Anchorage LIO proposal offers savings, settlement to lawsuit; LAA disputes figures
Editor's note: This story has been updated with the state's analysis of the LIO owners' offer and subsequent comments.
A proposal by the building owners to keep the Legislature in the Anchorage Legislative Information Office building could save the state millions of dollars and get the legislators out of a political bind.
However, Pam Varni, executive director of the Legislative Affairs Agency, which handles business for the Legislative Council, disputed the figures in a Feb. 5 memo to Council Chair Sen. Gary Stevens.
The proposal, submitted Jan. 29 to Stevens, suggests the State of Alaska purchase the building for $37.9 million to accrue maximum savings that would outpace projected savings of moving legislators into the nearby Atwood Building, primarily occupied by executive branch agencies.
A meeting of the Legislative Council is Feb. 11 is scheduled for 5 p.m. to discuss the proposal.
Tax-exempt financing would be “considerably less” than the current lease payments of $281,000 per month the Legislature currently pays, and the equity in the building would serve as an accrued savings account for the state, according to 716 West Fourth Avenue LLC, the building owner group.
The leaseholder company name is the Downtown Anchorage address of the LIO and the offer is signed by longtime Anchorage developer Mark Pfeffer, the firm’s managing member.
Varni wrote to Stevens that the proposal overstates the costs of moving to the Atwood Building by $11 million over 10 years and by $16.3 million over 30 years by including costs for debt service that is currently set to expire in March 2017. She concludes that purchasing outright or financing a purchase of the building would cost the state from $22.5 million to $94.4 million over 30 years compared to moving to the Atwood Building.
The 716 proposal creates a "statistical misperception," according to Varni.
"The purpose of statistics is to make something easier to understand; however, when used in a misleading fashion, may trick the casual observer into believing something other than what the actual data show," she wrote. "In this instance, 715 West Fourth Ave LLC, asserts it is less expensive to stay at 716 W. 4th Avenue than the Atwood Building, based on unrealistic and erroneous debt service data."
The Legislature could terminate the lease seemingly without legal ramification because of a clause in nearly all government contracts stating fulfillment of the agreement is “subject to appropriation,” in this case, by the Legislature. If the Legislature doesn’t fund it, for any reason, the lease or contract falls apart.
Pfeffer has indicated an intention to sue if the Legislature walks away from its obligation.
The proposal also states that 716 has secured a settlement to dismiss a lawsuit brought by Jim Gottstein, owner of the adjacent Alaska Building, against the LIO owner group and the Legislative Affairs Agency.
Gottstein’s complaint alleges the LIO lease is illegal because it is neither an extension of an existing lease, nor 10 percent below market value, as statute requires for a long-term extension.
To fully settle the suit the Legislative Affairs Agency must agree to waive potential claims to recoup legal fees, according to the proposal document. Last month, the judge in the suit denied Gottstein’s petition to receive a “whistleblower” award of 10 percent of any money saved if the lease is ruled illegal.
Trial in the case is currently scheduled for March.
A Department of Revenue analysis of the Legislature’s options based on figures provided by 716 West Fourth Avenue — buying the building outright, having another state agency purchase it, break the 10-year lease and move to the Atwood or keep the status quo — found a potential savings of more than 55 percent over the existing lease another state entity finances the purchase for the Legislature.
Another stopgap solution offered to lower the existing rent by 5 percent, or $169,000 per year, beginning July 1 until a purchase could be executed. A rent reduction would require lender approval.
The lease is paid through May 31, 2016.
The owner group also notes it has approval to waive earthquake insurance on the building, which could save another $59,600 per year from the Legislature’s $3.3 million annual bill.
Amy Slinker, a spokeswoman for 716, said in a statement that Varni's memo lacks third party analysis.
"The Department of Revenue's professional review shows the ability for clear savings," Slinker said.
Revenue’s examination of the options put the upfront cost to move out of the LIO and remodel 30,000 square feet of the Atwood at $3.5 million to $5.5 million, with an annual building operating cost of $664,000.
Purchasing the LIO in some fashion would require the initial payment and then operating payments of $269,000 per year for 45,000 square feet of usable space.
Legislative Affairs concludes the Atwood's annual operating cost to be $613,000, based on Varni's memo.
State ownership would also save $231,000 per year in municipal property taxes; however, taking the building off the city’s tax roll has been a reason cited by legislators for why the council did not purchase it initially.
Anchorage Democrats, the public and legislators from elsewhere in the state have disparaged the LIO lease terms as far too expensive at a time when the state is facing annual budget deficits approaching $4 billion.
On Dec. 19, the Legislative Council unanimously recommended the full Legislature vote not to fund the lease at a meeting in the Anchorage LIO unless a solution that is cost-competitive with moving to the Atwood Building could be resolved within 45 days — by Feb. 5.
In a statement released prior to the proposal being made public — multiple news outlets were denied a copy when requests were made to Stevens’ office — Slinker wrote the group trusts the council will consider the proposal that meets the council’s terms.
“Our discussions with Sen. Stevens over the past 45 days have pushed us to dig deep for short-term, interim savings,” Slinker wrote. “That then set the stage for a long-term solution to save millions of dollars and help avoid any negative financial implications for the state.”
The building houses off-season offices for 25 Anchorage legislators and is the de-facto home to much of the general Legislature’s out-of-session activity.
The Legislative Council, then led by Rep. Mike Hawker, R-Anchorage, decided to rebuild on the old LIO building site in 2013 after numerous attempts to find existing suitable space that meets the unique needs of a public government body in Anchorage failed.
The Legislature contributed $7.5 million towards the construction cost, so Pfeffer and his company ultimately funded $37 million, about $28 million of which is long-term debt and $9 million is Pfeffer’s cash equity position in the property, he has said.
Appraisals of the six-story building plus its underground parking facility have been as high as $48 million, but numerous estimates put its value at $44 million. The customized office space cost $44.5 million to build in 2014, according to Pfeffer.
His group first drafted and submitted terms for the state to purchase the building for $37 million plus closing costs Oct. 9; a proposal requested by the Legislative Affairs Agency, which manages business for the council. The original terms agreed to by Legislative Affairs attorneys set a Jan. 31 deadline to act on the sale terms, according to correspondence between attorneys for both sides. 716 waived the deadline in a Jan. 29 letter on conditions that the council votes to buy the LIO by Feb. 5 or appropriate funds for fiscal year 2017 rent in the state budget.
Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at [email protected].