Elwood Brehmer

AGDC narrows CEO search; AK LNG sticks with 42-inch pipe

The Alaska Gasline Development Corp.’s search for a new CEO appears to be winding down. AGDC board member Hugh Short, who has led the board’s hunt for a new president and CEO, said in an interview that the board has winnowed its list of candidates down to one finalist and a secondary candidate. From a broad perspective, the depressed nature of worldwide oil and natural gas markets has been a concern during the process, but Short said the near-term uncertainty regarding the status of the $45 billion-plus Alaska LNG Project has not challenged the search. Rather, the State of Alaska needs someone with the experience and expertise to market the project and maintain its prominence worldwide in the minds of potential LNG buyers, he said. There is no timetable for when a new president will be named. Former AGDC President and CEO Dan Fauske abruptly resigned in late November at the request of Gov. Bill Walker. At the time the state had just approved the buyout of TransCanada Corp., which previously held the state’s share of the 800-mile pipeline and the North Slope treatment plant. After the buyout, the state now owns a full 25 percent share of the entire project. Walker said then he wanted more pipeline experience in AGDC’s top role as a result. Fauske, who had led AGDC since its inception as a subsidiary of the Alaska Housing Finance Corp. in 2009, has significant experience in the finance industry. Fritz Krusen, previously a vice president, has been AGDC’s interim president since mid-December. The Alaska LNG Project has been AGDC’s primary focus in recent years, but the corporation is still sitting on the design for the smaller, in-state Alaska Stand Alone Pipeline project, or ASAP, the project for which AGDC was originally formed. Specifically to the Alaska LNG Project, it appears the pipeline size is staying the same. Project spokeswoman Kim Fox of ExxonMobil wrote in an email that the project team has recommended it stick with the current 42-inch design after a five-month study process in which the 42-inch and 48-inch pipe sizes were evaluated. Walker pushed for the larger pipe study — which cost $20 million to evaluate — contending added capacity in the pipeline would encourage more natural gas exploration on the North Slope and could give companies searching for gas along the pipeline corridor — Doyon Ltd. is exploring near Nenana — a better opportunity to get their gas to market. The 42-inch pipeline would be dominated by North Slope gas owned by BP, ConocoPhillips and ExxonMobil, as well as the state’s gas, for about the first two-thirds of the project’s 25-year design life, before depletion from the Prudhoe Bay and Point Thompson fields is expected to start gas throughput decline at about year-18. Legislators on AGDC board A bill that would add three legislators to the AGDC board of directors is on its way to the governor’s desk. Senate Bill 125 passed the House April 9. It would put three nonvoting members of the Legislature — a senator appointed by the Senate president, a representative selected by the House Speaker and a member of the joint minority caucus — in oversight positions on the gasline corporation board. The AGDC board currently consists of five public members appointed by the governor and two state commissioners other than the heads of Natural Resources and Revenue. Sponsored by Anchorage Republican Sen. Mia Costello, the bill’s intent is to better inform the Legislature on AGDC’s work and increase collaboration between the corporation and the Legislature, which must approve any long-term contracts AGDC enters into.  “Having legislators participate in an advisory, nonvoting capacity adds experience and continuity to the board,” Costello’s sponsor statement reads. “Legislators understand they type of budget decisions that will be needed to meet the state’s cash calls for a gasline project, and would be helpful for discussions on project financing.” House Speaker Rep. Mike Chenault, R-Nikiski, also sponsored a similar bill this session. There are questions surrounding the constitutionality of SB 125, however. Assistant Attorney General Jerry Juday said to the AGDC board at its April 8 meeting that he thinks the bill is unconstitutional because a provision in the state constitution prevents dual office holding and having legislators serve on the board of an executive branch corporation could violate the separation of powers between the branches, Juday said. A March 30 memo from Legislative Counsel Emily Nauman to Chenault notes, as Costello’s sponsor statement does, that legislators already serve in similar roles on other state boards, such as the Knik Arm Bridge and Toll Authority and Alaska Seafood Marketing Institute. Nauman wrote that the nonvoting role may not violate the separation of powers doctrine, but also acknowledged that legislative positions on any state board might stand today simply because they haven’t been challenged. “What is clear is that the issue of nonvoting legislative members on executive branch boards is unsettled,” Nauman wrote. “The only sure resolution is a decision by the Alaska Supreme Court. I would certainly warn that there is a risk involved in placing nonvoting legislative members on the AGDC board, as the board is serving an executive branch function.” Gasline budgets The agencies working on the Alaska LNG Project are waiting just like everyone else to see what comes out of the House and Senate budget conference committee. AGDC’s $10.4 million budget request for fiscal year 2017 made it in the House version of the operating budget but was omitted from the Senate version. Corporation officials said at an April 8 board meeting that they are anticipating being funded in the resolved budget but are in “standby mode” until it is finalized. AGDC had a budget of roughly $13 million in previous years; the reduction to about $10 million is a result of eliminating 13 positions always vacant from its budget request. The corporation has never had more than 25 employees but was established with 38 potential positions. The Department of Natural Resources cut its final funding request for the North Slope Gas Commercialization Office by $18.7 million from the $35.7 million that was in the governor’s original budget to $16.9 million as progress on the commercial side of the project has all but stalled. Most of the money in the remaining request would be used by the Department of Law to pay for the state’s outside counsel in ongoing contract negotiations with the project partners — BP, ConocoPhillips and ExxonMobil — through reimbursable service agreements between the departments. DNR eliminated $2.6 million from its ask to fund new marketing lead and marketing negotiator positions, but the department is still looking to add seven high-level positions to the Gas Commercialization Office at a cost of nearly $1.6 million. Walker’s original budget request, made late last fall, would have added 21 positions to the state’s Gas Commercialization team with a personnel cost of $11.1 million. Slower-than-expected progress in negotiations between the producers on lynchpin agreements to determine how and when natural gas can be pulled from the Prudhoe Bay and Point Thomson fields has held back progress on other contracts needed to move the project into the front-end engineering and design, or FEED, stage, according to DNR officials. A decision to move to FEED in the gated process of the project is roughly set for early next year. At one point it was expected those agreements would be in place by last fall, or by the end of the current legislative session. However, with DNR still reporting a lack of progress on the commercial terms of the project that timeline could be muddled. Elwood Brehmer can be reached at [email protected]

Study: Pensions underfunded, underperforming

The back-and-forth over who will pay what to state retirement plans has caused plenty of consternation in Juneau the last two weeks, but a new study concludes the debate would be unnecessary if Alaska had just followed its own guidelines the last time state pensions were reformed. Coincidentally released March 29 — a day after Republican Senate Finance Committee co-chairs Sens. Pete Kelly, R-Fairbanks, and Anna MacKinnon, R-Eagle River, introduced legislation to shift some of the state’s pension fund obligations to municipal governments — a Reason Foundation study claims Alaska’s $6.7 billion unfunded pension liability is largely a result of underfunding by the state and overly optimistic investment return expectations. The suite of Senate Finance bills and the Reason study address the state’s Public Employees Retirement System, or PERS, and the Teacher Retirement System, or TRS, pension plans. Senate Bill 209, which would shift the part of the state’s obligation to pay for unexpected PERS costs to local governments, was put on hold after intense public criticism and new consultant analyses that suggest the payments may not be as large as once suspected, at least in the near-term fiscal years. The defined benefit retirement plans were closed to new participants at the end of the 2006 fiscal year over fears the state could not support the ever-growing pension liability the plans were generating. That liability was a combined $1.9 billion for the plans that were more than 80 percent funded at the end of fiscal year 2004, according to the Reason study. To stem the liability tide, the Legislature passed the Alaska Retirement Security Act in 2005, which closed PERS and TRS and put state employees and Alaska teachers hired after July 1, 2006, on defined employee contribution plans similar to 401(k) plans in the private sector. It is there where Reason picked up the story. According to the study, the state was “erratic” with its PERS and TRS contributions in the years following the passage of the Retirement Security Act, fully funding its annual obligation in only three of the 10 years after pension reform was thrust into the limelight. Cumulatively, the state funded 88 percent of its required contribution from 2005-14. “The lower-than-required contributions made budgeting easier for lawmakers, but at the long-term expense of the plan, with the missed payments simply being added to unfunded liabilities,” the study states. It does not examine the state’s health care, disability and medical benefits plans. The Reason Foundation is a Los Angeles-based policy think tank that advocates for free market ideals. The underfunding was most prevalent in fiscal years 2005-07, when required contributions in the $400 million per year range to stay on track were paid with actual contributions that were $100 million to $200 million per year short. After two years of full funding, the short stacks resumed in 2010 and carried through 2013, although the second time each year’s contribution was short less than $100 million when yearly cost plus unfunded amortization payments were calculated at $400 million to $600 million per year. The nine-member Alaska Retirement Management Board, which includes seven public members and the commissioners of Revenue and Administration, sets the annual required contribution for the funds. Legislators do have a say in how amortization of the unfunded liability is calculated and funded. Lofty investment return goals also added to the PERS-TRS unfunded liabilities, according to the study. Alaska’s pension plans were, and continue to be, based on 8 percent average predicted returns for invested funds. However, during the study period from 2005-14, the pension funds earned a combined average return of 5.8 percent. After 2008 the average return dropped to 5 percent, primarily due to the financial crisis known as the Great Recession in 2008-09. Study co-author Anthony Randazzo said in an interview that Alaska is not alone in failing to adequately fund its pension plans and not achieving its targeted rate-of-return for the funds, but the fact that misery loves company doesn’t change the challenge the state is facing. According to Randazzo, roughly one-third of states have explicitly under-funded their public employee pensions and nearly all have missed investment return goals, which historically have been in the 8 percent range. An 8 percent investment return was much more feasible in the 1980s when interest rates were higher and most funds were invested in fixed income bonds, he explained. Today, pension funds hold mostly equities and real estate, but common return goals are still in the 7 percent-plus range, Randazzo said. He contends pension managers should use much more conservative return goals closer to 4 percent per year. “The actuarial community believes, based on demographic patterns, even if plans are underfunded today, as Alaska’s badly is, you can still use high rates-of-return because the feel there is enough money flowing in to pay the benefits out,” Randazzo said. “That is a short-term focus.” Further darkening the picture, according to the study, is the fact that future obligation projections are based on an 8 percent average investment return. If that return is not met the unfunded gap grows again. Randazzo suggested the overly optimistic investment goals over time could compound into the pension plans being up to 40 percent underfunded over 50 years. “Alaska is part of a group of states that are walking over a fiscal cliff in the coming decades and Alaska is in the group that’s at the head of that pack,” he said. Officials in the Revenue and Administration departments said the state’s required contribution to its defined benefit plans in fiscal 2017 is still being calculated because it is based on salaries that are projected for the upcoming fiscal year. Estimates put the state’s 2017 defined benefit PERS obligation at approximately $340 million and the TRS obligation at more than $116 million. The study acknowledges that Alaska’s PERS and TRS funds are in a better position today than if the state had not closed the defined benefit plans. Randazzo said Alaska, along with Michigan, was studied because they were among the first states to close defined benefit pension programs. Through fiscal year 2014, the last year of data included in the study, the PERS plan would have been 61 percent funded without the 2005 reform based on historical state funding, the study concludes. As of the end of fiscal year 2015, the state’s total PERS liability was $13.4 billion, on a net fund position of $8.6 billion, or 64 percent of its obligation, leaving a $4.8 billion unfunded liability. For TRS, no reform would have resulted in only 55 percent of the state’s liability being funded. The fiscal year 2015 annual report puts the TRS fund at a 74 percent funded position, with a $1.9 billion unfunded liability. Combined, the funds carry an unfunded liability of roughly $6.7 billion, significantly less than the $8.4 billion unfunded burden the state would have faced without closing the defined benefit plans, according to Reason. The liabilities at the end of fiscal 2015 include a $3 billion infusion from state savings to offset yearly pension payments that were forecasted to approach $1 billion without a substantial down payment. Still, Randazzo said the state likely would not have had to make that big payment to start the 2015 fiscal year if it had better managed the plans. By paying fully the annual actuarially determined contributions and using a more achievable rate-of-return the State of Alaska could have a $4.1 billion unfunded liability instead of the $6.7 billion it faces today. “There’s almost no world in which the state would’ve taken $3 billion to pay down a $4.1 billion unfunded liability given that the funding ratio on it would be so much better,” he said. Instead, that $3 billion that was pulled from savings would likely be available to relieve pressure on the state’s current $4 billion-plus budget gap. Elwood Brehmer can be reached at [email protected]  

Owners ‘conceptually’ agree to $32.5 million offer for LIO

The Legislative Council made a $32.5 million offer to purchase the Anchorage Legislative Information Office building late March 30. It is the first substantive progress to resolve an issue that has lingered during a session in which policymakers are faced with financial decisions that could impact the course of the state for years to come. Rep. Mark Neuman, R-Big Lake, was the lone no vote among the 14 council members on a motion to approve the purchase offer. Council Vice Chair Rep. Bob Herron, D-Bethel, said the purchasing the custom-built, six-story office building would save the state about 50 percent over 20 years compared to the $3.3 million per year lease terms the Legislative Council agreed to in 2013 for renting the building. “It’s time to put this issue to rest either way. Our state faces great fiscal uncertainty and this distraction takes away valuable time and energy from our ability to focus on continuing the great work that we’ve done to shrink the day-to-day cost of government, and focus on reforms to major cost drivers like Medicaid, prisons and crime and retirement systems,” Herron said in a statement. “Thank you to my colleagues on the council for tonight’s decision.” The building owner group, 716 West Fourth Avenue LLC, named after the Downtown Anchorage address of the building and led by real estate developer Mark Pfeffer, had made repeated attempts to sell it to the Legislature for $37 million starting in October. That is the amount Pfeffer’s group invested in the $44.5 million project. Pfeffer said April 6 that “conceptually, we are in agreement on the price pending other details of the transaction.” The annual lease rate for the premium office space — nearly five times what the Legislature paid for the former, smaller, decrepit Anchorage LIO — has drawn public and political ire from many who say the state should not be spending multi-million dollars per year for off-season legislative offices when it is trying to find its way out of a $4 billion budget deficit. The Legislature contributed $7.5 million for tenant improvements. It moved into the building shortly after it was completed in December 2014. The lease, invalidated by a March 24 Superior Court ruling, is paid through May 31. Judge Patrick McKay deemed the process by which the lease was procured in 2013 by then-Legislative Council chair Rep. Mike Hawker, R-Anchorage, to have violated competitive bidding guidelines in state procurement code. 716 filed a motion for reconsideration with the court March 30, arguing the ruling was premature and exceeded the court’s authority — that simply finding the council’s procurement process to be flawed does not automatically invalidate the lease. The Alaska Supreme Court has ruled in similar cases involving public procurement issues that the governing body can be obligated to pay for work done by a contractor under an improperly secured agreement because a private party should be able to trust a public body will uphold a deal and is not responsible for how it was reached. An attorney for 716 cited multiple cases in which judgments in favor of the private contractor were reached in a March 27 letter to hired Legislative Council attorneys. Prior to the Legislative Council meeting, Pfeffer revised 716’s offer several times, ultimately settling on a sale price of just less than $34 million. An independent financial analysis of the Legislative Council’s options done in early March found purchasing the LIO with low-interest bonds for $35.6 million would match the long-term price, on a per square-foot basis, of moving to the nearby Atwood Building. The state-owned Atwood houses executive branch agencies. The full Legislature could seemingly purchase the building outright through a direct appropriation or finance a deal with state bonds. Council chair Stevens said during the public portion of the meeting that, “nothing is precluded from finding a way to finance this project.” Some legislators have pushed to move the Anchorage offices into the Atwood Building to rid the state of its expensive political headache. Department of Administration Commissioner Sheldon Fisher told the council prior to an executive session that included Pfeffer at its March 31 meeting that the prospective space at the Atwood would not be fully move-in ready until January 2018. Elwood Brehmer can be reached at [email protected]  

UA president has big ideas to manage smaller budgets

There are major changes coming to the University of Alaska. Many of the changes will, unsurprisingly, be budget driven, as Alaska’s institutions of higher education absorb their share of the state’s $4 billion budget deficit nightmare. However, UA President Jim Johnsen said in a March 30 interview with the Journal that strictly focusing on improving the bottom lines at Alaska’s campuses would miss major opportunities to reinvest in what they do well. “I think it’s much smarter for the university, in its mission to serve the state well, actually to be clear and conscious about what our priorities are, and even though our budgets are being reduced, to actually focus on — set aside money for — investment in key areas even as we’re being cut,” Johnsen said. “Some people think that’s nuts. They say, ‘Let’s all stick together here and everybody take a 5 percent or 10 percent or whatever reduction and we’ll all be here and we’ll save our jobs.’” Now seven months into the lead role, his primary goal is to avoid what happened to the university system after Alaska’s first oil price-driven fiscal crisis. Johnsen’s first job with the University of Alaska came in 1996, when he was hired as director of labor relations. He saw a collection of schools with “demoralized” and thin ranks of faculty and staff after years of rash budget cuts that started in the late ‘80s, Johnsen recalled. “There was nothing that was excellent — that was carrying people through — and so I want to focus on distinctive and unique strengths of each one of our universities,” he said. Johnsen was UA vice president for administration when he left the system for the private sector in 2008. Determining what Anchorage, Fairbanks and Southeast do well is the easy part. The University of Alaska Fairbanks is the most oft-cited Arctic research institution in the world. In the R/V Sikulliaq, its School of Fisheries and Ocean Sciences has operating rights to one of the nation’s premier research vessels. Through partnerships with Oregon and Hawaii, UAF leads one of a handful of federally designated test sites for unmanned aircraft research. “Research is going to happen in Alaska; it’s going to happen here for many years,” Johnsen said. “Are we going to let Dartmouth do it all or the University of Colorado, because they’re going to do it, or do we train our own research workforce?” UA Anchorage prides itself on its nursing and engineering programs. UAA’s Institute of Social and Economic Research was another “unique strength” Johnsen cited. The economic impacts of prospective state budget cuts detailed in a study led by ISER Director Gunnar Knapp were sought-after figures as the House and Senate drafted their respective versions of the state operating budget earlier this session. The University of Alaska Southeast is Alaska’s primary liberal arts institution, but also runs the world-class Center for Mine Training. Strengthening what the state’s universities already do well will not come without sacrifice, however, particularly when the system’s budget is not getting bigger. Gov. Bill Walker’s 2017 fiscal year budget proposal would cut the university’s unrestricted General Fund budget by about $15 million, or about 4 percent, to $335 million. That would be on par, percentagewise, with the cut in the current 2016 fiscal year. Unrestricted General Fund support from the Legislature accounts for roughly 40 percent of the UA budget. It peaked in fiscal year 2014 at $371 million. This year, the Senate passed a university cut of about $25 million; in the House it was closer to $50 million. The final UA budget will be hammered out in a conference committee in the coming weeks. The three main campuses absorbed the cuts in the current 2016 fiscal year primarily — without discounting some employees who were laid off — through attrition and defunding vacant positions. Johnsen said the university system will continue to eliminate vacant positions and try to minimize layoffs, but also noted that capturing savings through employee attrition doesn’t allow UA to chart its own course. With hesitancy towards cutting faculty, the only place to turn is administration. The Senate’s budget could mean cutting between 300 and 500 positions statewide, according to Johnsen. “I think the people of Alaska are going to demand if you’re reducing academic programs by ‘X’ percent, we’d sure like to see your administration reduced by a comparable or more percent,” he said. He added that on top of the now yearly budget cuts, the UA system absorbs about $25 million per year in “unfunded mandates” — negotiated salary increases, benefit increases and ever inflating deferred maintenance costs. The system’s latest estimates put its total deferred maintenance need at roughly $700 million. The administration proposed $10 million for university deferred maintenance needs in its capital budget. Johnsen emphasizes to legislators that he understands the university budget can’t be spared, he said, but at the same time that it can’t absorb drastic cuts if it is to successfully “bridge” to a leaner, more focused and prosperous future. He said a drastic cut this year from the Legislature would expedite and challenge the system’s Strategic Pathways initiative to evaluate structural academic program reform. Johnsen pitched the Strategic Pathways to the Board of Regents in January and has said it would take two or three years to fully identify and implement the changes with the funding in the governor’s budget. If the UA unrestricted General Fund appropriation is much less than the Senate’s proposed $325 million for fiscal year 2017, Johnsen said, “It’s going to be very, very difficult to take that kind of time to do a deliberate, data-based and really inclusive process and so then it’s going to have to be sharp and it’s going to have to be pretty fast and when you do that you end up with unintended consequences.” A piece of the near-term funding bridge will probably be another look at tuition rates, he said, but that decision is ultimately up to the UA Board of Regents. At an average of about $6,100 per year for lower level undergraduate resident tuition, Alaska’s campuses remain among the most affordable state schools in the nation, despite the fact that the UA Regents have increased tuition by 5 percent each of the last two academic years. Johnsen also noted that Alaska ranks very high in terms of the state’s per student contribution from its General Fund to its universities. “It’s the share of the cost that students bear; we’re super low,” he said. However, he hopes to de-link, at least to some degree, tuition at the system’s community colleges from the three main campuses. Tuition at Alaska’s community colleges is the same as at the three large campuses because the satellite schools are extensions of the hub universities. That has led to Alaska having some of the lowest traditional university costs but some of the highest community college tuition in the country, Johnsen said. He commended the Kenai Peninsula Borough for voluntarily supporting the Kenai Peninsula College in Soldotna with about $700,000 of property tax revenue each year and suggested that could be a model used at some of the other community colleges. The future, according to Johnsen, also likely includes consolidating some of the system’s 478 degree and certification programs to specific schools, as many of them are duplicated across the state. Through increased use of distance learning between campuses, students could receive the same education without the expense of redundant faculty and classroom space for some programs, he surmised. He has also discussed the concept of admissions standards, at least for the three main campuses, with the leaders of UAF, UAA and UAS. Some sort of academic requirement to enroll at the universities would address the issues of high numbers of students with remedial course needs as well as the system’s poor graduation rates for baccalaureate students, Johnsen said. “Fifty percent of our students require developmental or remedial education,” he said. “Fifty percent, that is a whopper of a number; and you’re not getting credit towards a degree for that (coursework) and yet you’re writing a check for that — you’re borrowing money for that.” Less than 30 percent of UA students working towards baccalaureate degrees graduate within six years, according to the UA system. That is roughly on par with other open enrollment universities, but is far short of the 56 percent graduation rate after six years nationwide. By funneling students that need refresher courses to the community campuses first, in a more traditional higher education model, students should be better prepared to successfully pursue their degrees once at the main universities, Johnsen said. Elwood Brehmer can be reached at [email protected]

Nuna development delayed by at least a year

Caelus Energy is delaying work on its $1.2 billion Nuna oil development and is asking the state to extend a royalty reduction agreement for the project. Casey Sullivan, a spokesman for the company, wrote in a statement that the central North Slope project has been deferred due to sustained low oil prices and uncertainty regarding the future of the state’s oil and gas tax credit program. The schedule for first oil from Nuna has been pushed back a year or more from September 2017 to late 2018 or early 2019, according to the Division of Oil and Gas. Legislation introduced by Gov. Bill Walker to revamp the oil and gas tax credits is working its way through the committee process. The latest version of the bill in the House would reduce some subsidies for Cook Inlet projects but do little to change the tax regime on the North Slope. Acting Department of Natural Resources Commissioner Marty Rutherford approved a royalty modification request for the project in January 2015 that would reduce the state’s royalty share of production to 5 percent until total revenue from Nuna reaches $1.25 billion. At that point, which company officials have said would likely be about three years after first production, the state royalty would return to the traditional 12.5 percent rate on the project’s five leases. The modification was contingent upon Caelus sanctioning the project by April 2015, which it did, and sustained oil production commencing by the end of September 2017. Sullivan confirmed the Dallas-based independent has requested an extension to the modification agreement from the department. According to the Best Interest Finding supporting the original modification, the state would forgo about $66 million in revenue at the temporary 5 percent royalty rate. However, the state is expected to collect more than $1.2 billion over the life of the field and Caelus contends it would not develop Nuna without the royalty reduction. Adjacent to Caelus’ offshore Oooguruk field unit, the company estimates peak production from Nuna will be 20,000 to 25,000 barrels per day. A 22-acre gravel pad is complete and the first phase of development includes drilling 30 hydraulic fractured wells, 15 each for production and reinjection. Caelus delayed development work at Nuna this winter to focus on exploring its promising Smith Bay leases in near shore state waters adjacent to the National Petroleum Reserve-Alaska in a remote part of the western Slope. This winter’s Smith Bay program entailed drilling two exploration wells from a grounded ice pad. Caelus CEO Jim Musselman has said Smith Bay is the company’s biggest prospect on the Slope with “billion-barrel” potential. The company also holds significant leases on the eastern Slope that it hopes to start exploring sometime in 2017. Caelus entered Alaska in 2014 when it closed a deal to acquire the in-state assets of Pioneer Natural Resources. The company is leading development of hydraulic fracturing techniques on the Slope. The expense associated with fracking is among the reasons the royalty modification is needed to develop Nuna, according to Caelus. Subsequently, the Caelus agreed to share typically proprietary information on the drilling technologies to be employed at Nuna within two years after initial production as part of its agreement with the state.   Elwood Brehmer can be reached at [email protected]  

Legislative Council makes $32.5 million offer for Anchorage LIO

The Legislative Council made a $32.5 million offer to purchase the Anchorage Legislative Information Office building late Thursday night. It is the first substantive progress to resolve an issue that has lingered during a session in which policymakers are faced with financial decisions that could impact the course of the state for years to come. Rep. Mark Neuman, R-Big Lake, was the lone no vote among the 14 council members on a motion to approve the purchase offer. Council Vice Chair Rep. Bob Herron, D-Bethel, said the purchasing the custom-built, six-story office building would save the state about 50 percent over 20 years compared to the $3.3 million per year lease terms the Legislative Council agreed to in 2013 for renting the building. “It’s time to put this issue to rest either way. Our state faces great fiscal uncertainty and this distraction takes away valuable time and energy from our ability to focus on continuing the great work that we’ve done to shrink the day-to-day cost of government, and focus on reforms to major cost drivers like Medicaid, prisons and crime and retirement systems,” Herron said in a statement. “Thank you to my colleagues on the council for tonight’s decision.” Amy Slinker, spokeswoman for the building owners, wrote in an emailed statement that the group is glad the council made a decision to try to resolve the issue that has become a burden for both sides. The offer has not yet been accepted, and the full Legislature will have to approve the appropriation to purchase. “Now we have something to talk about,” Slinker wrote. “We are going to analyze it and get back to (the council) soon.” The annual lease rate for the premium office space — nearly five times what the Legislature paid for the former, smaller, decrepit Anchorage LIO — has drawn public and political ire from many who say the state should not be spending multi-million dollars per year for off-season legislative offices when it is trying to find its way out of a $4 billion budget deficit. The building owner group, 716 West Fourth Avenue LLC, named after the Downtown Anchorage address of the building and led by real estate developer Mark Pfeffer, had made repeated attempts to sell it to the Legislature for $37 million starting in October. That is the amount Pfeffer’s group invested in the $44.5 million project. The Legislature contributed $7.5 million for tenant improvements. It moved into the building shortly after it was completed in December 2014. The lease, which was invalidated by a March 24 Superior Court ruling, is paid through May 31. Judge Patrick McKay deemed the process by which the lease was procured in 2013, a process led by then-Legislative Council chair Rep. Mike Hawker, R-Anchorage, to have violated competitive bidding guidelines in state procurement code. 716 filed a motion for reconsideration with the court March 30, arguing the ruling was premature and exceeded the court’s authority — that simply finding the council’s procurement process to be flawed does not automatically invalidate the lease. The Alaska Supreme Court has ruled in similar cases involving public procurement issues that the governing body can be obligated to pay for work done by a contractor under an improperly secured agreement because a private party should be able to trust a public body will uphold a deal and is not responsible for how it was reached. An attorney for 716 cited multiple cases in which judgments in favor of the private contractor were reached in a March 27 letter to Legislative Council’s outside counsel. Prior to the Legislative Council meeting, Pfeffer revised 716’s offer several times, ultimately settling on a sale price of just less than $34 million. An independent financial analysis of the Legislative Council’s options done in early March found purchasing the LIO with low-interest bonds for $35.6 million would match the long-term price, on a per square-foot basis, of moving to the nearby Atwood Building. The state-owned Atwood houses executive branch agencies. The full Legislature could seemingly purchase the building outright through a direct appropriation or finance a deal with state bonds. Council chair Sen. Gary Stevens, R-Kodiak, said during the public portion of the meeting that, “nothing is precluded from finding a way to finance this project.” Some legislators have pushed to move the Anchorage offices into the Atwood Building to rid the state of its expensive political headache. Department of Administration Commissioner Sheldon Fisher told the council prior to an executive session that included Pfeffer at its March 31 meeting that the prospective space at the Atwood would not be fully move-in ready until January 2018.   Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at [email protected]

Cruise tax increase on hold pending audit

Gov. Bill Walker’s attempt to touch every major state industry in his overall plan to balance the state’s upside down budget has hit a snag as it pertains to the visitor industry. House Bill 252 and its mirror Senate Bill 136, proposed by the Walker administration, would repeal current law that allows cruise operators to deduct the local “head tax” each passenger pays from their state head tax obligation. While the current deduction is eligible statewide, it applies mainly to Juneau and Ketchikan, as they are the communities with significant cruise traffic that have local head taxes — $8 per passenger in Juneau and $7 in Ketchikan. The Department of Revenue projects eliminating the tax deduction would bring in an additional $16.6 million per year to the state, which would primarily come from taxing each of the roughly 1 million cruise passengers that stop in Juneau and Ketchikan another $15 in total. Current state law considers a taxable voyage to be one that includes at least 72 hours in state waters — waters within three miles of shore. HB 252 would remove the state waters requirement and tax all commercial passenger vessels that dock at an Alaska port and including all travel time on a voyage, not just those that spend at least 72 hours in state waters. The Revenue Department estimates it would collect, as part of the $16.6 million, about $1.8 million per year from cruise voyages that currently are not taxed because of the “state waters” loophole. That money would be shared with the communities in which the vessels were docked. John Binkley, president of Cruise Lines International Association Alaska, said in an interview that eliminating the local tax deduction is pointless in regards to attempting to balance the state budget because the additional state head tax money is restricted General Fund revenue and therefore could not be used to plug Alaska’s $4 billion budget deficit. “What’s the point of raising another $15 million if you can’t use it?” Binkley said. The commerce clause of the U.S. Constitution generally prevents states from taxing interstate travel, which is what most Alaska cruises are because they largely originate from Seattle. Alaska’s $34.50 per cruise passenger head tax gets around the U.S. Constitution because the revenue is dedicated to the Commercial Vessel Passenger Fund subaccount within the state General Fund and supports dock improvements and other amenities that benefit the cruise industry in the communities that ships call on. The State of Alaska currently pays $5 per passenger to each of the first seven communities a cruise ship calls on. In fiscal year 2015 the state paid 16 municipalities just more than $15 million based on head tax revenue collected from the prior calendar year’s cruise ship stops in each of the communities that received tax money, according to Revenue’s Shared Taxes and Fees Annual Report. Prior to a 2010 settlement between the state and industry that reduced the state tax from $46 to $34.50 per passenger and increased the number of ports per voyage eligible for funding from five to seven, communities could either collect their own head tax and be ineligible for state support or allow the state to collect the tax and receive the distributed revenue afterward. The settlement also established the current head tax sharing guidelines, which allows communities with local taxes — Juneau and Ketchikan — to collect their own taxes while also receiving Commercial Vessel Passenger funds from the state. At the same time, the state allows cruise operators to deduct their local tax payments from their state obligations. Deputy Revenue Commissioner Jerry Burnett said in an interview that the administration was not only trying to include the cruise industry in its larger budget solution by eliminating the tax deduction, but also that the legislation would fix what he called a “very fundamental problem” that exists in current statute. “Depending on which seven ports of call you’re sharing $5 with, the way the tax is written now you could be short money to share. In fact, people were afraid we were short of money last year,” Burnett said. “$34.50 is not $35.” The concerns about the Commercial Vessel Passenger Fund balance, or CPV, were raised in legislative committee hearings last year, according to Burnett. The fund held $2.1 million after at the end of fiscal year 2015 last June 30 after the just more than $15 million disbursement to local governments. Its ending balance has dipped slightly in recent years. The fund held nearly $2.8 million at the end of 2013 and $2.5 million after 2014, according to the state Tax Division. Burnett said the fund has to date stayed in the black because not all cruise ships visit seven ports in their voyages across the state. Community tax audit Neither of the administration’s head tax bills introduced in January have moved from their original Labor and Commerce Committee referrals at least in part because the Legislature is waiting on an audit to see if local governments have been spending the shared head tax money properly. Burnett said the administration is not objecting to the Legislature holding up the bills until the audit is released. Finance Committee co-chair Sen. Anna MacKinnon, R-Eagle River, last March requested the audit be done by Legislative Budget and Audit Committee staff. MacKinnon wrote in a memo to Budget and Audit chair Rep. Mike Hawker, R-Anchorage, that “it has been asserted that some communities are ‘stock piling’ their CPV shared taxes and not using them on appropriate projects.” Budget and Audit Committee members in executive session reviewed the preliminary audit March 18 and the final audit should be reviewed by the committee again in a closed-door meeting sometime in mid-April near the end of the regular legislative session before being released to the public, according to committee staff.

Owners: Legislature not off the hook for costs after ruling

An attorney for the owners of the Anchorage Legislative Information Office building contends a judge’s ruling invalidating the Legislature’s lease of the building does not absolve the governing body of its responsibility to pay for the political hot mess. In a five-page letter dated March 27, Easter Sunday, to Legislative Affairs Agency attorneys obtained by the Journal, Donald McClintock, attorney for the building owner group 716 West Fourth Avenue LLC, wrote that a cancellation of the $3.3 million per year lease based on the court’s ruling would expose the Legislature to a substantial portion 716’s damages. 716 West Fourth Avenue is the Downtown Anchorage address of the LIO building. The owner group includes longtime Anchorage real estate developers Mark Pfeffer and Bob Acree. The Legislative Affairs Agency handles business matters for the Legislature. McClintock’s letter asserts that 716 gathered $37 million through financing and equity in 2013 to fund the build-to-suit project and that several banks extended credit based on the promise the Legislature would hold up its end of the 10-year lease. “It would be a clarion call to the entire financial community — and a serious blow to the public interest — if the state could cancel a lease (even under the guise of a court’s ruling) for its own failed procurement process, and walk away after the other side had fully performed,” McClintock wrote. “716, at a minimum, would be entitled to be made whole through an award of its reliance damages.” He added that 716 believes the Superior Court ruling “is wrong on many levels” and intends to point out its deficiencies in a motion to reconsider. Written much like a court brief, McClintock’s letter cited multiple cases in which the State of Alaska and local governments were held liable for damages to private contractors after government was found to have violated procurement statute. Judge Patrick McKay ruled the lease invalid March 24 because he determined it to not be an extension of an existing lease, and therefore the arrangement negotiated by former Legislative Council chair Rep. Mike Hawker, R-Anchorage, violated state procurement guidelines. The Legislature moved into the building on the 10-year lease after it was completed in late 2014. Anchorage attorney and owner of the adjacent Alaska Building Jim Gottstein filed suit against 716, the project development group, and the Legislative Affairs Agency March 31, 2015, contending the lease was not an extension of a former agreement because it was for renting a new building. Gottstein also argued the lease further violated state statute because the $281,000 per month rent for the 64,000 gross square-foot building with underground parking exceeds a requirement for state rents agreed to through a lease extension to be at least 10 percent below market rate. The rental rate did not need examining, according to McKay’s order, because the lease was improperly secured. The Legislature has paid rent for the building through May 31. Aftermath The Legislative Council, now chaired by Kodiak Republican Sen. Gary Stevens, has gotten heavy pressure from the public and many legislators to cut ties with the LIO because of the high lease rate at a time when the state is faced with a roughly $4 billion budget deficit. Stevens has said he believes the state simply can’t afford the lease, citing a “subject to appropriation” clause in the contract that could presumably void the agreement with little or no recourse for the owners if the Legislature decides not to fund rent payments. Other members of the council have repeatedly expressed similar sentiment, but have also said they worry about the message moving out of the building would send to the business community about the trustworthiness of the State of Alaska. At a Dec. 19 meeting, the council unanimously recommended the full Legislature not fund the lease in the 2017 fiscal year state operating budget unless a solution to stay in the LIO that is cost-competitive, on a per square-foot basis, could be found. 716 spokeswoman Amy Slinker noted in a prepared statement March 29 that several appraisals valued the building project at more than $44 million and that multiple lenders approved the appraisals and based credit on them. “We are continuing good faith negotiations with the Legislature and are hopeful a deal that benefits all parties can be agreed upon soon,” Slinker wrote. She also confirmed that Pfeffer met with Stevens March 28 and will attend a March 31 Legislative Council meeting in executive session to discuss the LIO. Prior to McKay’s ruling, Pfeffer indicated an intent to sue the Legislature if it walked away from its lease at the LIO. McClintock wrote that the goal of his letter was “certainly not to give notice, nor does it have any bellicose intent,” but under the circumstances, “Walking away from the lease would require 716 to proceed with a contract claim against the Legislature in order to protect the full economic benefit promised under the lease.” Attorneys for Legislative Affairs and 716 stressed to McKay in oral arguments March 22 that the Legislative Council repeatedly sought proposals from other parties for suitable Anchorage office space through public requests for information starting in 2007. When no solution was found, Hawker was given authority by the council to act as the contracting officer for the project and he agreed to rebuild on the existing LIO lot at the time. The $44.5 million project also included purchasing and demolishing the next-door Anchor Pub. The defendants also claimed that because the steel support structure and foundation of the former, smaller LIO building remained intact during construction, the 10-year lease was an extension of the previous rental agreement and not one for a new building. House Minority Leader Chris Tuck, D-Anchorage, praised McKay’s ruling in a formal statement, saying he hopes it ends “these kinds of backroom deals.” The LIO is the home office for 25 Anchorage legislators and is often the de-facto meeting place for hearings when the Legislature is not in session. It substituted as the capitol building last spring when the Republican-led Legislature ignored Gov. Bill Walker’s demand that a special session to resolve budget issues be held in Juneau. Instead, legislators “gaveled out” of the Juneau special session called by Walker and reconvened in Anchorage. McKay noted in his frankly worded order that the Legislature fronted $7.5 million of tenant improvement costs during project construction, a requirement he believes further pushes the lease beyond the realm of an extension. “Plain common sense — a principle which jurisprudence should not require to be checked at the courtroom door — mandates a finding that a contract to lease over 2.5 times more newly constructed space for just under five times the current rent with an introductory payment of $7.5 million for leasehold improvements is not a simple lease extension,” McKay wrote. “A court finding that this leasing scheme could be sole-sourced would eviscerate the competitive principles of the state procurement code.” Legislative Affairs outside counsel Kevin Cuddy argued in a Feb. 26 brief to the court that many of the issues surrounding the case were nonjusticiable — that the court did not have authority to rule on issues such as the Legislative Council’s procurement procedure and whether the new Anchorage LIO was in the best interest of the state because they were political in nature. However, Cuddy conceded that the court could rule as to whether the lease constituted an extension of the previous agreement or was a standalone contract. Options with costs At its meetings in recent months, the council has been reviewing the cost feasibility of purchasing the building or of a potential move to the nearby Atwood Building, which houses state executive branch agencies. A March 14 report from San Francisco-based Navigant Consulting found that after 20 years of ownership, the inflation-adjusted cost of purchasing the LIO for $37 million with bonds at the current market rate to be nearly on par, on a cost per square-foot basis, with moving to the Atwood. The $37 million price tag is what Pfeffer has repeatedly said 716 would be willing to sell the building for. According to Pfeffer, it is roughly the amount 716 would need to recoup its investment in the project that cost $44.5 million to complete, minus the $7.5 million state contribution. Purchasing the LIO for $37 million equates to a 20-year net present value cost of $31.7 million and the 20-year cost to move to the Atwood would be $24.2 million, according to the Navigant analysis; the additional usable space in the LIO closes the per square-foot cost gap to $3.08 per square foot to stay and buy the LIO versus $2.95 to move to the Atwood Building. The report found $35.6 million to be the sale price at which the LIO, with 42,900 square feet of usable space, would match the $2.95 per square-foot price of moving to the Atwood, which has 34,100 square feet of available space, a fact highlighted by McClintock in his letter to LAA. Included in the cost of moving to the Atwood is $3.5 million Legislative Affairs expects it would cost to make the available Atwood space suitable for legislative offices. Extending the now-voided $3.3 million per year lease similarly for 20 years would cost $61.8 million in today’s dollars, which is an even $6 per square-foot, the Navigant analysis concluded. Moving out of the LIO could also cause the state to lose the $7.5 million investment in the building, which combined with the first year’s rent and operating costs brings the total cost of occupying the building for less than two years to more than $11 million.

Tourism again a bright spot in ‘16

Alaska’s tourism industry should be a bright spot in 2016 as other sectors of the state’s economy face uphill battles.  The final tally of cruise passengers, which often make up more than half of all visitors to the state, is expected to be up about 2 percent over what was a strong 2015, according to Cruise Lines International Association Alaska President John Binkley. “We anticipate exceeding the million-passenger mark in our cruise Alaska pipeline,” in 2016, Binkley said. “Our throughput is increasing.” The bump in cruise visitors is primarily due to larger ships being committed to Alaska and not increased sailings, he said. Holland America Line is swapping out the 1,900-passenger Oosterdam with the 2,100-passenger Nievw Amsterdam this summer. Royal Caribbean will employ the more than 1,000-foot Explorer of the Seas, with capacity for about 3,100 passengers, in Alaska waters to replace 2,100-passenger Jewel of the Seas; and Princess Cruises will call on its Crown and Ruby Princess ships for Alaska, each with staterooms for nearly 3,100 passengers as well. Binkley said cruise customers are driving the industry shift to larger vessels because they provide more waterside amenities that cruisers want. He added that the ships’ capacities are based on two passengers per stateroom, but the rooms often have bed space for three or four individuals, meaning the actual number of travelers could exceed expectations. “We’re seeing much more multi-generational family travel in cruising to Alaska — grandparents bring grandkids, that sort of thing — so you have more than 100 percent, usually 104, 105, 106 percent of lower berth capacity is what the ships actually bring,” Binkley said. Nearly all cruise sailings to Alaska waters originate in Seattle and Vancouver and traverse the Inside Passage, with stops in Ketchikan, Juneau and other Southeast communities. About a third of the ships then continue across the Gulf of Alaska to the Southcentral ports of Whittier, Seward, Homer and Anchorage. Statewide, Alaska saw a record numbers of visitors last year, with more than 1.7 million people traveling to the state in the summer of 2015, according to the state Commerce Department.  Additionally, each visitor spends an average of about $940 per person once they get to Alaska, according to Commerce estimates. Travel Juneau CEO Liz Perry said there was also a significant bump in air traffic into Juneau last year as Delta Air Lines increased its presence in the market. However, she said Delta was not pulling traditional business from Alaska Airlines, which also had a 3.5 percent increase in passengers to Juneau last year. The upward trend in air travel, driven by a strong Lower 48 economy and lower fuel prices translating to lower airfares, is expected to continue. “We’re enjoying about 100,000 independent travelers this (summer) season, too,” Perry said. Independent travelers typically make up about 10 percent of all visitors to Juneau, according to Perry. She also said the $54 million cruise ship dock expansion project led by the city is on schedule, with the first of the panamax-capable docks on track to be finished later this year and work on the second wrapping up in 2017. The project will provide public shore side infrastructure to accommodate two 1,000-foot vessels at once. Currently, the only 1,000-foot vessel capable dock in Juneau is the privately owned AJ Dock. Juneau’s cruise season will kick off April 30 this year, a couple days earlier than usual, with the arrival of the Crystal Cruises Crystal Serenity. Visit Anchorage CEO Julie Saupe said the continued healthy number of cruisers in Southeast should translate to a strong and stable number of cruise passengers in Southcentral as well. Last year, roughly 330,000 cruise passengers visited Southcentral ports, which was an 8 percent increase from 2014. Saupe said port schedules are about the same as last year, but a slight increase in passengers could come from larger ships making the port calls. Visit Anchorage tracks cruise ships arriving to all Southcentral ports because the vast majority of those passengers end up in Anchorage via coach bus or the Alaska Railroad once the ocean leg of their voyage is complete. Once the passengers arrive, it’s Visit Anchorage’s job to keep them here. “I think with the strength of the U.S. economy — our U.S. passengers at least — we have a good shot at encouraging them to stay a few extra days and do some of the land tours, which we’re always working on,” Saupe said. Increased passenger traffic through Ted Stevens Anchorage International Airport last year is expected to hold as well, she noted. Almost exactly 1 million passengers passed through the Anchorage airport during the peak summer months of June, July and August last year, a nearly 8 percent increase over 2014. Saupe also said after most of the summer visitors return home Anchorage will host the Adventure Travel Trade Association’s World Summit Sept. 19-22. While the industry conference is limited to 700 participants, she said the benefits of this particular trade show could go well beyond a brief influx of visitors. “The neat thing about this group is they are people who sell adventure travel around the globe, so they’ll have a chance to experience Alaska firsthand and we hope that they’ll go forth and sell (Alaska)” she said. Elwood Brehmer can be reached at [email protected]

Judge finds Anchorage LIO lease invalid

The Legislature’s $3.3 million per year lease for the Anchorage Legislative Information Office building was thrown out in a Thursday state Superior Court ruling. Judge Patrick McKay ordered the lease be ruled invalid because he determined it to not be an extension of a prior lease with the Legislature’s landlord, 716 West Fourth Avenue LLC, a group managed by Anchorage real estate developer Mark Pfeffer. McKay’s ruling means then-Legislative Council chair Rep. Mike Hawker, R-Anchorage, violated state procurement guidelines in 2013 when he did not seek a new lease through a competitive bid process, thus invalidating the lease. 716 West Fourth Avenue is the Downtown Anchorage address of the LIO building. The Legislature moved into the building after it was completed in late 2014. Anchorage attorney and owner of the adjacent Alaska Building Jim Gottstein filed suit against 716, the project development group and the Legislative Affairs Agency March 31, 2015, contending the lease was not an extension of a former agreement because it was for renting a new building. The Legislative Affairs Agency handles business matters for the Legislature. Gottstein also argued the lease further violated state statute because the $281,000 per month rent for the 64,000 square-foot building with underground parking exceeds a requirement for state rents agreed to through a lease extension to be at least 10 percent below market rate. The rental rate did not need examining, according to McKay’s order, because the lease was improperly secured. The Legislature has paid rent for the building through May 31. Attorneys for Legislative Affairs and 716 stressed to McKay in oral arguments Tuesday that the Legislative Council repeatedly sought proposals from other parties for suitable Anchorage office space through public requests for information starting in 2007. When no solution was found, Hawker was given authority to act as the contracting officer for the project and he agreed to rebuild on the existing LIO lot at the time. The defendents also claimed that because the steel support structure and foundation of the former, smaller LIO building remained intact during construction, the 10-year lease was an extension of the previous rental agreement and not one for a new building. McKay noted in his frankly worded order that the Legislature fronted $7.5 million of tenant improvement costs during project construction, a requirement he believes further pushes the lease beyond the realm of an extension. “Plain common sense — a principle which jurisprudence should not require to be checked at the courtroom door — mandates a finding that a contract to lease over 2.5 times more newly constructed space for just under five times the current rent with an introductory payment of $7.5 million for leasehold improvements is not a simple lease extension,” McKay wrote. “A court finding that this leasing scheme could be sole-sourced would eviscerate the competitive principles of the state procurement code.” 716 spokeswoman Amy Slinker wrote in an email to the Journal that the building owner group is reviewing the court decision and analyzing its next steps forward. What the ruling means for the Legislature’s future in the building that was custom-made for it remains to be seen. The Legislative Council, now chaired by Kodiak Republican Sen. Gary Stevens has gotten heavy pressure from the public and many legislators to cut ties with the LIO because of the high lease rate. The council has been reviewing the cost feasibility of purchasing the building or of a potential move to the nearby Atwood Building, which houses state executive branch agencies at its meetings in recent months. A March 14 analysis from San Francisco-based Navigant Consulting found the 20-year, inflation-adjusted cost of purchasing the LIO for $37 million to be nearly on par, on a cost per square-foot basis, with moving to the Atwood.   Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at [email protected]

State projects $2B investment loss

Not surprisingly, Alaska’s fiscal picture got worse with the March 21 release of the 2016 Spring Revenue Forecast. Total state revenue for the 2016 fiscal year, which ends June 30, is now projected to be about $3.6 billion, down more than 60 percent from the $9.5 billion of income estimated in the Fall 2015 Revenue Forecast released last December. The fall outlook for investment revenue had the state taking in $3.8 billion in fiscal year 2016, while the spring forecast expects the Fund to take a loss of just more than $2 billion for the year. In the first two quarters of fiscal year 2016, or from last July 1 to Dec. 31, 2015, the Fund lost $1 billion according to reports released by the Permanent Fund Corporation Feb. 12. The vast majority of the turnabout in the revenue forecast is attributable to poor financial market performance since the start of the New Year, which for the State of Alaska translates into lost income from Permanent Fund investments. The Dow Jones Industrial Average lost 5.5 percent in January and is currently down nearly 3 percent from one year ago. The Permanent Fund, which includes the principal of the Fund and the Earnings Reserve, ended fiscal year 2015 last June 30 with $55.9 billion in total assets and fell as low as the $48 billion range in January. However, Revenue Commissioner Randy Hoffbeck noted in a press briefing that markets have been on the rebound even since the spring forecast was compiled. In the most recent quarter ended Dec. 31, 2015, the Permanent Fund returned 2.1 percent, bringing the fiscal year-to-date return through two quarters to a loss of 2.2 percent according to reports released Feb. 12 by the Permanent Fund Corporation. The Fund held $52.7 billion as of March 18, according to the Alaska Permanent Fund Corp. Total state revenue was $8.5 billion in fiscal year 2015 and is expected to rebound near that amount to $8.2 billion in the 2017 fiscal year that starts July 1. Unrestricted General Fund revenue for 2016 was also revised down by $277 million, to about $1.3 billion in the latest forecast, as lower-than-expected oil prices more than offset an upward bump in the state’s oil production projection. The spring estimate for the average price in fiscal year 2016, is $39.50 per barrel for Alaska North Slope crude, compared to the fall estimate of $49.50 per barrel. The 2016 production estimate, on the other hand, increased about 3 percent from just more than 500,000 barrels per day in fall to 516,700 barrels per day in the latest calculation based on data provided by the producers, Hoffbeck said. In 2017 production is expected to fall back to about 506,000 barrels per day. Unrestricted revenue will fall as well, according to the forecast, to just more than $1.2 billion on a price projection of about $40 per barrel for next fiscal year, which is $564 million less than the fall forecast. Depending on how much is cut from the final state budget, if the lower 2017 revenue projection holds true it could increase the budget deficit that has been pegged at $3.5 billion to nearly $4 billion for next fiscal year. Diminishing oil income has also diminished the state’s dependence on it as a revenue source from supplying nearly 90 percent of all unrestricted state funds in prior years to 55 percent to 60 percent going forward, according to Hoffbeck. Long term, the Revenue Department expects oil to stabilize in the $60 per barrel range by 2021, which Hoffbeck said partially reflects the historical inflation-adjusted average price as well as the range where shale oil, which can be brought into production quickly, becomes profitable. “It makes sense that $60 would be kind of a ceiling we would bump into on oil price,” he said. The annual spring revenue forecast is typically released in early April, but Gov. Bill Walker said the preliminary forecast was released March 21 to better inform the Legislature and the public as major structural changes to how the state manages its money are contemplated during the last weeks of the legislative session. “The more information that’s available sooner, the better,” Walker said during the press briefing. The announcement comes as legislators are planning to tap into the Permanent Fund Earnings Reserve to bridge the current budget deficit. The last time the Fund lost money was during the Great Recession of 2009, when it lost $2 billion. Elwood Brehmer can be reached at [email protected]

Analysis finds buying Anchorage LIO close to moving cost

An independent review of the Legislative Council’s options to deal with the Anchorage Legislative Information Office building found the cost of purchasing the building to be nearly on par with moving the Legislature’s Anchorage offices elsewhere. San Francisco-based Navigant Consulting Director Nigel Hughes concluded in a report dated March 14 that purchasing the Anchorage LIO would cost 4 percent more, on a per square-foot present value basis, than moving to the nearby Downtown Atwood Building, which houses state executive branch agencies. The conclusion is first based on a $37 million purchase price, which Anchorage real estate developer Mark Pfeffer, managing member of the building owner group, 716 West Fourth Avenue LLC, has said he would be willing to sell for. It also assumes the purchase would be financed over 20 years at 3.1 percent interest, which was the going rate for tax exempt bonds on March 7, according to the Alaska Housing Finance Corp. 716 West Fourth Avenue is the Anchorage address of the LIO building. Subsequently, the analysis takes into account that the 42,900 square feet of usable space in the LIO is significantly greater than the 34,100 square feet of space available at the Atwood Building. While purchasing the LIO for $37 million equates to a 20-year net present value cost of $31.7 million and the 20-year cost to move would be $24.2 million, according to Hughes, the additional usable space in the LIO closes the per square-foot cost gap to $3.08 per square foot to stay and buy the LIO versus $2.95 to move to the Atwood Building. Included in the Atwood scenario is the $3.5 million in renovations the Legislative Affairs Agency estimates it would cost to make the available Atwood space suitable for legislative offices. The Legislative Affairs Agency handles business and legal matters for the council. Extending the existing 10-year, $3.3 million per year lease on the building to 20 years would cost $61.8 million in today’s dollars, or an even $6 per square foot, the analysis concludes. “Our goal from the beginning of our conversations with the ALaska Legislature and the Legislative Council has been to find an agreement that is good for Alaska,” 716 spokeswoman Amy Slinker said in a statement. “The Navigant analysis provides a solid step forward. We will continue to discuss in good faith options that can achieve savings.” The Legislative Council has found itself in a political bind over the current lease at a time when the state is trying to manage its way out of a $3.5 billion-plus budget deficit. 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 with help from state finance agencies. With the issue being a political hot potato, that help didn’t come. Navigant’s Hughes notes in his analysis that there are issues for the council to consider beyond simply the bottom line cost. If the council decides not to fund the current LIO lease, it “will need to consider the wider financial and legal implications between the state and the business community,” Hughes wrote. 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 hinted intent to sue if the Legislature walks away from its obligation. The Legislative Council, then led by Rep. Mike Hawker, R-Anchorage, decided to rebuild on the old LIO building site in 2013 after 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. A Nov. 24 cost analysis done by AHFC and the Department of Revenue with information provided by the Legislative Affairs Agency put the 10-year cost of purchasing the LIO for $37 million with fixed-rate bonds at $48.8 million when financing and operating costs were included— translating to $8.97 per square foot. The comparable cost to move to the Atwood Building was found to be $10.1 million, including the $3.5 million for tenant improvement costs. AHFC Deputy Executive Director Mike Buller sent an email to Legislative Affairs Agency Executive Director Pam Varni Dec. 3 contending the analysis should not be considered when evaluating the council’s options because, among other reasons, it used a 10-year amortization for the purchase a longer-term assets and ignored the residual value of owning the building after it would be paid for. “Unfortunately, I cannot support the analysis of the options presented in your report to the council and a public discussion at this time will only embarrass everyone involved,” Buller wrote. He declined to comment further. Varni said in an interview that Legislative Council chair Sen. Gary Stevens was made aware of Buller’s concerns; however, neither Stevens nor Varni brought the issue up in discussions, according to a transcript. Questions to Stevens’ office regarding the Nov. 24 analysis were directed to Chief of Staff Katrina Matheny, who also serves as council staff. Matheny said Stevens waited until Feb. 11 to recommend an independent analysis of the council’s options because he was concerned more with the Legislature’s direct cash outlay on a 10-year basis, which is equivalent to the current lease, and less so with the inflation-adjusted present value cost or other issues. “We had no intention at that point (in early December) of hiring an independent third-party; we didn’t think one was needed,” Matheny said. When a Jan. 29 proposal from 716 West Fourth Avenue contended purchasing the LIO for $37 million would save the state money over moving to Atwood was quickly disputed by Varni for overstating moving costs by up to $16 million over 30 years, Matheny said the “dueling comparisons” pushed council members towards an independent review. Settlement passed Ultimately, waiting to hire outside help could have cost the council an opportunity to settle a lawsuit challenging the legality of the current Anchorage LIO lease. 716’s Jan. 29 proposal for the Legislative Council to purchase the building included a settlement in the lawsuit brought against the building owner and the Legislative Affairs Agency by Anchorage attorney Jim Gottstein, who also owns the Alaska Building adjacent to the LIO. Gottstein contends the lease violates state law because the council did not follow proper procurement code when it contracted with Pfeffer’s development team in 2013. He and 716 agreed to settle by Feb. 12 if the council and Legislative Affairs agreed to not attempt to recoup attorney fees from Gottstein in the settlement. The settlement, from 716’s perspective, was also contingent upon the council funding the current LIO lease or agreeing to purchase the building, according to the Jan. 29 document. Matheny said the settlement “fell by the wayside” because of the deadline and that Stevens wanted the state Superior Court to decide whether the lease is legal or not before making a decision on the building. Judge Patrick McKay heard partial summary judgment arguments March 22. He indicated an intent to issue a ruling by the week of March 28. Elwood Brehmer can be reached at [email protected]

No bonds means bare-bones capital budget

With little appetite from legislators for a general obligation bond package, bare bones capital budgets the next couple years are probably a harsh reality of the state’s fiscal situation. The administration’s proposal for a $500 million general obligation, or GO, bond package to fund up to $250 million of capital appropriations in each of the 2017 and 2018 fiscal years received, seemed possible, if not likely, to pass the Legislature based on reactions when the idea was first offered by Gov. Bill Walker in December. Attitudes have changed, however, as the session has worn on. Revenue Commissioner Randy Hoffbeck said during a March 21 press briefing that there was growing concern in the Legislature about taking on additional debt at a time when the state’s budget is upside down to the tune of a $3.5 billion-plus deficit. “The consensus seemed to be with legislators that they would like to wait until we get a stabilized fiscal plan in place because bonding will have to dovetail with whatever plan that we come up with,” Hoffbeck said. An administration plan to bond for future state pension obligation payments also fell on deaf ears and was subsequently scrapped. When first proposed, the bonding plans were pitched as a way to leverage the state’s low-interest borrowing capacity under the premise that the state can get a better percentage return on its savings over the long-term than the interest on the bonds would cost. The leaders of the capital budget in both chambers of the Legislature largely echoed Hoffbeck’s conclusions in interviews. Senate Finance co-chair Sen. Anna MacKinnon, R-Eagle River, said she heard through public testimony to the committee that many Alaskans feel the state operating budget is still too large, and therefore it wouldn’t be prudent to add spending for capital projects. Walker floated the GO bond proposal as a way to pay for critical and incomplete infrastructure projects across the state, but House Finance co-chair Rep. Steve Thompson, R-Fairbanks, said his primary concern lies in the prospect of “Christmas treeing” on a bond package. That is, a fear that numerous, nonessential projects would end up decorating the bond legislation. Both MacKinnon and Thompson said the sentiment towards capital spending could change next year if the Legislature works out a fiscal plan that stabilizes state revenue and substantially reduces annual deficits through some use of the Permanent Fund’s investment earnings, taxes and budget cuts. Thompson added that it will be a new Legislature next year, which could bring with it new priorities. MacKinnon also cited the State Bond Committee’s January Debt Affordability Analysis report, which concludes Alaska has the capacity to take on about $175 million in additional GO bonds without further impacting its credit rating. Multiple ratings agencies have slightly lowered the Alaska’s formerly sterling credit ratings this year because of the messy budget situation, and, so far, a lack of a plan to address it. “The issue is we absolutely could use debt to finance some projects that we think are viable and that would benefit the state long-term, and I believe that may still be a conversation going forward, but the issue is that currently we are structurally imbalanced and if we don’t change the way that we are structurally balances I can’t in good conscience go forward and recommend a bond package to anyone,” MacKinnon said. The hitch in holding off on a bond package is that waiting one year means waiting at least two. GO bond proposals must be approved by the public on a general election ballot — if not this November then not again until November 2018 — that also means approval from the electorate is far from a sure thing. While GO bonds often pass in better budget times, the prospect of voters signing off on state debt when cuts are being made to other areas of government spending is more uncertain. Hoffbeck said that when the next window for GO bonds opens up it would be something the state “would need to strongly consider.” MacKinnon did not rule out the possibility of funding high-priority projects — namely those that address safety issues — through direct appropriations next year. As for the 2017 budget, she said the capital budget, which will come out of the Senate first, will take center stage in the last couple weeks of the session, with the state’s priority being “to squeeze every dollar of matching money” out of federal capital programs. Much like last year, the governor’s proposed capital budget uses about $180 million of state general funds to match more than $950 million of federal money mostly for highway and airport improvement programs. All in, Walker’s capital budget totals more than $1.2 billion thanks to the federal support. As recently as fiscal 2013, when oil prices averaged close to $100 per barrel and translated into full state coffers, Alaska spent more than $2 billion of its own money in a capital budget. The drastic change in capital spending is exemplified simply in the size of the actual budget bills — 194 pages in 2013 versus 20 pages from the administration this year. Because it takes up to six years for most state appropriations to fully “hit the street” in the form of work for contractors, Alaska’s construction industry is still relying on the larger capital budgets from days gone by for much of its work. Significant contraction from the oil and gas sector led the Associated General Contractors of Alaska to project a decline in construction spending this year of about 18 percent, which would take the industry roughly back to the activity level seen 2013. Cut from the administration’s initial capital budget was $5 million for the Alaska Energy Authority’s popular Renewable Energy Fund grant program that supports projects across the state focused on getting rural communities off of diesel and fuel oil for home heating and electric generation. Since 2008, the Legislature has committed $271 million to the Renewable Energy Fund. It received $11.5 million in the budget passed last year, one of the few state programs to be funded in the state’s slim 2016 capital spend. AEA contends completely cutting Renewable Energy funding this year will impact its ability to administer prior-year grants. MacKinnon said the authority should expect to be “touched” by changes in state spending habits, but also noted she is working on a way for surplus funds from the Power Cost Equalization Program, also administered by AEA, to support renewable energy projects. The premise behind the idea being that rather than spending PCE money each year to subsidize electric costs, the money could be used to permanently reduce rural energy prices through generating renewable energy. Power Cost Equalization is an endowment-style state subsidy that buys down the cost of electricity for rural Alaska residents and small businesses. “It’s a theory we need to do the math on,” MacKinnon said. Elwood Brehmer can be reached at [email protected]

Enstar, Furie seal gas deal through April ‘21

Enstar Natural Gas Co. appears to have locked up 90 percent of its gas supply needs into 2021 after finalizing a deal with Furie Operating Alaska. The gas supply and purchase agreement filed March 14 with the Regulatory Commission of Alaska is for a firm supply of 6.2 billion cubic feet, or bcf, of natural gas per year from April 2018 through March 2021. During the first year of the contract the gas price would be $6.70 per thousand cubic feet, or mcf, nearly 20 percent less than the price the utility will pay — based on Consent Decree pricing — under a contract it has with Hilcorp Energy that expires at the end of March 2018. The contract has a price escalator of 2 percent per year, which is half of the annual price increase allowed under the Consent Decree. Base gas in the last year of the deal would be $6.97 per mcf. Daily calls for extra gas during peak winter demand periods would be about $1 more per mcf than the base price for the life of the contract. Enstar also has the option to extend the gas supply contract for two additional years through March 2023, but it must notify Furie of its intent to do so by April 1, 2018, according to a letter from the utility submitted to the RCA. The 2012 Consent Decree, agreed to by the State of Alaska and Hilcorp, set price caps on Cook Inlet natural gas through 2017 to prevent a monopoly situation when Hilcorp became the dominant player in the market through its purchases of Marathon Oil and Chevron assets. The ending Consent Decree price for base load gas in 2017 is $7.72 per mcf. Enstar estimates its average gas cost, when higher priced variable load gas is included, will be $8.33 per mcf under its Consent Decree-based contract with Hilcorp set to expire March 31, 2018. The utility also recently reached a gas supply deal with Hilcorp for 70 percent of its firm demand from early 2018 through early 2023. The initial gas price in that contract is $7.56 per mcf, a 9.2 percent price drop from the end of Consent Decree pricing. It also has a 2 percent price escalator. Both of the deals are pending RCA approval. Enstar projects its latest contract with Hilcorp will save Southcentral natural gas customers $14 million in the first year as the lower gas price is passed through to consumers. On the demand side, the utility is forecasting flat demand for gas at about 33 bcf per year through 2023 due to increased efficiency and conservation efforts by consumers offsetting small growth in its customer base, Enstar leaders have said. Furie’s deal with Enstar is the Houston-based independent’s second contract with Southcentral utilities since entering Cook Inlet. Furie agreed last September to supply Homer Electric Association with a base load of 4 bcf per year through 2018, with options to extend through 2020. That deal kicks in April 1 at a $6.50 per mcf base price. HEA will pay $7.00 per mcf for base load gas in 2018. Furie started exploratory drilling in the Kitchen Lights Unit offshore from Nikiski in 2011. Since, the company has spent over $700 million to bring Kitchen Lights online, according to company executives in testimony to the Legislature. Much of that money was invested in the first new production platform to be installed in the Inlet since the 1980s. Elwood Brehmer can be reached at [email protected]

Committee bill cuts Cook Inlet credits, not much more

Legislators began putting their imprints on Gov. Bill Walker’s oil and gas tax credit overhaul with the first committee version of the legislation released March 19. The House Resources Committee substitute of House Bill 247 is a mild version of the original bill; it gradually reduces the value of credits companies could claim for capital expenses, but does not address the minimum production tax rate or “tax floor.” Tax Division Director Ken Alper said in testimony March 21 that the bottom line savings to the state from the committee bill would be roughly $45 million to $65 million per year versus the status quo credit program. The administration’s bill would save an expected $400 million in fiscal year 2017 mostly by eliminating a 20 percent credit on capital expenditures and a 40 percent credit on drilling expenses, both in the Cook Inlet basin. Walker also proposed raising $100 million in new revenue through increasing the minimum production tax from 4 percent to 5 percent and preventing North Slope producers from using credits to take their tax liability below the minimum tax floor. The House Resources Committee is co-chaired by Reps. Benjamin Nageak, D-Barrow, and Dave Talerico, R-Healy. The committee version was promptly passed to House Finance late March 22 after 43 of 45 amendments to the bill were dismissed. They were brought primarily by Anchorage Democrat Reps. Geran Tarr and Andy Josephson. The lone amendment to pass from the Minority members was introduced by Tarr to ensure a legislative working group the bill would establish to evaluate the future of the Cook Inlet oil and gas tax regime includes members of the minority caucuses in the House and Senate. Rep. Paul Seaton, R-Homer, also introduced numerous amendments to the committee substitute mostly focused on further reducing the state’s direct cash outlay for refundable credits for existing producers. Of the seven Majority caucus members on the Resources Committee, Seaton has been the most critical of the state’s current industry tax credit program through the lengthy hearing process. “Once you’re giving people a lot of monetary support they want to keep giving to even if it’s not necessary,” he said in an interview. Tax credits should focus on helping companies develop new projects rather than producers working on existing fields that are already profitable with the basins high natural gas costs, he said, which the committee bill doesn’t adequately do. The only amendment of Seaton’s to make the bill requires companies engaged in exploration or development to file a $250,000 surety bond with the state to cover its unsecured creditors. It grew from Buccaneer Energy filing for bankruptcy in 2014 after developing the small Kenai Loop gas field, which left several Buccaneer small contractors on the Kenai Peninsula high and dry. He described the bond as a “small insurance policy” for businesses providing goods and services such as fuel or camp services to explorers. So far in fiscal 2016 the state has paid $473 million in refundable oil and gas tax credits for work that predominantly occurred in 2014, according to Alper. The total 2016 refundable tax obligation is expected to reach $700 million, but the state will be able to pay the remainder of that in the 2017 fiscal year, he said. To date, the State of Alaska has paid out roughly $3.5 billion in refundable oil and tax credits, Alper said, since the subsidy program took off in the 2007 fiscal year. Walker introduced HB 247 and its Senate mirror bill, SB 130, as a way to significantly reduce what he characterizes as an unsustainable expense that is a large part of the state’s $3.5 billion-plus budget deficit. Company representatives have said the administration’s policy changes would pile on an industry that is already losing money on every barrel it produces at current prices. The cost of producing North Slope oil and getting it to market is approximately $46 per barrel, according to the Revenue Department, while Alaska North Slope crude sold for $41 per barrel March 21, the first time it was above $40 this year. The committee’s HB 247 focuses on Cook Inlet and “Middle Earth” refundable credits. The Middle Earth region is anywhere in Alaska other than the North Slope and Cook Inlet geologic basins. It would reduce the current 40 percent Well Lease Expenditure credit to 30 percent in 2017 and 20 percent in 2018. The Net Operating Loss, or NOL, credit for those areas south of the Slope would also be cut from 25 percent to 10 percent on Jan. 1 2017. The committee bill also replaces a $25 million per company annual limit on refundable credits proposed by the administration with a $200 million annual repurchase cap. Alper said the $200 million cap would likely come into play only for companies executing major development projects requiring annual spending approaching $600 million. A requirement to make public the companies receiving refundable tax credits pushed by the governor was also left out of the substitute bill. Alaska Oil and Gas Association Executive Director Kara Moriarty said in an interview that the committee bill is recognition of the industry’s position in that it doesn’t make structural tax changes, but that changes to the Cook Inlet credits are still a concern. “Regardless of the (fiscal) situation the state is in, raising taxes on an industry in our situation only makes the situation worse,” she said. Tarr and Josephson, on the other hand, described the version of HB 247 that is moving on as a missed opportunity to save the state hundreds of millions of dollars per year in a Minority caucus press release. “I want to support the oil industry and in some cases can see the usefulness of co-investing in exploration and development projects,” Tarr said in a statement. “However, the (credit) current system is out of balance and needs to be reformed. House Bill 247 in its current form is unrecognizable from the original bill.” The two versions of HB 247 do align on eliminating a loophole in current statute that allows North Slope producers of new oil — production brought online in recent years — to compound a 20 percent new oil credit known as the Gross Value Reduction with a 35 percent NOL credit to produce a refund greater than the company’s actual loss. The Gross Value Reduction credit lowers the taxable wellhead value of new oil by 20 percent before other considerations are added to the oil’s taxable value. Alper said closing the Gross Value Reduction plus NOL loophole was first projected to save the state about $13 million next fiscal year, but that figure continues to go up as low oil prices force more producers to claim operating losses. Members of the committee and the Walker administration have noted throughout the tax policy debate that the loopholes allowing companies to take their tax liability below the 4 percent floor and grow their operating loss credit are a consequence of current oil prices below $50 per barrel that were not modeled when Senate Bill 21, the broader oil tax structure, was passed in 2013. According to the Tax Division, the committee bill would not impact tax structure for major North Slope producers — companies with over 50,000 barrels per day of production. It would impact new entrants to the Slope or small producers only at low prices through closing the NOL loophole. For Cook Inlet producers and companies developing production, however, the final impact of the latest version of HB 247 would be a reduction in state support that is now up to 55 percent for development costs to the 20-30 percent range by the time the credit reductions are fully implemented in 2018, Alper said. The Senate Oil and Gas Tax Credit Working Group held last year and headed by Sen. Cathy Giessel recommended hardening the production tax floor, which the committee substitute does not, and making any changes to the credit program forward looking, which it does. Elwood Brehmer can be reached at [email protected]

Lower revenue forecast reflects market volatility

Not surprisingly, Alaska’s fiscal picture got worse with the March 21 release of the 2016 Spring Revenue Forecast. Total state revenue for the 2016 fiscal year, which ends June 30, is now projected to be about $3.6 billion, down more than 60 percent from the $9.5 billion of income estimated in the Fall 2015 Revenue Forecast released last December. The vast majority of the disparity is attributable to poor financial market performance since the start of the New Year, which for the State of Alaska translates into lost income from Permanent Fund investments. The Dow Jones Industrial Average lost 5.5 percent in January and is currently down nearly 3 percent from a year ago. As a result, the fall outlook for investment revenue had the state taking in $3.8 billion in fiscal 2016, while the spring forecast expects the Fund to take a loss of just more than $2 billion for the year. The Permanent Fund ended fiscal year 2015 with $55.9 billion in total assets and fell as low as the $50 billion range in January. However, Revenue Commissioner Randy Hoffbeck noted in a press briefing that markets have been on the rebound even since the spring forecast was compiled. The Fund held $52.7 billion as of March 18, according to the Alaska Permanent Fund Corp. Total revenue was $8.5 billion in 2015 and is expected to rebound to $8.2 billion in the 2017 fiscal year. Unrestricted General Fund revenue for 2016 was also revised down by $277 million, to about $1.3 billion in the latest forecast, as lower-than-expected oil prices more than offset an upward bump in the state’s oil production projection. The spring estimate for the average price in fiscal 2016 is $39.50 per barrel for Alaska North Slope crude, compared to the fall estimate of $49.50 per barrel. The 2016 production estimate, on the other hand, increased about 3 percent from just over 500,000 barrels per day in fall to 516,700 barrels per day in the latest calculation based on data provided by the producers, Hoffbeck said. In 2017 production is expected to fall back to about 506,000 barrels per day. Unrestricted revenue will fall as well, according to the forecast, to just more than $1.2 billion on a price projection of about $40 per barrel for next fiscal year, which is $564 million less than the fall forecast. Depending on how much is cut from the final state budget, if the lower 2017 revenue projection holds true it could increase the budget deficit that has been pegged at $3.5 billion to nearly $4 billion for next fiscal year. Diminishing oil income has also diminished the state’s dependence on it as a revenue source from supplying nearly 90 percent of all unrestricted state funds in prior years to 55-60 percent going forward, according to Hoffbeck. Long-term, the Revenue Department expects oil to stabilize in the $60 per barrel range by 2021, which Hoffbeck said partially reflects the historical inflation-adjusted average price as well as the range where shale oil, which can be brought into production quickly, becomes profitable. “It makes sense that $60 would be kind of a ceiling we would bump into on oil price,” he said. The annual spring revenue forecast is typically released in early April, but Gov. Bill Walker said the preliminary forecast was released March 21 to better inform the Legislature and the public as major structural changes to how the state manages its money are contemplated during the last weeks of the legislative session. “The more information that’s available sooner, the better,” Walker said during the press briefing.   Elwood Brehmer can be reached at [email protected]

Price drops in Enstar, Furie gas deal

Enstar Natural Gas Co. appears to have locked up 90 percent of its supply needs into 2021 after finalizing a deal with Furie Operating Alaska. The natural gas supply and purchase agreement filed March 14 with the Regulatory Commission of Alaska is for a firm supply of 6.2 billion cubic feet, or bcf, of gas per year from April 2018 through March 2021. During the first year of the contract the gas price would be $6.70 per thousand cubic feet, or mcf, nearly 20 percent less than the price the utility will pay — based on Consent Decree pricing — under a contract it has with Hilcorp Energy that expires at the end of March 2018. The contract has a price escalator of 2 percent per year, which is half of the annual price increase allowed under the Consent Decree. Base gas in the last year of the deal would be $6.97 per mcf. Daily calls for extra gas during peak winter demand periods would be about $1 more per mcf than the base price for the life of the contract. Enstar also has the option to extend the gas supply contract for two additional years through March 2023, but it must notify Furie of its intent to do so by April 1, 2018, according to a letter from the utility submitted to the RCA. The 2012 Consent Decree, agreed to by the State of Alaska and Hilcorp, set price caps on Cook Inlet natural gas through 2017 to prevent a monopoly situation when Hilcorp became the dominant player in the market through its purchases of Marathon Oil and Chevron assets. The ending Consent Decree price for base load gas in 2017 is $7.72 per mcf. Enstar estimates its average gas cost, when higher priced variable load gas is included, will be $8.33 per mcf under its Consent Decree-based contract with Hilcorp set to expire March 31, 2018. The utility also recently reached a gas supply deal with Hilcorp for 70 percent of its firm demand from early 2018 through early 2023. The initial gas price in that contract is $7.56 per mcf, a 9.2 percent price drop from the end of Consent Decree pricing. It also has a 2 percent price escalator. Both of the deals are pending RCA approval. Enstar projects its latest contract with Hilcorp will save Southcentral natural gas customers $14 million in the first year as the lower gas price is passed through to consumers. On the demand side, the utility is forecasting flat demand for gas at about 33 bcf per year through 2023 due to increased efficiency and conservation efforts by consumers offsetting small growth in its customer base, Enstar leaders have said. Furie’s deal with Enstar is the Houston-based independent’s second contract with Southcentral utilities since entering Cook Inlet. Furie agreed last September to supply Homer Electric Association with a base load of 4 bcf per year through 2018, with options to extend through 2020. That deal kicks in April 1 at a $6.50 per mcf base price. HEA will pay $7.00 per mcf for base load gas in 2018. Furie started exploratory drilling in the Kitchen Lights Unit offshore from Nikiski in 2011. Since, the company has spent over $700 million to bring Kitchen Lights online, according to company executives in testimony to the Legislature. Much of that money was invested in the first new production platform to be installed in the Inlet since the 1980s.   Elwood Brehmer can be reached at [email protected]

Medicaid reform passes Senate

Medicaid has been a divisive topic in Alaska since Gov. Bill Walker announced his plan to expand the federal insurance program in the state early last year, but the Medicaid reform package that unanimously passed the Senate March 11 seems to be something lawmakers and health care leaders can agree upon. Sen. Pete Kelly’s Senate Bill 74 that was sent to the House after a 19-0 vote combined parts of the administration’s Medicaid reform and expansion bill with an earlier version of Kelly’s bill, both of which were introduced last session. The Department of Health and Social Services estimates the changes to the Medicaid system in SB 74, as it is currently constructed, would save the state more than $31 million right away in fiscal year 2017. Those savings are expected to increase to nearly $114 million per year by 2022 as the programmatic reforms are fully implemented. Kelly, a Fairbanks Republican and co-chair of the Senate Finance Committee, said the savings estimates are very conservative in discussion on the Senate floor before the vote on the bill. He also said prior attempts at Medicaid reform “missed the point” in trying to change patient behavior and therefore didn’t achieve meaningful savings. “(SB 74) is a reform bill that goes after the system, not after the recipient,” he said. Walker said in a statement to the Journal that he typically does not comment on legislation until it reaches his desk, but that he is committed to working with the Legislature on Medicaid reform. Medicaid expansion funded The state’s Medicaid expense has grown more than 70 percent in the last decade, from less than $400 million in 2006 to nearly $700 million this fiscal year at a time when the state is running $3.5 billion-plus annual budget deficits. The federal government is contributing more than $1.1 billion to Alaska’s Medicaid program this fiscal year. The ballooning cost of the program has been oft cited by legislators opposed to expanding it to a new group of beneficiaries, which Walker did last summer via executive order after the Republican-led majorities in the Legislature chose not to last year. A lawsuit against Walker by the Legislative Council challenging his authority to expand the program without the Legislature’s approval was dismissed in state Superior Court earlier this month. Republican leaders in the Legislature have said they intend to appeal the decision to the Supreme Court. The cost of the new class of Medicaid beneficiaries was fully covered by the federal government in fiscal year 2016, which allowed Walker to take the money without legislative approval, but will eventually require a 10 percent state match of about $20 million per year after 2021, based on DHSS enrollment estimates. The federal government’s 100 percent match ends at the end of 2016, meaning the state must begin contributing a match for the last half of fiscal year 2017, which runs through June 30 of that year. The state’s first payment for the new Medicaid recipients, estimated at $3.8 million based on enrollment projections, was funded in the operating budgets passed by House and Senate earlier this month, according to the offices of the Finance Committee chairs in each body. House Bill 227, a Medicaid reform package introduced by Rep. Paul Seaton, R-Homer, passed from the House Health and Social Services Committee to Finance March 9. Federal dollars make up savings By far the most of the forecasted savings to be wrung from SB 74 — $29 million in 2017 growing to $97 million in 2022 — would come from getting more Medicaid services for Alaska Natives fully covered by the federal government. Care received by Alaska Natives enrolled in Medicaid from IHS and Tribal health providers has long been fully funded by the federal government. Changes to federal rules within the last year expand what the feds consider to be received through an Indian Health Services or Tribal health facility. “The policy changes basically broaden what’s considered a service delivered through a Tribal facility to include the related transportation costs and also to include referrals out to other providers from the Tribal system when certain conditions are met,” DHSS Deputy Commissioner Jon Sherwood said in an interview. Federal funding will also now cover 100 percent of the Medicaid expense for Alaska Natives in long-term care facilities outside of a Tribal network. Previously, the match for all care received by Alaska Natives from non-IHS and Tribal facilities was 50 percent, similar to the match for Medicaid services to the broader public. Managed care SB 74 would also require DHSS to implement a primary care case management system to push Medicaid enrollees towards primary care first and away from potentially unnecessary and more expensive specialty provider and emergency room visits. Alaska Primary Care Association Executive Director Nancy Merriman said she doesn’t know what the case management system would look like yet, but hopes it “takes the form of a primary care health home for Medicaid enrollees where that practice has the ability to provide comprehensive and coordinated care for patients.” Included in the optimal system model would be services across the provider spectrum and care coordinators, particularly for individuals with chronic issues, to assure critical health information reaches from one provider to another and help in managing everything from prescriptions to appointments, according to Merriman. Overall, Merriman said she spent a substantial amount of time following the formation of SB 74 and commended the Senate Finance Committee for undertaking a “really thorough process of learning about all the different facets of Medicaid and then really listening to people and putting together a pretty good bill.” The bill also directs the Health Department to partner with a statewide hospital organization in developing a hospital-based approach to reduce over-utilization of emergency services. Sherwood said he expects to start talking with the Alaska State Hospital and Nursing Home Association about the directive if the bill is passed, as the idea was first floated by the organization. Also among the department’s duties would be establishing a medical assistance reform program that would, among other things, reduce travel expenses paid through Medicaid by requiring recipients to obtain care in their home communities whenever possible and expand the use of telemedicine for primary, behavioral and urgent care. Outside telemedicine allowed To make telemedicine providers as accessible as possible, the Department of Commerce, Community and Economic Development is directed to establish a business registry of telemedicine providers in the state. Telemedicine providers are required to be licensed in Alaska but do not have to be located in the state under the bill. Sen. Peter Micciche, R-Soldotna, a Finance Committee member, said on the Senate floor that telemedicine costs about a third of an in-person visit and one-tenth of most emergency room visits. “We are one of only two states that does not allow telemedicine to be practiced across state lines, this bill will change that,” Micciche said. Coinciding with the push to expand the use of telemedicine, the State Medical Board is also tasked with adopting guidelines for physicians who provide treatment or prescribe drugs without an in-person examination that are consistent with national guidelines for administering telemedicine. Behavioral health Also added to the state Health Department’s duties would be the management of a behavioral health system that integrated into the broader primary care system. In partnership with the Alaska Mental Health Trust Authority, the department would develop a plan for community-based behavioral health services that addresses related housing, employment and criminal justice issues. Mental Health Trust CEO Jeff Jesse said in an interview that the focus of the behavioral health reform is an attempt to elevate the treatment of behavioral, or mental, health issues to the primary care level. “We really want to integrate care so that the whole person is being looked at in as many settings as possible,” Jesse said. Prioritizing behavioral health treatment can address minor depression or substance use early on and prevent what can become extremely harmful and costly issues down the road if left untreated, he said. Sherwood echoed what others have said in regards to behavioral health reform, that everyone knows the cost savings are there, but they are hard to quantify because they stretch far beyond medical costs. “We know that when behavioral health issues are not addressed appropriately and quickly we see increased pressure on the criminal justice system, law enforcement, our courts, our correctional system. We see increased pressures on our child protection system; we see increased use of inappropriate services like emergency room services and other kinds of hospitalization,” Sherwood said. The Mental Health Trust’s role in reforming Medicaid goes beyond changing behavioral health practices for in the state to that of a funder, according to Jesse. The trust is in the process of considering a list of requests from DHSS to fund the drafting of federal waivers, provider assistance programs and consulting contracts for studies; “all those one-time expenses that, particularly in this fiscal climate, are pretty hard for the department to come by and hard for the Legislature to appropriate,” he said. In all, he said the self-funded trust could end up contributing several million dollars to the reform effort, which would likely require a restructuring of its current operations but also be worth the extra effort, Jesse said. He, like Merriman of the Primary Care Association, commended the committee for its thorough work on the far-reaching bill. Among the studies the bill calls for is a look at privatizing the Alaska Psychiatric Institute and the six state-run assisted living Pioneer Homes for elderly Alaskans. The original Pioneer Home in Sitka was a converted U.S. Marine barracks that first provided housing, meals and basic medical care to indigent elderly men in 1913, according to the Health Department. Pioneer Home residents applying for payment assistance would also have to show proof of a Medicaid application on the basis that Medicaid eligible individuals could have care partially paid for through the federal Medicaid match, a possible savings approaching $1 million annually, Micciche said. Health plans, opioid monitoring, fraud enforcement Additionally, the bill directs the Department of Administration to analyze the feasibility of establishing a health care authority to consolidate all state employee and retiree health care plans with local school district employee plans to maximize market purchasing power in an attempt to achieve lower insurance rates for the state. Beyond just Medicaid, SB 74 also requires providers and pharmacists to register with the state Prescription Drug Monitoring Program. The prescription drug database was established in 2008 as a voluntary program in an attempt to reduce the over-prescription of opioids and other addictive and controlled substances. Sen. Cathy Giessel said before the Senate vote that setting up the program was the first step of progress and “this inclusion in the Medicaid reform bill is the other half step.” Physicians and pharmacists would be required to search for a patient in the database before prescribing a controlled substance to see if the patient had also been prescribed the medication by another provider and could be “doctor shopping” as Giessel described it. The bill has an allowance for physicians and pharmacists to authorize a designee access to the database who would also register with for the program. Making participation in the Prescription Drug Monitoring Program mandatory will benefit all Alaskans, not just Medicaid beneficiaries, she said. Medicaid fraud is addressed in SB 74 through increased enforcement by the Department of Law and formation of the Alaska Medicaid False Claims Act. Largely in-step with federal law, the Medicaid False Claims Act would set civil penalties between up to three times the damages incurred by the state plus attorneys fees, but not less than $5,500 or more than $11,000 for each count. It would also set a statute of limitations of 10 years for any action to be brought against a provider or beneficiary accused of Medicaid fraud. Stricter fraud monitoring is expected to save the state up to $900,000 per year, according to the Law Department. The department requested $365,000 for two full-time positions to focus on Medicaid fraud for one year until the lawyers can pay for themselves. Criminal Division Director John Skidmore called the request a “put up or shut up” scenario in testimony to Senate Finance March 7. “If we collect the money, we’ve paid for ourselves and if we don’t, we’re not asking you to increase our budget, only to increase our authority to spend if we collect the money,” he said. Implementing the many changes in the bill — if it passes the House with a similar look — will also require seven new Health Department positions in 2017 and nine new staff in 2018. The department projects that number will decrease to five permanent positions once the transition period is complete in 2020. Elwood Brehmer can be reached at [email protected]

Alaskans note lack of input in pushback against Arctic plan

Alaska’s leaders in Juneau and Congress had harsh words for a joint March 10 statement from the White House and Canadian Prime Minister Justin Trudeau announcing plans for new emissions caps on the oil and gas industry and preservation of significant chunks territory in each country’s Arctic. The statement was released as Trudeau made the first official visit by a Canadian prime minister to the White House in nearly two decades. “Beyond deepening cooperation to reduce greenhouse gas emissions — which will have an outsized impact on the long-term health of the global Arctic — President Obama and Prime Minister Trudeau are announcing a new partnership to embrace the opportunities and to confront the challenges in the changing Arctic, with indigenous and northern partnerships, and responsible, science-based leadership,” the statement reads. It asks the leaders of all Arctic nations to embrace the objectives of conserving Arctic biodiversity, incorporating traditional indigenous knowledge in decision-making, supporting strong Arctic communities and building a sustainable economy in the region. The U.S. took chairmanship of the international Arctic Council last year from Canada, which held the post starting in 2013.  The council is a non-binding body of eight Arctic nations meant to spur positive relationships between the countries on Arctic issues. Secretary of State John Kerry led U.S. representation at an Arctic Council meeting in Fairbanks the following week. Sens. Lisa Murkowski and Dan Sullivan and Gov. Bill Walker all noted the omission of Alaska in drafting the 10-page agreement in formal statements of their own. The sentiment is similar to comments made following the president’s three-day visit to Alaska last summer, which was used as a vehicle to promote his climate change policies. “The Arctic presents great opportunity for our state and our nation to prosper in a global economy. However, the way to achieve that is by greater federal investment in our state’s Arctic development efforts, and not the restrictive policies that were presented today,” Walker said March 10. “It is important to consider the interests of all stakeholders in the region – whether it be focused on marine and wildlife preservation, international travel and shipping, or natural resource development. In doing so, we will ensure Alaska and the United States remain at the forefront of a flourishing Arctic economy.” Walker has said he pushes Obama to allow for oil and gas exploration on the coastal plain of the Arctic National Wildlife Refuge each time he meets with the president, despite actions from the White House to move further towards preservation, not development, of the area. Specifically, the U.S.-Canadian Arctic plan calls for protecting at least 17 percent of the countries’ Arctic land and 10 percent of far north marine waters by 2020. Obama and Trudeau also agreed to the “ambitious and achievable” goal of reducing methane emissions from oil and gas operations by up to 45 percent below 2012 levels by 2025, according to the statement. Further, both countries also endorsed the World Bank’s initiative to eliminate routine methane flaring from oil and gas facilities by 2030. Methane is the primary component of natural gas. “Recognizing the role that carbon markets can play in helping countries achieve their climate targets while also driving low-carbon innovation, both countries commit to work together to support robust implementation of the carbon markets-related provisions of the Paris (climate) agreement” reached in December, the joint statement reads. The countries would also be required to consult each other before approving future oil and gas development in the Arctic. Murkowski called the consultation requirement “simply stunning” in a release from her office. She also said by focusing almost solely on climate change in regards to the Arctic, the Obama administration fails to address other needs in the region, namely economic development. “Although the joint statement makes topical reference to consultation with indigenous people and the incorporation of traditional knowledge into decision-making, it also implies unjustifiable limits that will leave Alaskans standing at the door, rather than seated at the table, on Arctic policy,” Murkowski said. The announcement was not received kindly by the largest private employer in Alaska and the Native regional corporation for the North Slope. “Unfortunately, this is the treatment we’ve come to expect from this administration,” said Arctic Slope Regional Corp. president and CEO Rex A. Rock Sr. “Although these burdensome and largely unnecessary regulations will negatively impact the economy and the people of our region, Alaska’s North Slope, we continue to be completely left out of the conversation when the rules are being drafted. It appears, by all counts, the only side the administration bothered to reach out and listen to was the environmental groups, like the Center for Biological Diversity, World Wildlife Fund and National Resources Defense Council. “Make no mistake, this agreement isn’t the final word; we will fight for keeping the door of opportunity open across the Slope.” Environmental groups noted by Rock hailed the announcement as leadership towards protecting one of the world’s most delicate environments. To achieve the methane reduction goals the Environmental Protection Agency and Environment and Climate Change Canada will develop new regulations governing methane emissions from existing oil and gas sources as soon as possible. The EPA will quickly begin a process requiring producers operating existing methane emissions sources to provide data that will assist in developing “comprehensive standards to decrease methane emissions,” according to the joint statement. The proposed actions will harm the nation’s energy sector, and in-turn could impact the lives of hundreds of millions of Americans that rely on low-cost energy for their quality of life, Sullivan said, adding they could be “particularly devastating” for Alaska at a time when the state needs oil and gas revenue more than ever. “If the initiatives are enacted, less oil and gas will be produced in our state, more jobs will be lost, and state coffers will be increasingly diminished,” he said. “Now is the time when Alaska needs a federal government that will work with the state, instead of working against us to stymie economic opportunity.” Arctic fisheries were also addressed in that Obama and Trudeau are calling for an international agreement to preemptively close unregulated fishing in the central Arctic Ocean, an area that is increasingly accessible as summer sea ice continues its retreat. Elwood Brehmer can be reached at [email protected]  

Arctic OCS included in latest five-year plan

Alaska wasn’t excluded from the Interior Department’s latest five-year Outer Continental Shelf Oil and Gas Leasing Program plan released March 15, just days after President Obama issued a joint statement with Canadian Prime Minister Justin Trudeau calling for further protections of the nations’ Arctic areas. The proposed 2017-2022 program is a step in the Interior Department’s environmental impact statement process for determining what, if any, Outer Continental Shelf, or OCS, oil and gas lease sales it should hold. It does not ensure drilling off Alaska’s coast in the coming years, but it does evaluate potential sales in the Chukchi and Beaufort seas as well as the federal waters of Cook Inlet between 2017 and 2022. Also included are options to move a potential Beaufort Sea sale up from 2020 to 2019, and a no sale option. The Chukchi sale is scheduled for 2022 and Cook Inlet for 2021. The last Cook Inlet sale was in 2004 and drew no bidders. Elsewhere the proposal includes options for leases in the Gulf of Mexico, but removes sales in the mid- and South Atlantic coast areas. Interior Secretary Sally Jewell said in a department release that the program is a balanced proposal that protects sensitive areas and supports save development of the nation’s energy resources. Specifically to Alaska, Jewell said the proposal removes areas from consideration for leases — a 25-mile coastal buffer and the Hanna Shoal walrus foraging area in the Chukchi, and all of Bristol Bay — that Obama withdrew from future lease consideration in January 2015. “We know the Arctic is a unique place of critical importance to many, including Alaska Natives who rely on the ocean for subsistence,” Jewell said. “As we put together the final proposal, we want to hear from the public to help determine whether these areas are appropriate for future leasing and how we can protect environmental, cultural and subsistence resources.” The March 10 statement from the White House and Canadian Prime Minister Trudeau called for protecting at least 10 percent of each country’s Arctic federal waters by 2020. The Interior program report notes the fact that the Trans-Alaska Pipeline System, or TAPS, is currently running about one-quarter full and oil discoveries in the Chukchi and Beaufort seas have the potential to stem TAPS throughput decline. It also mentions a request by Gov. Bill Walker to move the Beaufort sale up from 2020 to 2018. In a statement from his office Walker commended Jewell’s decision to include potential Alaska OCS lease sales to this point in the program process. “Over the past year, I have had many meetings with Secretary Jewell to discuss our access to our resources. In those meetings, I emphasized to her the need for forward planning and ensuring that Alaska is part of the Interior’s five-year leasing plan,” Walker said. “Secretary Jewell and I have not always agreed on issues affecting Alaska, but I’m pleased that we can work with the federal government on this topic.” The Wilderness Society issued a statement expressing a hope the Obama administration will remove all Arctic areas from the Bureau of Ocean Energy Management’s final five-year OCS lease plan. Shell abandoned its multi-year, $7 billion effort to explore its Chukchi leases in September after the company received what it said was disappointing results from its lone exploration well. Shell also cited the federal regulatory process as a reason for discontinuing its Alaska OCS exploration. Alaska U.S. Sen. Dan Sullivan was not impressed with the Interior announcement. “While on the surface the Department of the Interior’s proposed OCS lease plan — which includes acreage in Cook Inlet and the Chukchi and Beaufort Seas — sounds positive, it’s akin to a car dealership announcing a lease sale without providing any keys,” he said in a statement from his office. “For production to be realized and for Alaska to benefit, there needs to be regulatory certainty and a willingness on the part of the Executive Branch to work with, instead of against, lease holders. The energy industry was watching Shell’s ordeal in the Arctic closely. Largely as a result of confusing and conflicting regulations, that company spent seven years and $7 billion to drill a single well. Few, if any companies, could afford a repeat.” ConocoPhillips and Statoil followed Shell in announcing they would also suspend work on the Arctic OCS leases they hold. Shell spent more than $2 billion for its Arctic OCS leases; ConocoPhillips spent about $500 million. Soon after, Jewell announced Interior was canceling planned lease sales for the Chukchi and Beaufort scheduled for 2016 and 2017 based on lack of industry interest. Interior has also denied requests by Shell for extra time on its leases set to expire in 2017 in the Beaufort and in 2020 in the Chukchi, but the company is appealing that decision. Alaska U.S. Rep. Don Young was equally underwhelmed. “Considering the insurmountable regulatory burdens put in place by (Interior) during Shell’s OCS exploration, I have little confidence potential bidders will come forward on the two Arctic lease sales,” Young said in a statement through his office. “Unless the (Interior) and the agencies under its umbrella work to create a regulatory environment that truly gives exploration a chance, I have no expectation for successful development in the Arctic under the Obama administration. “I find little rejoice in the inadequate number of lease sales being offered today and the regulatory environment under which they are being released.” Elwood Brehmer can be reached at [email protected]

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