Governor apparently manages Department of Transportation and not Vice Versa; Bridge Project on the Ropes

January 26th, 2015

The flurry of activity around the Knik Bridge project in the last two months has made two things clear: First, the Governor Walker appears serious about taking the Bridge out of his capital budget request; he ordered the Department of Transportation and Public Facilities (DOT) stop spending funds on the project. Second, despite attempted resistance from the Department, Walker remains in charge.

With oil below $50 a barrel, the Governor’s first step to getting control of an approximate $3.5-4 billion state annual deficit came on December 26, 2014 when the new Governor issued Administrative Order 271 to stop spending non-obligated and unencumbered funds on six megaprojects. Besides the Knik Arm Crossing, the other projects were the Ambler Road, the Juneau Access Road, the Susitna-Watana Dam, the Kodiak Launch Complex and the Alaska Stand Alone Pipeline project. See here for Governor Walker’s press release.

The DOT Push Back that Failed

A January 5, 2015 memo from holdover DOT Commissioner Kemp to Governor Walker’s new Office of Management and Budget Director, Pat Pitney with a copy to the Governor’s Chief of Staff, Jim Whitaker boldly defended his department’s projects. Kemp argued that both the Juneau Road and Knik Bridge were “long-standing goals of the state” that represented a “cost-effective opportunity.” He also said canceling both projects would “likely trigger” the requirement to repay the estimated $73 million in federal funds spent on the Knik Bridge and the $25 million in federal funds spent on the Juneau Access project. By arguing that the Knik Bridge could be funded by state and federal bonds and user fees, Commissioner Kemp was, in effect, backing up the controversially optimistic toll revenue forecast and implying the Bridge would have no impact on the state’s budget.

The resistance of DOT bureaucracy to the apparent cancellation of the two projects stood out among the other state departments and agencies reacting to the suspended six megaprojects.

Critics of Commissioner Kemp’s reasoning were not long in coming out. With DOT’s estimated cost of the Bridge at $1 Billion (critics say around $2 Billion), bridge critic Jamie Kenworthy said the mathematical logic of Kemp’s reasoning was that if you had put five cents into a project that did not make sense, should the other 95 cents follow? Others pointed out when costs ballooned on Anchorage’s Highway to Highway and the Knowles Coastal Trail extension projects, both were canceled by the state and FHWA without the state having to repay the federal funds expended. Faced with these past examples, DOT Transportation spokesperson Jeremy Woodrow backed off his earlier claim that refunding would be required, and instead admitted that past repayment issues had been settled on a case by case basis.

On January 12 the Governor fired Commissioner Kemp. The Juneau Empire and later the Alaska Dispatch and the Fairbanks Daily News Miner quoted the Governor’s spokesperson Grace Jong who made clear that both the Knik Bridge and Juneau Access projects were “on the block.”

The Subway Eminent Domain Fiasco: A DOT Left Hand/Right Hand Problem or an Out of Control Bureaucracy?

On January 8, 2015, DOT contractor HDR notified the owners of the Subway business on Government Hill threatening that if ”there is not some form of mutual agreement reached between the parties within 14 days” regarding acquiring of their property lease for Bridge right of way, the case would be referred to the Attorney General for instigation of eminent domain proceeding to acquire Subway’s interests in the property. The HDR letter copied Knik Bridge Director Judy Dougherty and the Attorney General’s Office.

The willingness of DOT to incur further legal and right of way costs appeared to contradict both the Governor’s December Administrative Order 271 to halt further un-obligated spending and the Knik Arm Crossing and Toll Authority’s (KABATA’s) November 14, 2013 Board resolution to let existing businesses operate until the project’s plans were nailed down.

It’s not clear whether DOT leadership, including Central Region Director Rob Campbell, knew that Knik Arm Crossing Director Judy Dougherty was continuing steps to take to acquire property. But the Governor reacted by canceling any further efforts to acquire more right of way, remarking “let’s not go and start tearing down buildings and closing businesses” for the hypothetical project. It is not known if the Tesoro Station on Government Hill received a similar eminent domain letter from DOT, as their property is also slated for demolition, should the Knik Bridge pass their financial and permitting hurdles.

Government Hill Community Council President Stephanie Kesler applauded the Governor’s decision to cancel the eminent domain proceedings while pointing out that DOT had still not canceled the contract to demolish two private homes and the Sourdough Motel. She asked that the DOT employees who ignored the Governor’s administrative order be held accountable. Senator Ellis (D-Anc) described the attempted taking of two operating business as a continuation of the Department’s “pattern of intimidation” of the neighborhood and Bridge opponents.

Summary: New Sheriff in Town and New Commissioner, but old legislature?

On January 23 the Governor announced that he had appointed former DOT Commissioner Marc Luiken to his former post. A former Elmendorf Vice Commander, Luiken reportedly had been fired by Governor Parnell after he had quantified the budget needed just to maintain DOT’s transportation infrastructure and argued for the priority of maintenance over new construction. While he had never publicly aired his differences with the Governor and his transportation aide Randy Ruaro, reports had circulated from aides that the Governor asked for Luiken’s resignation when it became clear that Commissioner Luiken did not share the Governor’s support for the megaprojects that had drawn such enthusiasm from the Associated General Contractors and local politicians, and particularly from the Mat-Su Borough.

On January 9, 2015, DOT proposed Amendment 13 to the Statewide Transportation Plan (STIP) that would drop the Knik Arm Crossing from the STIP, and transfer those funds to other projects, taking the necessary bureaucratic step of asking for public comment by February 13 on the proposed amendment.

With these actions by the Governor and the Department of Transportation, it has become clear that the Governor is focused on cutting the capital budget and a Commissioner is now in place who shares the new Governor’s priorities. But it is not clear whether the legislature will go along with the Governor’s priorities.

On January 22, 2015 the joint Senate and House Transportation Committees met to hear testimony and discuss the fate of the megaprojects. The legislators’ general discussion neither endorsed nor suggested trying to overturn the Governor’s decisions. Testimony from the Acting DOT Commissioner included the information that $84.8 million has been spent to date on the Knik Arm Crossing including $72.9 million in federal funds.

Also on January 22, 2015, the AP’s Becky Bohrer reported that the Senate Finance Committee had hired former Parnell Revenue Commissioner and KABATA Board member Angela Rodell on a 4 month, up to $100,000 contract, to provide advice on the retirement system, the gas line, and the state’s bond rating. A year ago Rodell had instigated the latest finance plan for the Bridge that proposed the state directly finance the project and testified in favor of legislation that passed committing state bonds to the project (contingent upon receipt of a federal loan that KABATA had been turned down for six times). Without the authority to incur further consultant costs, it appears that the administration cannot now pursue the letter of interest loan application.

But with the legislature now in session, the final story of the Knik Bridge project may not be over yet.

Parnell Administration Denies Records Appeal

November 24th, 2014

Reports Still Withheld: Consultants Hired for Data or Deliberations?

In what may be his final action on the Knik Arm Crossing project, on November 19, 2014 Department of Transportation and Public Facilities Commissioner Patrick Kemp denied the administrative appeal of Government Hill Community Council President Stephanie Kesler’s Public Records Act request for release of the long promised socioeconomic reports (see earlier posts below) on the project.

With the assistance of Assistant Attorney General David Jones and Knik Arm Crossing Project Director Judy Dougherty, Commissioner Kemp stated the reports are still incomplete and so Ms. Kesler’s June, and August 2014 PRA requests were not valid. Per the schedule announced by KABATA in mid-2013, the Cardno/Agnew::Beck socioeconomic report with new population and employment forecasts was to be a three month project which was due to complete over a year ago.

State records show both Cardno and CDM Smith have been paid a total over $1.3 million by KABATA and the Department of Transportation in the past two years, so it is not clear how just “chapters” and not the entire studies were allegedly complete. What is clear is that the reports are a necessary precursor to the revised federal TIFIA loan letter of interest. Unfortunately, delay in providing those reports severely limits opportunity for the public and local officials to comment on the new population projection data, estimated toll revenue, and the resulting revised financial plan before consideration of the plan by federal officials during the TIFIA application process.

The Knik Bridge project has been turned down six times for a needed federal TIFIA loan; the legislature’s commitment for state bonds and future transportation funds for what DOT&PF continues to claim will be a $894 million project, is contingent upon the receipt of an approximate $343 M federal loan.

In denying the administrative appeal, the state argued that it was entitled to the “deliberative process” case law exemption from the state Public Records Act because the consultant work was in effect embedded in the state’s decision making process. Commissioner Kemp did not cite any information from existing contracts with the consultants to back up the state’s claim that the consultants were to play a part in the decision making process. Rather, the “Statement of Services” in the 2013 RFP done for the revised population projections by KABATA made clear that the chosen consultant was to produce “data” and for the consultant to present their “findings” to the Department and the legislature.

When Knik Arm Crossing Project Director Judy Dougherty and the consultants present to Anchorage Metropolitan Area Solutions (AMATS) and Muni Planning and Zoning members on December 8, 2014, the public will presumably learn for the first time about the new foundational population and employment estimates for the project promised after a scathing LB&A audit came out in April, 2013. KABATA signed an agreement with AMATS in August, 2013 to provide AMATS socioeconomic data for the scheduled 2015 update by AMATS of the 2040 Long Range Transportation Plan (LRTP). Because, that data has not been shared with the Muni, AMATS has had to hire a separate consultant to produce independent revised population and traffic estimates to try to stay on schedule for the revised LRTP due to be completed in 2015. As explained in earlier posts, because the socioeconomic studies were not required to be coordinated with each other, there will now likely be three different assumptions used by the Mat-Su Borough, AMATS and DOT/KABATA for their various transportation effort.

Countdown to More Transparency?

Stephanie Kesler has 30 days from the November 19, 2014 denial of administrative appeal to take the Commissioner Kemp’s decision to the state superior court. By then some of the reports information may be released at the December 8 DOT presentation and there may be a new Department of Transportation Commissioner who has a different understanding of the state Public Records Act and more willingness to share project data with the public and local officials.

Key Reports Withheld, Gas Pumps Gone

October 28th, 2014

A column in the October 25, 2014 Alaska Dispatch News by Jamie Kenworthy highlights the two denied Public Requests Act (click here and here) and an administrative appeal (click here) for the Department of Transportation and Public Facilities for release of the long promised reports on the socioeconomic data used to justify the Bridge.

After a scathing legislative audit identifying “unreasonably optimistic” population and toll revenue projections, KABATA (Knik Arm Bridge and Toll Authority) promised a fresh start with new socioeconomic data and hired the team of Cardno/Agnew::Beck to make an independent estimate of the region’s population and employment. That new socioeconomic data was to have been completed by September 30, 2013, over a year ago, per KABATA’s own press release (click here). That due date continues to slip: The February, 2014 KABATA newsletter promised the updated toll and revenue forecast would be available “within weeks”. The new revised socioeconomic data was to provide the background for a revised traffic and toll revenue forecast, but that report was still missing at the end of April, 2014. Thus, the legislature approved the project without having any assurance that there would be sufficient toll revenues needed to pay off the necessary state and federal bonds. The Bridge financing bill, HB 23, committed the state to fund what KABATA estimates to be an $894 million cost to build a 2 lane bridge contingent upon receipt of a $341 M federal TIFIA loan for which the state has been turned down for now six times.

In this article, the Alaska Dispatch summarized the dispute over the withheld reports.The original Public Request Act (PRA) for the studies was filed by Government Hill Community Council President Stephanie Kesler on June 11, 2014 and renewed August 20, 2014, and appealed to the Commissioner of the Department of Transportation and Public Facilities (DOT/PF) on October 7, 2014. In an October 10, 2014 response to the appeal, DOT/PF acknowledged that by law the Department had 10 days but because the Assistant Attorney General who was familiar with the project was gone for two weeks, the response would likely to be delayed. From the state’s denials of the PRA request it is not clear whether the reports are complete or not. What may be likely is that the Cardno / Agnew::Beck forecast of population and employment data was completed a year ago. But Cardno, Inc may have forecasted lower numbers than necessary to pay off the bonds, so the toll and revenue consultant CDM Smith – the same firm criticized in the 2013 legislative audit – has had to model a number of new traffic scenarios to get the number high enough to show enough revenue to pay off the federal loan for which they are applying.

Political skeptics may interpret the withholding of the reports for which the two consulting firms were paid over $1.3 million in FY 13 and FY 14 (click here) as being dictated by the November 4 election. However the withholding of the socioeconomic report may be driven by larger financial considerations. To get the federal TIFIA loan upon which the project depends, the project needs an “investment grade” toll and revenue forecast. To pass that financial review the state must show that there are sufficient population and traffic numbers to produce the tolls to pay off the bonds on the proposed $341 M federal loan. Consequently, hiding the data may prevent critics from questioning the state’s numbers. Interestingly, DOT/PF recently stated that, “The change in direction for how the project would be financed (ie. TIFIA and bonds) changed the type of data and increased the amount of necessary information than was originally planned under the previous P3 funding method. As a result, the contractor and subcontractors have required more time to generate the report.” That directly conflicts with the testimony provided by Rep. Mark Neuman (R-Big Lake) during the March 12, 2013 House Transportation Committee hearing on HB23, where he stated that Standard & Poor had already provided an “investment grade” rating for the project.

Business chooses to dis-invest at property threatened by this Project without Financing

The only gas pumps on Government Hill have now been removed by Tesoro, who apparently made the decision that it does not make business sense to upgrade the station’s gas tanks while the Department of Transportation threatens to acquire the station for the right of way for the Bridge project.

The decision by Tesoro and its real estate landlord apparently caught the neighborhood, the state, and the Alaska Railroad which has a long term lease with the station’s owners off guard. Click here for the Alaska Dispatch article.

On November, 15, 2013 amidst an earlier kerfuffle with the neighborhood over acquisition of neighborhood homes and businesses for a project that lacked financing, KABATA issued a press release to highlight that the KABATA Board’s intent in “protecting the interests of the subtenants to remain in possession until construction begins.” As DOT spokeswoman Jill Reese, stated in the October 15, 2014 ADN article, “We had no intention whatsoever of not continuing their lease, and then not paying them for every bit of the relocation and expenses that they would have had.” She added that such compensation is required by federal law.

On Tuesday October 14, 2014 Melinda Gant, Vice President of the Government Hill Community Council, spoke with Matt Gill, Tesoro’s External Affairs Senior Manager. Mr. Gill stated that Tesoro was in the midst of a company-wide initiative to replace their single-walled underground tanks with double-walled underground tanks. However, Tesoro received notice from Brauvin Real Estate (Tesoro’s landlord) that the lease was being transferred from the Alaska Railroad to the Alaska Department of Transportation as a part of the Knik Arm Crossing’s right-of-way acquisition process. Mr. Gill then stated that given the uncertainty cast by the Knik Arm Crossing, Tesoro could not justify the investment in the double-walled tanks.

It appears that what economists call “uncertainty” has created a disincentive for Tesoro to make a long term investment in upgrading the business. While DOT’s public stance apparently commits the state to help keep a functioning local businesses alive until the Right of Way is needed, the practical effect for acquiring Right of Way before a large project is financed, discourages new investment in local businesses and leaves the neighborhood with no gas station in the interim.

Discontinuance of fuel sales by the Government Hill Tesoro is a severe blow to the neighborhood, its businesses, Government Elementary School and JBER. The station was almost always busy with vehicles filling up. Neighbors, soldiers and airmen, school parents, AT&T employees, business owners, and many others used that station. The uncertainty imposed on the Government Hill Business District by the potential lease transfer has had the direct effect of lost sales at this location and a loss of economic choice by local residents and one would imagine that Tesoro would like to recoup that lost business if possible.

The Government Hill Community Council is currently working with the DOT/PF and Tesoro to find a solution where the community can keep an important feature of the business district fully operational by providing the necessary “certainty” that had been taken away by DOT/PF’s pre-mature actions on Right of Way.

Protesters Greet Alaska DOT and Bidders at Knik Arm Bridge Demolition Sites

July 16th, 2014

During a site visit for potential demolition bidders on July 15th, over 50 local and city-wide protesters held signs and chanted their opposition to demolition of viable homes in the Government Hill neighborhood for an unfunded bridge. The Government Hill community is an historic residential area and the oldest neighborhood in Anchorage.

On July 3rd, the Alaska Department of Transportation and Public Facilities (ADOT) announced it would remove two homes and one former business located in the path of the proposed Knik Arm Bridge even though there is no likely financing for the bridge. The 164-page Specifications document for the estimated $500,000 to $1 million demolition project is available on ADOT’s website.

Following passage of HB 23, signed by the governor on June 20, ADOT took over nearly all Knik Arm Bridge and Toll Authority (KABATA) duties. This proposed demolition is the first step by ADOT to pursue the bridge in its new role. HB 23 requires the bridge to receive a low-cost federal “TIFIA” loan for one-third of its $1.6 billion cost, however, before the state can proceed with construction. KABATA has been turned down five times for a TIFIA loan, which typically goes to congested urban areas (e.g., Los Angeles, the Tappan Zee Bridge north of New York City).

Government Hill Community Council President Stephanie Kesler commented on the proposed demolition. “It is completely irresponsible and fiscally wasteful for the state to demolish viable homes and diminish our neighborhood for a project without a clear path for funding. Today’s protest shows that our community and our many allies are committed to fighting this bridge even if the properties are gone. We will not roll over and move on.”

Dan Bonney, a retired career military leader from Eagle River, stated that “Demolition of these properties is irreversible and foolhardy absent likely federal funding for the Knik Arm Bridge. Without overwhelming public benefits which I don’t see here, the state should not override local concerns.”

Local media coverage of the protest was extensive:

KTUU (NBC): Planned Knik Arm Bridge Relocations Spark Protest

KTVA (CBS): Bridging the gap on the Knik Arm controversy

APRN: Residents protest home demolition, Knik Arm Bridge

Anchorage Dispatch News: DOT plan to remove Government Hill homes sparks protest

Needed Right of Way? Or Demolitions to Create Facts on the Ground?

July 9th, 2014

Following a familiar public relations tactic to try to bury bad news by releasing it right before a long holiday weekend, around 3 PM on July 3rd, the Department of Transportation issued a press release announcing its intent to solicit bids to demolish 2 houses and the Sourdough Lodge on Government Hill.

The project is now dependent on a hard-to-get $300 million federal loan that KABATA has been turned down for five times and whose reapplication by the state is still pending. (Click here to assess the Bridge’s national competition. Note how almost all projects except the Knik Arm Bridge have had their reviews complete or have been asked for more information.)

The two houses to be demolished are considered livable while the Sourdough Hotel was a functioning business until KABATA acquired the property. AKDOT has yet to acquire two other commercial properties and enter into a long term lease for land owned by the Alaska Railroad.

With no financing plan in place for the project, and at least a year before right-of-way would need to be in hand, it is not clear why the state believes it necessary to demolish the structures soon for a project with an uncertain future. The KTVA report quoted Government Hills Community Council President Stephanie Kesler who noted the irony of tearing down livable housing in a city with a housing shortage.

Devin Kelly’s article today in the Anchorage Daily News quoted KABATA and now DOT spokeswoman Shannon McCarthy saying it would be more expensive to secure or rent the property than to demolish them now. Those statements, even if accurate on an accounting basis, would have been irrelevant if KABATA had waited for the project to be financed before acquiring the properties.

Bridge Wins, KABATA Loses

May 1st, 2014

For the first time, a bill passed the legislature that will provide major state funding for the project contingent upon approval of a difficult-to-get $300 million federal TIFIA loan.

However, the project’s progress came at a price. CS HB 23 passed on the last day of session. The bill shifts all project management – bonding, permitting, and right of way acquisition – to the state Department of Transportation and Public Facilities (ADOT&PF). KABATA’s sole remaining function will be to collect tolls. For that reason, key legislators have openly implied that KABATA will be abolished next session.

But for 2 missing pro-bridge votes in the House, the state indirect guarantee for both the proposed $300 million state loan and an up to $500 million KABATA loan or bond to repay TIFIA, would have passed and KABATA would have remained in charge of the project.

A House-Senate conference committee chaired by retiring Representative Alan Austerman (R-Kodiak) then produced a drastically different bill that removed all indirect moral obligation language behind the proposed TIFIA loan that was in the Senate version. Now only tolls and not the state, stand behind the proposed TIFIA loan.

The final House approval of the new bill showed past bridge critics such as Republicans Reps Feige, Hawker, and Costello returning to the majority. As a result, the overwhelming House approval reflected the majority-minority split with only Democrats in the minority voting No. For futher details, see this Alaska Journal of Commerce article and this Frontiersman article.

The legislature also passed a state capital budget with $55 million for the project, $5 million new money from the state to match $50 million of expected federal funds, which is close to the previously allocated funds left over from the 2005 Federal Earmark for the project. The ADOT&PF is likely to use some of those funds in the coming year to contract with a design and engineering firm to take the current 35% design to an approximate 65% design. The 65% design level should produce a more refined cost estimate for the overall project than the $894 million number given the legislature in March.

However difficult it will be for the state to obtain a TFIA loan based only on toll revenue, this is the first time in four years that a bill was passed to potentially put the state’s credit behind the project by approving an up to $300 M state bond. One sign that the embattled project now looks more real than ever is that the last day decision of the legislature to back the project was front page news in the national publication Bond Buyer (behind paywall).

The bill now goes to the Governor who is expected to sign it and so put ADOT&PF in charge of the project on July 1, 2014.

The Shifting Battleground and Changed Schedule

With state support contingent upon a TIFIA loan for one-third of the project’s costs, the fate of the project now shifts from a political and priorities discussion among elected officials in the Alaska legislature to a more technical discussion of project credit worthiness between the state and TIFIA program officials at the federal Department of Transportation.

To submit its first stage federal “Letter of Interest” application, the state will now have to provide the feds with the socio-economic study, the revised traffic and toll revenue study, and the new financial plan that was promised to the legislature last year but was not provided this session. The one page ADOT&PF – KABATA financial plan that showed no amount for toll revenue or bond payments will obviously be insufficient for the project to be considered by TIFIA.

In his March 27, 2014 presentation to the Alaska Support Industry Alliance, KABATA Chair Michael Foster expressed great confidence that the TFIA loan would be approved if the Senate version of the HB23 passed. One state official has privately acknowledged that the socio-economic study to be done by Cardno and Agnew:Beck projecting population and jobs (an important first step in projecting traffic and toll revenues) has long been done but it would not be released by KABATA until after session. Even if the socio-economic study originally due 9/30/13 is finished, that study was to be used by KABATA’s discredited Revenue forecasting firm, CDM Smith to provide a revised traffic and toll study as the basis for a new financial plan.

State debt manager Deven Mitchell and the Department of Revenue and not KABATA will now work with ADOT&PF to provide that financial information to TIFIA and this administration oversight may push consideration of the loan into the next TIFIA round. Over $40 billion in projects were submitted to TIFIA for the round that started August, 2012 and TIFIA commitments made since then may use up all of this round’s funding before Alaska submits its revised application.

As a result, the fate of the project may well depend on the amount of funding in the next TIFIA around to be announced sometime after October 1, 2014. The TIFIA program has broad bi-partisan support but the program’s funding level is tied to the necessary renewal of the Highway Trust Fund. The Highway Trust fund has been described as the one piece of major legislation that both houses of congress will need to address prior to the November, 2014 elections.

Because states and private partners have had trouble coming up with the two-thirds funding necessary for major transportation projects, there has been some congressional discussion about allowing the TIFIA program to loan up to 50% of a project’s budget. Even if, as expected, TIFIA funds are higher in the next round than current levels, that possible change to 50% federal funding would result in the usual 5-8 projects being financed out of approximately 40 submitted each round. It is also likely that boosting TIFIA funds may cause a reduction in federal transportation dollars that provides 90% of the funding for the vast majority of Alaska’s transportation projects, as well as making up one third of the proposed funding for the Knik Arm Bridge.

So it is likely that by the time the newly elected legislature takes office in January, 2015, the Knik Arm bridge project will have been turned down for funding in the 2012 round or is awaiting a decision in the new round that can be launched no earlier than the new federal fiscal year Oct 1, 2014. If KABATA was still in charge, that scenario could have predictably led KABATA, a single project state agency, to push for full state funding.

Congress is expected to renew the Highway Trust Fund without raising federal fuel taxes; almost certainly they will not be raised prior to the November election. Because of a flattening out of miles driven nationally and improved vehicle mileage performance, states will continue to see a decline in federal formula funding. As a result, next year ADOT&PF with less federal formula funds, will probably have to identify projects that would be displaced or postponed indefinitely by the bridge. This year, ADOT&PF told legislators only that a bridge commitment would at most delay major projects by just 6 to 12 months.

Project optimists can hope that a federal TIFIA loan commitment before Spring 2015 could have ADOT&PF presenting a financial package to the legislature for approval during the next legislative session. Individuals who are skeptics of federal TIFIA funding for one of the “Bridges to Nowhere” and who are keen observers of the past pace of TIFIA credit decisions, predict a slower pace on the Bridge decision. In that scenario it will not be until the 2016 legislative session that the legislature will need to face up to either abandoning the project or fully funding the bridge at 100% using state funds.

House Sits on Bridge Funding

April 22nd, 2014

CS HB 23 which would provide a $350 million state revenue bond and an up to $500 million loan or bond by KABATA to repay a proposed federal TIFIA loan to finance the Knik Arm Bridge, sailed through the Alaska State Senate on April 12, on a 16-4 vote with only Democrats Ellis, French, Gardner, and Olson dissenting. See this Anchorage News article by Richard Mauer

None of the missing information delineated in our April 12, 2014 post was provided prior to the Senate vote. Also not provided was a considered analysis of whether the state’s credit rating could be adversely affected if KABATA defaults on its TIFIA loan. The TIFIA loan would not be a liability that the state is is obligated to cover, but KABATA is authorized to enter into agreements with the state for financing its project, and the specific terms of those agreements could drag the state’s credit rating into the picture. Either way, Alaska will be last in line for tolls to repay its state revenue bonds.

The only successful amendment to the bill provided that property KABATA forcibly acquires through its power of eminent domain cannot be demolished prior to receiving a hard-to-get federal TIFIA loan for one third of the project costs. However, KABATA is free to demolish the homes and businesses it has already acquired, and it is free to continue to purchase more homes and businesses and to demolish them at any time.

The bill headed back to the House on April 14, for concurrence, where it has now sat for over a week.

The final large non-bridge issue to be resolved before adjournment is the additional education funding amount. That issue will be worked out in the House-Senate free conference committee on the state’s capital budget.

In terms of the bridge, It is not clear if a vote in the House will be scheduled on the significantly revised CS HB 23 bill that passed last year. The original HB 23 was designed to move the bridge project to AHFC where AHFC would have reworked all of the numbers behind the toll estimates for a Public-Private partnership model. However, the new Senate bill keeps KABATA in charge of the project and abandons the public-private financing model in favor of building the bridge with public money only.

Two Omens?

Two pieces of information that emerged in the last few days suggest that it may be a struggle to pass a large capital project costing $894 million (KABATA estimate) in an extended session colored by talk of budget restraint and teacher layoffs.

First, an article by Gregg Erickson in the © Alaska Budget Report (Used by permission), established that the draft 2015 capital budget’s commitment of $50 million in federal funds to the KAC represents 20% of next year’s federal transportation funding for the entire state (the state has been receiving about $250 million dollars a year in federal funds for the its transportation program). Erickson’s math appears to contradict the assurances of Department of Transportation Program Development Director Jeff Ottesen to the Senate Finance Committee. Ottesen stated that the $50M earmarked for the Bridge would represent no more than a 6-12 month delay in funding the existing pipeline of projects. The projects likely to be crowded out by the Bridge are listed in our April 11, 2014 post.

State Debt Manager Deven Mitchell also testified to Senate Finance Committee that the tolls should be sufficient to repay the TIFIA loan after O&M costs are paid. So if, as expected, there was no further toll revenue to repay the proposed up to $300 million state loan, that would add another 10%-20% equivalent of annual federal transportation dollars for the project to Erickson’s estimate of 20% of 2015 federal funds.

Second, an unanticipated amendment by Representative Les Gara (D-Anchorage) yesterday to strip $55 M for the Bridge out of the capital budget received some bipartisan support, failing 12-27. The $5 million state match represents “new money” for the project. The remaining $50 million is considered “old money” from the original federal earmark. Since bridge opponents did not lobby this item, the Republican support for this effort may reflect the heavy lifting required to pass a big ticket item such as CSHB 23 in the extended session. Other non-bridge capital budget amendments were turned aside largely on majority-minority lines.

No Financial Spreadsheet Necessary: Senate Considering Bridge Funding Bill

April 12th, 2014

With nine days to go in the legislative session, CS HB 23 has moved to the Alaska Senate Floor. If CS HB 23 passes the Senate, it will next go to the House where the bill must pass if it is to become law before the legislature adjourns on April 20.

CS HB 23 earlier passed the Senate Finance Committee with 5 approvals (Senators Meyer, Bishop, Fairclough, Kelly, and Hoffman) to 1 do not pass (Senator Olson). The only financial information provided the committee for what KABATA estimates as a $894 million dollar project, was a 1 page listing of funding sources which included a $251 million state revenue bond, existing and anticipated state and federal transportation funds of $226 million, $55 million from next year’s capital budget, and a $341 million federal TIFIA loan which must be obtained to trigger the state funding. The Bond Committee would have to approve the package.

Reverse Engineering the Missing Spreadsheet

While traffic counts and expected toll revenue were discussed in two days of hearings at the Senate Finance Committee, at no point did KABATA or the State Department of Transportation produce any information on estimated toll revenues or any schedule of projected bond payments. As a result, there was no way for committee members to determine if the numbers added up. Although there were verbal references in testimony to less than 10,000 cars a day being needed to make the bond payments in the early years, no information was provided showing the traffic numbers necessary to produce the revenue to pay off the hoped for federal loan and the state revenue bonds.

Using that one page plan from KABATA-DOT&PF and numbers from recent presentation of KABATA Chairman Mike Foster to the Alaska Industry Support Alliance, retired emeritus Professor Scott Goldsmith produced a spreadsheet (click here for Goldsmith spreadsheet and commentary by Jamie Kenworthy) showing that the Bridge would have a cumulative deficit by $242 million by 2034. The point of the Goldsmith exercise was not to define a cost for the project but rather to show that, even by KABATA numbers, the legislature would have to annually pay for the toll shortfall for the next 18 years.

The Senate Finance Commission had much discussion about increasing traffic on the Glenn and that the Bridge could forestall the full cost of necessary Glenn improvements. Goldsmith’s spreadsheet included information from the latest Department of Transportation traffic counts showing that for the last three years traffic between the Mat-Su Valley and Anchorage has not increased.

As 5 people who testified to the Committee pointed out, KABATA has not produced the new demographic data, traffic and toll projections and financial information promised by KABATA after last April’s highly critical Legislative audit. The audit stated that KABATA’s predictions were “unreasonably optimistic.” Further confirming that KABATA’s projections were “unrealistically optimistic,” two more recent projections performed for the Department of Transportation for tolled traffic, resulted in numbers that are 50% and 74% lower than KABATA’s old unrevised numbers.

If (When?) Tolls Fall Short Will KABATA Default or Will the Legislature Make Up The Toll Shortfall?

Questions from Senator Ellis (D-Anchorage) to the Department of Revenue and the Attorney General’s office asked what would happen if toll revenues proved insufficient to repay the proposed TIFIA loan.

Assistant AG Jeff Stark denied that one particular section of the bill constituted a moral obligation of the state. But the confusing cross references of “toll bridge reserve fund” “bond redemption fund” and “bond reserve fund” appears to extend the clear responsibility the State would have for the $300 M fund to also include any bond or loan KABATA might approve. By their nature, so called “moral obligations” are a guarantee not written in the statute but CS HB 23 contains the customary language citing “reserve funds” and obligations to report any shortage of necessary funds to the legislature which are the customary tools of establishing a moral obligation for the state to have to back up the debt issued by its own agencies.

Bob French marked up CS HB 23 showing a number of questions about how the reserve funds would actually work. Click here to view the marked up version.

Assistant AG Stark also answered a question directed to the Department of Revenue by stating, “Since KABATA will not be relying upon State backing to obtain the TIFIA loan, a default by KABATA will not impact the State’s credit rating.”

No Alaska state agency has ever defaulted on its obligations, whether to investors or the federal government. But most bond professionals are quite skeptical of Stark’s assurance that there would be no impact on the state’s credit rating from a KABATA default on the proposed $341 million loan. What is a more likely scenario say bond authorities, is that when toll revenue proves insufficient, the legislature will annually make up the shortfall rather than risk a credit downgrade and higher interest rates having to being paid by the state and local units of government.

That expected scenario of the “blank checks” embedded in CS HB 23 was the topic of Scott Goldsmith’s testimony to the Senate Finance Committee.

There was little discussion by the Senate Finance Committee that under the new public finance structure of CS HB 23, as opposed to the old public-private partnership model KABATA pushed last year, the state will now be responsible for all cost overruns.

So what projects will be crowded out by the Knik Arm Bridge?

Department of Transportation Program Development Director Jeff Ottesen reassured the Senate Finance Committee that in making room for the Bridge in the state’s adopted transportation plan would bring at most delay of 6-12 months of some projects and the only canceled projects were ones that will no longer be necessary, such as those improving the ALCAN highway bridges, since all gasline discussions now focus on an in-state line to Valdez or Cook Inlet.

However, the Department of Transportation now has out for public comment, the amendments necessary to accommodate adding the Knik Arm Bridge to the transportation plan. That information makes it possible to identify the canceled or postponed projects that will be immediately affected if CS HB 23 passes and those projects are spread across the state. Click here for a list of the canceled and postponed projects.

Proposed Statewide Transportation Improvement Program Amendment 9 which Revises Knik Arm Bridge Costs Major Changes to Highway Projects Statewide to Ensure “Fiscal Constraint”

April 11th, 2014

Federal transportation law requires the changed approach to financing the Knik Arm Bridge to be reflected in the Statewide Transportation Improvement Program (STIP) for 2012-2015, previously approved by the federal government. Any major change to the STIP via an amendment must ensure that the cost numbers balance, known as “fiscal constraint.” The revised Knik Arm Bridge financing which underlies CSHB 23 requires changes to other transportation projects in the existing STIP, including postponement of construction, cancellation of project components, accounting measures that ensure other projects in the future will have to be cut back, etc.

Amendment 9 to the STIP is now out. Based on the contents in the amendment, it’s clear that highway projects in the Mat-Su Borough (Glenn and Parks Highways), near Ft. Greeley, along the Dalton Highway in the North Slope Borough, in Haines, and in Juneau are likely to be significantly and adversely impacted. See the chart below. Some of these projects will have to find new federal or state funding in the future.

Click here to view the full size document.

STIP Ammendment 9

Easy to Start, Impossible to Finish III

April 1st, 2014

Ten major transportation and energy capital projects planned by the State of Alaska could cost up to $17.7 billion and would nearly quadruple Alaska’s debt service, says a new report by engineer and transportation expert Lois Epstein.

“State leaders need to decide if it makes fiscal sense to proceed with all of these expensive projects, especially given their limited returns on investment,” said Epstein, who is arctic program director for The Wilderness Society and previously directed the Alaska Transportation Priorities Project, a non-profit transportation watchdog organization.

The 10 projects and their costs are shown in the chart below, and on the second page of Epstein’s report, which is available here.

“The state has in hand only eight percent of the money it needs to build these 10 projects,” Epstein said. “With oil revenue in decline in the near-term after passage of SB 21, a law cutting taxes on oil production, we need leadership in Juneau to serve as a check on the governor and to prevent unwarranted projects from becoming burdens to the state for decades to come. Legislators should fund ‘needs’ like education and repairing crumbling infrastructure before funding ‘wants,’” she added.

Recommendations in the report include:
1) Pursuing only major road/bridge projects that address key transportation needs, e.g., increasing safety, reducing congestion, fixing deteriorating infrastructure, and addressing air quality problems.
2) Not starting projects that do not have the financial resources to be finished.
3) Not letting project momentum obscure the need to re-evaluate projects when adverse facts become available.

Table 1: Money available to construct major, proposed transportation and energy infrastructure projects vs. project costs

Easy to Start Impossible to Finish chart