims for 40 more at Prudhoe

BP navigated its way through the oil price depression and is now focused on new targets to keep the old Prudhoe Bay field vibrant for another 40 years. BP Alaska President Janet Weiss said the company’s emphasis on “40 more years” at Prudhoe, which began pumping oil in 1977, is more than just a mantra. “It’s about 40 more, it really is. When you think about Alaska in an energy renaissance, it’s really important to have the strength of that foundation. You’ve got to have a strong Prudhoe Bay; you’ve got to have a strong Kuparuk area to really help support the infrastructure it takes for all of the sexy development that’s going on right now,” Weiss said. The “energy renaissance” is a reference to the suite of new, large oil projects on the Slope that are in varying stages of advanced exploration, permitting and development. Weiss and other BP Alaska leaders discussed the company’s plans, challenges and opportunities in the state during an hour-long sit down Jan. 31 with the Journal and Anchorage Daily News. Company officials attacked the idea of producing from Prudhoe for decades more by working it backwards while oil prices were at their lowest, and what it takes is ongoing efficiency improvements, according to Weiss. BP Alaska is continually working to lower its cost base by 5 percent per year, she said. “We took a look at what it would take for us to be at mid-life and we’re on that path and what it basically does take is really minimizing decline in a big way,” Weiss said. The story of North Slope production decline — from more than 2 million barrels per day in 1988 to about 520,000 barrels per day currently — is well told. Oil production at Prudhoe has followed the same trend; it plateaued at about 1.5 million barrels daily through much of the 1980s and has gradually fallen since. BP, the operator of the field on behalf of co-owners ExxonMobil and ConocoPhillips, has largely managed to stabilize production from Prudhoe and smaller satellite fields in the 280,000 barrels per day range since 2016. Initially projected to produce about 9.5 billion barrels, the field has now surpassed 13 billion. “Forty more is really about ushering in modernization, transformation, digitization, agile working,” she said. “Doing things better up there so we can extend the life of that absolutely world-class reservoir.” BP Alaska Vice President of Reservoir Development Fabian Wirnkar said Prudhoe has a bit more than 1 billion barrels left to produce from traditional oil-bearing formations. The company is currently in the midst of the first, full-field 3-D seismic data shoot over the field, which will cover 455 square miles. Started in late January, the shoot should take about 90 days to complete. The resulting data will start to become available over the summer, according to Wirnkar, who Weiss has dubbed “Dr. Grow.” He came to Alaska a little more than a year ago at her request after working around the world for BP. Wirnkar said he believes there are still new reservoirs to be found within Prudhoe and the seismic shoot will help the company identify those otherwise “hard to find fluids.” BP also has two drilling rigs working at Prudhoe this winter. The rigs will combine to drill or work over 35 to 40 wells, according to Weiss. “With our partners we are all in agreement that there are still some significant resources here; some that we don’t even know. I always tell Janet that when I was in the Lower 48 I worked a lot in the Permian and there was a time when they were like ‘there’s nothing left in the Permian,’ and you turn around now and you have some new resources and new rocks that are showing up,” Wirnkar said. Revitalized by the shale revolution, the U.S. Geological Survey now believes the greater Permian Basin in West Texas and New Mexico holds more than 46 billion barrels of recoverable oil. New drilling techniques, particularly horizontal drilling, have helped greatly in improving production while keeping costs down. Wirnkar compared horizontal drilling to doctors who install a stent in a patient’s heart by accessing the bloodstream at the femoral artery in the upper leg and winding their way towards the heart. “Once you start doing some investigating you might be surprised with what you see and so that’s one of the things in BP we’re looking at,” he said. “OK, where can we start looking at some of the bypass rocks that we thought were just seals or that we thought were just source rocks and for some reason now the have become a reservoir? We have reservoir experts who are continually looking and testing the possibilities out there.” One of the long-term possibilities to help keep Prudhoe going is making viscous, or heavy, oil production viable. Industry officials believe there are upwards of 38 billion barrels of viscous oil under the Slope and much of it is quite shallow at depths of less than 5,000 feet. Weiss said BP partnered with ARCO in the early 2000s to spend about $750 million first trying “really simple, straight-hole” wells to produce viscous oil, which doesn’t flow as well as the light crude Slope fields are known for. Subsequent tests of complex multilateral wells proved unsuccessful when the wells started breaking at the junction of the lateral and vertical wellbores, Wirnkar added. More recently, BP has concluded that viscous-focused wells do indeed need to be a bit “simpler” and the company believes it has a better completion technique to keep the junctions intact, according to Weiss. The work has taken the cost to produce viscous oil from roughly $80 per barrel closer to the $50 range, she said, while explaining why viscous oil needs to be blended with current production sooner than later to keep all the oil flowing smoothly. “You want to get after the viscous and heavy (oil) at the time that you’re still sending light down the pipeline. That is the biggest issue that’s out there and why we look at it a lot with TAPS (the Trans-Alaska Pipeline System),” Weiss said. Alyeska Pipeline Service Co. spends significant time and money to find ways to keep the oil in the pipeline warm and moving at low volumes, and heavier oil could add to the challenge. Italian major Eni and Hilcorp, BP’s partner in the North Slope Milne Point field and the Liberty prospect, have led improvements to viscous oil processing facilities, according to Weiss. She noted that one of the major reasons BP agreed in 2014 to partner with Hilcorp at Milne Point was the Hilcorp’s work on developing viscous oil. A final investment decision on Liberty, which has had its federal permit issued last year challenged in court, is expected in early 2020, according to the BP Alaska group. Regarding Prudhoe Bay wells that have had their outer casing “jacked up” due to warming permafrost, Weiss said the issue has arisen on a “handful” of old wells from the 1970s before the field started production. The outer casing on those wells is set in the permafrost. “Because that outer shoe was in the permafrost you saw this kind of ripping apart and this well jacking up,” she said, adding BP has removed the well houses on each well in question and has been working with the Alaska Oil and Gas Conservation Commission, which regulates production in the state. The AOGCC has a hearing set for Feb. 7 on the issue. Finally, a big driver of the recent cost reductions at BP — and in the industry overall — is automation, which likely means somewhat reduced job levels in aspects of the industry’s work. However, automation also makes the work safer, Weiss highlighted. “It’s about changing the nature of the jobs and automating solutions so we’re less transactional,” she said. “The workforce of tomorrow does need to move upstream, solving the new problems and then we automate those solutions. If you don’t do that you lose out.” BP’s current Alaska workforce is about 1,500 and the company contracts for nearly another 4,000 workers, according to the group. Elwood Brehmer can be reached at [email protected]

ConocoPhillips turns first annual profit since 2014

ConocoPhillips continued its turnaround from the oil price collapse by netting the company’s first annual profit in four years with net income of more than $6.2 billion in 2018. In its year-end earnings report issued Jan. 31, the Houston-based oil major additionally posted a fourth quarter profit of $1.8 billion, compared to a fourth quarter 2017 profit of nearly $1.6 billion. ConocoPhillips lost $855 million overall in 2017. The fourth quarter result is also the company’s best quarterly return since the third quarter of 2014 when oil prices averaged $97 per barrel and it earned $2.7 billion, according to report archives. In Alaska, ConocoPhillips turned profits of $445 million for the fourth quarter and $1.8 billion overall for 2018. The companywide earnings came on the back of $10.3 billion in revenue for the quarter and $38.7 billion for the year. ConocoPhillips generated $5.5 billion in free cash flow during the year, according to the earnings report. CEO Ryan Lance said he is proud of the results in a formal statement. “Our accomplishments reflect our clear commitment to a value proposition that is focused on returns and free cash flow generation, and that balances investments with returning cash flow to shareholders through price cycles. This is our formula for offering investors a compelling way to invest in our sector, ” Lance said. “We look forward to delivering another strong year of performance in 2019.” ConocoPhillips announced a first quarter dividend of 30.5 cents per share ahead of the earnings report. The dividend will be paid March 1. ConocoPhillips stock closed trading at $67.69 per share Jan. 31, up from a pre-earnings opening price of $65.76 per share. The company sold its oil for an average price of $68.03 per barrel last year, compared to $51.89 per barrel in 2017. ConocoPhillips Alaska leaders have said the company has set a $40 per barrel oil price breakeven benchmark for all of its future projects. During the year ConocoPhillips paid down $4.7 billion in debt and reached its debt target of $15 billion 18 months ahead of schedule, according to an earnings release. Last July, the company announced a deal with BP to swap a portion of its interests in the offshore Clair Field in Britain’s North Sea for BP’s 38 percent stake in the Kuparuk River oil field on the North Slope, which ConocoPhillips operates. The cash-neutral deal gives ConocoPhillips a 92 percent stake in Kuparuk, according to state Division of Oil and Gas records. The company also commenced production from its $725 million Greater Mooses Tooth-1 oil project in early October. GMT-1 is expected to produce up to 30,000 barrels of oil per day at its peak and marks the first oil production from federal leases within the National Petroleum Reserve-Alaska. Later that month ConocoPhillips approved funding for the nearby and slightly larger $1 billion-plus GMT-2 project, which is forecasted to come online in late 2021. The company also initiated permitting on its large Willow oil prospect, also in the NPR-A, which could cost $4 billion to $6 billion to fully develop over the next six-plus years. ConocoPhillips spent nearly $1.3 billion on capital projects in the state last year out of an overall capital budget of $6.7 billion. BP, ExxonMobil report results BP, which operates the massive North Slope Prudhoe Bay oil field, reported a full-year 2018 profit of $9.4 billion Feb. 5, compared to $3.4 billion in 2017. The London-based major also reported an underlying replacement cost profit of $3.5 billion for the fourth quarter from strong performance in all of its business sectors. The company generated an 11.2 percent return on invested capital during the year, compared to 5.8 percent in 2017, according to the financial report. BP’s 2010 Gulf of Mexico oil spill settlement payments totaled $3.2 billion last year. Its oil and gas production was up more than 8 percent year-over-year, averaging 3.7 million barrels of oil equivalent in 2018. ExxonMobil, operator of the Point Thomson gas field on the North Slope, on Feb. 1 reported full-year earning of $20.8 billion, up from $19.7 billion in 2017 and fourth quarter earnings of $6 billion, down 28 percent year-over-year. However, excluding U.S. corporate tax reforms and impairments, the fourth quarter results were $6.4 billion, compared to $3.7 billion in the last months of 2017, according to a company statement. ^ Elwood Brehmer can be reached at [email protected]

Construction spending forecasted to rise 10%

The coming year should be better than last for Alaska’s construction industry and the state economy as a whole. Construction spending across the state is expected to increase about 10 percent this year over last to a grand total of more than $7.2 billion, according to the Associated General Contractors of Alaska’s annual industry forecast. AGC of Alaska Executive Director Alicia Siira said the trade group is “cautiously optimistic” about 2019 after some very tough times. “Our industry has really taken a beating over the past few years with this recession and we could really use some good news,” Siira said. “We’re hopeful this trend continues and we start to see some dollars moving through the state to help support the economy.” Alaska’s construction workforce averaged a little more than 15,000 workers the past two years and employment levels that low hadn’t been seen since 2001-02, according to state Labor Department data. The industry was doubly hit by Alaska’s three-year oil price-induced recession. Not only did oil companies sharply curtail capital spending, but the state also cut its capital budget allocations from more than $2 billion to less than $200 million in recent years. Restoring some of that state capital spending is a top priority for AGC. State economists expect Alaska to officially climb out of the recession towards the end of the year. The construction industry is correspondingly expected to add roughly 900 jobs in 2019. Most of the spending growth is expected to come via the oil and gas industry and Department of Defense projects at Interior military installations. Both sectors are pegged for 13 percent growth; however, in oil and gas that means an increase to $2.7 billion and roughly $700 million overall for Alaska Defense spending in 2019. On the oil side, many companies have managed to reduce their operating costs to where they can afford to resume investing in larger projects at current prices in the $60-70 range — a price band that is being predicted for several years. The discovery of the now-prolific Nanushuk oil formation on the North Slope has also spurred some oil prospects with development costs pegged at upwards of $5 billion. As a result, oil industry spending is projected to increase for several years, according to the forecast. Military construction in the state continues to center on Eielson Air Force Base near Fairbanks, which is readying for two new squadrons of F-35 fighters that are planned to start arriving in 2020. “Some of the larger elements of the (F-35) ‘bed-down’ are a flight simulator, new maintenance buildings, aircraft weather shelters, new utilidor, as well as renovation of many existing structures,” the forecast states. Additional missile defense projects are ongoing at Fort Greeley near Delta Junction and Clear Air Force Station near Nenana. While not as significant in terms of overall dollars, the mining industry is projected to increase its capital spending by 18 percent this year to $265 million as three of Alaska’s six big large mines — Red Dog in the Northwest and Pogo and Fort Knox in the Interior — have major expansions planned. Siira said she is hopeful political forces will continue to support the resource industries. “For increased spending to continue we feel that we need some stability in our stat and timely review of resource development projects which support the economy and, of course, construction spending,” she said. Overall private industry spending is expected to be about $4.4 billion, a 9 percent year-over-year increase; Alaska public construction expenditures should grow about 7 percent, with about $200 million or more coming as a result of the Nov. 30 earthquake. “Our industry, both vertical and road construction, did see an increase in activity due to the earthquake and although it was unfortunate, it maybe highlighted some of the projects that have been overlooked over the years,” Siira noted. She added that private building damage from the earthquake is more difficult to quantify. State and local government officials have emphasized since the earthquake that additional damage will likely be revealed with the arrival of spring. Longer term, the state still has a $2 billion-plus deferred maintenance list that it must address and new cost estimates to rehabilitate the Anchorage port have shot up dramatically to nearly $2 billion as well.   Elwood Brehmer can be reached at [email protected]

DEC nominee: Experience a plus, not a problem

Jason Brune insists his time working for a former investor in the Pebble mine project and advocating for other resource developments in Alaska is experience that benefits his newest role leading the Department of Environmental Conservation, despite claims by many detractors that it should disqualify him from consideration. Among the first appointments to Gov. Michael J. Dunleavy’s cabinet in November, Brune told Senate Resources Committee members during a Jan. 25 hearing on his confirmation that the questions regarding his professional background are “appropriate and fair,” while also noting that he has no financial interests in the Pebble Limited Partnership and has sold all of his stocks in oil and mining companies that work in the state. He highlighted a belief that Alaska has the most stringent environmental protection standards in the world and as DEC commissioner he demands everyone in the state be held to them. “My personal environmental ethic is ‘think globally, develop locally.’ I believe that provided that the companies that are trying to invest here do uphold the highest environmental standards, we should work with them to try to allow that investment and the development of those resources to occur here,” he said. Brune worked as the U.S. public affairs manager in Anchorage for London-based mining major Anglo American from 2011-14. Anglo American was a 50 percent partner in the Pebble project and invested more than $540 million in exploration and pre-development work at Pebble before announcing it would walk away from the project in September 2013. Before agreeing to lead DEC, Brune most recently worked as the lands and resources director for Cook Inlet Region Inc. He also spent more than a decade with the Resource Development Council for Alaska with about half of that time as executive director. The RDC is an organization that promotes Alaska’s oil and gas, mining, timber, tourism and fishing industries. Public testimony during the Senate hearing was overwhelmingly against Brune’s confirmation as DEC commissioner. Nearly all the individuals that testified in opposition to his confirmation cited his prior work history, contending he could not be objective in reviewing permit applications Pebble would need to submit to DEC before it can develop the large copper and gold mine. DEC is often most visible through its Spill Prevention and Response, or SPAR, Division, but the department also has primacy over several federal Clean Air and Clean Water Act programs as well as overseeing drinking water and food safety in the state. Opposition in written testimony offered to the Resources Committee before the hearing also centered on permitting Pebble. Brune received written support from industry groups such as the Alaska Miners Association, the Council of Alaska Producers and the Alaska Independent Power Producers Association. State commissioner-designees must be confirmed by a majority of legislators in a joint House and Senate vote that is usually held in spring near the end of the legislative session. Brune said in a Jan. 11 interview prior to the hearing that he doesn’t have a position on the highly contentious mine plan. “As a regulator I have the requirement to objectively look at what Pebble has to do to go through the process, so no, I don’t support the Pebble project. I don’t oppose the Pebble project. I think they deserve to have a fair hearing,” he said. The results of an annual poll of Alaskans by the Republican-led Senate majority caucus on current policy issues show that 61 percent of poll respondents oppose development of Pebble even if the company can secure all the requisite environmental permits. An outlier in the debate over Brune’s work history, Icicle Seafoods spokeswoman Julianne Curry, who is also a former executive director of United Fishermen of Alaska, wrote in support of his confirmation. “We have worked with Mr. Brune in the past and have found him to be knowledgeable and interested in finding solutions to problems facing Alaska. His hard-working nature and ability to cut directly into issues will help make him an asset in DEC,” Curry wrote. Brune said his experience in the resource industries can be beneficial to leading DEC and he believes it’s one of the reasons the Dunleavy administration asked him to apply for the job. “I’m not going to rubber stamp any permit for any project — for Pebble, for an oil and gas permit, for a fishing permit. I’m going to look at it and I’m going to make sure that they’re doing what they need to do to protect the environment but that we’re working alongside them to ensure that they’re given a fair process and that we’re partners in bringing responsible resource development jobs to the state,” he said in an interview. Brune’s undergraduate education is in biology and is what originally brought him to Alaska. He spent a summer in the early 1990s as an intern with the U.S. Fish and Wildlife Service cleaning and monitoring sea otters impacted by the Exxon Valdez oil spill in Prince William Sound. He later came close to a master’s degree in environmental science from Alaska Pacific University, but never completed his thesis. “(The otter work) was very impactful on me because I saw, of course, how resource development can be done in the worst way possible. The impacts of the oil spill, we never, as Alaskans, want to see that again. That never should have happened and it’ll never happen again hopefully and we need to put protections in place to make sure it never happens again,” Brune said. On other issues, he said DEC needs to be adequately funded so it can adjudicate permit applications but at the same time he and DEC division directors are working with Dunleavy’s Budget Director Donna Arduin to determine what the department can and can’t afford to do when the state is faced with major deficits and dwindling savings. One of the programs Brune suggested could be on the chopping block is the Ocean Ranger program, which he has heard there isn’t much support for continuing. The program was established in 2006 via a voter initiative and requires certified marine engineers or individuals with expertise in marine safety and environmental protection to monitor marine discharges from large cruise ships operating in the state. DEC also has other regulations and sampling programs to monitor cruise ship discharges, according to the Ocean Ranger web page. “There are things that in these fiscally austere times that we have to ensure are still appropriate,” Brune said. “We have things on the books that are unfunded mandates or that are not necessarily doing anything to protect the environment; they’re just adding regulatory hurdles for companies and we have to evaluate those.” Brune also stressed a belief that “local problems are best met by local solutions,” particularly noting that he hopes DEC can successfully implement recommendations on how to best improve at times dangerously poor winter air quality in the Fairbanks area from a local stakeholder group. He continued to say that he expects the issue of PFAS contamination in drinking water supplies, particularly in rural Alaska, to be a growing issue DEC will have to address during his tenure if he is confirmed. Per- and polyflouroalkyl substances, known as PFAS chemicals, are artificial chemicals used, among other things, as highly effective fire suppressants at airports. Brune said DEC is working with DOT to test wells near airports in several rural Southeast and Western Alaska communities and has found the contaminants in each well that has been tested, in addition to Fairbanks. “I think we need to be a resource for the citizens of Alaska to give them the confidence that the water they’re drinking, that the things they’re doing, are safe,” he said. ^ Elwood Brehmer can be reached at [email protected]

Alaska Air Group reports drop in annual income

A handful of factors that converged on Alaska Air Group Inc. in 2018 resulted in modest net income of $437 million, but company executives said they expect improved financial performance this year during a Jan. 24 earnings call. The Seattle-based parent to Alaska Airlines and regional carrier Horizon Air netted $23 million in the fourth quarter, compared to $315 million in last three months of 2017. The $437 million full-year profit is off 55 percent from 2017 full-year earnings of $960 million. Alaska Air Group CEO Brad Tilden said a year ago the company faced the challenges of increased competition, higher fuel costs, more expensive labor agreements and internal growth. “Today, that picture looks very different. Our growth has slowed. Newer parts of our network are maturing and fuel prices are down; demand overall is solid,” Tilden remarked. “We have good momentum moving into 2019.” Despite earnings down 73 percent year-over-year, he called the $23 million netted in the fourth quarter “solid,” noting per unit revenues rose significantly at 5.2 percent, a trend that is expected to continue. Alaska Air Group’s per gallon fuel cost — the largest expense aside from labor for many airlines — was up 25 percent in 2018 overall and nearly 17 percent for the fourth quarter. Overall, the company generated about $1.2 billion in operational cash flow for the year and spent about $960 million on capital expenses, which resulted in $240 million of free cash flow and more than $1.2 billion in cash on-hand at the end of the year. Chief Financial Officer Brandon Pedersen said capital expenditures should be down to about $750 million in 2019 with less fleet growth and free cash flow should improve as well. Alaska Air Group cut its balance sheet debt by $470 million in 2018 and ended the year with a 47 percent debt-to-capitalization ratio, down from 59 percent after its purchase of former San Francisco-based competitor Virgin America for $4 billion in December 2016. Company leaders expect to hit their debt-to-cap target in the low to mid-40 percent range this year, Pedersen said, noting the company now owns outright 95 aircraft valued at $1.7 billion. “Our long-term owners tell us they value a conservative balance sheet and it’s been a hallmark of our past success,” Pedersen commented during the earnings call. Alaska Airlines and Horizon Air increased their combined passenger capacity 5.3 percent in 2018 but that growth was slowed to 1.1 percent year-over-year in the fourth quarter. The company has also negotiated joint labor agreements with each of its employee groups except for aircraft technicians since buying Virgin America. Tilden said work to integrate Virgin America systems and employees into Alaska Airlines is almost over, which he said was done remarkably quickly as well given its complexity. The refurbishment of Virgin America Airbus aircraft to Alaska livery and interiors should be done early next year, he added. The first fully refurbished Airbus reentered service in early January. “All of this means we’re rapidly becoming a better version of ourselves with greater reach and scale with the same competitive advantage we’ve always had and fantastic opportunities ahead,” Tilden said. He highlighted that the company’s on-time departure rate increased to 86 percent in 2018 and Horizon Air led regional carriers with an on-time arrival rate of 83 percent. Alaska Airlines officially opened its new $50 million, 100,00 square-foot hangar — large enough to accommodate two of the new, larger Boeing 737 Next Generation aircraft it flies — at Ted Stevens Anchorage International Airport in the fourth quarter. The work translated into $147 million in performance bonuses awarded to Air Group employees in 2018; $120 million of which was paid Jan. 25. It was the 10th consecutive year Alaska Air Group issued performance-based incentives totaling more than 5 percent of annual wages, company executives said. “We’re proud of this payout because it’s an example of how we’re trying to run this business in a balanced way that benefits all of our stakeholders. We’re providing good wages and good benefits to our people and sharing $147 million of incentive pay with them for hitting important goals,” Pedersen said. “Our guests are getting low fares and an improving product and our owners are getting a larger dividend.” On Jan. 14 Air Group announced plans to add at least 3,000 jobs across various business segments. In 2018 the company added roughly 1,500 full-time equivalent positions, bringing its total full-time workforce to 21,600. Roughly 75 percent of the new positions will be in Washington, according to a company release. The company also announced that its quarterly shareholder dividend payment would increase 9 percent to 35 cents per share when it is paid March 7. The company paid out $158 million in shareholder dividends in 2018 and repurchased another $50 million worth of common stock. The $23 million quarterly profit and $437 million in full-year earnings translate to earnings per share of 19 cents and $3.52 per share, respectively. Alaska Air Group stock ended Jan. 25 trading at $63.48 per share, down slightly from a Jan. 24 pre-earnings report opening price of $65.72 per share. Alaska Air Group is forecasting 2 percent capacity growth this year and 3-4 percent growth in 2020, according to executives. Tilden said company leaders have also set a multi-year goal to produce profit margins in the 13 percent to 15 percent range by focusing on improving performance in areas the company can control. “We’re on the road to deliver higher margins in 2019 and 2020 as we work with our people to leverage Alaska’s substantial competitive advantage over a route network that now has greater reach and scale,” he commented. Continued per-unit cost containment will be a major part of the improved returns expected in the coming years, according to Pedersen. He said 2018 unit costs were up 3 percent on about 5 percent capacity growth, which was better than early year guidance of 3.5 percent unit cost growth on a 6.5 percent increase in capacity. Unit costs would have been close to flat in 2018 if not for the added expenses of new labor agreements, Pedersen added. This year nonfuel costs are expected to increase 2-2.5 percent on about 2 percent capacity growth, according to Pedersen, who called it “an exceptionally strong cost plan considering the low (capacity) growth and the roughly 120 basis points of headwind we expect from a higher mix of regional flying.” Finding savings through new agreements with contractors is a major element of Air Group’s plan for the coming year as well. “We’re looking for long-term partners who can help us reduce costs today in exchange for future opportunities to grow their business with us,” Pedersen said. Elwood Brehmer can be reached at [email protected]

Cuts to education, VPSO in supplemental budget draw scrutiny

It’s quickly going to become another extremely tense legislative session if the release of Gov. Michael J. Dunleavy’s supplemental budget is any indication. Senate Finance Committee members noted as much Jan. 29 when Office of Management and Budget officials presented their fiscal year 2019 supplemental budget proposals to the committee for the first time. This year’s supplemental requests were made in two bills; one dealing with regular budget adjustments and another $139.3 million “disaster supplemental” to deal with state earthquake repairs and wildfire suppression efforts within the Department of Natural Resources. Specifically, the administration is proposing $29.4 million in state earthquake-disaster funding to match $102 million in expected federal disaster support. Another $7.9 million would address DNR’s wildfire needs. The more standard capital and operating budget proposals total $110 million; however, the vast majority of that — more than $92 million — would come from federal programs. The remaining nearly $18 million would be money from outside sources such as fees or transfers between state agencies. The big sticking points for legislators are a $20 million proposed cut to education funding and a $3 million reduction to the Village Public Safety Officer program. OMB Director Donna Arduin said other than the earthquake spending the administration wanted to present a supplemental that didn’t spend more from the general fund than the original 2019 budget passed last spring. “We worked collaboratively with our agencies to identify areas where there was cash available, where items had not been spend yet during the fiscal year because we felt we needed to prioritize the fiscal situation that we’re facing in Alaska as well as our need for disaster response and recovery,” Arduin told the committee. Senators from both parties took issue with the $20 million education cut, as the money was part of an end-of-session budget compromise last year. Northwest Alaska Democrat Sen. Donny Olson emphasized that it was meant to partially offset the impacts of inflation on school districts after several years of flat formula funding through the state’s Base Student Allocation, or BSA. Sen. Lyman Hoffman, D-Bethel, questioned whether or not the $30 million for 2020 that was also a part of last year’s budget deal would be cut in Dunleavy’s budget plan for next year, which must be released by Feb. 13. The state is facing a roughly $1.6 billion deficit and Dunleavy opposes new taxes so large budget cuts are expected. Arduin said that would be addressed in the upcoming budget. “In my opinion you’re talking to the wrong people first. You should be talking to the school districts first to see where that money is going to be obligated going forward so we don’t have another supplemental,” said Sen. Click Bishop, R-Fairbanks. Arduin generally responded that school districts or other groups expecting state money should budget for it until it has actually been allocated and changed hands, not just approved by the state. Hoffman contended that the education spending bills “are the law of the land,” recalling Dunleavy’s campaign promise to follow state laws, particularly in regards to the Permanent Fund dividend calculation. Arduin noted the spending cuts are simply proposals at this point and the money will be spent if the Legislature rejects them. Hoffman and Olson also pressed administration officials on plans to increase Alaska State Trooper spending by $3.6 million for salary increases meant to improve Trooper recruitment and retention while the VPSO program is cut by $3 million; although Arduin said the $3 million reduction is money approved that the program did not receive requests to spend. Hoffman said the public safety funding changes could appear to prioritize urban Alaska over rural residents. “The salary structure that exists for the VPSOs needs to be addressed as well,” he said. “Taking the money at this time is shortsighted and does not do justice to the services that are required for the people in the far flung corners of Alaska.” Those cuts would offset an additional $15 million for Medicaid claims made in fiscal year 2018 that still need to be paid after the Legislature knowingly short-funded the program in the current year budget. The supplemental also includes a $5 million re-appropriation from the Alaska LNG Project fund back to the General Fund. That money would not come out of the Alaska Gasline Development Corp.’s $10.3 million operating budget for this year, but instead would lessen the corporation’s available funds for future years. As of the end of November AGDC had $39.7 million left from prior legislative appropriations, according to corporate finance reports. AGDC spokesman Tim Fitzpatrick said via email that the corporation worked with the administration to identify where savings could be found and the $5 million in unused funds was the result of that work. “As AGDC works to focus its priorities, and brings stakeholders to the table, we are confident that we will have the resources and funding to operate successfully,” Fitzpatrick said. Elwood Brehmer can be reached at [email protected]

Dunleavy administration pumping brakes on gasline

Gov. Micheal J. Dunleavy’s administration plans to go back to the future for a successful Alaska LNG Project. Revenue Commissioner Bruce Tangeman stressed the administration’s belief that the state-owned Alaska Gasline Development Corp. needs to shift its focus away from intense efforts to get the $43 billion gasline project approved quickly in favor of resurrecting the “stage-gate” approach favored by the state’s former producer partners during a Jan. 18 speech at the Meet Alaska oil and mining contractor trade show in Anchorage. “The (administration) transition is a great opportunity to pause and see exactly where we’re at in the process with the Alaska LNG Project specifically. It’s a good chance to reach out to our partners that we used to be involved with on a different level and see what their views are of the gasline and the LNG market — get their expertise,” Tangeman said. He added that Dunleavy is very familiar with the project from his time in the state Senate. Dunleavy and other legislators were comfortable with the stage-gate megaproject development process employed until the state took over leadership of the project in late 2016, according to Tangeman. The deliberate stage-gate process breaks overall project development into numerous stages and after each is finished a decision is made whether or not to advance to the next stage. For Alaska LNG, the decision points, or gates, were times when BP, ConocoPhillips, ExxonMobil and the State of Alaska could evaluate their desire to continue or allow the other partners go ahead without them. The companies approach former Gov. Sean Parnell about the prospect of the state being a 25 percent partner in Alaska LNG, which was appealing to the state because it was a way to participate without undue risk, said Tangeman, who was a deputy Revenue commissioner when the public-private Alaska LNG Project ownership structure was devised during Parnell’s tenure in the governor’s office. Parnell has since consulted with Dunleavy on the current status of the project since the election. “We had partners who had done this kind of work and we were going to jump on their backs and ride across the finish line to a successful, profitable project,” he recalled. ExxonMobil was leading the project at that time and the company’s Alaska LNG manager Steve Butt emphasized a need to continually focus on lowering the project’s final cost of LNG supply through optimized project design and infrastructure engineering, in turn leading to improved project economics overall. However, when oil markets bottomed out at sub-$30 per barrel prices in early 2016 — and oil-linked global LNG prices followed suit — the companies suggested to then-Gov. Bill Walker that the project could either be slowed or the state, through AGDC, could take it over. Walker, a longtime advocate for a publicly-led gasline project, quickly chose the state-led option. The Alaska LNG team at the time was wrapping up the roughly $600 million preliminary front-end engineering and design, or pre-FEED, stage of the project, which resulted in reams of environmental and engineering data and the current cost estimate of $43 billion, below the conceptual range of $45 billion to $65 billion. Under Walker, AGDC focused on marketing the project to potential customers in the Asia-Pacific region, an aspect of development Walker repeatedly said had been incorrectly ignored under the prior producer-led Alaska LNG structure. AGDC also began the multi-year process of securing federal permits for the project in April 2017 primarily using the information gathered during pre-FEED. Tangeman said interim AGDC President Joe Dubler and new board members appointed by Dunleavy are also taking time to better understand where the quasi-state agency is in negotiations with potential customers as well as the status of permitting with the Federal Energy Regulatory Commission. FERC is scheduled to release a draft environmental impact statement for the project sometime in February. Dubler, a former finance executive with AGDC, officially takes over as president of the corporation Feb. 1. The board hired him Jan. 10 immediately after firing Keith Meyer, who was hired in 2016 under Walker’s guidance for his significant experience in Lower 48 LNG and pipeline companies. AGDC secured 15 letters of interest from potential customers under Meyer’s leadership and was actively negotiating with six of them when he was let go, according to corporate management. The most notable interest has come from a consortium of state-owned Chinese corporations, which signed a joint development agreement, or JDA, with AGDC in November 2017 in front of President Donald Trump and China President Xi Jinping. The JDA outlines the prospect of the Bank of China and oil giant Sinopec Corp. becoming anchor customers and financiers of the project, with the bank debt funding up to 75 percent of the $43 billion project cost in exchange for Sinopec purchasing 75 percent of its LNG production capacity. Final JDA negotiations have been extended for six months after a Dec. 31 deadline was not met. While the administration is championing a slower approach, board chair Doug Smith also said he doesn’t want to slow any of the progress the corporation has made. Tangeman made it clear that AGDC would not be making a final investment decision on Alaska LNG in 2020 as Meyer had been pushing for, but getting a record of decision from FERC would be valuable and it’s unclear exactly how much that will cost. The state will not be leading a project into construction with as much risk as it carries now, he said. AGDC was also preparing for what executives called an “equity road show” to market the project to investors this year. They often noted the producers would be welcome investors to the project. Tangeman said Dunleavy doesn’t expect to return to the prior structure, but he would be happy with it. “We understand what took place with the price of oil, the price of gas over the last several years but we’ll be talking with (the producers) to see what the climate is now, where we are with oil at $60; what is the gas market; is there an appetite to reengage and see if we can move forward as a partnership again?” he said. “We look forward to having those discussions again. And ultimately a stage gate approach will be put in place so we know and Alaskans know exactly how we’re going to build this project.” The Legislature will also have its say, Tangeman noted. AGDC had previously stressed the need to move quickly on the project to meet a mid-2020s market demand window. BP Alaska President Janet Weiss said in an interview that a state-led project has tax advantages the IRS has recognized that could lower the cost of supply and government-to-government relationships with customers are valuable as well. The state is wrestling with the challenge of assuring it can find a competent builder for the project, something BP, which has assisted AGDC since the state took over, would need to be comfortable with before it would invest. The London oil major also agreed to key terms, including pricing, in May with AGDC to sell its share of North Slope gas into the project. Weiss said BP, which has championed the state’s project “is all about educating and figuring out how to go forward” in discussions with the administration and Legislature. Tangeman said in an interview that the potential customers AGDC is negotiating with understand some change is going to happen in the project with a change of governors but that it will survive if it is economic. He said they also understand there is still a lot of work to do. AGDC veered from the formal stage gates between pre-FEED and FEED, which the companies estimated to be up to a $2 billion undertaking of much more detailed work. “All that hard work has gotten us to a 10-yard line but I think we still have a long way to go to get to the 10-yard line,” Tangeman said, referencing Walker’s campaign metaphor for how close he believes the state is to finally building a gasline. “And I think it’s going to be important that Alaskans understand that.” Tangeman later added in an interview that, “Gov. Dunleavy doesn’t want to go that 90 yards with 100 percent of the risk on our back.” ^ Elwood Brehmer can be reached at [email protected]

Economists: Three-year recession to end ‘with a whimper’

There is a general belief among Alaska economists that the longest recession in the state’s history will come to an end later this year, but the economy isn’t likely to look much different then than it does now. Longtime Alaska Labor Department Economist Neal Fried expects employers will add roughly 1,400 jobs in 2019, which, while a definite positive, would only be about 0.4 percent growth in the job market. Overall, the state has lost about 12,000 jobs since late 2015, when depressed oil prices and ballooning state budget deficits led to contraction in some of the state’s largest industries — oil, construction and government. While the final numbers for 2018 are still being tallied, Fried and University of Alaska Anchorage economic professor emeritus Scott Goldsmith believe final numbers will show the state lost about 2,300 jobs last year, a 0.7 percent contraction of the workforce after consecutive years of losses in excess of 4,600 jobs in 2016 and 2017. Statewide employment was down 0.3 percent in December, according to a Jan. 18 Labor Department release. Goldsmith said the state is headed towards what he described as a “post-recession” period and not a true recovery, which would technically mean a return to pre-recession job levels. Current employment levels mirror 2011, according to Fried. Relatively stabilized oil prices in the $60 to $70 per barrel range, a suite of new North Slope oil prospects and — tentatively — stabilized state government spending are what Fried and Goldsmith are basing their 2019 projections on. “The declines are declining,” Goldsmith said at a Jan. 16 luncheon, noting that Alaska was adding jobs at a rate of just about 0.4 percent per year in the three-year period leading up to the recession. “If you recall those were years when oil prices were over $100 per barrel so one would’ve expected that the economy would’ve been chugging along at a pretty brisk rate, but it really wasn’t so I think that’s worth thinking about as we move forward,” he added. They’re forecasting the oil and gas industry, which has shed about 5,000 jobs — more than one-third of its total Alaska workforce — since 2015, will add about 300 jobs this year. Oil and gas companies added 100 jobs in December year-over-year, according to the Labor Department. The closely linked construction industry added another 200 jobs in December and Fried is predicting Alaska builders will hire 900 more employees over the coming year. “A recession usually ends with a whimper. What generally happens is the positives get big enough to overwhelm the negatives,” he said, which is what he is predicting for 2019. Additional employment gains of about 500 jobs are expected in the health care and hospitality industries, sectors that mostly continued to grow during the recession. Those additions will offset small losses in government and retail, according to Fried. UAA Institute of Social and Economic Research professor Mouhcine Guettabi noted that the improved economic outlook is predicated on the Legislature and Gov. Michael J. Dunleavy not resolving the state’s current $1.6 billion budget deficit with spending cuts alone. “If that ($1.6 billion) were to get removed from the economy, obviously all of this gets tossed aside,” he said. ISER has concluded that state government spending cuts are the most economically damaging way lawmakers can close the state’s budget gap. That’s because Alaska uniquely relies on oil tax and royalty revenue and as of this year investment earnings from the Permanent Fund to pay for government services — money that is additive to the overall state economy — instead of recycled broad-based tax revenue. ISER estimates $100 million in state operating budget cuts roughly equates to 1,000 or more full-time jobs lost depending on how the cuts are implemented. ^ Elwood Brehmer can be reached at [email protected]

Major producers building carbon pricing into future plans

The list of oil and gas companies with global influence that support some form of carbon pricing continues to grow. Alaska’s “big three” producers — BP, ConocoPhillips and ExxonMobil — are all now a part of that group. ExxonMobil announced in October that it would be donating $1 million to Americans for Carbon Dividends, a campaign led by former U.S. Sens. John Breaux, a Democrat, and Trent Lott, a Republican. ConocoPhillips doubled down on that donation in December with a $2 million pledge to Americans for Carbon Dividends over the next two years. BP executives have been trumpeting the expression “dual challenge” for several years, referencing the company’s belief that worldwide energy production will need to continually increase at the same time global carbon emissions must be drastically reduced. “In decades to come there needs to be 2.5 billion people lifted out of poverty and there’s going to be another 2 billion added to our planet, so there is a deep need for energy, and we need to do it better with less emissions,” BP Alaska President Janet Weiss said during a Jan. 18 speech at the Meet Alaska contractor trade show in Anchorage. “At BP we strongly support the transition to a lower carbon economy and we have it tied to our larger business strategy,” Weiss added later. BP estimates roughly 20 percent of the world’s greenhouse gas emissions are subject to some form of carbon pricing mechanism and expects two-thirds of its emissions will be in countries with some sort of emissions or carbon policy by next year. As a result, the London-based oil major has instituted an internal carbon price of $40 per metric tonne of carbon dioxide on its operations in industrialized nations in order to “help anticipate greater regulatory requirements” on its greenhouse gas output, an official statement on the company’s carbon price says. BP also supports the global carbon emissions reduction goals set out in the 2015 Paris Agreement. ConocoPhillips now either incorporates a carbon price into the economic analyses it runs on all of its proposed projects or runs a sensitivity tests of its projects against likely future carbon pricing scenarios. Those evaluations are conducted based on existing regulations for projects in countries with carbon pricing already in place and similarly to BP are based on a cost of $40 per tonne for large projects in countries without a carbon tax, according to its climate change strategy. Energy policy experts of all stripes acknowledge support for carbon pricing, or tax, mechanisms is gaining steam domestically and abroad, but where does that leave Alaska, with its oil-dependent economy and small population that burns a large amount of fossil fuels per capita compared to most other states primarily because of its cold climate? According to the U.S. Energy Information Administration, in 2015 Alaska had the fourth highest level of energy-related carbon dioxide emissions per capita in the country behind Wyoming, North Dakota and West Virginia, states with high levels of coal consumption, cold winters, or both, an EIA report notes. Speaking on background, leading officials with Alaska’s major producers said the companies’ support for carbon pricing initiatives comes from the belief that working towards a cleaner environment is a sound tenant of doing business, and something shareholders increasingly demand. For simplicity’s sake, oil companies in support of carbon pricing almost unanimously favor a national policy in the U.S. over state-by-state systems and a global policy would be most ideal for the same reason. Americans for Carbon Dividends is backing the Baker-Shultz plan spawned in part by former secretaries of State James Baker and George Shultz, who advocate for a slowly rising but revenue-neutral carbon tax that would be paid back to all citizens through a dividend. The Baker-Shultz concept also includes removing other carbon regulations subsequently deemed unnecessary and “border adjustments,” or fees levied on goods imported from countries without carbon pricing policies. Alaska’s three oil majors are also members of the Climate Leadership Council, a group comprised of some of the world’s largest companies and environmental nonprofits that also backs the Baker-Shultz plan. The Climate Leadership Council touts the national carbon dividend concept as “pro-environment, pro-growth, pro-jobs, pro-competitiveness, pro-business and pro-national security” and something that can be morphed to match the needs of other countries that have not already put a cost on carbon emissions. The council contends its dividend plan is the most equitable carbon tax concept being debated because it would tax consumers based on their purchases — the more wealthy of which generally buy more goods and fuel and therefore contribute more to greenhouse gas emissions — but distribute the carbon tax-generated dividends equally. Consequently, the dividends would most greatly benefit lower income individuals who are more likely to turn around and spend the money in the national economy, according to the council. However, many Republicans argue the carbon dividend idea is not as “pro-everything” as the Climate Leadership Council claims. David Banks, an executive with the American Council for Capital formation and former energy and environment policy advisor to President Donald Trump, said during the Jan. 18 conference that a carbon tax is not the answer and would simply lead to “carbon leakage,” where higher emitting business sectors move to jurisdictions without a carbon price. Banks also questions the motives of oil companies backing such policies. “You have activist shareholders who have hijacked the shareholder resolution process to achieve what they can’t get through legislation or regulation on climate,” he said. “They’re essentially working a backdoor process to force public companies to accept climate-related goals that may not be in the best interest of the average shareholder who simply wants the company to pursue measures that increase the value of the stock.” Officials with the big companies working in Alaska dispute that accusation. Robert Dillon, a conservative strategist and former Republican communications director for the Senate Energy and Natural Resources Committee, said in an interview that upstream energy companies can support a carbon tax because they can pass it through to end users. Dillon also insists the cost of administering such a program would degrade its benefit. He and Banks both believe the money for dividends would ultimately be diverted to other needs, particularly in the era of no congressional earmarks. “If oil and gas support for a carbon tax gains a critical mass of support in Congress it’s highly likely that it will be hijacked and used as a revenue stream to save something like Social Security,” Banks said. He supports a blending of climate and international trade policies to favor lower carbon products, which would give advanced economies like the U.S. a competitive advantage because manufacturing and energy production practices here usually result in less carbon emissions than in developing nations. The U.S. currently imports more “embodied carbon,” or carbon emitted from producing a given product, than it exports and that increases total U.S. carbon emissions by about 10 percent, according to Banks. “There’s no question that U.S. (natural) gas would be more competitive than Russian gas in Europe if life-cycle emissions were taken into consideration,” Banks argues. He and Dillon stressed that legitimate climate change solutions will be market-driven — such as lower cost natural gas displacing coal for electricity production — and government’s role is to invest in research and development of cleaner energy technologies while removing barriers to innovation. Alaska actions On the state level, Gov. Michael J. Dunleavy scrapped former Gov. Bill Walker’s Climate Action Leadership Team shortly after taking office and has repeatedly said the state overall is not a major carbon emitter on the national or global levels. Therefore, the State of Alaska needs to focus on oil production and otherwise generating a strong economy that can allow it to invest in ways to adapt to a changing climate, such as relocating coastal communities threatened by erosion, according to Dunleavy. The University of Alaska Anchorage Institute of Social and Economic Research recently published a report that estimates the consequences of a warmer climate will require the state to spend $340 million to $700 million per year in additional public infrastructure repairs and upgrades over the coming decades. Renewable Energy Alaska Project Executive Director Chris Rose said in an interview that it’s understandable that the oil companies want a carbon tax implemented as broadly as possible and advocating for one now is a hedge against uncertainty, as he believes carbon pricing will eventually be commonplace. However, that conflicts with the fact that new policies are almost always generated in states that act as policy laboratories, “incubators, if you will,” Rose said. “If the oil companies want to wait for a national or international (carbon) policy I think they’ll be waiting for a long time,” he said, noting the oil industry lobbied against a carbon tax referendum in Washington state that was soundly defeated on the November ballot. The root issue with carbon pollution, according to Rose, is it isn’t nearly as tangible as roadside garbage and therefore it’s harder to generate support for policies to curb it. “The problem with carbon dioxide is it’s invisible and if people could see they’re polluting they’d look at id differently,” he said. “All of those costs of carbon are being externalized.” Rose suggests a state carbon tax — as unlikely as it is in the near-term — could easily be implemented at the gas pump, for example, but the revenue could then be invested in economic activity inducing energy efficiency programs. A carbon tax could support a state “green bank” that would act similarly to the Alaska Industrial Development and Export Authority, the state’s development bank, with a focus on renewable energy and efficiency investments. “Energy efficiency is always the cheapest” way to reduce carbon emissions, Rose said, as evidenced by the Alaska Housing Finance Corp. home weatherization programs that have reduced participants home energy use by roughly 30 percent. An Alaska green bank could use the tax revenue to leverage private investment in a revolving loan fund that wouldn’t rely on grant funding as state energy programs have in the past, Rose said. The green bank would not only reduce energy costs — freeing individual and business capital for other uses — but it would also spur construction activity and help private banks become comfortable in lending for renewable energy or efficiency projects, according to Rose. For its part, BP has started bringing carbon-pricing mechanisms to Alaska indirectly. Last March, BP and Southeast Alaska Native regional corporation Sealaska Corp. announced that they had reached agreement on a carbon offset project in which Sealaska set aside 165,000 acres of carbon-absorbing forestland for at least 110 years to mitigate for BP’s carbon emissions in California, which has a carbon cap-and-trade program. The finances of the deal remain confidential, but the Sealaska Native Alaska Forestry Project was issued 11 million carbon credit offsets by the California Air Resources Board for agreeing to not harvest the timber or otherwise develop the acreage, according to the company. Sealaska then sold those credits at a lesser price than it would cost BP to reduce its California carbon emissions below the state’s emissions cap. A single credit equals one ton of carbon dioxide, according to Weiss. It allows Sealaska to derive revenue from the land while preserving it for salmon and wildlife habitat and other traditional uses, according to the company. Weiss said BP reached a similar deal with Ahtna Inc. last October that is the largest carbon forestry project in the country. “These projects support sustainable future management and multi-use access to the forestland and create economic opportunities for the region,” she said. “They also incentivize verifiable and permanent emissions reductions in sectors of the economy that would otherwise not be incentivized to pursue such reductions.” Ahtna declined to comment on its deal with BP, but Rose said the State of Alaska — with its roughly 100 million, mostly undeveloped acres — could play the role of a carbon banker by agreeing to set aside some of its forests or even coal prospects. ^ Elwood Brehmer can be reached at [email protected]

Dunleavy adminstration pumping brakes on gasline direction

Gov. Micheal J. Dunleavy’s administration plans to go back to the future for a successful Alaska LNG Project. Revenue Commissioner Bruce Tangeman stressed the administration’s belief that the state-owned Alaska Gasline Development Corp. needs to shift its focus away from intense efforts to get the $43 billion gasline project approved quickly in favor of resurrecting the “stage-gate” approach favored by the state’s former producer partners during a Jan. 18 speech at the Meet Alaska oil and mining contractor trade show in Anchorage. “The (administration) transition is a great opportunity to pause and see exactly where we’re at in the process with the Alaska LNG Project specifically. It’s a good chance to reach out to our partners that we used to be involved with on a different level and see what their views are of the gasline and the LNG market — get their expertise,” Tangeman said. He added that Dunleavy is very familiar with the project from his time in the state Senate. Dunleavy and other legislators were comfortable with the stage-gate megaproject development process employed until the state took over leadership of the project in late 2016, according to Tangeman. The deliberate stage-gate process breaks overall project development into numerous stages and after each is finished a decision is made whether or not to advance to the next stage. For Alaska LNG, the decision points, or gates, were times when BP, ConocoPhillips, ExxonMobil and the State of Alaska could evaluate their desire to continue or allow the other partners go ahead without them. The companies approach former Gov. Sean Parnell about the prospect of the state being a 25 percent partner in Alaska LNG, which was appealing to the state because it was a way to participate without undue risk, said Tangeman, who was a deputy Revenue commissioner when the public-private Alaska LNG Project ownership structure was devised during Parnell’s tenure in the governor’s office. Parnell has since consulted with Dunleavy on the current status of the project since the election. “We had partners who had done this kind of work and we were going to jump on their backs and ride across the finish line to a successful, profitable project,” he recalled. ExxonMobil was leading the project at that time and the company’s Alaska LNG manager Steve Butt emphasized a need to continually focus on lowering the project’s final cost of LNG supply through optimized project design and infrastructure engineering, in turn leading to improved project economics overall. However, when oil markets bottomed out at sub-$30 per barrel prices in early 2016 — and oil-linked global LNG prices followed suit — the companies suggested to then-Gov. Bill Walker that the project could either be slowed or the state, through AGDC, could take it over. Walker, a longtime advocate for a publicly-led gasline project, quickly chose the state-led option. The Alaska LNG team at the time was wrapping up the roughly $600 million preliminary front-end engineering and design, or pre-FEED, stage of the project, which resulted in reams of environmental and engineering data and the current cost estimate of $43 billion, below the conceptual range of $45 billion to $65 billion. Under Walker, AGDC focused on marketing the project to potential customers in the Asia-Pacific region, an aspect of development Walker repeatedly said had been incorrectly ignored under the prior producer-led Alaska LNG structure. AGDC also began the multi-year process of securing federal permits for the project in April 2017 primarily using the information gathered during pre-FEED. Tangeman said interim AGDC President Joe Dubler and new board members appointed by Dunleavy are also taking time to better understand where the quasi-state agency is in negotiations with potential customers as well as the status of permitting with the Federal Energy Regulatory Commission. FERC is scheduled to release a draft environmental impact statement for the project sometime in February. Dubler, a former finance executive with AGDC, officially takes over as president of the corporation Feb. 1. The board hired him Jan. 10 immediately after firing Keith Meyer, who was hired in 2016 under Walker’s guidance for his significant experience in Lower 48 LNG and pipeline companies. AGDC secured 15 letters of interest from potential customers under Meyer’s leadership and was actively negotiating with six of them when he was let go, according to corporate management. The most notable interest has come from a consortium of state-owned Chinese corporations, which signed a joint development agreement, or JDA, with AGDC in November 2017 in front of President Donald Trump and China President Xi Jinping. The JDA outlines the prospect of the Bank of China and oil giant Sinopec Corp. becoming anchor customers and financiers of the project, with the bank debt funding up to 75 percent of the $43 billion project cost in exchange for Sinopec purchasing 75 percent of its LNG production capacity. Final JDA negotiations have been extended for six months after a Dec. 31 deadline was not met. While the administration is championing a slower approach, board chair Doug Smith also said he doesn’t want to slow any of the progress the corporation has made. Tangeman made it clear that AGDC would not be making a final investment decision on Alaska LNG in 2020 as Meyer had been pushing for, but getting a record of decision from FERC would be valuable and it’s unclear exactly how much that will cost. The state will not be leading a project into construction with as much risk as it carries now, he said. AGDC was also preparing for what executives called an “equity road show” to market the project to investors this year. They often noted the producers would be welcome investors to the project. Tangeman said Dunleavy doesn’t expect to return to the prior structure, but he would be happy with it. “We understand what took place with the price of oil, the price of gas over the last several years but we’ll be talking with (the producers) to see what the climate is now, where we are with oil at $60; what is the gas market; is there an appetite to reengage and see if we can move forward as a partnership again?” he said. “We look forward to having those discussions again. And ultimately a stage gate approach will be put in place so we know and Alaskans know exactly how we’re going to build this project.” The Legislature will also have its say, Tangeman noted. AGDC had previously stressed the need to move quickly on the project to meet a mid-2020s market demand window. BP Alaska President Janet Weiss said in an interview that a state-led project has tax advantages the IRS has recognized that could lower the cost of supply and government-to-government relationships with customers are valuable as well. The state is wrestling with the challenge of assuring it can find a competent builder for the project, something BP, which has assisted AGDC since the state took over, would need to be comfortable with before it would invest. The London oil major also agreed to key terms, including pricing, in May with AGDC to sell its share of North Slope gas into the project. Weiss said BP, which has championed the state’s project “is all about educating and figuring out how to go forward” in discussions with the administration and Legislature. Tangeman said in an interview that the potential customers AGDC is negotiating with understand some change is going to happen in the project with a change of governors but that it will survive if it is economic. He said they also understand there is still a lot of work to do. AGDC veered from the formal stage gates between pre-FEED and FEED, which the companies estimated to be up to a $2 billion undertaking of much more detailed work. “All that hard work has gotten us to a 10-yard line but I think we still have a long way to go to get to the 10-yard line,” Tangeman said, referencing Walker’s campaign metaphor for how close he believes the state is to finally building a gasline. “And I think it’s going to be important that Alaskans understand that.” Tangeman later added in an interview that, “Gov. Dunleavy doesn’t want to go that 90 yards with 100 percent of the risk on our back.” ^ Elwood Brehmer can be reached at [email protected]

Microcom founder launches new satellite broadband project

If everything goes according to Chuck Schumann’s plans it will soon be easier to do everything from providing health care to running an oil field to streaming a favorite movie in rural Alaska. Schumann founded the Anchorage-based satellite telecom provider Microcom in 1984. Now he’s parlaying that success — Microcom has expanded to Hawaii and Lower 48 markets — into a project to provide up to 40 gigabytes of broadband Internet capacity across Alaska. “We’re working hard to solve the problem of access to broadband in rural Alaska. In following the industry we were always hearing people talk about solving the problem in Africa or South America or the Middle East and countries around the world and they weren’t focused on solving the problem in Alaska,” Schumann said in an interview. Schumann’s plans started with founding Microcom subsidiary Pacific Dataport Inc., or PDI, in 2017. Pacific Dataport has since partnered with San Francisco-based satellite developer Astranis Space Technologies Corp. to build and launch one, and eventually several, “microsatellites” to support The Aurora System broadband network. "We really couldn't have asked for a better first customer and a better partner," Astranis CEO John Gedmark said in a Pacific Dataport announcement about the project. "Not just because of PDI's vision and dedicaiton to bridging Alaska's digital divide, but also becasue this is a perfect opportunity to showcase our phased approach to bringing online the more than 4 billion people in the world without reliable internet access." Phase one of the Aurora project is set to launch in 2020 and offer up to 7.5 gigabytes of broadband capacity across Alaska, according to Schumann. If successful, subsequent expansions to The Aurora System and a second satellite launch in 2021 will grow that capacity up to 40 gigabytes, he said. His companies have heard from large resource developers in rural parts of the state that broadband service now is too expensive and unreliable, which just adds another layer of challenges to an already technically challenging industry. Rural Alaska health care providers have also expressed a widespread need for better Internet access to aid in providing telehealth other information sharing needs. Currently, Alaska has about 2.5 gigabytes per second of satellite bandwidth across multiple broadband providers, according to PDI. The broadband tracking website BroadbandNow lists Alaska as being 80 percent covered by some sort of broadband service at an average speed of 25.8 megabytes per second. Alaska is the 44th most connected state when it comes to broadband availability, according to the site. “A couple of years ago we were just fed up with being left out of everything because satellite platforms covering Alaska just are too low on the horizon; we were just left out of things,” Schumann said in describing a common challenge with Alaska satellite connections. “They don’t cover Alaska. (We’re) always at the mercy of taking the scraps that someone would give us.” That is, satellite-based systems used in extreme latitudes are often obstructed by objects on the ground, or even the curvature of the earth, because they must be pointed at low-earth orbit, or LEO, satellites circling the earth at the equator. The Aurora System will overcome that issue by utilizing geosynchronous equatorial orbit, or GEO, satellites that are launched into an orbit thousands of miles above Earth and mirror the planet’s rotation. Schumann said the Aurora satellites will be positioned roughly over Hawaii “to give the best possible look angle” to Alaska. They will be able to provide broadband service up to 500 miles north of the North Slope, he said. “We’ll be able to serve cruise ships transiting the Arctic Ocean with a large amount of capacity that’s being demanded by the cruise ships of the future,” he added. The Aurora System will be run by Pacific Dataport. Microcom will offer small business and residential retail broadband from the system and Pacific Dataport will handle business-to-business and wholesale broadband contracts, according to Schumann. While the project is still in its early stages, a Pacific Dataport release states Aurora System service should initially be available for about one-third the average cost of current broadband rates for residential and wholesale customers in the state with three times the current satellite capacity. Schumann said the first phase, which will be “in the tens of millions of dollars” of investment, is as much of a sure thing as it can be because it is already fully funded. “We’re already building; we’re already ordering. We’ve been in progress now for well over a month in getting the project underway so the decision was made to let the word out that we’re underway,” Schumann said, adding “that we needed to give rural Alaskans hope that we were underway.”   Elwood Brehmer can be reached at [email protected]  

AGDC audit recommends minor changes, additional report forthcoming

Alaska Gasline Development Corp. officials by and large have spent $433.3 million in line with the requirements tied to that money but missed the mark on other, smaller legislative mandates and in-house rules, according to a special Legislative Audit Division review of the state-owned corporation. Released Jan. 14, the audit determined that AGDC had spent all but $150,000 of the $433.3 million in accordance with legislative intent for the appropriations. The misstep occurred when seven invoices from the Bureau of Land Management were charged to the corporation’s Alaska LNG Project fund instead of its Alaska Standalone Pipeline, or ASAP, project fund as they should have been. The charges were made after a new working agreement was signed with BLM and “were coded incorrectly to the AK LNG fund,” according to the audit report. AGDC staff subsequently corrected the errors when they were flagged by the auditor, the report states. Accounting for a $157 million re-appropriation of gasline funds to an education account in 2015, AGDC has received $479.8 million from the Legislature since 2010; $225 million of which was meant for the smaller, in-state ASAP project and another $254.8 million to further the $43 billion Alaska LNG Project. AGDC has exhausted its ASAP money and had $39.7 million left in Alaska LNG funds remaining at the end of November, according to figures presented at the corporation’s Jan. 10 board of directors meeting. A joint permitting record of decision for the ASAP project is expected from the U.S. Army Corps of Engineers and BLM as soon as the federal government shutdown is over. ASAP is a gasline project for in-state use estimated to cost approximately $10 billion. The finance review covered the period from July 1, 2014, to March 31, 2018. AGDC’s administrative support was handled by the Alaska Housing Finance Corp. prior to July 2014. AGDC started as an arm of AHFC and the Legislature separated the two in 2013. Some legislators have questioned whether AGDC had kept its project spending segregated during a time of severe overall state budget challenges given development of the long-sought Alaska LNG Project could benefit from additional money. The audit additionally concluded that AGDC had not complied with statutory language requiring its hiring procedures to include an Alaska veterans’ preference and recent corporate budgets and large contracts had not been approved by the board of directors as called for in the corporation’s bylaws. AGDC’s annual operating budget has been static at $10.3 million for several years. Then-AGDC board chair Dave Cruz wrote in a Jan. 2 formal response to the audit that the board approved a veterans’ preference policy in August and that staff would notify the board of future contracts of more than $1 million and seek board approval for contracts in excess of $5 million. Management will also seek full board approval for future operating budgets, according to Cruz. “AGDC is a dynamic organization that has successfully navigated through considerable organizational change,” he wrote. “AGDC is committed to continuously monitoring operations to ensure current processes are in alignment with established policy and good corporate governance. AGDC is committed to continuous improvement.” AK LNG report, financing Legislative Budget and Audit Committee chair Sen. Bert Stedman announced during a Jan. 14 meeting that the committee is working on a report with consultants hired to evaluate the overall potential fiscal impacts of Alaska LNG development on the state’s finances. Stedman said he originally wanted the Alaska LNG fiscal report — spanning everything from broad construction costs to the implications of specific lease expenditures by the North Slope producers — to be available by the Jan. 14 meeting as to apprise the incoming committee chair from the House of the work the committee has been doing to evaluate the gasline project. As of this writing a majority caucus had not been formed in the House and it was unclear who would chair the LBA Committee. However, the committee was told in mid-December that the flow information from AGDC and other relevant state agencies had been “highly restricted,” which delayed completion of the document, according to Stedman. He noted the Legislature didn’t approve AGDC’s request last year for unlimited authority to accept outside funding in large part because legislators weren’t comfortable with the amount of information the corporation was providing them. “We’re hopeful that we’ll have a smooth transition (to House leadership) and this document will help sitting members in the Legislature and staff and the public better understand the scope and realm (of fiscal issues) that we’re dealing with,” he said. Randy Ruaro, a member of Stedman’s staff said the report could be done in late January. Outgoing Rep. Paul Seaton of Homer also voiced concerns he has regarding the financing structure for Alaska LNG that AGDC is contemplating during the meeting. According to Seaton, AGDC Commercial Vice President Lieza Wilcox said negotiations with the Bank of China and Sinopec — two of the three state-owned Chinese companies AGDC has been negotiating with as a possible anchor customer and financier for the project — include the possibility of Sinopec receiving cheaper gas than other customers for 1 percent to 2 percent debt financing in return. Wilcox was part of mid-December meetings in Houston with LBA consultants, committee members and administration officials. Seaton participated via teleconference. The November 2017 joint development agreement AGDC signed with the Bank of China, Sinopec and China Investment Corp. contemplates Sinopec buying up to 75 percent of the project’s LNG capacity in exchange for the Bank of China funding up to 75 percent of the estimated $43 billion Alaska LNG Project. The remaining project funding would be raised through equity investments, according to AGDC officials. “What disturbed me was they said the Chinese are interested in this project because they could get cheap gas. They mentioned $5 (per million British thermal units) if things worked out,” Seaton said in an interview. “When you have a national bank and a national oil company working together on a project — heck, they could have 0 (percent) or 1 percent money and they’re going to make those payments and all of a sudden that’s where it could be really cheap.” Those comments caught his attention because corporation leaders have previously estimated building and operating Alaska LNG infrastructure would cost more than $6 per mmBtu, which does not account for feedstock gas and shipping costs, Seaton said further. He’s worried it could leave the state with LNG priced on equity financing with 8 percent to 9 percent returns that would be too costly to sell on world markets. “The whole plan has been 75 percent Chinese but this financing model means that it’s no longer one project; it’s two separate projects because the financing for the projects are totally separate and therefore one can be economic and one can be noneconomic,” Seaton described. AGDC officials disputed the $5 gas price reference but noted volume discounts are common in markets for many products. AGDC communications Vice President Tim Fitzpatrick said “pricing for gas from the project is still in the negotiation process” and also pointed out that in-state gas from the project would not have liquefaction and shipping costs added to it. Elwood Brehmer can be reached at [email protected]

USPS cancels Bypass Mail pilot project at last moment

A pilot program aimed at finding cheaper ways to deliver goods and mail to North Slope communities has been scrapped just before it was set to launch. The U.S. Postal Service had partnered with Lynden Transport Inc. and planned to use multiple modes of transportation to make Bypass Mail and non-priority mail deliveries around the North Slope hubs of Deadhorse and Utqia’vik, formerly Barrow. The pilot program was set to start Jan. 15 and run for one year. USPS officials went as far as to inform other mail carriers that could see their business impacted by the plan. Jodi McDermott, a commercial air network manager with the Postal Service, wrote in a Dec. 7 letter to Anchorage-based Northern Air Cargo leadership that Lynden Transport would deliver the same mail at the same frequency as before, but would use tractor-trailers traversing the tundra during winter, marine landing craft in summer and aircraft only during the spring and fall shoulder seasons. The belief, according to McDermott, was that Lynden would be able to achieve as good or better on-time service compared to the air service primarily used today. A major freight carrier in Alaska with corporate offices in Anchorage and Seattle, Lynden Transport is the parent company to 16 air, marine, ground and logistics subsidiaries. “The Postal Service expects substantial savings during the one-year pilot test. If the pilot test is successful, the annual savings are expected to increase due to continual Department of Transportation airline rate cost increases. These transportation savings come at a critical time for the Postal Service, as we continue to experience financial losses every year,” McDermott wrote. Established in 1972 as a way to ease demand on postal facilities that were running over capacity, the Bypass Mail program supplies a large portion of the consumer goods used in rural Alaska. The program uses a complex system of rate and aircraft classifications depending on the route served to determine freight fees. Those rates are established by the Department of Transportation and imposed on the Postal Service. Air carriers transport the freight orders that could be anything from food to power tools to household items, directly to their destination without going through a postal facility. The carriers are paid by the Postal Service. The Alaska Congressional Delegation successfully fought off changes to the Bypass Mail rate structure proposed by Rep. Darrell Issa, R-Calif., in 2014. At the time, officials with the Postal Service inspector general’s office said during a House committee meeting regarding Issa’s legislation that the Alaska-specific program lost $76 million in 2013, or 70 cents for every dollar of the $108 million the post office invested. Issa’s bill would have required the Postal Service to recover up to half of its Bypass Mail costs by 2020 through incremental rate increases. It’s unclear exactly why the Postal Service suddenly changed course and canceled the multi-modal test. USPS Alaska spokesman Brian Sperry said Jan. 14 via email that the program had been withdrawn and was no longer being pursued and he could not elaborate further on the reasons why. A spokesman for Lynden Transport also did not respond to questions about the program and why it was nixed. Alaska Air Carriers Association leaders sent a letter to McDermott Dec. 13 requesting the Postal Service pause the program until the potential impacts to contracted mail carriers could be identified. The letter also suggests that if the pilot program meets the requirements of federal Bypass Mail statutes and regulations the Postal Service should issue a request for proposals “to all eligible air carriers for the services requested.” AACA Executive Director Jane Dale said in a brief interview that it was subsequently determined the Postal Service has the legal authority to launch the pilot without going through a standard RFP process. She stressed the association does not want to meddle in any one company’s business, but seeks transparency and open competition for opportunities available to its members. Dale could only speculate as to why the program was canceled. ^ Elwood Brehmer can be reached at [email protected]

Meyer out as president of Alaska Gasline Development Corp.

Keith Meyer is out as the president of the Alaska Gasline Development Corp. Meyer was dismissed from his position on Thursday and replaced on an interim basis by Joe Dubler, who is currently the executive vice president of finance and administration for the Cook Inlet Housing Authority. Dubler worked for AGDC as vice president of commercial operations under former President Dan Fauske, who resigned from the position at former Gov. Bill Walker’s request in November 2015 after the Legislature approved a buy out of TransCanada Corp.’s interest in the $43 billion Alaska LNG Project. Continuing the shakeup, Doug Smith, who was appointed to the board by Gov. Michael J. Dunleavy on Monday, was voted the new chair of the board of directors and Dan Coffey, also appointed Monday, was named vice chair. Smith replaces Dave Cruz as chair. Cruz has served on the board of AGDC for the past three administrations after first being appointed by former Gov. Sean Parnell. Meyer has led AGDC since June 15, 2016. The Alaska LNG Project is nearing a milestone with the scheduled release of a draft environmental impact statement scheduled to be released next month. A joint development agreement with three large nationalized Chinese companies to invest in up to 75 percent of the project was signed in November 2017 but a recent Dec. 31 deadline to formalize commercial agreements was extended for six months. Laborers’ Local 341 union leader Joey Merrick, one of the board members replaced Monday, thanked AGDC staff for their hard work during the public comment portion of Thursday’s board of directors meeting and encouraged the new members to continue the work that has been done. “We’re close to having some customers, which is the key to this project,” Merrick said. Smith thanked Cruz for staying with AGDC, calling him “an integral part of this board,” during the meeting. He also said in a talk with reporters following the meeting that the leadership changes do not signal a change in course for the state-owned corporation. “We’re not looking to derail any progress,” Smith said, emphasizing that he wants that message relayed to those interested in participating in the project with the state. He declined to elaborate on why Meyer was let go, calling it a “personnel matter.” AGDC officials said during an update on the Alaska LNG Project that they are in active negotiations with six potential LNG buyers. Meyer had previously stressed 2019 would be the year AGDC would begin courting potential Alaska LNG investors with an “equity road show” in addition to continuing regulatory work and securing customers. Dunleavy was regularly critical of the state-led Alaska LNG Project structure during his time in the state Senate and while campaigning for governor, stressing that the private sector needs to play a larger role in the project, as was first envisioned. The state took over the lead role on the project in 2016 after the major producers partnered on the project wanted to slow the pace down as LNG prices collapsed along with oil. Officials in the governor’s office avoided answering questions as to why Meyer was terminated.  AGDC External Affairs Vice President Tim Fitzpatrick said Dubler would not be available for comment Thursday. Meyer joined AGDC from LNG America, a Houston-based energy logistics firm he founded in 2008 that focuses on increasing the use of LNG as a fuel for the maritime and transportation industries, according to an AGDC release. He was paid a base salary of $550,000 per year, making him the highest-paid state employee, and the board of directors voted last month to award him two years of performance bonuses totaling $296,000. Dubler will officially start at AGDC Feb. 1 with a base salary of $350,000 and will not be offered pay bonuses, according to state officials. Walker also shook up the board of directors at AGDC soon after taking office, firing two board members a month after taking office in January 2015, and replacing Fauske later that year.   Editor's note: This story has been updated from the original with additional reporting. Look for updates to this story in an upcoming issue of the Journal.  

Senate set to work as House in disarray

Another challenging session is fast approaching, but Alaska’s Legislature remains half-baked. That’s because at the time of this writing the House is still without a majority caucus despite the Supreme Court’s Jan. 4 decision to uphold a single-vote victory for Fairbanks Republican Rep.-elect Bart LeBon in District 1. In the Senate, leaders of the Republican majority are again preparing to tackle major issues on which they have made progress in recent years but significant work remains. Incoming Senate President Cathy Giessel, R-Anchorage, told a gathering of the Resource Development Council for Alaska at the group’s annual legislative preview meeting Jan. 3 that addressing crime problems in the state will be the top priority for her caucus in 2019, a position in line with Gov. Michael J. Dunleavy’s primary goal for his first session in office. Dunleavy and many legislators — some of whom first supported it — have pushed for a wholesale repeal the now-beleaguered criminal justice reform package in Senate Bill 91 passed in 2016. Giessel said in a brief interview that there are “significant flaws” in SB 91 and on the whole the public wants it repealed but continuing changes can be made that could be beneficial without sacrificing some of the more popular aspects of the law, such as tougher penalties for various felony convictions. She said prosecutors across the state have helped legislators identify some of the gaps in SB 91 that can be closed without a straight repeal. Finance Committee co-chair and operating budget leader Sen. Bert Stedman, R-Sitka, said he expects the omnipresent issue of closing the state’s large budget gap will keep legislators working well into overtime for a fifth consecutive year. The 2020 fiscal year deficit is currently pegged at about $1.6 billion, but Dunleavy’s final budget proposal should cut spending to the point of being balanced, according to Budget Director Donna Arduin. At that point it will be up to the Legislature to determine how many of the administration’s cuts it wants to implement. It’s those major policy calls — and the fact that there are little state savings to fall back on — that lead Stedman to believe legislators will work up to and possibly over their constitutionally allotted 121 days. With $1.7 billion left in the Constitutional Budget Reserve Fund it would be possible for legislators to turn to it one more time to fill the deficit but there is general agreement that the state needs to keep at least $1 billion, and ideally $2 billion, in reserve to respond to emergencies and for cash flow management purposes. That means legislative action will be needed to make the structural budget cuts required to resolve a deficit of that size, according to Stedman. “I’ve expressed concern and a desire to the administration to have legislation prepared and ready for legislative action. In my opinion, (big changes) should be led by the administration; the agencies are the ones with the expertise, with the more intimate knowledge of their operations,” he said. “The Legislature, the body of the people, doesn’t have the background.” Senate Republicans are looking to major changes to the state’s Medicaid program, for one. Democrats argue Medicaid expansion, accepted by former Gov. Bill Walker in 2015, is a win for the state because it has afforded upwards of 40,000 low-income Alaskans access to health insurance that is 90 percent funded by the federal government, a funding level legislators are happy to match for other federal programs such as highway funding. However, Giessel contends the expanded class of Medicaid recipients, which includes working-age men, takes money away from the individuals the safety net was originally intended for. “Working age men — we need to get them to work,” she said. On the other hand, Stedman said he wants to make sure the state is collecting all of the Medicaid funding that’s available. “I’m interested in seeing how much money we’re leaving on the table and I think it’s significant — in the tens of millions — and I think we need to clean up that area and try to get as much match as absolutely possible,” Stedman said in an interview. The Senate’s final Permanent Fund dividend amount will be a collective decision, he noted, but Stedman is of the opinion the PFD appropriation should be half of whatever the state’s percent of market value, or POMV, draw on the fund is in any given year. He believes splitting the draw 50-50 for dividends and government support would help alleviate the politicization of the issue. Stedman is more concerned about the size of the POMV draw; he said the current 5.25 percent draw is too large and it needs to be reduced to the 4.5 percent range to be sustainable over the long-term. At 5.25 percent, the Revenue Department estimates the 2020 fiscal year POMV draw will be roughly $2.9 billion. “We shouldn’t be looking at the Permanent Fund as a milk cow to milk it as much as we can and hope the historical (average returns) average out and we don’t have any abnormal hiccups in the financial markets,” Stedman stressed, recognizing a smaller draw means less revenue, putting more pressure on the state budget. “The Permanent Fund should be siloed and run as a portfolio regardless of our financial needs.” His biggest worry, though, is that legislators will use take “the easiest course of action” in the upcoming session and fill the deficit via an ad hoc draw from the roughly $16 billion available through a simple majority vote in the Earnings Reserve Account of the Permanent Fund, he said. “That issue of protecting the Earnings Reserve and protecting the Permanent Fund from appropriations is a very serious matter,” Stedman continued. “You can’t point at one party — the no-good SOBs down the hall, they want to take big chunks of money — it’s all the SOBs in the building. We have good intentions but collectively we’re very dangerous and hard on the savings of the state because it’s easier to make a 21 and 11 vote than it is to restructure our operations.” He emphasized that he is looking forward to a robust debate on how to best avoid overusing the fund. House disarray Because no one wants to show their hand, no one among House legislators is talking. There is very little legislators in the House can do until they settle on a majority caucus, according to Lt. Gov. Kevin Meyer’s Chief of Staff Josh Applebee. The lieutenant governor presides over the initial floor sessions of the House and Senate each year, swearing in new members and taking nominations for House speaker and Senate president pro-tems. “That’s all his duties are. It’s incredibly limited what the lieutenant governor can do,” Applebee explained. “The lieutenant governor as presiding officer is only empowered to do those things — maintain decorum, call them to order, swear them in.” Without a majority to nominate a speaker the House will not even be able to accept messages from the Senate or the governor, according to the Legislature’s uniform rules. Applebee noted that means “the body can’t conduct any business other than electing a speaker pro-tem and that includes being able to approve the governor’s appointment of Sharon Jackson” to the House District 13 seat vacated by now-Corrections Commissioner Nancy Dahlstrom. Applebee investigated what happened the last time — in 1963 — the House started a session without a majority, through reading the Legislative Journal from the time. “They really tried to explore other powers the (lieutenant governor) had and they came to the conclusion that there are none,” he said of the 20-20 caucus split in 1963. “There’s no committees to be appointed, communications from the governor and the Senate can be received but not acted upon; they basically sit on the clerk’s desk.” He added that it could go so far as to challenge votes to adjourn a floor session. “Back in ’63 they couldn’t agree on how long to take a recess,” Applebee recounted. How it eventually shakes out should add up to an interesting lesson on the inner workings of Alaska politics. ^ Elwood Brehmer can be reached at [email protected]

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