Tim Bradner

Race for gov shaping up, House to be in play

What’s in the crystal ball for the 2018 governor’s race? The view is still cloudy but vague images can be discerned in the glass. One looks strikingly like Gov. Bill Walker, and we can see Lt. Gov. Byron Mallott right behind him. Other images are fleeting — former state Sen. Charlie Huggins, current Sen. Mike Dunleavy of Wasilla, former House Speaker and current Rep. Mike Chenault, former U.S. Sen. and Anchorage Mayor Mark Begich and Scott Hawkins. All but Begich, the Democrat that lost to current U.S. Sen. Dan Sullivan in 2014 who hasn’t yet made any intentions known, are declared Republican candidates for governor. We can make out someone else, barely. Is it John Binkley? It’s political season in Alaska again. Alaskans’ favorite political parlor game for the rest of the year will be who’s up and in and who’s down and out. General elections occur every two years in Alaska on the even year, and 2018 is it. This is also the fourth year for Walker and Mallott, the incumbents in the top two positions in the state executive branch, who are running for reelection. Voters will also elect or reelect legislators, too. Every incumbent in the 40-member state House will be up, as well as half of the 20-member state Senate. House members serve two-year terms and senators serve four-year terms with 10 of them, or half, standing for reelection every two years. Election year is also a huge distraction for sitting legislators during their annual session, which begins in mid-January, Meanwhile, who’s up so far in the big prize: the governor’s race? It’s still early. August, the primary election, and November, the general election, are still far in the future in political time. A lot can, and will, happen between now and then. Both Walker and Mallott have the power of the incumbency, which brings pubic exposure and a huge advantage. But over four years an incumbent picks up negative baggage, and for Walker it is his veto two years ago of half of the money for the annual Permanent Fund Dividend. Former state Rep. Harry Crawford, an Anchorage Democrat, thinks the trimming of the PFD, which the Legislature did itself last year, will hobble Walker. For Alaskans of modest incomes it was a blow in a recession year, Crawford said. “I know Democrats who put Walker-for-Governor signs in their yards last election, but they say they won’t be do it again,” he said. Others, like former House Speaker John Harris, a Republican, say the PFD cut will hurt Walker a bit, but will get lost in the wash by the time the election rolls around. What could soften the sting of the PFD cut is Walker’s decision to expand Medicaid under the federal Affordable Care Act, which helps Alaskans of moderate income get health care. Among rural Alaskans, where the PFD is important to family incomes, the push by Walker and Mallott to give greater recognition to Tribes has been very popular. Still, there are challengers chipping away at Walker and Mallott. Among Republicans, Walker’s decision in 2014 to run as an independent (he previously ran as a Republican) and to team up with Mallott, a Democrat, to forge an independent ticket backed by union clout, still stings. That initiative led to a razor-thin victory over former Gov. Sean Parnell, the Republican, who was widely expected to win reelection. Parnell’s narrow defeat led to four years of bad relations with Republicans in the Legislature, which hurt Walker’s major legislative agenda items: a state-led gas pipeline and reform of the state’s finances keyed by using Permanent Fund earnings. Opponents who have lined up against Walker will use all that to stoke up fires against the governor. On the Republican side, Dunleavy and Huggins, both from the Matanuska-Susitna Valley, are trying to corner the conservative vote. Dunleavy has loudly championed an uncut PFD, which would continue to rise under the existing payout formula in statute, and also champions budget cuts as the state’s main solution to its fiscal problems. Huggins isn’t yet as vocal on these issues but he has solid conservative credentials after years in the state Senate. This pair will face off in the Republican primary but there are reports the two have a pact that one may withdraw to support the other later this spring if one of the two gains strength among voters (polls show the two are largely unknown). Another name in the Republican race is Scott Hawkins, an Anchorage businessman, who is also a conservative. While Hawkins isn’t widely known either, a new face in the race can become an advantage and lack of name recognition can be overcome if a candidate can raise enough money for advertising. A name that keeps circulating in the Republican race is John Binkley, a businessman and former state senator whose greatest advantage is name recognition and a reputation as a moderate who could offer Republican voters in the primary an alternate to conservatives Dunleavy, Huggins or Hawkins. However, reports are that Binkley is reluctant to enter the race, at least so far. Four of his children purchased the state’s largest daily newspaper this past fall, and have since returned the Alaska Dispatch News to its original name of the Anchorage Daily News. On the Democratic side, Begich is still being talked about, although he is also said to be reluctant about the race after he considered it earlier. If Begich were to enter the race on the Democrat side, he would drain support from Walker and Mallott, particularly among labor groups and traditional Democrats. This would make for an extremely unpredictable three-way race in the general election between a strong Democrat, the independent Walker, and a conservative or moderate Republican. If Begich does not enter the race, it would leave Walker as independent and Mallott pitching to Democrats and a rural voters. Some poll results, which are confidential, show Walker’s popularity down and faring poorly in a three-way race, with a Republican candidate, mainly Dunleavy, showing stronger against an independent (Walker) and a Democrat. In a two-way race, with no Democrat and Walker as independent running only against a Republican, the Republican still looks to win, according to the poll conclusions, which were described to the Journal of Commerce. However, other polls may show different results, and a lot can happen between now and August and November. Walker’s gas pipeline deal with China, although it is not binding, has attracted a lot of attention and the governor will cite it as a key accomplishment. However, the final agreement with major Chinese companies is not due to be concluded until next December, which will come after the November general election. That means Walker can campaign on the promise of the deal. Whether it successfully comes together at the end of 2018 will have no bearing on whether the governor will be reelected or not. Continued debate on the state’s financial situation will color the races, of course. Walker is proposing an employment, or wage, tax on citizens and basically status quo on the budget, while Republicans in the Legislature will oppose the tax and favor more budget cuts. All sides in the Legislature, however, favor a plan to make use of some earnings of the Permanent Fund and to “cap” the PFD near its historic average of $1,100 to $1,200. However, if Dunleavy stays in the race and pushes preservation of the dividend’s current formula, or even to put it into the Constitution (an idea some Democrats also favor) it could set the tone of the 2018 debates in Juneau and legislators’ own campaigns later in the year. As Republicans try to take back the Governor’s Mansion, they’ll also be trying to take back the House that currently has 21 members of their party but is led by a coalition that is dominated by Democrats. After the 2016 elections, three Republicans House members – Reps. Gabriel LeDoux of Anchorage, Louise Stutes of Kodiak, and Paul Seaton of Homer — crossed party lines to join the Democrats in forming the leadership for the House. The Republican party has mounted an effort to oust the three mavericks either from the party primary or ultimately at the polls, but few believe Seaton can be defeated in Homer or Stutes in Kodiak because outside influence, such as from a political party, is typically resented in a small community. LeDoux, from Government Hill in Anchorage, may be more vulnerable, but it’s too early to predict any outcome. The House Majority Coalition’s control of the House is by a narrow margin, however, and the loss of one Democrat plus one of the three Republicans would make for a 20-20 split. Republican-Democrat coalition organizations have happened in both the House and Senate several times in the past, typically with rural Democrats caucusing with Republican majorities. Efforts by the respective parties to defeat such mavericks have rarely borne fruit, although Democrats were successful in defeating Rep. Ben Nageak of Barrow in 2016 by backing Rep. Dean Westland, D-Kotzebue, who just resigned in the wake of multiple allegations of improper sexual behavior. Westlake’s resignation will bring a new face to Juneau from District 40, but his temporary replacement, who will serve until the next election, will be a Democrat from the district appointed by the governor from three names put up by the Democratic party. For now at least, Westlake’s replacement will preserve the basic numbers holding the coalition together. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Crime bill looks certain, taxes less so as special session grinds on

The Legislature is grinding its way through the second week of its special session — the fourth for 2017 — and it now seems clear that public anger over a spike in theft and petty crime has boiled over and diverted legislators from Gov. Bill Walker’s original purpose the session, which was to pass a new revenue measure aimed at easing the state’s deficit. Lawmakers gaveled in to the special session Oct. 23 but quickly became preoccupied with Senate Bill 54, a bill addressing problems in SB 91, a criminal justice reform bill passed in 2016. So far little attention is being paid to the revenue proposal, an annual “payroll” tax proposed by the governor. The tax bills are HB 4001 in the House and SB 4001 in the Senate. Given the mood of the public it seems certain that some form of SB 54 will pass but prospects for the tax bill are uncertain, and even doubtful. The House Finance Committee held one hearing on the bill Oct. 26 but a second hearing planned for Oct. 27 was canceled. The Senate has held no hearings on its version of the bill. Sources in the House, asking not to be identified, said the Finance Committee is ready to take up the governor’s bill but won’t do so until the Senate signals a willingness to consider it. So far Senate leaders have not said when or if they will take up the bill. Walker’s proposal would impose an annual tax generally linked to income but with a “cap” on the tax of $2,200, or whatever is twice the amount of the previous year’s Permanent Fund Dividend, for top wage earners. The tax would be less for Alaskans with lower incomes and would also tax nonresidents’ income. On the crime legislation, a push developed early for outright repeal of SB 91 among some conservative legislators, who were prompted by constituents angry about the petty crime wave, but voices of moderation are now weighing in supporting the limited fixes in SB 54, which mainly toughen penalties for minor crimes that were softened in SB 91. The governor and Attorney General Jahna Lindemuth support that approach. Parts of SB 91 enhance drug treatment and post-release counseling for inmates, which are measures aimed at preventing a return to crime and, eventually, to prison. “SB 91 has only been law for a little over one year; indeed, some elements have not even been put into effect,” the Alaska Regional Coalition, a group of rural Alaska nonprofits, told legislative leaders in an Oct. 27 letter. “SB 91 unjustly bears the brunt of public frustration about the recent uptick in crime. This is not to minimize the righteous fear and anger of victims. There are other obvious significant factors at play in our communities, not least of which are a statewide economic recession and a surge in use of and addiction to prescription and illicit opioids.” The group urged lawmakers to show restraint in making changes in the law but also to fund the treatment and inmate reentry parts of SB 91, as well as provide more resources for public safety, behavioral health and the state’s legal and correctional systems. Business groups, who originally raised the concerns over the easing of penalties for minor crimes like shoplifting, also now support the limited fix. “We have reviewed the version (of SB 54) passed by the House Judiciary Committee and believe it should be adopted by the Legislature. We believe the changes in SB 54 will help deter misdemeanor crime and provide enforcement agencies the tools to help reduce criminal activity,” wrote Denny DeWitt, the state director of the National Federation of Independent Business, in a letter to legislators. “While SB 54 may not resolve all concerns with SB 91, it is important to, at least, take this modest step now.” SB 54 passed the Senate last year and was moved out of the House Judiciary Committee on Oct. 26 with amendments added. The House Finance Committee, which now holds the bill, held public hearings on Oct. 30. In hearings held Oct. 31 by the committee, Lindemuth told the legislators that budget cuts have limited the ability of state prosecutors to deal with the surge in misdemeanors and petty crimes. The Law Department’s general fund appropriations have dropped from $73 million in fiscal year 2012 to just more than $50 million in fiscal year 2017, Lindemuth said in her presentation to the committee. The number of attorneys in the state’s Criminal Law Division has dropped from 128 to 106 between fiscal years 2014 and 2017, the attorney general said. “Our capacity to prosecute misdemeanors is down 33 percent since 2014,” she said. The Law Department has had to husband resources to deal with major crime, Lindemuth said. Capacity to handle felony prosecution is down only 3 percent, as an illustration of that, but this is at the expense of resources for petty crime. On the fiscal side, the governor’s wage tax is aimed at raising between $300 million and $325 million in new revenue, which would be only a small dent in a the current fiscal year deficit estimated at $2.5 billion. “We are proposing a payroll tax of 1.5 percent of wages earned by Alaskans and non-resident workers, capped at $2,200 or twice the previous year’s Permanent Fund Dividend amount, whichever is higher,” Revenue Commissioner Sheldon Fisher said in a recent briefing. In comparison, a personal income tax bill, HB 115, passed by the House earlier this year but rejected in the Senate, would have brought in more than $600 million in new annual revenues. Although it is not technically before the special session, a bill to use some of the annual Permanent Fund earnings has passed both the House and Senate in different forms, but no final version has been reconciled between the bodies. If passed it would bring about $2 billion a year of new revenue to the treasury. All of this, combined with the state’s traditional revenues from oil and other tax sources, still wouldn’t be enough to eliminate the deficit between revenues and spending, which total $4.4 billion this year in undesignated general fund expenditures. New budget cuts will be considered for the remaining deficit, but the governor argues that massive cuts have already been made in recent years and state agencies are now at bare bones levels. “We have cut more than 44 percent from state spending over the last four years while drawing $14 billion from savings,” Walker said in previous statements. “With the downturn in oil prices, it’s clear that we must find a new source of revenue to pay for troopers, teachers, transportation and other essential services. We must end the uncertainty for a heathy state economy.” Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Production predicted to rise for third straight year

The State of Alaska is forecasting an increase in oil production for the third year in a row. Officials from the departments of Natural Resources and Revenue briefed legislators on the latest forecast Oct. 30, predicting an average of 533,000 barrels per day on the North Slope during the current fiscal year. This estimate is based on four months of production data since July 1, the beginning of fiscal year 2018, said Ed King, a petroleum economist with the Department of Natural Resources. King said he believes the trend will hold through the upcoming winter months, which are typically peak production time for oil fields on the Slope. If the trend holds it would be 9,000 barrels per day up from last year’s average of 524,000 barrels per day. Fiscal year 2017 ended this past June 30, and state analysts now have actual production data for the 12-month period, King said. Last year saw a similar increase of 9,000 barrels per day over fiscal year 2016, and that year saw a 13,900 barrels-per-day gain over 2015, he said. Cook Inlet oil production, which is holding steady at about 18,000 barrels per day, is not included in the numbers but would be in addition to the North Slope totals, King said. The increase for the North Slope is remarkable because crude oil prices began a slide in late 2014 and dropped from more than $100 per barrel to less than $30 per barrel by January 2016. Prices have recovered since then, and Alaska’s Department of Revenue is predicting an average price of $54 per barrel for North Slope crude this year, Commissioner Sheldon Fisher told the legislators at the Oct. 30 briefing. The price per barrel on Oct. 30 estimated by the Revenue Department was $60.73. King said the state had been forecasting declines in production based on historical decline rates and also because North Slope field operators cut capital spending by 44 percent last year in reaction to low oil prices. The spring forecast released this past April was for just 459,000 barrels per day in fiscal year 2018. “What surprised us is that operators of the large ‘legacy’ producing fields were able to find enough efficiencies to increase production despite laying off drill rigs and drilling fewer wells,” King said. “We assumed reduced capital expenditures and rig laydowns would result in accelerated decline. The operators outperformed expectations, doing more with less.” The field operators also beat their own forecasts, King said. Under state law producers are required to provide the state with forecasts of production and capital and operations spending on a field-by-field basis, but in fiscal year 2017 the actual production exceeded the companies’ estimates to the state he said. About half of production increase in the last two years can be attributed to improved performance at the large BP-operated Prudhoe Bay field, which produces about half of total Slope production, and about half to expanded production in the ConocoPhillips-operated Alpine field, mainly at CD-5, a new drill site that has enjoyed exceptional output, King said. With greater confidence in the ability of North Slope producers to sustain production and develop new prospects, the state has revised its long-term production forecast to remain essentially flat, at about 500,000 barrels per day or more, through 2027. Previously the state had estimated that production would drop to about 300,000 barrels per day by 2025 or 2026, which is the point that the Trans-Alaska Pipeline System would experience severe operating problems. Paul Decker, a geologist who heads the DNR resource evaluation group, said a factor in the improved long-term outlook is that the state assumes that certain new discoveries now in development will actually be come online. Previously the state discounted any new oil from wells not beginning production within 12 months of the forecast, Decker said. This proved to be conservative because several years are required to bring new North Slope discoveries into production. The higher production will result in a modest increase in revenue this year and next, according to a revised state revenue forecast also released Oct. 30. State unrestricted general fund, or UGF, revenues are expected to be $1.83 billion this fical year, officials told the Senate Finance Committee. For next fiscal year 2019, the budget legislators will prepare next spring, the outlook is for $2.01 billion in UGF revenues. Greater oil production is good news, but things on the budget side are more sobering. Pat Pitney, the state budget director, told the Senate Finance Committee Oct. 31 the $4.4 billion unrestricted general fund spending planned for the current fiscal year will likely increase to $4.7 billion next year because of increases basically built into the budget such as state spending on health care for Medicaid, state employees and retirees. If the health care trends hold, the increase for the following year will be to $4.9 billion and to $5 billion the year after. State health care expenses have been rising at an annual rate of about 5.25 percent. Credit questions State administration officials acknowledged the state has an obligation to pay past tax credits applied for under an oil incentive development program ended by the Legislature this past summer. Under questioning by Senate Finance co-chair Sen. Anna MacKinnon, R-Eagle River, state Revenue Commissioner Sheldon Fisher said Oct. 30 the state accepts the liability but the timing is uncertain as to when they can be paid. The following day MacKinnon asked the same question of state budget director Pat Pitney, who agreed that the state has the liability. MacKinnon said she and other legislators have been contacted by banks who loaned money to oil developers, mostly small independents, based on the expectation that tax credits paid by the state would allow borrowers to repay loans. “I just want it on the official record that the administration accepts the liability,” MacKinnon said. Fisher said the state is making minimum payments on the money owed, which totals more than $700 million according to the Revenue Department, but the plan is to increase the payments from about $78 million in fiscal year 2018, the current budget year, to nearly $200 million in fiscal year 2019 and with varying annual payments ranging between $120 million to $150 million until the liability is paid off in 2025. The Legislature has ended the incentive program but some tax credit refund applications are still coming in, Fisher said. Those will end as the program winds down, Fisher said. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Missile tests stand up Alaska Aerospace business

North Korea dictator Kim Jong-un tested his new intercontinental ballistic missiles twice in July. It was his way of showing the world he has a big one. Both times events in Alaska deflated him, at least a bit. Kim’s first test was July 4 and his second on July 29. The U.S. fired off a test missile interceptor July 10 from Kodiak’s Pacific Spaceport with a second interceptor launched July 30, one day after Kim fired off his second test ICBM. Both interceptors from Alaska hit their ballistic missile targets high above the Pacific Ocean. They were fired by U.S. Army units from the Kodiak launch facility, which is owned and operated by the state-owned Alaska Aerospace Corp. It wasn’t really tit-for-tat with Kim Jong-un, of course. The coincidence of the dual interceptions, both shortly after Kim launched his missiles, delighted Americans and sent a message to the North Korean dictator. But the Alaska tests, involving the U.S. Terminal High Altitude Area Defense, or THAAD, system, were actually planned a year ago by the U.S. Missile Defense Agency, according to Craig Campbell, CEO of Alaska Aerospace, who spoke July 26 at a World Trade Center Anchorage lunch event. Still, Kim’s aggressive testing has lent an urgency to the U.S. missile defense program and focused new attention on Alaska’s role in it. U.S. missile defense interceptors aimed at intercepting intercontinental ballistic missiles in “mid-course,” high in their trajectory while in space, are already based at Fort Greely, east of Fairbanks. Long-range radar systems that would detect enemy missiles are at Clear Air Force Station, southwest of Fairbanks. Upgrades and expansions at both installations were underway even before North Korea launched its latest missile program, but these will now be accelerated. Alaska’s U.S. Sen. Dan Sullivan was able to get amendments into this year’s National Defense Authorization Act that would authorize 28 additional ground-based interceptors as well as development of new missile defense sensor technologies that would function in space. Sullivan’s amendment includes a study of installation of up to 100 interceptor missiles at locations across the U.S. The Alaska senator had previously introduced a bill expanding the interceptor program, co-sponsored by a bipartisan group of 25 senators, but he wound up being able to incorporate 85 percent of the bill in a series of amendments to the defense appropriation bill. Kim’s missiles, however, have also extended a lifeline to the Alaska spaceport at Kodiak, which had been struggling. When the state formed the then-Alaska Aerospace Development Corp., or AADC, and built the Kodiak launch complex in the early 1990s, the goal was always to primarily service commercial space companies by offering an alternative, lower-cost launch site to the big government-owned launch centers at Cape Canaveral in Florida and Vandenberg Air Force Base in California. The commercial space industry didn’t develop as quickly as expected, however, but the state was able to keep the lights on at its Kodiak facility by launching test missiles in the early stages of the U.S. missile defense program as well as for other government agencies. There were a handful of commercial launches too, including some that put satellites into orbit. But the launches weren’t frequent enough, and by 2012 the future looked uncertain for the state’s space venture. “We can’t pay the bills with just one launch every 12 to 18 months,” said Campbell, who came aboard at AADC in 2011 and became its president of in 2012. Campbell, a former state adjutant general and lieutenant governor, moved to inject new life into the state corporation. For starters, the name changed, removing “development,” so that it became the Alaska Aerospace Corp. It was an important distinction. “We did this because we are really an operations, not a development organization,” Campbell said. Having “development” in the name conveyed a message that the state corporation was still developing when, in fact, it had long proved itself as a capable manager of launch operations. The Kodiak Launch Complex was also renamed Pacific Spaceport Complex to bring more attention to its location and access to a wide area of the North Pacific, with no populated areas, across which launches can be made safely. There was some really bad luck in 2014, however. An Army test missile malfunctioned just after it launched and had to be destroyed, but debris from the explosion caused heavy damage at the Kodiak facility. It seemed like the end of the road. “The launch itself was flawless. The problem was in the missile itself,” Campbell said. Alaska Aerospace was still without customers, however, and it now had a damaged launch facility. To top it off, in 2015 Gov. Bill Walker had to cut the small amount of state general fund support for the corporation as the state faced an implosion of its oil revenues. Extensive repairs to the Kodiak facility totaling $35 million were largely paid for through the company’s insurers. Campbell wrote via email that as a state-owned corporation the complex was covered through the state insurance pool. The repairs were completed in 2016 with $20.3 million worth of work completed by Davis Constructors and Engineers Inc. of Anchorage and the launch complex was back in business. Meanwhile, Campbell and his crew hustled for contracts. “Things were looking grim, but we went out with an aggressive marketing effort,” Campbell said. AAC returned to a former prime customer, the Missile Defense Agency, and opened an office in Huntsville, Ala., where the MDA is headquartered. The initiative paid off with an $80.4 million multi-year “task order” from the agency, a kind of purchase order to cover launch activities. The two THAAD tests in July were part of that. More missile defense tests will likely happen and the timing if those is confidential. One that is officially set for next summer, however, is a test of a modified Israeli “Arrow” interceptor, a joint Israel-U.S. test program. The Arrow 3 is a modified version of Arrow 2, which Israel has long used. “Arrow 3 is a longer-range version and it needs a bigger test range. But you can’t just launch these over the Mediterranean Sea,” Campbell said. The wide expanse of the Pacific south of Kodiak provides the space, he said. MDA has brought breathing room for Alaska Aerospace, with funding to cover operations and maintenance until the commercial business picks up. That’s now happening, Campbell said. Alaska Aerospace has strategically targeted a fast-emerging niche of the commercial space business, companies launching small rockets, typically with small satellites. These firms need a lower-cost alternative to the big U.S. government launch sites, and also ones that can offer flexibility in scheduling because military and large commercial users dominate the schedules of Cape Canaveral and Vandenberg. There are now several places in the world that can offer this, New Zealand for example, but few are in the U.S., an important factor for certain customers, Campbell said. One commercial contract that is signed and scheduled for December is with a new space company that cannot now be identified, Campbell said. Interestingly, this will be the first launch from Kodiak of a rocket using liquid fuels. All other rockets have been solid-fueled. “This will require us to design and install facilities to handle liquid fuels,” with fuel storage and piping, as well as planning additional safety measures, Campbell said. Once the liquid fuel systems are installed, the Kodiak facility will offer customers the option of using liquid-fueled rockets, which are typically less costly and more attractive to commercial customers. The military typically uses solid fuel rockets. Vector Space Systems, an Arizona-based company formerly known as Garvey Spacecraft, has also signed with Alaska Aerospace for test flights of its new Nanosat Launch Vehicle, the Vector-R, in 2018. A contract that still in negotiation for launches planned in 2018 and 2019, is with Rocket Lab USA, a California-based company that has been in the space business for several years. Alaska Aerospace supported Rocket Launch earlier this year in a launch by the company in New Zealand; the Alaska corporation provided its mobile range safety and telemetry equipment in support of Rocket Lab, moving the equipment to New Zealand. Rocket Lab now wants to use Kodiak for launches of its new “Electron” rocket, Campbell said. Another company in discussions for launches in 2019 is Zero Point Frontiers, based in Alabama, for its 55-foot Xbow Launch Vehicle that will launch small satellites to orbit. Interestingly, Zero Point Frontiers would use a rail-launch system it has developed for its small rockets, an alternative to the traditional vertical launch of rockets from a pad. Alaska Aerospace will be involved in helping design and install this, Campbell said. Once the system is installed it will remain in Kodiak, giving the Pacific Spaceport another new capability. Also, some companies negotiating with Alaska Aerospace want an ability to put satellites in an equatorial orbit, which is more easily done from a launch site at a more southerly latitude than Kodiak, which is more suited to launches to polar orbits for satellites. Alaska Aerospace is now investigating possible sites for alternative southern launch locations in the Pacific, one at Saipan and the other on Hawaii, the biggest of the Hawaiian Islands, Campbell said. ^ Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Vigor works to cut turnover by training local workforce

Vigor Industrial, operator of shipyards in Ketchikan and Seward, has embraced training of a local workforce as its key strategy in reducing a costly problem with turnover of skilled workers, company officials say. In 2015, with a $101 million contract in hand to build two new, 280-foot state ferries and an increasing workload from the fishing industry, Vigor experienced a 46 percent turnover. Within a year, Vigor managed to reduce that rate to 23 percent, and the downward trend continues in 2017, said Doug Ward, Vigor’s manager of Alaska business development. In 2016 Vigor employed 191 people in Ketchikan, with the number steadily growing as the shipyard attracted more business. Ward said Vigor’s key strategy in reducing turnover is an intensive focus on growing the resident skilled workforce, mostly by upgrading skills of people already working in the shipyard. The company has brought in new local recruits, too, a result of Vigor’s on-the-job training for entry workers and its involvement with the Alaska Construction Academy, which offers instruction and certifications in construction and shipyard skills. Last January, Vigor announced an expansion of its efforts through Maritime Works, a coalition of Alaska marine industries aimed at fostering workforce development in the state’s big maritime sector, including the seafood industry. The expansion of Vigor’s program in Ketchikan is the first initiative under the Maritime Works initiative, although other partners in the group also have efforts underway. Ward said a special feature of Vigor’s program is an expanded use of technology on the shop floor, in this case apps on mobile cellphones that have increased productivity and improved safety at the Ketchikan shipyard. This year the procedure is being expanded to the training programs. In safety, workers with apps loaded in their cellphones photograph potential safety problems and distribute them instantly for corrective action, if that is needed, Ward said. The procedure helped Vigor reduce its recordable injury incidents from about 13 three years ago to 1.8 in 2016, he said. A similar gain, this time in productivity, resulted when Vigor applied the cellphone apps to design changes needed when parts being fabricated in the yard don’t fit or work as the design team intended. Photos from the shop floor instantly communicate the problem to the entire production and engineering team, as well as the naval architects, resulting in corrected drawings being made available in hours rather than days or weeks, Ward said. Now the procedure is being extended to Vigor’s on-the-job training. “To our knowledge we are the first to be doing this,” he said. For training, the smartphone with its app will provide two major benefits. One is that it gives a worker on the shop floor access to learning materials, including videos, while learning on the job. This increases the efficiency of the training, Ward said. Second, and most important, it provides a way to easily document the training. “It provides direct evidence, a record, of the training, which is critical in getting the final certification,” he said. In a related development, Vigor has applied for its fourth annual agreement to be a participant in the Alaska Construction Academy, a network of training entities for construction skills operating in several parts of the state, except that the Ketchikan branch focuses on shipyard skills. For Vigor, the affiliation with the construction academy brings a formal relationship with the state Department of Labor and Workforce Development and training providers like the University of Alaska and AVTEC in Seward. The construction academies statewide, however, are going through radical changes with the sharp reductions in state budgets. Previously, appropriations of state funds from the Legislature supported the programs, which were operated by the Alaska Construction Foundation, nonprofit education arm of the Associated General Contractors Alaska. With state funding cut, AGC’s foundation has had to exit the program, which has now been passed to the state Department of Labor and Workforce Development for overall administration, although there is less state money available this year. Several of the academies in rural areas are now to be operated by regional workforce training centers, and in Ketchikan by Vigor, with the needed funding scraped up from competitive grants, national and state philanthropies and employer investments . Ward said a key factor in the Alaska Construction Academy, in its several locations, has been the ability to certify training under the National Center for Construction Education and Research, or NCCER, a construction industry program which issues certificates for about 70 construction-related skills and maintains a national database of certificates. Several years ago shipyard skill certifications were added. Recently representatives from Jobs For the Future, a national group, visited Ketchikan to introduce formal apprenticeship in the occupation of welder/fitter. The loss of state funding for the academies was a real threat to Alaska workforce development, Ward said. Several nonunion Alaska contractors like Peak Oilfield Services and CH2M depend on the NCCER certifications for their craft workers. “I was very worried that with the demise of funding for the construction academies would result in the NCCER certification for Alaska lapsing. The initiative to maintain it through the Department of Labor and the Maritime Works has become very important,” Ward said. To give Maritime Works an organizational structure, a relationship was established in 2014 with the Alaska Process Industries Career Consortium, a long-established industry nonprofit that works with the industries that operate industrial plants, like oil and mining companies. “This was a natural fit for Maritime Works,” Ward said. “APICC has a proven, 20-year track record working with industry and training providers like the University of Alaska.” APICC will provide management of any funds received to support Maritime Works and will also coordinate outreach efforts, particularly with schools. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Sitka direct marketing sales soaring

It could signal fundamental changes in the way seafood will be marketed for a century-old Alaska industry. Or it could be just another marketing niche, profitable for just a few. Either way, Sitka Salmon Shares caught a lot of attention when it began direct sales of Alaska fish to Lower 48 consumers in 2012. Direct marketing of Alaska fish to the Lower 48 is hardly a new idea. Years ago, Sitka harvester Sherry Tuttle drove around San Francisco with king salmon in the trunk of the car, begging chefs to try the product. They did, and liked it. Nic Mink at Sitka Salmon Shares is taking this to a whole new level, however, moving and selling fish in large enough quantities to overcome economy of scale challenges that confront individual harvesters who do direct sales but not so large that the connection for the consumer of where the fish comes from, and who caught it, is lost. That information goes along with a box of fish delivered to customers, and there’s even a link to a video tour of the fishing vessel, Mink says. Sitka Salmon Shares will process and sell about 150,000 pounds of seafood this year with about $4 million in sales. This is no competition for big, traditional processors in Sitka like North Pacific Fisheries, which moves several million pounds of fish every year from its plants in Sitka. But things can change fast these days in business, and the internet and e-commerce have unleashed whole new ways of marketing and business organization even if the seafood enterprises are, for now, small niches. Sitka Salmon Shares had an unlikely beginning. Its startup in 2012 was a project of the Sitka Conservation Society, a conservation group, and was in fact a fund-raiser. Mink, who has a Ph.D. in history and environmental studies, was teaching at Knox College, a liberal arts school in Galesburg, Ill. He was in Sitka in 2011 and helped the Sitka Conservation Society organize a fundraiser, selling fish to faculty at Knox College and friends of Mink’s in Galesburg. “The Sitka Conservation Society’s interest was in creating more support for sustainable fisheries and raising consumers’ awareness of where their fish comes from,” Mink said. The fundraiser was so successful Mink decided to start a business with some of the Sitka harvesters who had supported the effort. This was also near the start of the national “local foods” movement, and with the growth of internet marketing the timing seemed good for new players, like Mink, to bring a different background and new ideas to the business. “I was a professor of natural resource management. Now I’m a fish monger,” he jokes. The first two years involved small steps and learning lessons, with fish purchased from harvesters processed with local custom processors who mainly dealt with sport charters. The business quickly outgrew their capacity and Mink faced a dilemma. Sitka has several very small custom processors and its big, traditional seafood plants. There was no medium-scale processor in between. Sitka Salmon Shares had to create one in 2014 by purchasing Big Blue Fisheries, a custom processor, along with a formal incorporation of the business and recruiting 13 local fishermen as investors (there are 25 who supply fish to the company including the 13 shareholders). Sitka Salmon Shares spent a year updating equipment and installing a high-tech freezer and ice machine to ensure fish stays in top form during two to six weeks in surface shipping to customers. Marsh Skeele, one of the first harvesters to supply Sitka Salmon Shares and a company founder, and who now works full-time in its management, said he was interested in the direct-selling concept. “I want people who buy my fish to know the care that I put into handling them,” he said. Skeele was fishing full-time in 2015, part-time in 2016 while also working in management at Sitka Salmon Shares, and is now full-time with the company among its 35 employees. Mink credits Skeele, a second-generation fisherman, with being an early advocate for the company among harvesters in Sitka. “He helped sell our idea to other fishermen. This was important because there are a lot of small, fly-by-night processors in this business who have left people burned,” Mink said. “The big processors have been here 60 or 70 years and they are known to be reliable. It’s a big risk for a harvester to take a chance, selling to a small, new company,” he said. Skeele convinced fishermen to take the risk. Skeele is recruiting more fishermen to sell to Sitka Salmon Shares but he won’t take just anyone. “We want people who care about quality and who are willing to invest in chilling equipment and even take shorter trips,” to get fish back to Sitka faster, Skeele said. “We also want people who understand the direct connection to the consumer.” Mink said that Sitka Salmon Shares’ distribution and marketing strategy is aimed at selling the product at retail, for salmon typically at about $15 per pound to $25 per pound. That’s in the same general price range as Whole Foods, a national chain that touts its food quality, but Mink said his fish are of higher quality and handled better than Whole Foods. Repeat business from retail customers seems to affirm that, he said. For harvesters, the company’s direct-to-the-customer business model means that Sitka Salmon Shares can typically pay 20 percent to 30 percent above the “dock price” for fish paid by large processors, but since this can’t be guaranteed the company will at least guarantee to match the dock price, Mink said. The big advantage for harvesters, however, is that they know in advance what their prices will be, which gives them stability for planning, Mink said. The large processors’ dock prices can vary during the season. A key part of the business strategy in direct selling is knocking out the middlemen. Some larger seafood companies have as many as four steps in the supply chain, various wholesalers and distributors before the fish arrives at the grocery counter. Only Trident Seafoods and Ocean Beauty Seafoods, both large companies, sell their own branded products but even those go to large retail chains like Costco. Even these sales are a small share of the companies’ overall sales, but they are higher profit. Sitka Salmon Shares goes a step further by selling directly to consumers. The company has 4,000 direct-sale customers in the U.S. Midwest — that’s up from 70 in 2012, the company’s first year — who are served out of three company-owned distribution centers in Galesburg, Ill.; Schaumburg, Ill., a suburb of Chicago, and Madison, Wis. Sales span five states in the nation’s heartland, Minks said. It’s no coincidence that the distribution centers are in communities with colleges and a young demographic. Frozen product is shipped by barge to Seattle and trucked east to the distribution centers. Final deliveries to customers from distribution centers are in vans owned by Sitka Salmon Shares, and marked with the company’s name. Customers pay $79 to $109 per month to receive weekly boxes containing four to five pounds of the fish they request. “Eighty percent of our volume moves through our own distribution chain,” to retail customers, Mink said. Market promotion is mostly word-of-mouth through the growing networks of consumers interested in alternatives to the mass-market food supply chain. A critical part of the business model is doing the final processing and packaging at the Midwest distribution centers where costs are far lower than in Sitka, Mink said. “Electricity is almost 10 times more expensive in Sitka than in the Midwest; 15 cents a kilowatt hour here compared with 1.8 cents a kilowatt hour there,” he said. Land in Sitka is expensive and scarce because the community is hemmed in by the Tongass National Forest. Getting good workers can be a challenge in Sitka, a problem shared by all businesses there. Because of this, “we do as little with the fish as we can in Sitka and as much as we can in the Midwest where it’s cheaper,” particularly packaging, he said. There are other ways the company runs lean, such as using public docks to offload fish and load ice on fishing vessels. The large processors, which operate at a much bigger scale, must operate and maintain their own docks. Sitka Salmon Shares can’t be as competitive in wholesale as the big companies, Mink acknowledges. “Still, the large seafood processors sense the market opportunities and some are testing the direct-sales market, but large companies don’t operate well at smaller scale. They’re set up to operate most efficiently at wholesale and in larger volumes,” Mink said. Meanwhile, Sitka Salmon Shares is really into something, he believes. “There’s a huge, untapped market out there,” Mink said, for creative marketing to a younger generation. “E-commerce is changing the relationships between food producers and consumers.” As the nation’s appetite for seafood grows, the market share of consumers interested in the source of their fish, and the sustainability of fisheries, will also grow, he said. ^ Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Physicians’ initiative tackles cost through coordinated care

An Anchorage-based physicians’ initiative is aiming at improving health and reducing medical costs through a coordinated care program, mainly by reducing reliance on hospital emergency rooms for routine or non-emergency problems. The goal is to steer patients toward more effective care, typically through primary care and better use of specialists, reducing the burden on hospital emergency rooms, the most expensive form of health care. Alaska Innovative Medicine, or AIM, formed four years ago by six Anchorage physicians and Jocelyn Pemberton, a medical administrator, now has an active caseload of about 270 and has helped about 5,000 patients since the project started in January 2015. Premera Blue Cross Blue Shield helped inspire the initiative and remains a strong supporter, Pemberton said. Most of the patients being assisted are Blue Cross members with costs paid through their health insurance. “This all started four or five years ago in discussions within the physician community about how to improve the health care system and reduce waste through collaboration,” Pemberton said. The founders were Anchorage physicians Jeremy Gitomer, Noah Laufer, Eric Miknich, Kathy Hurlburt, Tim Bateman and Terry Lester, along with Pemberton. “We created the concept of clinically-driven care coordination out of these discussions,” she said. “The idea was to provide a multi-disciplinary approach that would allow us to be flexible and match the needs of each patient. The social worker or the case manager often takes the lead with the patient and can pull in resources as they are needed. “We are not a clinic, although we have an office for our staff to meet with patients who aren’t comfortable with a home visit.” Most of AIM’s work is with patients in their home setting after they have met with them in the hospital at discharge. “Our role is to help coordinate the patient’s integration back into the primary care system from the hospital and to ensure the continuity of the care,” Pemberton said. The belief is that coordinated care, compared with ad hoc visits to emergency rooms or medical specialists, will lead to more effective care and in the long run, lower costs. Pemberton said it is physicians’ referrals that generate the bulk of new patients for AIM because they have an established relationship and trust with the patient. In this, the group has a ready-made referral network of physicians who work in Southcentral Alaska hospitals through The Hospitalist Group, a collaborative of about 80 physicians contracted to provide in-hospital service. Pemberton is also CEO of the Hospitalist Group. In addition to the hospitalists, there are 49 local primary care physicians now participating with AIM. The idea of coordinated care — the right care at the right time — has long been talked about in Alaska’s health care community but has never been actually done, at least in a formal way. In other states managed care is done through health maintenance organizations, or HMOs. These organizations are typically led by insurers and are aimed mostly at lowering costs. HMOs are not allowed under Alaska laws. What’s different about AIM’s approach, Pemberton said, is that it is led by physicians focused on health care rather than insurance companies who are concerned more with costs and the bottom line, at least in the minds of many consumers. The difference has led to a higher level of trust for AIM’s approach among those being served, Pemberton believes. The evidence for this, she said, lies in “call back” rates, or phone inquiries from patients, a kind of rough consumer satisfaction indicator. Phone calls from patients in managed-care HMOs typically average about 15 percent to 20 percent but average 85 percent to 90 percent for AIM, when there is a physician referral. Premera Blue Cross, which is a nonprofit insurance company, has supported AIM’s project from its inception because it believes the coordinated care approach in sound and will improve health for its members, said Jim Grazko, Premera’s CEO for Alaska. Premera steers members it believes can be helped by coordinated care to Alaska Innovative Medicine and also shares claims data, which documents medical experience. “We sometimes see a high degree of emergency room use. There are always times when people do need the ER but also times when it is not really necessary. We try to deflect some of that to more appropriate care,” typically primary care but also specialists, Grazko said. “We’re talking about people who are at their most vulnerable state, facing a medical emergency or actually in the hospital. It’s important to have an advocate at that point to help people navigate the system.” Pemberton said, “We do a lot of medication counseling. Our goal is to help a patient understand a health plan and how to navigate the system, but we can help with calls to physicians to get follow-up care. If there are problems getting appointments, we can help.” Having physicians (through AIM) make calls can often open doors to get appointments or get patients in earlier to see specialists, she said. AIM’s engagement also varies with the individual. “Some patients need just one visit to go over the health plan but we’ve been involved for as long as two years with others,” she said. There have been surprises, however. “When we started we thought the needs would be mostly clinical,” she said. “What we found, though, is that most of our needs have involved social workers,” for health issues related to lifestyle and behavior. If there are mental health issues, referrals are made to providers in those fields. “Our support is in getting the patient to recognize that he or she needs help, then help get it,” Pemberton said. One area where a real need has been identified is when patients travel out-of-state for medical procedures and need support integrating back into the provider system at home. “Many out-of-state hospitals have good support systems while patients are there, but once people are discharged and headed home it’s ‘you’re on your own,’” she said. “AIM can provide that transition help.” Pemberton said it may be too early to demonstrate cost savings but there is substantial anecdotal evidence that some ER visits are being avoided. One indicator of that such intervention can save money comes from the state Department of Health and Social Service Medicaid Services Division, which launched an intervention service two years ago for state Medicaid recipients identified as high-ER users, and who volunteered for special assistance. Margaret Brodie, director of the state Medicaid division, said the state program resulted in $6.6 million in savings last year and $8.6 million in savings are projected this year. The comparison is with what was estimated to have been spent in ER visits. At this point the state program is at a preliminary level involving telephone consultations of Medicaid recipients who volunteer with a registered nurse mainly reminders about medication and appointments. Brodie said the department program also includes nurses who make home visits for a small number of people who need special assistance. The state is now looking at ways to expand its program with more intensive care coordination, Brodie said. “We’ve all learned a lot over the last two to three years (with AIM’s program) and our goal now is to widen the number of people being served with these kind of services,” Grazko said. Coordinated care, involving integration of health services, is well established in the Alaska tribal health organizations — Southcentral Foundation’s “Nuka” system of integrated care is now recognized nationally — but the idea is in its infancy outside the Tribal system. It is also done at a smaller scale in places like Juneau’s Bartlett Hospital, which contracts with social workers to bring behavioral expertise into the hospital. A formal physician-led coordinated care model like that developed by AIM is a first for Alaska, at least outside the tribal health system, Pemberton believes. “We’re an experiment,” she said. “Our idea was to start it and demonstrate its success.” Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Last-minute bill could aid municipal redevelopment

The Legislature’s passage of Senate Bill 100 on the final day of the regular session on May 17 could now give municipalities new flexibility for economic development tax incentives. The bill is being transmitted to Gov. Bill Walker, who must still sign it. Other provisions important to local governments, including clarification of state law related to municipal liens along with new authority for second class boroughs to establish emergency service areas, were included in the final version of SB 100. This is an example of what often happens in the legislative process, when language from other bills that are pending in different committees is added to a fast-moving priority bill in the final stages of enactment. In this case, SB 100, which originally dealt with an urgent problem related to municipal liens, had passed the Senate and was in the House Rules Committee, where the provisions from three other bills were added. The economic development language in SB 100, taken from Wasilla Rep. Cathy Tilton’s House Bill 156, deals with municipal incentive property tax reductions, for redevelopment of deteriorated property as an example. Current law limits these incentives to five years and also sets conditions that many projects are unable to meet, local officials say. SB 100 eliminates the limit, leaving it up to municipalities to set the duration of the incentives, and eases the conditions that must be met, which were argued to be too rigid. Municipal officials supported the changes. “In times of economic downturn like Alaska is now experiencing, tools like this provide communities with a way to invest in themselves that can pay dividends in the future,” said Bill Popp, president of Anchorage Economic Development Corp. Seward’s Assistant City Manager Ron Long also weighed in, writing in a letter that the current law with the five-year limit may have worked for smaller projects but is too short for many development projects. “Today’s larger and more capital intensive development projects can’t find enough certainty in a five-year agreement that might not be renewed to be part of a viable business plan,” Long wrote. He cited Seward’s Marine Industrial Center, now in phase one and preparing for phase two, as an example of a long-term project with substantial local benefits, and where an extended tax-break could help. Present law not only restricts the incentives to five years but also limits the incentives to properties meeting certain criteria: that properties have not been on the tax roll before; that they would generate sales outside a community of goods or services produced in the community; that they would reduce imports of goods or services; and that they have not been used for similar purpose within six months. Statutes now require all three of these tests to be met for a property to qualify, and they are too rigid, Popp said in his letter. “These criteria are overly onerous for municipalities and are the main reason why this tax abatement tool has never been used,” Popp wrote. Senate Bill 100 changes this to where only one of the criteria rather than all of them, must be met. Modifying the requirement, “gives municipalities the flexibility they need,” Popp wrote. “Our communities are all different and a truly effective tool is one that gives local control over property tax-based incentives. Susanne Fleek-Green, chief of staff to Anchorage Mayor Ethan Berkowitz, said the mayor strongly supported the changes in SB 100 and pointed to several Anchorage projects the new law could boost, including redevelopment of a city-owned building, once the community’s hospital, at 9th and L streets, and hopes for a new building on a city-owned downtown parking lot near the city’s 9th Avenue “parkstrip.” Other candidates for the enhanced incentives include renovation of Anchorage’s historic Fourth Avenue Theater and the derelict Northern Lights Inn in the city’s Midtown area, Fleek-Green said. The extended tax incentives could attract developers and help make the projects pencil out, she said. The final version of the legislation also includes authorization for a municipality to grant property tax exemptions if fire protection systems are installed in the building. An exemption, if granted, cannot exceed 2 percent of the assessed value of the structure, according to the bill. Language from another bill, Rep. Mike Chenault’s HB 148, was also rolled into the final version of SB 100 in the Senate Rules Committee. Chenault’s bill would allow second class municipalities, such as the Kenai Peninsula Borough, where Chenault’s district is located, to establish an emergency service area along state highway corridors and adjacent public lands. This provision is mainly aimed at the need for emergency services along the heavily-traveled Seward and Sterling highways through the Kenai borough. Under current law it is difficult for the borough to provide emergency services along the highway corridor. With this authority now in SB 100, the problem would be solved. A critical provision in SB 100, and the original purpose of the bill, which was sponsored by Sen. Dennis Egan, D-Juneau, is to correct a problem for municipalities created by a 2012 state Supreme Court decision that had an indirect effect of invalidating many municipal liens on properties, for example for unpaid utility bills. To be valid under the 2012 Supreme Court decision, municipal liens had to have a link to a state law, and because liens based solely on municipal ordinances were not included in the state’s code of civil procedure, a result of the 2012 decision, the link to a state law was broken. This weakened the ability of local governments to file liens. Many municipalities across the state endorsed Egan’s bill as an urgent priority. ^ Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

One week down without much progress

JUNEAU — Legislators ended their first week of a special session May 24 with little progress in passing a state budget or bills relating to a restructuring of state finances, which are now mostly dependent on oil revenues and savings accounts. The hallways of the state capitol are virtually empty with most lawmakers home for an extended break, which has now been extended through the Memorial Day weekend. Special sessions last 30 days, so legislators have until June 17 to do their business or else Gov. Bill Walker will call another special session, which can also last 30 days. Although the capitol hallways are quiet there are a few legislators around. The rules call for lawmakers to meet in session at least once every three days, so both the House and Senate have held “technical” sessions with just a handful of leaders present and minor procedural matters considered. State budget deadlines are nearing, however. If no budget for fiscal year 2018, which begins July 1, has been approved by June 1, state personnel rules require the state administration to begin sending out “pink slips” to state workers, or notifications of possible layoffs if there is no approved budget by July 1. This came near to happening last year, again with extended special sessions, when legislators jammed up over oil and gas tax legislation. Pink slips never went out last year, “although we came very close,” state budget director Pat Pitney said May 24. “If we do it this year the notifications will be very broad, going to almost all state workers,” she said. Essential public employees like state troopers, corrections officers and employees in state Pioneers Homes may be exempted from the notifications but the details of that haven’t been worked out yet, Pitney said. If there is no budget approved by July 1 the state government has no authority to operate, she said. That means a government shutdown. “We would be in uncharted territory,” Pitney said. “There are no statutes to guide us even for essential state services,” she said. In his May 17 call for a special session the governor listed critical items including the state operating, capital and mental health budgets, which are separate appropriation measures, along with a bill restructuring use of Permanent Fund earnings and setting an appropriation limit, proposed state fuel tax increases, changes to oil and gas tax laws and tax credits, and a bill strengthening controls on dispensing of opioids, a powerful painkiller that is often abused. When a regular session of the Legislature ends, as the 2017 session did on May 17, all bills not yet acted on remain in committee until the next regular session. When a special session is called the normal procedure is for bills being considered in the special session to be reintroduced. In this instance, however, the governor’s listing of specific bills in his proclamation for the special session allows legislators to work on those bills in their latest, most current versions. The exception to this is the governor’s call in the proclamation for a new “broad-based” tax. Because the state senate voted down HB 115, the House-passed bill that contained a state income tax, that bill no longer exists. Walker is holding off on introducing a new broad-based tax, for now, to give the Legislature time to re-introduce its own proposal. If no proposal is forthcoming the governor said he will introduce a tax bill, and he has not yet said whether it will be an income tax or a state sales tax. The sole action the Legislature has taken so far in the special session was the House approval May 22 of HB 159, the opioid control bill that is a priority for the governor. The Senate has not yet approved this bill although the Senate Finance Committee did hold a hearing on its version of the legislation on May 23. Versions of the operating budget, Permanent Fund and oil tax bills have passed both House and Senate and conference committees have been appointed for all three measures although the committees have not met. No Senate conferees have been appointed for House Bill 111, the oil tax bill as of May 24. House conferees were appointed earlier, consisting of Rep. Geran Tarr, D-Anchorage as chair, along with Reps. Andy Josephson, D-Anchorage, and Dave Talerico, R-Healy, as the other two members. Conferees on the operating and mental health program budget bills, HB 57 and HB 59, which have passed both the House and Senate, include Rep. Paul Seaton, R-Homer, as chair, along with Reps. Neal Foster, D-Nome and Lance Pruitt, R-Anchorage. Senators on the budget bills include Sen. Lyman Hoffman, D-Bethel, as chair, along with Sens. Anna MacKinnon, R-Eagle River, and Donny Olson, D-Nome. On SB 26, the Permanent Fund restructuring bill, which includes a statutory spending limit in the Senate version that was stripped out by the House, Sen. MacKinnon is chair on the Senate side with other Hoffman and Dennis Egan, D-Juneau. The state capital budget, SB 23, has passed the Senate but is still in the House Finance Committee. The governor has included it on his list for the special session. The governor’s proposal to increase state fuel taxes, in HB 60 and SB 25, are in the House and Senate Finance committees. Because the capital budget and the fuel tax increase measures have not yet passed both bodies there is no conference committee on those bills. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

State will pursue revised rules for NPR-A with Interior Dept.

State officials will push new U.S. Interior Secretary Ryan Zinke for a revamp of Obama administration rules restricting oil and gas development in the National Petroleum Reserve-Alaska, state Natural Resources Commissioner Andy Mack said May 12. “We will be submitting a specific proposal within the next couple of weeks to Secretary Zinke. This grows out of meetings our governor, Bill Walker, had with the secretary earlier this year in which he seemed receptive,” Mack said in an interview. “We believe we can help BLM (Bureau of Land Management) in developing a new plan that is balanced,” between resource development and environmental protection, said Mack, who was officially confirmed to his position May 16. The NPR-A was created in 1923 as a potential source of oil for the U.S. Navy, but despite exploration over the years it is only recently that there have been commercial oil and gas discoveries. The U.S. Bureau of Land Management, which manages the 23-million-acre petroleum reserve on the western North Slope, would develop the new plan, but Mack said the state hopes to be heavily involved. BLM’s current management plan, developed under former Interior Secretary Ken Salazar, was implemented in 2013 and placed large parts of the reserve into special conservation areas, effectively putting large areas off-limits to petroleum exploration and development. The current plan also makes access difficult for transportation infrastructure, such as pipelines or roads for use by communities in the region, state officials have said in the past. Salazar’s final Record of Decision approving BLM’s plan placed 11 million acres, about half of the reserve, into special conservation areas. This included a 3.6-million-acre special protected area around Teshekpuk Lake and including coastal wetlands near the Beaufort Sea coast. State officials were critical of the plan because NPR-A’s coastal areas are considered highly prospective for petroleum discoveries. The Barrow Arch, a broad regional geologic formation that hosted the large Prudhoe Bay-area oil discoveries farther east, also extends along the coast of the northeast NPR-A and includes areas Salazar put off limits. Mack said the restricted areas also impede infrastructure needed to support discoveries on state-owned submerged lands offshore the reserve. Caelus Energy, a Dallas-based independent, has announced a significant discovery at Smith Bay, offshore the NPR-A and about 100 miles northwest of the nearest industry infrastructure at the Alpine field. If Caelus is unable to build an onshore pipeline from Smith Bay through coastal areas of the reserve it will be forced to build an offshore pipeline, which creates risks and environmental hazards. The prospectivity of NPR-A itself for discoveries has now been confirmed by ConocoPhillips and its minority partner, Anadarko Petroleum, who are making discoveries further inland in the reserve. The companies are now developing one project, Greater Mooses Tooth No. 1, or GMT-1, which is scheduled to start production in late 2018, and have two other prospects, GMT-2 and Willow, a new discovery, in the planning stages. Any new initiative to unwind restrictions will be highly controversial with national environmental groups, particularly if it eases restrictions in the Teshepuk Lake and coastal wetlands areas of the reserve that are heavily used by migrating waterfowl in the summer. It would also require a redo of the environmental impact statement for the current NPR-A management plan, which is also likely to spark litigation from conservation groups. However, what is also different now, Mack said, is that Inupiat communities on the North Slope, now mainly dependent on air and seasonal barge service, are supporting provisions for transportation infrastructure in the NPR-A as a way to bring living costs down. In other remarks, Mack said in a May 12 briefing that he believes recent new discoveries on the North Slope will continue to prop up North Slope production. The commissioner spoke to Commonwealth North, an Anchorage-based business and public policy group. “The recent increase in oil production can almost entirely be attributed to the strong performance at CD-5,” a new project near the Alpine field developed by ConocoPhillips and Anadarko Petroleum, Mack said. Strong production at Prudhoe Bay and the Kuparuk River field, which supply most North Slope oil production, were also factors. The state Department of Natural Resources is now forecasting a 4 percent drop in North Slope crude oil production next year to an average of 505,000 barrels per day. The new estimate revises a number published April 14 in an earlier forecast, that reflected a sharp drop to 445,000 barrels of average slope output, a 12 percent decline which alarmed state legislators working on state budgets. Ed King, a petroleum economist and the Department of Natural Resource liaison with the Legislature, said the agency adjusted figures in the earlier number to account for new production. “New information has come in since the production estimates were prepared several months ago. When we assembled the forecast certain new projects were not included but those are included in the revision,” King said. The forecast period is for state fiscal year 2018, which begins July 1 and extends to June 30, 2018. The department is also estimating an increase in Cook Inlet oil production in fiscal year 2018 to an average of 17,400 barrels per day, up from a 14,900 barrels per day average for this year, fiscal year 2017. King cautioned that North Slope production estimates could still vary, depending on the success of producers in the large Prudhoe Bay and Kuparuk River fields holding production even, as they did in 2016, King said. The two fields provide the bulk of North Slope production and have historically declined at about 5 percent yearly. However, field operators BP, at Prudhoe Bay, and ConocoPhillips, at Kuparuk River, managed to largely stem the declines last year. BP held production at less than a 1 percent decline at Prudhoe even after cutting its drill rigs from five to two. King said it’s uncertain that performance will be repeated in 2017 with fewer rigs at work. In the Kuparuk River, field production was roughly even with 2015 with the decline largely offset by production from the new Drill Site 2S. CD-5, a nearby production site, also contributed new production, King said. No new projects are expected in 2017 that will provide a similar offset to decline. However, new production projects now in construction on the Slope will begin production late 2018 and help stem decline in 2019. These include ConocoPhillips’ new Greater Mooses Tooth No. 1 project in the National Petroleum Reserve-Alaska, with an expected output of 30,000 barrels per day, and Hilcorp Energy’s new Moose Pad project in the Milne Point field, with an expected output of 12,000 to 18,000 barrels per day. The state spring forecast also revised a production estimate for current-year fiscal year 2017 production to an average of 523,700 barrels per day, a second straight year of increases and far greater than the 495,000 barrels per day that was projected this past December. This includes greater output from the Prudhoe Bay than state officials expected earlier as well as more production from CD-5. While the near-term outlook is for level production in Alaska, or a minor decline, the medium-term, to 2022, is more uncertain because low oil prices have delayed some projects that were expected to come on line in that period, according to Paul Decker, chief of resource evaluation group in the state Division of Oil and Gas. Those include Caelus Energy’s Nuna project, which could produce 25,000 barrels per day, and Mustang, a small project planned by Brooks Range Petroleum, which will be able to produce 12,000 barrels per day to 15,000 barrels per day. Both are on hold and are unlikely to be put into production before 2022. However, prospects are brighter for the long-term beyond 2022, Decker said, although this may depend on some improvement in oil prices. Armstrong Oil and Gas and Repsol are engaged with regulators on approvals of the Pikka project, which will be capable of producing 120,000 barrels per day, and ConocoPhillips has its GMT-2 in the NPR-A, which could produce 25,000 to 30,000 barrels per day, the company has said. King said both of those projects are at least five or six years out. Further out in the queue is Willow, a new ConocoPhillips discovery in NPR-A, that could be capable of 100,000 barrels per day, and Caelus Energy’s discovery at Smith Bay, in state-owned offshore waters north of the NPR-A, the company believes might produce 200,000 barrels per day. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Legislators, industry, work out independent contractor definition

A knotty problem over the definition of an independent contractor in a bill dealing with workers’ compensation has been worked out in the Legislature. However, delays created by extended negotiations over the issue, between business groups and the state administration, now mean House Bill 79 will remain in the House Finance Committee until the 2018 legislative session. But with the kinks worked out HB 79 should move easily toward passage next year. A similar measure, Senate Bill 40, is pending in the Senate Labor and Commerce Committee, but senators decided early on to let the House take the lead in working out problems. Gov. Bill Walker sponsored the legislation, which was introduced in the House and Senate Jan. 25. Most of HB 79 and SB 40 deal with procedural issues and streamlining in the state workers’ compensation program but a key part of the bill is to define, in statute, what constitutes an independent contractor, according to Marie Marx, director of the Division of Workers’ Compensation. The division is part of the state Department of Labor and Workforce Development. Earlier this spring the Alaska Trucking Association, the National Federation of Independent Business, or NFIB, and the Alaska Homebuilders Association objected strongly to the definition of an independent contractor that was originally in the bill. Everyone is on board with new language, however. “This clears up the uncertainty as to when a person is independent,” said Aves Thompson, executive director of the Alaska Trucking Association, who was involved in the redrafting. “There’s now a clear set of rules. If you do these things, you can meet the standard. There’s no more splitting of hairs,” or subjective decisions, Thompson said. The truckers, NFIB and homebuilders have submitted letters to legislators supporting the latest version of HB 79. An example of a problem for truckers in the original language, Thompson said, was a prohibition against an employer from hiring a contractor in the same “core field.” “We are motor carriers who haul freight and this could be interpreted so that we couldn’t hire independent truck drivers,” Thompson said. “In my world (of trucking) the ability to hire contract drivers is critical in ramping up quickly to meet a contract. It would take too much time to hire people as employees.” Marx and others in the division want a definition in the law so there is clear guidance for employers on when a worker is an independent contractor, and where the employer then has no responsibility to provide workers’ compensation insurance. The lack of clarity has led to abuses, Marx said, where employers either intentionally or unintentionally “misclassify” workers as contractors when they should be employees. Many contractors and labor unions are unhappy with this, claiming that competitors can inappropriately call workers contractors to avoid the cost of insurance, and then underbid firms that do provide insurance. Ambiguity can lead to unpleasant surprises for employers, Marx said. Because there is now no definition, the state Board of Workers’ Compensation makes largely subjective determination after a worker has been injured and a claim is filed alleging misclassification by the employer. The board relies on a multi-factor test that relies on judgment as to the nature of the work involved and if an employer is found to have misclassified the worker as independent the employer is liable for medical and other costs. Having a clear definition in statute ends that ambiguity, Marx said. Thompson credited state Labor Commissioner Heidi Drygas and workers’ compensation director Marie Marx in working with business and labor groups to reach a compromise. It reflects well on the legislative process. HB 79 was moved slowly through the House Labor and Commerce Committee and then the House Judiciary Committee as changes were made. Rep. Lora Reinbold, R-Eagle River, offered the final package of amendments to resolve problems in the Judiciary Committee. There were some issues raised with other parts of HB 79, such as the workers’ compensation medical fee schedule, but those were resolved by other amendments in committee. The independent contractor disagreement was contentious, however. Marx called its resolution a win-win for all parties. “We can meet our goal of keeping abuse by employers from happening and providing guidance to employers,” Marx said. “Employers will be happy because it will keep them from being underbid,” by unscrupulous competitors. Most employers want to do the right thing but the ambiguity and lack of uncertainties in the current system can create surprises, which can be expensive. “The bill is not intended to force anything on independent contractors, but to ensure people know what is required if they do want to be independent,” she said. Other parts of the bill, which were noncontroversial, involve procedural matters such as speeding up dispute resolution before the Workers’ Compensation Board and to provide a timeframe for an employer to authorize or deny medical treatment upon a medical provider’s written request. The bill would also reduce costs by allowing employers to pay benefits to injured workers electronically and mandate the filing of certain reports from employers and insurers electronically. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

State program shows success recruiting health workers

A seven-year-old program to recruit medical professionals to Alaska led by the Department of Health and Social Services has resulted in 254 physicians, behavioral specialists, dentists and other professionals coming to or staying in Alaska to work. Most were recruited for rural and small communities, which is where shortages are most acute. The state program is called SHARP, short for the tongue-twisting Supporting Health Access (through loan) Repayment Program, and it helps graduating health professionals handle mountains of student loan debt. That can be towering by the time of graduation. Robert Sewell, who manages SHARP for the state, recalls one recent psychiatry graduate packing $900,000 in education debt. “It will be hard to pay that off in a person’s lifetime,” he said. Debt loads of $150,000 to $450,000 are common. Alaska has shortages in almost every field in the health professions, and the state has always had a tough enough time attracting medical professionals, particularly to small communities where climate and remoteness add challenges. Sewell said he heard officials at the Alaska Native Tribal Health Consortium say the rural health organizations they work with are short 120 physician assistants, and that’s not including the facilities like the Southcentral Foundation in Anchorage. It’s just one example, he said. Shortages in the health care professions are a nationwide problem, however, and to attract medical graduates Alaska must compete with other states, many who can offer lucrative financial packages as inducements. “When you’re packing that kind of debt you have no choice but to look to who can make you a decent deal,” Sewell said. Some states are offering incentives under various programs that help with loan repayments but that may also pay cash in bonus payments, both of which Alaska has done. Alaska is a relative latecomer to this competition but the state is now geared up, although budget shortfalls have put a crimp in part of the program that was state-funded. However, funding for this is likely to be replaced with more money from health care employers, who have always chipped in, Sewell said, along with possible funds from other private contributors. The initial program, which still exists, began in 2010 with “SHARP 1,” focusing on primary care medical professionals and including physicians, dentists and behavioral health specialists. Currently, SHARP-1 is funded 50 percent with federal funds, 34 percent by health provider employers and the remainder from the Alaska Mental Health Trust Authority. The only state money currently involved is for the cost of administration, which is a federal requirement. A second, state-led program, “SHARP 2” was launched in 2012, and quickly became a nationally known model. It was funded 75 percent with Alaska general fund dollars and 25 percent with health care employers, Sewell said. SHARP 2 included other professionals such as pharmacists, physician assistants, nurse practitioners and registered nurses along with dental hygienists and clinical social workers. Alaska needed them all. The Legislature agreed with that and passed House Bill 78 unanimously in 2012. The largely state-funded SHARP 2 was not restricted to primary care. However, state general funds are now tight and new applications under SHARP 2 are not longer being accepted, Sewell said. “SHARP 3,” the new program component that will involve no state funds is now taking shape, and will be announced this year. Tom Chard, executive director of the Alaska Behavioral Health Association, chairs the health professionals’ advisory board for SHARP and is an enthusiastic backer of the program. “We have the demand (for health services) but we don’t have the supply (of medical personnel). SHARP helps fill that void,” Chard said. “The program is pretty targeted, and we find we get a lot of quantitative data and a lot of other information. It’s one of the few programs where we can really connect the dots,” in dealing with the problem of shortages, he said. Kathy Craft, director of the Alaska Health Workforce Coalition and also on SHARP’s advisory committee, said SHARP is one of several tools being used to address the workforce problem in health care. One other is “grow your own,” through initiatives like the University of Alaska Anchorage’s successful nursing programs. “But in many specialties, we’ll have to import from out-of-state. SHARP has definitely boosted our workforce, with people being placed in all parts of the state,” she said. “One advantage of the pending SHARP 3 is that it will have the flexibility for employers to work with an applicant and a funding foundation to put together a tailored package,” Craft said. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Lower profile legislation chugs through extended session

As the legislative session in Juneau grinds on toward May approaching the 120-day constitutional limit, a number of bills important to business are still pending. Two business-related measures have passed, and some are at an advanced stage that could possibly become law this year. Most, however, will wait until 2018. In a two-year session, bills introduced in the first year can be held over to the second. One measure that has passed establishes a mechanism for financing energy improvements on private buildings. House Bill 80 has passed both the House and Senate and is awaiting transmittal to Gov. Bill Walker. The bill allows municipalities to establish a program for local building owners to finance improvements including energy conservation or renewable energy systems with payments made through property tax assessments. The procedure is similar to that done with water and sewer extensions. HB 80 was a priority for Fairbanks-area legislators where building owners hope to use it to lower costs for converting to natural gas. It is not available for residential buildings, however. Another bill now passed and en route to the governor is Senate Bill 9, by Sen. John Coghill, R-Fairbanks, that straightens out technical problems in existing law regarding establishing special business zones near military bases that may qualify for certain federal funds. An important bill that is pending, and which may make it to passage this year, is Sen. Peter Micciche’s Senate Bill 64, now in the House Labor and Commerce Committee. It passed the Senate 19-1 on March 27. The measure would allow for an environmental “covenant,” a form of legal notice, to become a recordable interest in deeds on property where environmental contamination is present. The procedure is used in many states, but so far not Alaska. The covenant recognizes the presence of contamination and describes it, and provides for any restrictions on use of the property needed to protect human health, said Kristen Ryan, director of the Department of Environmental Conservation’s spill prevention and contaminated sites program. Environmental regulators, which in Alaska is the DEC, signs off on the agreement, as does the property owner, Ryan said. In his sponsor statement, Micciche said, “A covenant provides transparency throughout the life of the property and provides assurances to buyers and sellers that risks will be safely managed. In other states covenants have been useful in transforming blighted property into marketable assets, he said. The benefit with the covenant is adding certainty for property owners, and buyers, who worry about long-term liability if they purchase property with contamination. Another important bill, but one that may run out of time this session, is House Bill 79, a measure sponsored by Gov. Bill Walker that would streamline state workers’ compensation procedures and also add a legal definition of an independent contractor for purposes of workers’ compensation insurance. The bill is now in House Finance Committee after having passed through the Labor and Commerce and Judiciary committees. No one is objecting to the streamlining parts of HB 79 but intense disagreements developed over the independent contractor definition. Those have now been resolved, according to sources familiar with the bill, but progress of the legislation was slowed so much that it may just be held until 2018. A Senate version, SB 40, is in the Labor and Commerce Committee, where it has had one hearing, on Feb. 28. The wrangle over the definition of independent contractor resulted because no definition currently exists in state statute and the state Division of Workers’ Compensation is concerned with some employers who abuse the system by improperly classifying employees as contractors. That allows requirements to purchase workers’ compensation insurance to be avoided, lowering their costs. The original definitions in HB 79 raised concerns from the Alaska Truckers Association and small business groups who worried that the language wouldn’t fit owner-operators of trucks or professionals working as consultants. Negotiations among the affected groups and the Division of Workers’ Compensation continued through the spring as the bill moved through two House committees. Agreements on the language have now been reached, however. Another bill by Micciche that affects business is his SB 63, expanding requirements for smoke-free environments in work places statewide. Many municipalities have workplace smoke-free ordinances in place, which cover about half the state’s population, but there are many communities that do not have the local requirements. Those would fall under SB 63 if it were to become law. Statewide bans on smoking do exist for hospitals and other public buildings but not places of work. The bill passed the Senate 15-5 on March 27 and is in the House Community and Regional Affairs Committee. One hearing by that committee was held April 25. One other bill of interest to business is SB 56, sponsored by Sen. Cathy Giessel, which would require heavy equipment manufacturers to assume certain costs incurred in servicing warranties in Alaska. Equipment is often at remote locations and manufacturers have been reluctant to pay for getting replacements parts and supplies to remote sites, which puts the burden on contractors, supporters of the bill have said. Not surprisingly, equipment manufacturers oppose the bill. Giessel’s bill is in the Senate Labor and Commerce Committee, which held one hearing on March 9. A House version introduced April 4 by Rep. Sam Kito, D-Juneau, HB 209, is in the House Labor and Commerce Committee, which he chairs. One hearing was held in that committee, on April 14. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Red Dog mine owner Teck reaches tax deal with borough

A contentious dispute over taxes is close to resolution between Teck Alaska, operator of the Red Dog Mine north of Kotzebue and the North West Arctic Borough. A new payment-in-lieu-of-tax, or PILT, has been agreed to by Teck and borough administrators, and is expected to be approved by the North West Arctic Borough assembly. It would result in payments to the borough ranging from $18 million to $26 million per year for 10 years. According to Teck’s annual financial filing, the new PILT will be about 30 percent larger than the last agreement. A previous PILT agreement had Teck paying the borough about $8.6 million per year as well as a separate payment of $2.4 million per year to the North West Arctic School District, for which the company received a 50 percent state tax credit. That agreement expired in December 2015. When negotiations on a new PILT broke down, the borough imposed a minerals severance tax that had been held in abeyance under the PILT. Teck then sued the borough. The new severance tax would have increased the amount Teck pays the borough from $12 million in 2015 to an estimated $30 million to $40 million in 2016. According to Teck, Red Dog supports 715 mine-related jobs with $75 million in annual payroll, and the company spends $160 million on supplies within Alaska each year. More than 600 of the jobs are held by shareholders of NANA Regional Corp., the Alaska Native regional corporation for the area. The controversy focused attention on a dispute that has long been simmering over whether the borough was getting a fair share of in-lieu payments from the mine to help support local services. With state funds for community programs being cut, the question assumed greater sensitivity. Since Red Dog went into production in 1989 the relationship between the mine, which is the world’s largest zinc and lead producer, and Inupiat communities in the Northwest Alaska region has been amicable. That’s mainly because NANA Regional Corp., the Alaska Native regional corporation based in Kotzbue, owns the land where the mine is built and receives royalties. By its 25th anniversary in 2014, royalty payments had topped $1 billion. Those help bolster dividends paid to NANA to its shareholders. The royalties are also shared with other Alaska Native corporations. The new PILT agreement functions in two parts. One is a proxy for a property tax where the mine will pay an annual payment, estimated at $14 million to $18 million per year, based on estimates of the value of Teck’s fixed assets at the mine. This comes under a PILT because the borough has no property tax. A second part of the agreement is an annual payment made by Teck into a new Village Investment Fund, with a first-year deposit of $11 million into the fund and subsequent payments that will be made on a percentage of Red Dog’s annual gross profit. The borough will administer the fund, with details yet to be worked out. The intent is that the fund will help support community programs, services and local infrastructure. Sources close to the negotiations said that Teck itself proposed the Village Investment Fund. Clement Richards, mayor of the borough, said he is pleased to get a proposal before the assembly to settle the dispute. “The (borough) administration has worked hard to negotiate an agreement that meets the needs of our borough, which is of utmost importance,” he said. Henri Letient, Red Dog’s general manager of operations, said, “The agreement will provide more resources for the people and communities of the region, while also supporting Red Dog’s ability to stay competitive and continue generating jobs and economic activity.” Overall, Red Dog has been doing well. Zinc prices have increased in recent months and Teck Alaska’s latest financial statement for Red Dog shows that production at the mine has been generally steady. The parent company, Teck Resources Ltd., reported profit of $1.1 billion in 2016 compared to just $188 million in 2015. Zinc production in the fourth quarter of 2016 was up 7 percent, the report said, due to higher recoveries of metal from the ore in the mill at Red Dog, but lead production declined by 4 percent due to lower grades in the ore. Production costs declined also due to lower fuel prices and optimization of the stripping ratio, or the volume of fill moved to reach the ore, at the mine. Production in 2017 is estimated at 545,000 tons of zinc and 115,000 tonnes of lead. A tonne, a common unit of measurement in mining, is 2,200 pounds, compared with a ton, which is 2,000 pounds. From 2018 through 2020, production is estimated at 500,000 to 525,000 tonnes of zinc and 85,000 to 115,000 tonnes of lead, mainly due to lower grades of ore being mined. Feasbility studies are now underway on ways to “debottleneck” the mill to improve metal recovery even as the grade of ore declines, according to the financial statement. ^ Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Cargo carriers concerned about tax hike

JUNEAU — Most attention focused on the state Legislature is on the big revenue bills: a state income tax, more changes in oil taxes and restructuring how Permanent Fund income is managed. But there are serious issues bubbling just below the surface, and even legislators aren’t aware of how they could adversely affect the state’s economy. Take air cargo, for example, which provides the majority of the revenues to Alaska’s international airports in Anchorage and Fairbanks. The state’s proposed increase in jet fuel taxes, which are included in Senate Bill 25 and House Bill 60, would triple the state tax when it is fully implemented, from 3.2 cents to 9.6 cents per gallon, according to information air carriers have given legislators. The bills are at an advanced stage in the Legislature, pending in both the House and Senate Finance committees. When a 2.7 cent per gallon “fuel flowage fee” — a kind of tax — is added to the tax increase, the total cost of fueling up a big air cargo jet at Ted Stevens International would be 12.3 cents per gallon, including the tax and the fuel fee, air carriers told lawmakers. That compares with a 2.4 cents per gallon jet fuel tax at Seattle-Tacoma, 3 cents per gallon tax in Portland and 2 cents per gallon tax in Vancouver, British Columbia, three west coast airports that are competitors with Anchorage for air cargo business. No fuel-flow fee is charged at those airports. “This scale of a tax increase could tip the scale for these carriers, undermining the Anchorage advantage in air cargo. It could have devastating long-term results for our economy,” said Bill Popp, president of Anchorage Economic Development Corp. In the midst of Alaska’s recession, the air cargo business, which is growing, is a bright spot. Cargo largely underpins the finances of Ted Stevens Anchorage International Airport, and the airport itself is a huge economic engine for the community, sustaining one in 10 jobs in Anchorage, Popp said. Cargo operators like FedEx and United Parcel Service use Anchorage as a hub for those carriers’ network of U.S.-Asia flights, and the locations of the hubs, despite Alaska’s higher costs, are supported by the favorable economics of refueling. This also underpins an extensive number of refueling stops by other U.S. and foreign air cargo carriers. Carriers can load their planes with more paying freight and stop in Anchorage to refuel and make more money compared with flying nonstop, for example from the continental U.S. to Asia. Landing fees and other costs are already somewhat higher in Anchorage compared with Seattle and Portland and considerably higher than Vancouver. The current jet fuel taxes are also higher in Alaska but close enough that the overall economics still support stopping in Alaska for refueling and operating hubs here, as UPS and Federal Express do. However, Popp thinks the magnitude of the tax increase being considered in the Legislature might be enough to tip the balance and begin the erosion of the industry. Carriers would be encouraged to consider other airports and eventually overfly with cargo as passenger jets now do. At least one major cargo operator is already flying nonstop West Coast-Asia and U.S. Midwest to Asia, although that is linked to specialty cargos, for now. Nick D’Andrea, United Parcel Service’s public affairs vice president, said his company is sympathetic to Alaska’s fiscal problem and even supports the motor fuel tax, which would affect UPS’s extensive surface delivery system in the state for freight and parcels. “We support the motor fuel tax because it’s a user fee,” with the revenues helping support road and highway maintenance, he said. Other parts of the legislation, which also hikes general aviation fuel and marine fuel, are similarly “user fees” that will help support infrastructure. “The jet fuel tax is different, D’Andrea said. “It is not a user fee,” linked to support of major airports UPS and other freight operators use. That’s because the state’s international airport system, which operate the Anchorage and Fairbanks airports, is already financially self-supported through landing fees and the fuel-flowage fee, which also helps support airport operations, D’Andrea said. The airlines own and operate their own fueling facilities. Instead of supporting airports the major airlines use revenues from the jet fuel tax will go to help support airports outside of Anchorage and Fairbanks that the big cargo carriers mostly do not use and where landing fees are not charged, with maintenance funded through the state’s general fund budget. That cross-subsidy is seems unfair, D’Andrea said. However, the more serious effect is that it will undercut the economics of the industry in Alaska. While fuel loaded on planes for international flights is now tax-exempt, D’Andrea said the tax increase on fuel for domestic flights can indirectly affect international flights. The carriers’ international flights that connect with domestic flights at the hubs in Anchorage would be tax-exempt on the international leg but would pay the higher tax on the domestic leg, D’Andrea said. D’Andrea said a solution to the problem is to exempt jet fuel sales at the Anchorage and Fairbanks airports from the tax increase because the taxes are not user fees, unlike the other fuel taxes in the legislation. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Habitat bill draws attention, but won’t get vote this year

JUNEAU — It is already being dubbed, “fish first, nothing else.” Reps. Louise Stutes, R-Kodiak, and Andy Josephson, D-Anchorage, have introduced a bill that would set up a new fisheries habitat permitting system, to be administered by the state Department of Fish and Game, for construction projects that affect waterways. Critics say the legislation would add serious burdens to environmental permit systems that are complicated enough, and set standards that many development projects will be unable to meet. Stutes brought the bill up in the House Special Fisheries Committee, which she chairs, for an initial hearing April 11. She said she will not push to move the bill this year, but will hold it for interim work and possible action in 2018. Although he is not listed as a co-sponsor, the bill is reportedly a priority for House Speaker Bryce Edgmon, D-Dillingham. One effect of the bill is a presumption that all waters of the state support anadromous fish and would be listed by ADFG, which would trigger the permit requirement. Many Alaska streams do not support anadromous fish, and for those the developers would have to do site-specific studies to show salmon or other species are not present. Under current law, the Habitat Division of ADFG maintains the Anadromous Waters Catalog of streams that support anadromous fish. If projects affect a listed stream a state permit is now required, but what is proposed in HB 199 is far more stringent. For major projects ADFG would have to do a detailed analysis not unlike the state Best Interest Finding documents prepared by the Department of Natural Resources for major state decisions. Fisheries groups supporting HB 199 say the current Title 16, which sets out the anadromous fish stream protection dates from the early 1960s, needs an update. The state Board of Fisheries wrote a letter in January urging legislators to update the statute and include public notifications, which are not in the current law. Advocates for HB 199 argue the process for listing streams is cumbersome and expensive because state biologists must do field work to test for fish. Because of that only 50 percent of the streams that actually support anadromous fish are listed, it’s argued. HB 199 would also lay out criteria for unacceptable projects causing stream impacts, which would automatically trigger a denial. Unacceptable projects would be those requiring water treatment in perpetuity, which some mining projects must do; replacement of a wild salmon stock that would be affected with hatchery stock, or a project that would dewater or divert an anadromous fish habitat for more than five years. These requirements would effectively block projects like Pebble, the Chuitna coalmine and Susitna hydro projects. At the April 11 hearing, fisheries groups supporting the bill said it was proposals for the Susitna and Pebble mine projects that caused them to push for specific standards to protect salmon as well as public notice requirements, both which are absent from current law. Lindsey Bloom, a member of Juneau-based “Stand for Salmon,” said her group was among those urging the Board of Fisheries to write its letter in January. At the hearing, critics of HB 199 said the bill goes far beyond what the Board of Fisheries recommended, however. Maver Carey, president of The Kuskokwim Corp., or TKC, an Alaska Native Claims Settlement Act village corporation formed by several mid-Kuskokwim communities, said, “House Bill 199 appears to be an effort to fix something that is not currently broken.” “The overreaching regulation and processes proposed will not only have a detrimental effect on proposed economic activities in the Middle Kuskokwim region, but may have detrimental effects on our much-needed community infrastructure projects along the Kuskokwim and its tributaries,” Carey wrote. TKC is the surface landowner at the proposed Donlin Gold mine, a large project now in advanced permitting. Two Native regional corporations, Doyon Ltd. and Cook Inlet Region Inc., shared TKC’s concerns in letter to the committee. Both corporations signed on to a letter opposing the bill submitted by the Resource Development Council, or RDC. The letter was also signed by several business and community organizations. “Concerns with this bill start with the question of why it is necessary. What is it trying to fix?” said Marleanna Hall, executive director of the RDC, an Anchorage-based development advocacy group that counts both mining and fishing as its member industries along with oil and gas, timber and tourism. To comply with the bill, “the added time to resource agencies, as well as permit applicants, would increase uncertainty and costs for development opportunities without a corresponding benefit to fish habitat,” Hall told the committee. There would be effects on upgrades to community infrastructure, such as airports and roads and construction of wastewater treatment plants as well as economic development with fish processing, timber harvesting and mining and oil and gas development, Hall said. However, the state’s premier commercial fisheries group, United Fishermen of Alaska, and other commercial and recreational fish groups have signed on with support, as well as several Native organizations. Not all fisheries groups support HB 199, however. One, the Bristol Bay Fishermen’s Association, weighed in against the bill April 11, arguing that everything HB 199 proposes could be done by regulation, said David Harsila, president of the association, and Anchorage attorney Geoffrey Parker, who works with the Bristol Bay association. Several at the hearing said ADFG now has authority and the flexibility to achieve the goals of HB 199 without setting up a new permit system. In a separate statement, Kara Moriarty, president of the Alaska Oil and Gas Association, weighed in against the bill: “HB 199 would create an expensive and cumbersome state permitting system that would be more onerous than current federal regulations. It would be harder to get state approval for oil and gas projects than it would be to get a section 7 permit under the ESA (Endangered Species Act) or a 404 (Clean Water Act) permit from the Corps of Engineers,” Moriarty said. “The bill would be duplicative,” of other permit systems, she said. “It’s easy for the anti-Pebble community to try and make this a fish verses mining bill, but it’s way beyond that.” Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Northrim: Resilient in recession, state must ‘get our act together’

FAIRBANKS — For a state officially in recession, the traditional economic indicators of Alaska’s economy are showing a remarkable resiliency, Northrim Bank economist Mark Edwards says. Edwards and other Northrim officials presented the bank’s 2016 economic overview in a presentation in Fairbanks on April 11, with similar events to be held in Juneau on April 12 and Anchorage on April 14. The usual ways of measuring economic performance — unemployment, home foreclosure and delinquency rates, and building permit activity — don’t yet reflect an economy going over the cliff, Edwards said. That’s not to say there hasn’t been pain, particularly in oil and gas, construction and professional services. Also, those are high-wage sectors and the loss of jobs there will have ripple effects because of less discretionary income spending in fields like leisure, recreation and entertainment, Edwards said. In opening the Fairbanks presentation, Northrim CEO Joe Schierhorn underscored the importance of the Legislature acting this year on solutions to solve a recurring $3 billion a year state fiscal deficit. “We are on record supporting a comprehensive solution including use of Permanent Fund income, measured spending and a broad-based tax,” Schierhorn said. Northrim has held that position for several years now, including endorsement of the broad-based tax. This position puts the bank at odds on this with some business groups, like the Alaska Chamber, which are lobbying against the income tax proposed in the House. The state now gets the bulk of its revenue from oil and gas, but those have been hit hard by a sharp decline in oil prices. On the economy, Edwards said preliminary data shows the state lost 7,600 jobs 2016, or 2.4 percent, with about 3,100 of the jobs lost in Southcentral Alaska and 2,800 in the state’s northern region, mainly in North Slope oil and gas. The Interior region, mainly Fairbanks, saw a loss of 700 jobs. Southeast lost 600, Edwards said. Oil and gas was hit hardest, down 3,100 statewide, or 23.5 percent; construction was down1,200 jobs. Professional and business services, a field that includes engineers, saw a loss of 1,300 jobs, or 4.6 percent. Health care, in contrast, boomed, adding 900 jobs or 2.6 percent. Tourism also did well in 2016 and will do so again in 2017. “This has been a tough time for a lot of people, however. We haven’t had to deal with a major recession since the 1980s, and we’re not there yet with this one,” meaning the scale of the 1980s downturn, Edwards said. The state still has a lot of advantages, however, mainly its land base and natural resource wealth. “Basically, we just have to get our act together. We have all the tools we need for a recovery,” he said. State government can do structural reforms to help that, such as streamlining regulatory requirements. Availability of skilled labor is also a concern the state can help with, through education and training. “We need to ensure we have the right skill sets to take advantage of opportunities,” Edwards said. Alaska Native corporations will also help stabilize things because they bring in revenue from out-of-state investments and through the spending of dividends paid to shareholders. Although higher than the nation, the state’s unemployment, 6.7 percent in December, is basically stable and is within historical ranges, Edwards said in Fairbanks. “U.S. unemployment rates have been more volatile over the last 20 years. National rates were as low as 3.9 percent and as high as 9.9 percent, whereas Alaska stayed within a much tigher band, reaching a low of 6.3 percent and a high of 7.9 percent,” Edwards said. Other indicators were stable, too. Home foreclosures and mortgage delinquencies are some of the lowest in the nation, he said. Building permits reached 1,503 in 2016, up 16 percent from the prior year. The bulk of the units built were for single-family housing but about 20 percent was for multi-family units of five units or more, according to Northrim’s report. In 2012, only 868 permits were issued statewide, reflecting a lingering effect of the 2008 recession. Overall, “the number of building permits for new, privately-owned housing of one to five-unit buildings remained relatively low for the tenth straight year,” Edwards said. Building permits were still below the average of 2,781 new units per year in Alaska during the prior decade, before the national recession hit. Per capita income in the third quarter of 2016 was eighth-best of the 50 states, at $55,588. That compared with $49,681 at the national level. However, total income in Alaska declined 0.7 percent in the third quarter, to $41.1 billion, compared with total income in third quarter 2015. Speaking on Fairbanks itself, Edwards said apartment rents in the Interior city were generally stable, at about $1,100 per month, on average. It was down marginally 0.6 percent from 2015. Fairbanks home sales prices climbed 3 percent in 2016, to $230,289 on average. In Anchorage, home prices increased over four consecutive years from $321,958 on average in 2011 to $366,836 in 2015. Average prices dropped in 2016 by 0.2 percent to $366,080, according to the report. The state’s economy is strong in other ways, Edwards said. For example, many properties are owned by people with large invested equity, who have financial capability because of that to absorb lower lease or rental revenues. There has been no uptick in distressed properties according to Edwards. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

PacRim owners shelve Chuitna coal mine plans

PacRim Coal’s plan for a 12.5 million-tons per year export coal mine has been put on hold, very likely ending work to develop the mine that has spanned decades. PacRim, an affiliate of Dallas-based Hunt Oil Co., has withdrawn from a lengthy quest for regulatory approvals for its Chuitna Coal Project, a spokesman said. The project is in the Beluga coalfields on the west side of Cook Inlet, 50 miles west of Anchorage. “Following several months of internal review and discussions, the partners in PacRim Coal, LP have decided to suspend pursuit of its permitting efforts to invest in other projects,” company vice president Joe Lucas said in a statement. Lucas said the company isn’t yet ready to say the project is dead, but “will be clarifying its intentions with the relevant agencies,” including the landowner, the State of Alaska’s Mental Health Trust Land Office. State officials were notified March 31 of the decision to withdraw from preparations of a state surface mining permit, said Russ Kirkhan, chief coal regulator in the state Department of Natural Resources. The decision by the owners, the Hunt family, was made the March 21, the state was told. The action came as a surprise as PacRim had been working on its state application as recently as two weeks ago, Kirkhan said. PacRim had been working on a draft environmental impact statement, or EIS, with the U.S. Army Corps of Engineers as lead agency. The Corps had put the EIS work on hold last November to allow the company to complete its application for the state surface mine permit, a Corps spokeswoman said. A complication for PacRim has been an extended permitting process and regulatory uncertainties caused by impacts of a surface mine development on local salmon streams. This also stirred opposition from environmental groups and residents of Tyonek, a nearby Alaska Native village. About 300 million tons of subbituminous coal reserves had been confirmed by PacRim’s drilling in a 5,000-acre area, but the region, known as the Beluga coal deposit, is estimated to potentially hold several billions tons of coal. While the coal is low-rank it has very low sulfur content, which makes it attractive as a blend stock to enable coal-fired power plants to meet air emissions standards. Usibelli Coal Mine Inc. now mines similar low-rank coal at its mine at Healy, and has exported coal to power plants in Asia and to Chile for use as blend-stock, although most of Usibelli’s production is sold to power plants in Interior Alaska. It has shipped only one export load in the last two years and the Alaska Railroad has shut down its coal terminal at Seward. PacRim wouldn’t say what motivated its decision but the continued outlook for a soft Pacific steam coal market and the political drag created by environmental opposition were no doubt contributing factors. The company has worked on the project since the 1970s and at one time, in 1990, it was fully permitted and ready to build. A slump in Pacific coal markets caused the Hunts to put a pause on construction, and when markets recovered and planning resumed, most of the permitting and environmental work had to be redone. State-owned lands in the area are held by the state Mental Health Trust Authority. An estimated $300 million in coal production royalties the project would have produced would have gone to the authority, which funds state programs for mental health and the disabled. Alaskans expressed disappointment in PacRim’s decision. “The Chuitna Coal Project would have provided many economic benefits to Alaskans, including an estimated construction cost of $750 million dollars, employing up to 500 workers over the two-year construction phase,” said Marleanna Hall, director of the Resource Development Council of Alaska. “It would have employed 350 people in production with an annual payroll of $35 million dollars. These are good, family-wage paying jobs.” The project has seen about $150 million spent on it with around $50 million of that in the last decade. “It’s unfortunate to have this investment no longer coming to Alaska,” Hall said. Local environmental groups took the opposite position. “This was a bad deal all around for Alaskans. It would have set a horrible precedent for mining through salmon streams,” said Bob Shavelson, director of Cook Inletkeeper, a local environmental watchdog, a reference to PacRim’s plan to temporarily divert, but then restore, several miles of a salmon-bearing stream. Tribal leaders at Tyonek voiced similar feelings. “Our waters are safe now! We can fish our river without any worries of harmful effects to our fish as well as the wildlife that surround the waters of our river,” said Arthur Standifer, Tribal president of the Native Village of Tyonek. Not everyone in Tyonek village shared that view. Leo Barlow, CEO of Tyonek Native Corp., the community-owned development corporation, said, “PacRim was a great company to work with. They have spent a lot of money and many years in planning, and had developed some pretty innovative strategies, such as moving coal in containers in ways that would eliminate dust and pollution. They hired our shareholders and consulted with us frequently.” In recent years, two companies have explored other ways of commercializing the Beluga. Cook Inlet Region Inc., the Anchorage-based Alaska Native regional corporation for Southcentral, owns extensive coal lands in the area and has done test drilling and planning for underground coal gasification, a process that would manufacture a coal synthesis gas through a combustion in deeply-buried coal seams. The gas could then be used in power generation or other uses. Australia-based Linc Energy, an independent, also conducted test drilling. Neither entity developed a project, however. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Tempers flaring as House, Senate spar over budget fixes

JUNEAU — Locomotives at each end of the Capitol’s second floor were being fired up this week — figuratively, at least — one at the state House end of the second floor and one at the state Senate end. A train wreck in the middle seems unavoidable. House leaders are insisting on a state income tax, a hike in oil taxes and little to any cuts to the state budget. Senate leaders want about $200 million in spending cuts, a Permanent Fund income restructuring and no new taxes on personal income or increased taxes on oil production. The differences are clear, and neither side shows signs of budging. Tempers are also rising. The Senate version of the operating budget was to be on the Senate floor April 6, making major cuts to education that are roiling the state’s education community, as well as state House leaders. A bill that restructures use of Permanent Fund earnings and caps the annual PFD at $1,000 for three years, along with a spending cap, has passed the Senate. “We’ve done our job, but the House has sent us nothing so far that deals with the fiscal gap. Until they act, all they do is talk about it,” Sen. Anna MacKinnon, R-Eagle River, co-chair of the Senate Finance Committee, said in a briefing by the Senate Majority April 3. There are signs the House Majority is having difficulty getting enough votes to pass its version of a fiscal plan that includes the income tax, in House Bill 115. The proposal to increase taxes on oil and gas companies, in HB 111, may also face challenges in the House Majority, which is a 22-member coalition of Democrats, three Republicans and two independents that can only lose one vote before a bill fails. In the House Majority briefing April 4, House Speaker Bryce Edgmon, D-Dillingham, said the Senate’s education cuts could result in one-sixth of the teachers being lost in his local school district in Dillingham. The Senate plan could have a cumulative effect, too. “The year after there could be an equal impact, so we’d lose one-third of our teachers, and the year after it could be up to half. This will really erode small school districts,” Edgmon said. House Finance Co-Chair Rep. Paul Seaton, R-Homer, said the Senate’s budget proposal for a 5 percent reduction to the Base Student Allocation (a formula that guides state funding for local schools) this year will cost school districts about $70 million. House Majority Leader Chris Tuck, D-Anchorage, criticized the Senate Finance Committee for not allowing the public to weigh in on the BSA proposal during public hearings on the operating budget because the reduction had not yet been made. Seaton took issue with another plan by the Senate, to phase out the state’s University of Alaska performance scholarships, a key accomplishment of former Gov. Sean Parnell. “This is something for education we’ve done right,” Seaton said. “It has resulted in 5,000 students enrolling at the University of Alaska over the last four years, and over the same period high school graduation rates have gone up 16 percent. Something must be driving that,” he said. “The Senate is holding education hostage just to get a Permanent Fund percent-of-market-value (POMV) bill and a cut to the PFD,” Tuck said, and meanwhile avoiding discussion of a new broad-based tax. Senate leaders argue their plan for a Permanent Fund POMV, which is in Senate Bill 26 that has passed and is now in the House, will result in a balanced budget by 2023 with no new broad-based tax or tax hike on oil. This assumes the $4.1 billion statutory spending cap of general fund revenues also in SB 26 is honored, and spending remains at that level through 2023. Seaton disputes the Senate’s numbers. “That plan (in SB 26) leaves us with an $800 million deficit this year and a $500 million deficit by 2023 that will continue every year, eventually depleting our cash reserves,” he said. Seaton did not explain why his arithmetic varies with the Senate’s but the assumptions are correct if the Senate’s proposed cuts are not enacted. Meanwhile, the only alternative to an income tax, a state sales tax, won’t work, Seaton said. “That’s why no one has brought it forth. It would have too many adverse effects on municipalities that now have sales taxes, and on businesses,” he said. “To get the same amount of revenue (as an income tax) a sales tax would have to be 4 percent and applied broadly and including purchases of equipment and supplies. This is really regressive because businesses would have to pay this tax up front, before they can put equipment to work.” Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

Insurance officials hope federal waiver will cover reinsurance costs

State officials and insurance companies in Alaska say they are encouraged by positive receptions so far from President Donald Trump’s administration on an application for federally-backed health “reinsurance” program for individual health insurance policies sold in the state that have been hit hard with losses. If the proposal is accepted, federal funds could replace a $55 million, one-year backstop put in place by the state in 2016, in House Bill 367, to prop up the individual health insurance market. The funding expires at the end of this year. Trump administration officials are interested in Alaska’s reinsurance program, and want to nurture it, because it represents the kind of state-led innovations in health care the new administration wants to encourage, Alaska Insurance Division Director Lori Wing-Heier said. This assumes that the basic structure of the federal Affordable Care Act remains intact, with health insurance subsidies paid through “metallic” plans offered on insurance exchanges. It appears for now that the ACA will continue roughly in its present form, although Republicans in the U.S. House and Trump have renewed a push for a repeal and replacement of the ACA with something structurally different. For now, however, the Alaska experiment in reinsurance is being watched closely by the new federal administration and by several states including western states with small, dispersed populations like Alaska’s, with similar problems with affordable health care. However, Minnesota and Iowa are also watching Alaska closely, Wing-Heier said. Jim Grazko, president of Premera Blue Cross Blue Shield of Alaska, said in a March 30 interview with the Journal that, “Alaska is developing a reputation for innovations. No other state has the small population and very small insurance pools like Alaska. There’s also an urgency here in tackling the problem, that hasn’t been felt elsewhere.” “A lot of states are watching Alaska.” Premera is now the sole insurer in the individual health insurance market after Moda Health was briefly suspended from operating before it departed last year citing financial losses. In 2014 before the ACA went into effect, Alaska had five companies in the individual market. Last year the state faced an emergency with the individual health insurance market with Moda’s impending exit and a possible 42 percent rate hike on the table from Premera, and the state administration and Legislature acted fast to create a temporary backstop by using assessments collected from every policy sold in the state. Alaska has had reinsurance for years, a subsidy for health insurance coverage for individuals with serious medical problems who couldn’t get coverage, under the state-created Alaska Comprehensive Health Insurance Association, or ACHIA. Insurance companies who sold health policies in Alaska paid fees to the association for the high-risk premium subsidies. Individuals with those policies contributed to the premium, and it wasn’t cheap for them, but coverage was at least available. When the Affordable Care Act passed, insurance companies could no longer deny coverage because of preexisting conditions. Most of the Alaskans in the ACHIA program — there were several hundred — dropped it and signed up in the newly-created individual insurance exchange, taking their serious medical problems with them. The Alaska individual insurance market, which numbered about 20,000 last year (it has since dropped to about 18,000) wasn’t big enough to absorb the costs, however. Washington state’s individual market numbers about 300,000 in comparison. Events last year coincided with two insurers pulling out of the Alaska health individual insurance market, Moda Health and Aetna, leaving Premera Blue Cross/Blue Shield as the sole company remaining selling individual policies. “We were the last guys left standing,” Grazko said. The result was predictable – huge losses for Premera. Grazko said his company has posted a $7.7 million in losses in the Alaska individual market over three years. The company lost $25 million in 2014 and 2015 but did have an $18 million profit in 2016, which reduced the three-year loss total and triggered an examination of the company’s financials. In a statement, Alaska’s Division of Insurance said 2016 profit may have been boosted due to delayed payments under the ACA’s risk transfer programs for 2014 and 2015 that were delayed, and showed up in 2016 in the company’s books. Adjusting for that, Premera’s profit and administration expenses show nothing unusual for 2016, the division said in its statement. State officials are still inspecting Premera’s three-year financial reports to verify information the company made available, insurance division director Wing-Heier said. By law, the Insurance Division must ensure companies’ returns are adequate but not excessive, she said. The losses projected last year, however, were enough that Premera initially filed a rate request for a 42 percent premium increase in the individual market, which prompted the state to step in with its reinsurance. That allowed the company to lower its 2017 rate increase to 7.5 percent. Grazko said the actuaries who crafted the revised rate anticipated fully drawing the $55 million available in the reinsurance program. What the state did, Grazko said, basically was to “repurpose” ACHIA by extending it to cover costly medical problems among people in the individual market, mostly those who had migrated from the former reinsurance program. The differences were that the new subsidy was paid through a fee on all insurance sold in Alaska, property and casualty included, rather just on health insurance policies as was previously the case. Also, the program was organized to pay costs for 33 specific high-cost medical procedures rather than costs experienced by individuals. The Legislature authorized the program at a $55 million funding level, which was the amount of losses for the high-risk people estimated at the time. Although this did not involve state general funds, the Legislature must still authorize state program expenditures even if paid for by others. How this is actually working out in 2017 won’t be known for a while, Grazko said in the Journal interview. Premera operates on a calendar year (compared with the state’s July-to-June fiscal year) and was only able to start drawing funds, paid by the fees, on Jan. 1, he said. It’s still too early to know what the costs will actually be for 2017, whether the $55 million authorization by the Legislature will be enough, or if the expenses don’t reach $55 million whether some of the authorization can be rolled in 2018. That means, however, that Premera will have to file a proposed individual insurance rate for 2018, due in May, based on just a few months of actual data. Also, it will likely still be unknown at that time whether the federal government can step in under the state waiver application. Based on that, Premera’s initial rate filing may cause some sticker-shock for Alaskans with individual health policies. Grazko said the 2018 premium filing can be revised later in the year when it becomes known what the federal government will do on the state’s waiver application. Meanwhile, Wing-Heier expects the waiver application to be approved, based on comments so far from the U.S. Department of Health and Human Services. The state does have to enact a statute change to comply with the federal waiver requirements, mainly in making contingency state appropriations multi-year. Those changes are now in a section of the state operating budget which is pending in the Legislature but it sure to ultimately be enacted. “The application (for the waiver) was filed on Jan. 3. We received notification that the waiver application has been deemed complete on Jan. 17. Secretary (Tom) Price issued a letter acknowledging our waiver and reinsurance program,” Wing-Heier wrote in an email. The waiver application totaled 183 pages and included an analysis by the University of Alaska Anchorage’s Institute of Social and Economic Research that the federally-backed reinsurance appropriation would be “budget neutral,” or not resulting in added costs to the treasury that would not otherwise occur. “Once the state budget is passed (with the required language) we expect that CMS (federal Centers for Medicare and Medicaid Service) will approve our waiver rather quickly,” she said. Even with federal backing the state would have to provide some general fund support, however. That would be $11 million in fiscal year 2018 and increasing gradually to $14.1 million in fiscal year 2022, according the information given to the Legislature’s finance committees by the Insurance Division. Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected]

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