Elwood Brehmer

St. Paul ready for takeoff with Sabrewing partnership

Small communities aren’t often able to attract investments in groundbreaking technologies. It’s even more rare when it happens to an ultra-remote island village near the edge of the Arctic; but thanks to the foresight of community leaders, the unique opportunities that isolation provides, and a little luck, St. Paul, Alaska, is on its way to becoming the center of field research for large commercial unmanned aircraft. Earlier this year, the Aleut Community of St. Paul Island, the Tribal government of St. Paul, inked a deal worth up to $43 million with Sabrewing Aircraft Co. to test, develop and ultimately purchase the company’s unmanned cargo aircraft. The partnership, officially announced Feb. 27, first calls for the Tribal government to establish the St. Paul Experimental Test Range Complex for testing Sabrewing’s Rhaegal and Wyvern vertical takeoff and landing prototype cargo aircraft. Eventually, the Tribe plans to buy up to 10 Sabrewing aircraft and form a joint-venture company with the manufacturer offering large unmanned aircraft pilot training, maintenance, leasing and other services. Sabrewing co-founder and CEO Ed De Reyes said the partnership with the tribe of St. Paul has pushed company leaders to expedite their plans. De Reyes said in a June 2018 interview with the Journal that the company was working toward completing the 4,500-mile trans-oceanic Pacific Drone Challenge this year. However, Sabrewing has since “set the Pacific Drone Challenge to the side” given the opportunity came sooner than expected to commercialize its aircraft. “In St. Paul I don’t think I’ve ever seen a place that has such a variety of capabilities (for unmanned aircraft) in one location. It sounds so weird because you never think you’d find this in the middle of the Bering Sea but it’s amazing. It is there,” De Reyes said. St. Paul is the largest of the Pribilof Islands, and sits roughly 250 miles north of the Aleutian chain in the Bering Sea. Patrick Baker, executive director of the Tribal Government of St. Paul, said the Tribe has a for-profit subsidiary that operates small unmanned aircraft — referred to as Part 107 aircraft in Federal Aviation Administration parlance — and wanted to expand that work but was not thinking about hosting a large unmanned aircraft system, or UAS, test range. Much of that work has been on small contracts with companies, universities and government agencies doing mapping and various types of environmental research. Historically, the village’s economy has revolved around Bering Sea crab and halibut fisheries. “We’re a community that’s a very resource-based community around fishing as the Tribal government. We’ve seen the trend of resource depletion, overfishing. The trend has been in decline so we’ve been looking for opportunities around diversification that also kind of fit with our mission,” Baker said. “With St. Paul and most of Alaska being challenged with logistics, we were looking to get ahead of technology, find tomorrow’s industry and we started with Part 107, training pilots, then training instructors. “We’ve found some opportunities around the 107-class aircraft but nothing quite on the same scale as the fishery resource. We feel this larger platform is the future. We feel we’re ahead — getting in at the right time; kind of building on that unique geography of St. Paul in the center of the Bering Sea.” St. Paul’s population has fallen from about 600 residents to a little more than 400 along with declines in the fisheries, he noted, as residents seek employment elsewhere. Stars align St. Paul Tribal Council President Amos Philemonoff described the last eight months as “pushing a snowball down a mountain,” adding that, “everything has just lined up perfectly. You just couldn’t ask for a better alignment of the stars.” The courtship with Sabrewing started after a Tribal government representative read a June 2018 story in the Journal profiling Sabrewing and the company’s plans to manufacture its aircraft in Anchorage. Cargo deliveries to remote communities is Sabrewing’s target market, and without the ability to legally fly its aircraft to Alaska with all the state’s opportunities in that market, Anchorage is a natural home for manufacturing its aircraft. “The more time that goes on the more sense it makes for us to be located in Anchorage,” De Reyes said in June. “I can’t think of any other place in the United States that has that unique — not only position in the aircraft industry — but that unique place in unmanned cargo (aircraft). It makes more sense than any other location that I can think of.” Sabrewing is also an associate member of the Alaska Air Carriers Association. Currently based in Camarillo, Calif., the company is focused on developing the Rhaegal first: a mid-sized aircraft with a cargo capacity of 800 pounds, a range of 360 nautical miles and a maximum altitude of 22,000 feet. Sabrewing’s aircraft are built on a composite airframe with a gas-electric hybrid power system that drives four electric motors, each turning a variable-position fan. While a hybrid system, the Sabrewing powertrain does not alternate between power sources in the way the popular Toyota Prius hybrid car does. Instead, a light, super-quick response rotary engine generates the power that is converted into electricity by the four motors in real-time. De Reyes said he believes the costs to operate and maintain a Rhaegal will be about half of what it takes to fly a traditional small cargo plane such as a Cessna Caravan, and those cost savings could translate directly into a lower cost of living in remote communities. The larger Wyvern, with a 4,400-pound payload and a 1,600-mile range, will come later, according to De Reyes. Eyeing Anchorage Company leaders are shopping for industrial space in Anchorage and hope to start putting the first Rhaegals together early next year. De Reyes said Anchorage will be more of an assembly facility as opposed to true manufacturing. The aircraft’s five major segments and other small components will be developed elsewhere and put together here. On the regulatory side, the FAA is close to approving an initial certificate of authorization, or COA, for the test range. The first COA is likely to be for a small area immediately surrounding St. Paul Island. It could be expanded soon after Sabrewing demonstrates it can operate the Rhaegal safely, De Reyes said. Ultimately, St. Paul offers approximately 126,000 square miles of relatively empty unrestricted airspace underneath the large jet traffic that starts at 27,000 feet, according to De Reyes. He and others have credited the FAA for being open to ideas for testing emerging technologies, such as unmanned aircraft, in recent years while still following the strict “safety first” mandate. FAA officials said they have been impressed in talks with St. Paul and Sabrewing leaders with their proactive approach to address regulatory issues. John “Nevada” Nevadomsky, a former director of the University of Alaska Fairbanks’ Pan-Pacific UAS Test Range Complex and Sabrewing’s new research and development director, also noted that the FAA Reauthorization bill passed by Congress last fall allows for Tribal governments to set up test ranges. UAS test ranges had previously been limited mostly to research institutions. The abundance of available airspace and inclement weather conditions afforded by the Bering Sea will help Sabrewing prove its mettle in all types of conditions, De Reyes said. The remote location also keeps the testing of proprietary technologies a safe distance away from those who aren’t supposed to see it, added De Reyes, who has worked extensively as a test pilot for numerous aircraft manufacturers. “I can’t tell you the number of projects we’ve worked on before where you’ll sit here and go, ‘Holy smokes, nobody was supposed to know about this,’ but yet, it’s in somebody’s magazine and they have data on how fast it flies and how high it flies right down to the nitty gritty,” he said. “But that’s one thing about St. Paul; when you get off the plane they know what you’re there for and if they don’t somebody’s going to find out. If you’re there to snoop it’s the wrong place to be because you’ll be invited to leave very quickly.” Education investment pays off Finally, the St. Paul Tribe’s forethought helped seal the deal from Sabrewing’s perspective. According to Baker, the Tribe has invested upwards of $1.6 million per year in profits from its businesses into STEM education materials and equipment at the community’s K-12 school to broaden students’ opportunities. De Reyes said he noticed parallels between the small south Texas town he grew up in — but had to leave to pursue his dreams in aviation — and St. Paul. “As I grow older I realize how much I miss the little town I grew up in. It’s still there but it’s not the little town I grew up in,” he described. “St. Paul, I think, will always have that same kind of community that it has now; they’re just moving forward but really recognizing this: If we put the mechanism in place to teach them here, to provide them with jobs and a meaningful living wage here in St. Paul, they’ll stay in St. Paul.” The Sabrewing partnership has brought a “buzz” to St. Paul, according to Council president Philemonoff. The excitement reaches down to the community’s youth, he said while describing a presentation Sabrewing and tribal leaders gave to the entire St. Paul student body. “Man, these kids, you could just see their faces light up — their arms shooting in the air. All we did was answer questions for a couple hours,” Philemonoff recalled. “There was this kid in front of me; he must have mouthed off 10 or 12 questions and I’ve never seen him talk before. Just amazing.” ^ Elwood Brehmer can be reached at [email protected]

AGDC ready to disband if Alaska LNG a ‘no-go’

New Alaska gasline officials are prepared to break up the band if an internal review concludes the current iteration of the $43 billion Alaska LNG Project doesn’t pencil out. Alaska Gasline Development Corp. President Joe Dubler told legislators during a Feb. 27 Senate Finance subcommittee meeting that the quasi-state corporation holding Alaska’s longtime hopes for a large natural gas pipeline project is in the process of scaling back while evaluating the technical and commercial viability Alaska LNG. Dubler, who officially took the helm at AGDC Feb. 1, emphasized that Gov. Michael J. Dunleavy replaced four board members and hired him to “refocus the corporation.” “What (Dunleavy) wanted us to focus on was the Alaska LNG Project to determine if the larger project with the export capacity could meet economic hurdles without undue execution risk,” Dubler said to members of the Senate subcommittee for the Department of Commerce, Community and Economic Development budget, which AGDC falls under. “If it is (viable) we’re going to solicit world-class partners for FEED, which is front-end engineering and design and completion of regulatory efforts,” he continued. “If we do all of our work and we determine that the project does not look like it’s going to be viable we will wind the project down, close the corporation up and return all the current funds that remain to the General Fund.” The message is a sharp contrast to what former AGDC President Keith Meyer — whom Dubler replaced after leading the corporation since June 2016 — often stressed. Meyer and former Gov. Bill Walker emphasized the state would only go forward with an LNG pipeline and export plan if it was economical, but there was never an indication the corporation would give up on finding a path forward for Alaska LNG if the current plan ultimately didn’t work. Dunleavy was highly critical of Walker’s state-led gasline plan while he was in the Senate and while campaigning for governor. He has said he wants to bring Alaska’s major oil producers back into the project if the administration ultimately decides to keep it moving forward. Dubler added that AGDC has closed its office in Houston and is in the process of consolidating its main Midtown Anchorage office by nearly half. A small, one-person office in Tokyo remains open, according to Dubler. He said the corporation’s $10.1 million budget proposed in Dunleavy’s fiscal year 2020 budget should be sufficient to complete the Alaska LNG Project environmental impact statement. AGDC spokesman Tim Fitzpatrick said after Dubler’s comments that it continues to be “business as usual” at the corporation. Fitzpatrick highlighted that there is no internal timeline to complete the Alaska LNG review; it will take as long as it takes, he said. While the $10.1 million covers corporate operations such as payroll and office leases, AGDC spends additional money on the project from the Alaska LNG fund, which held $34.1 million at the end of January, according to corporation officials. That spending is largely for technical contractors hired to gather information for project permitting. To date, AGDC has spent more than $260 million on the Alaska LNG Project. Also, while the governor could veto appropriations to AGDC, disbanding it and transferring remaining Alaska LNG funds to the General Fund would require legislative approval. Corporation officials are still in commercial negotiations with several parties that signed preliminary agreements to purchase LNG, Fitzpatrick said, including the three Chinese companies that signed a joint development agreement with AGDC in November 2017 to be potential anchor customers and financiers of the project. The Federal Energy Regulatory Commission, which is writing the Alaska LNG EIS, was expected to publish a draft of the document in February; however, the agency on Thursday revised that schedule for a June release. It’s generally believed the extended partial government shutdown affected FERC’s ability to meet the original schedule in addition to having many technical questions for which AGDC is still providing answers; FERC historically has been one of the best federal agencies in terms of meeting its self-imposed permitting schedules. The revised Alaska LNG schedule calls for a final EIS to be published in March 2020 with a record of decision coming shortly thereafter. Sen. Chris Birch, R-Anchorage, who chairs the Resources Committee and the subcommittee Dubler testified to, said in a brief interview there is a general consensus among legislators that AGDC should complete its current Alaska LNG permitting effort regardless of whether or not other aspects of the project are advanced. “You might be back asking (FERC) for another LNG license down the road,” Birch said, noting that he will be interested in seeing AGDC’s updated spending plan during a presentation to the joint House and Senate Resources Committees set for March 22. On March 4, AGDC received the joint record of decision on its original, smaller Alaska Standalone Pipeline, or ASAP, project from the Army Corps of Engineers and the Bureau of Land Management. The ASAP project, estimated at roughly $10 billion, is a smaller gas pipeline plan to get natural gas off of the North Slope strictly for in-state use. ASAP includes a 733-mile long natural gas pipeline system from Prudhoe Bay to the Enstar Natural Gas Co. distribution system near Big Lake, and a 30-mile long lateral line to Fairbanks. It does not include the large LNG plant needed for gas exports, which accounts for about half of the $43 billion Alaska LNG price, but experts also doubt the economics of any trans-Alaska natural gas pipeline without the LNG export component. The ASAP decision was likely also delayed because of the government shutdown that ended in January. ^ Elwood Brehmer can be reached at [email protected]

Corps releases draft EIS for Pebble

Alaskans interested in the future of the Pebble mine project should get their reading glasses ready. The U.S. Army Corps of Engineers is asking for feedback on its approximately 1,400-page draft environmental impact statement, or EIS, released Feb. 20 for the Pebble project. A 90-day public comment period begins March 1. Opponents of the mine contend the Corps limited its focus to environmental impacts at the mine site and ignored potential downstream effects, particularly to fisheries. To the contrary, Pebble Limited Partnership CEO Tom Collier said the company didn’t identify any major data gaps or substantive impacts that couldn’t be addressed in the draft document. “We see no significant environmental challenges that would preclude the project from getting a permit and this shows Alaska stakeholders that there is a clear path forward for this project that could potentially generate significant economic activity, tax revenue and thousands of jobs,” Collier said in a formal statement. Pebble estimates the project will generate about 2,000 jobs during its four-year construction and about 850 full-time positions over its 20-year life. “We have stated that the project must coexist with the important salmon fishery in the region and we believe we will not harm the fish and water resources in Bristol Bay. Now we have a science-based, objective assessment of the project that affirms our work,” Collier continued. The draft EIS examines Pebble’s proposed project submitted to the Army Corps of Engineers in December 2017. The Corps adjudicates Clean Water Act Section 404 wetlands fill permit applications on behalf of the Environmental Protection Agency and the size of the Pebble project triggered a full EIS review under the National Environmental Policy Act. While the plan is scaled back from previous mine concepts, the overall project would still stretch 187 miles from the mine site north of Iliamna Lake to the edge of the Sterling Highway on the southern Kenai Peninsula. In between would be a natural gas pipeline up to 12 inches wide traversing the Cook Inlet sea floor for 95 miles from the Anchor Point area to a deepwater port at Amakdedori west of Augustine Island. From there, a two-lane, private road would run 35 miles northwest to a ferry terminal on the south shore of Iliamna Lake. An ice-breaking ferry would then shuttle materials 18 miles across roughly the midpoint of the large Iliamna Lake. Another 30 miles of industrial road would connect the north ferry terminal near the village of Newhalen with the mine site. The gas pipeline would follow the rest of the transportation corridor to the mine. According to the EIS, the 8,086-acre Pebble mine site would permanently displace 3,458 acres of wetlands and 73 miles of streams. The site would consist of a large bulk tailings dam and storage facility, a pyritic tailings storage facility, a 270-megawatt power plant, multiple water management ponds and plants and a 608-acre open pit, among other facilities. It would all support processing of about 1.4 billion tons of mine material during the 20 years of production based on Pebble’s initial plans. Roughly 100 acres of wetlands would be lost in development of the transportation corridor, according to the EIS. There would be indirect impacts from fugitive dust and partial dewatering to another approximately 1,900 to 2,100 acres of wetlands depending on which development alternatives are chosen for the final project, according to the document. Alternative construction options beyond Pebble’s proposal include a more northerly ferry and pipeline route across Iliamna to Pile Bay at the far east end of the lake with a corresponding deepwater port at Diamond Point near Williamsport instead of Amakdedori to the south. Summer-only ferry operations are also considered and would require additional storage at the mine for metal concentrates, fuel and general goods. Residents around the lake have raised concerns that a year-round ferry could disrupt winter travel across the lake ice. Another transportation alternative would eliminate the ferry altogether and instead calls for an 82-mile road around the north and east portions of Iliamna to the Diamond Point port. Pedro Bay Corp., which owns much of the land north and east of Iliamna Lake, issued a statement Feb. 22 saying the Native village corporation continues to oppose Pebble and recently rejected a right-of-way agreement for a transportation corridor across its land. Additionally, Bristol Bay Native Corp. owns subsurface rights to lands owned by area village corporations and executives have told the Journal the regional corporation may use its subsurface title to try and prevent Pebble from burying a pipeline or developing gravel quarries to build roads across village corporation lands. Alaska Peninsula Corp. owns lands south of Iliamna Lake and has a surface access agreement with Pebble. Shane McCoy, the Corps’ manager for the Pebble EIS, said in a conference call with reporters that the EPA suggested a concentrate pipeline along the north road right-of-way. The pipeline would eliminate copper-gold concentrate trucking, but 18 round trips per day between the mine and port would still be needed to haul molybdenum concentrate, fuel and other goods. The pipeline alternative also considers a second pipeline to send concentrate slurry water back to the mine for reuse. McCoy said he is not aware of other specific mines that employ lengthy concentrate pipelines but he was told the concept is in use elsewhere. The only significant change considered at the mine site is constructing a bulk tailings dam with the downstream buttress method, which is generally considered to be more stable and requires more material than the common centerline method Pebble has proposed. Corps officials note the state Department of Natural Resources is in charge of reviewing Pebble’s dam designs when the company applies for its state permits. Dry stack tailings storage — which would eliminate the risk of a bulk tailings dam failure — was discounted early in the evaluation because Pebble’s proposed mining operation would be about four times larger than the largest mine using the dry stack tailings method. It involves filtering water out of the bulk tailings until the material is 75 to 85 percent solid and “soil-like,” according to an appendix of the EIS. “(The dry stack) option would greatly complicate the logistics of the milling operation to include frequent clogging of filters, the need for an emergency storage (tailings storage facility) when the filter plant is down for maintenance, and the large number of personnel and equipment needed to transport and place the filtered tails. The option is not practicable,” the document states. Time to comment Critics of the Corps’ process contend the agency is rushing its evaluation of Pebble to fall within the four-year timeframe — starting in May 2017 — before the EPA can revisit its authority to “veto” the project. Those were the main parameters of a 2017 settlement between Pebble and the EPA that resolved a lawsuit the company filed against the agency in 2014. Former EPA Administrator Scott Pruitt declined to finalize rescinding the proposed Pebble “veto” in January 2018; it’s an outstanding issue that must be resolved before the Corps can issue Pebble a Section 404 permit, if it decides to do so. Jason Metrokin, CEO of Bristol Bay Native Corp., which has led opposition to the project, said in a statement provided to the Journal that the 90-day comment period should be much longer. “A 270-day comment period on the (draft) EIS is the first — and necessary — step in holding PLP accountable during the permitting process. Bristol Bay cannot become a laboratory to test unproven and unprecedented mining practices,” Metrokin said. McCoy noted the 90-day comment period is twice the statutorily required 45 days and the Corps released the draft EIS to the public a week before the comment period begins to give interested individuals a head start on reading it. He said Corps Alaska District officials are discussing the possibility of extending the comment period. Pebble advocates argue many who are insisting on a longer comment period simply want to delay the EIS process in any way possible. Metrokin and leaders for Bristol Bay Native Association and Bristol Bay Economic Development Corp. wrote to Army Corps officials Feb. 5 requesting a 270-day draft EIS comment period. They stressed that Pebble has proposed to increase the amount of material it would mine by 25 percent since first applying for its wetlands permit and “some of the aspects of (Pebble’s) proposal appear to us to be unprecedented in the world of hard rock mining.” Sen. Dan Sullivan told reporters shortly after the EIS was published that he would likely be making a formal request to the Corps for a longer comment period given the scope and significance of the document. Sullivan has previously said he would generally like to reform and streamline the NEPA process to prevent unnecessary delays for development projects. Sen. Lisa Murkowski told the Journal in a Feb. 22 interview that her initial reaction was that the comment period should also be longer than 90 days for similar reasons but she couldn’t specify exactly how long would be appropriate because the EIS had just been released two days prior. She encouraged Alaskans to take the comment period seriously and said she will meet with Corps officials after having a chance to review the draft EIS herself. “The expectation of Alaskans and certainly my expectation is that this process that (the Corps of Engineers) is going through has to be rigorous; it has to be thorough; it has to be robust; and anything less than that is just not right and in fairness is just not acceptable,” Murkowski said of the Pebble EIS. Elwood Brehmer can be reached at [email protected]

Assembly begins critical look at Anchorage port plan

Faced with a looming price tag of nearly $2 billion to fix its port, unsavory funding options and competing claims, the Anchorage Assembly is again examining every aspect of rebuilding one of Alaska’s most critical pieces of infrastructure. The Assembly began its third review of plans to rebuild the municipal-owned port, which the body officially renamed the Port of Alaska in 2017, during a Feb. 20 Assembly Enterprise and Utility Oversight Committee meeting where representatives from several civil engineering firms were invited to present their thoughts on the current port modernization project. Assemblyman and committee co-chair Christopher Constant characterized the informal meeting as a “crowd-sourcing” session for Assembly members to gather high-level design concepts and other information that could be carried forward. Notably, Jim Campbell, president of the Anchorage-based firm PND Engineers Inc., said he believes major components of the new construction estimated to cost more than $1.4 billion can be done for just more than $300 million. PND engineered the docks for the original Port of Anchorage intermodal expansion project in the mid-2000s using its proprietary Open Cell Sheet Pile design. Construction work on the port expansion project was halted in 2010 and never resumed after extensive damage to installed sheet pile was discovered. PND was part of a complex web of contractors on that project that were sued by the municipality in early 2013 based on a study that found the Open Cell Sheet Pile design was not suitable for the project given the challenging construction conditions and seismic requirements at the Anchorage port. The suitability study was conducted by CH2M Hill, which is now named CH2M and is owned by the international firm Jacobs Engineering Group. PND leaders have long been adamant that their design was sound and it was improper installation that led the sheet pile to fail. There is little dispute amongst those who have followed the port developments that there were problems with construction techniques in the 2008-09 timeframe. However, the suitability study concluded those issues were on top of fundamental design flaws. PND settled with the city for $750,000 in early 2017. Campbell said at the time that the relatively small sum validates the company’s claims about the sheet pile design. “We still maintain, to this day, that the original design was not flawed,” Campbell said Feb. 20, later adding that PND’s sheet pile has been used successfully at ports across Alaska, including Kodiak and Dutch Harbor. He also highlighted the fact that CH2M is managing the current port modernization — with a more traditional pile-supported dock concept — only after drafting the report that deemed the previous design faulty. Officials in former Anchorage Mayor Dan Sullivan’s administration said in 2014 that CH2M was best suited to lead the second iteration of port reconstruction given its knowledge of the issues and the company did not know it would get the larger management contract when it was conducting the suitability analysis. The current port modernization schedule blends complex logistics and needs-based construction to keep regular port users reasonably happy during construction while also replacing some of the oldest infrastructure first. It calls for first building a new petroleum and cement terminal, or PCT, over the next two years at a cost of $223 million. A new PCT must be done first in order to free up space for when the adjacent cargo docks — used twice weekly each by TOTE Maritime and Matson Inc. — are rebuilt. It is also on the oldest part of the dock structure, according to Port Director Steve Ribuffo. Some sections of the pile-supported docks have been in place since 1961 and have far exceeded their initial 35-year design life as the saltwater they stand in has gradually taken its toll and badly corroded the steel support pilings. The PCT work is being partially funded with unspent money from the first project and court settlements, but city officials also recently proposed drastic increases to the port’s fuel and cement import tariffs to cover the cost of borrowing up to $200 million through revenue bonds for the remainder of the work. The proposed tariff changes were met with initial skepticism from members of the Anchorage Port Commission, an advisory body, because of the broader negative economic consequences they could have, commission members said. Municipal Manger Bill Falsey said while the tariff rate hikes are among the least appealing options for funding the project, they would act as a user fee increase and are one of the few ways for the city to fund the project without state or federal help. City officials regularly cite the how critical the port is to Alaska, not just Anchorage, as justification for help in paying for its overhaul. It’s estimated that roughly 90 percent of the goods destined for delivery across mainland Alaska are imported across the port’s docks. “It is the one need that beats all other needs,” Falsey said Feb. 20. “This is core, basic infrastructure.” The Legislature and former Gov. Bill Walker approved $20 million for the port last spring; however, with Gov. Mike Dunleavy’s emphasis on reducing spending to close the state’s $1.6 billion budget gap, the prospect of future state appropriations is uncertain. CH2M’s cost estimate for the modernization project has gone from approximately $500 million in late 2014 to more than $1.9 billion today. The company’s Jeff Bool told Assembly members that risk contingency accounts for nearly $300 million of the overall projection and built-in price escalation — given the current schedule calls for work through 2028 — adds another $202 million. Building the PCT should help refine the overall cost estimate, Bool said. “As we bid out the work on the petroleum cement terminal we’ll know what the larger costs are and we can forecast more accurately what these future facilities might cost,” he said. Additionally, he noted that larger federal tariffs on foreign steel have increased the cost of the fundamental building material by roughly 30 percent over the past two years. Bool and others have also said the city could reexamine the self-imposed criteria of a 75-year design life and building the PCT and one cargo terminal to withstand a catastrophic earthquake with the ability to be back in service within a week after such an event. Regular port customers have also requested amenities and equipment that add to the cost. “We have time to affect change in the cost,” Bool said. Some observers have suggested TOTE and Matson — which both call on the port every Sunday and Tuesday — could adjust their schedules, thus allowing Anchorage to build just one new, heavy-duty cargo terminal instead of two. Representatives from those companies did not respond to requests for comment, but Port of Alaska spokesman Jim Jager said the shippers have made it clear to port officials that their schedules can’t be changed. The logistics of getting fresh produce and other regular, time sensitive cargoes to the Port of Tacoma, combined with labor issues with longshoremen there challenge the feasibility of spreading the trips throughout the week, according to Jager, and Alaska’s relatively small market size reduces the incentive to try. Essentially, the shippers call the shots in this situation. PND’s Campbell insisted the city could build two basic, pile-supported docks off of the north backlands — the area CH2M contends is unstable, which PND disputes — for roughly $300 million and cut approximately $1.1 billion out of the cost. The concept is very similar to what the company did in Kodiak and the same Matson ships call on both ports, Campbell noted. He said Anchorage should “take what you’ve got there instead of throwing it out. If you actually just figure out how to address the problems from before and build something there it’s a big cost savings.” The current plan calls for removing much of the roughly 30 acres of fill that created the north backlands area during the expansion project at a cost of $253 million. The port leases much of the area for lay down and temporary storage now and officials want to keep part of it intact for those reasons. Bool characterized the north end demolition as “very high risk work” and the $253 million estimate includes about $50 million in risk contingency as a result. “We’ve got over a million yards of fill to remove and dispose of in the Inlet,” Bool said. “There’s a lot of unknowns, it’s risky and it’s a very expensive demolition.” Scrapping the whole north backlands area could actually be cheaper than trying to stabilize and preserve a portion of it, he said, but that’s another decision for port and city officials to make. Constant said in an interview after the meeting that the Assembly committee will hold weekly meetings at least through March to get perspective on the current plan from all the port’s stakeholders. Keeping on the current construction schedule won’t be as important as settling on an appropriate scale project, he said. “At $2 billion there’s utter shock in every direction and very little appetite for that type of project,” Constant said. However, port officials say the current maintenance program for badly corroded piles can keep the port open for about another 10 years before operations will have to be curtailed for safety reasons, meaning much schedule slippage would just add another challenge to the work. The full Assembly must approve any major port changes. PND’s proposals will be considered, but the company has a high bar to clear given its history at the port, according to Constant. “They really have to make their point; it doesn’t mean we shouldn’t listen,” he said. “No decision is going to be made based on what PND tells us.” ^ Elwood Brehmer can be reached at [email protected]

Tax credit lawsuit appealed to Supreme Court

The State of Alaska’s plan to pay off more than $800 million in oil industry tax credits by selling bonds is on its way to a final judgment. An attorney for former University of Alaska regent Eric Forrer, who sued the state challenging the constitutionality of the bond plan last May, appealed the case to the Alaska Supreme Court Feb. 21. Superior Court Judge Jude Pate dismissed Forrer’s lawsuit Jan. 2 in a lengthy and long-awaited ruling. Forrer’s lawyer, longtime Juneau attorney Joe Geldhof, contends Pate not only misconstrued the Alaska Constitution three times in his ruling, but also that Pate, a fairly new trial court judge, misapplied procedural court standards in granting the state’s motion to dismiss. Geldhof noted during the court proceedings that state attorneys never responded to Forrer’s initial complaint and instead filed a detailed motion to dismiss the case that Pate then treated as a motion for summary judgment. Pate concluded in his ruling that Forrer failed to state a claim upon which the court could grant relief on the grounds that House Bill 331 “passes constitutional muster.” Forrer alleges the plan to sell the “tax credit bonds” falls outside the tight sideboards the Alaska Constitution puts on the state’s ability to incur debt. He also argued in interviews and through court filings that the plan amounts to a de-facto dedication of General Fund money to pay the bond debt because not making the payments would have grave consequences on the state’s credit rating and future finances. The state Constitution generally limits the Legislature from bonding for debt to general obligation, or GO, bonds for capital projects, veterans’ housing and state emergencies. In most cases the voters must approve the GO bond proposals before the bonds are sold. State corporations can also sell revenue bonds, but those are usually linked to a corresponding income stream and only obligate the corporation to make payments, not the State of Alaska as a whole. The tax credit bond plan would have the Department of Revenue set up the Alaska Tax Credit Certificate Bond Corp. specifically for the purpose of issuing the 10-year bonds. State attorneys contended the plan is legal because the bonds would be “subject to appropriation” by the Legislature, which the bond buyers would be aware of, and therefore would not legally bind the state to make the annual debt payments. Department of Law spokeswoman Cori Mills wrote via email that the state stands by Pate’s ruling but has not yet received a notice of appeal in the case; and attorneys handling the case have not decided whether the state will request expedited consideration. The five-justice Supreme Court could remand the case back to Superior Court if it concludes Pate misapplied the procedural standards or it could acknowledge the alleged missteps but chose to focus on the constitutional arguments. Geldhof stresses that Forrer is most concerned that a ruling in the state’s favor will give local governments in the state — often with less public oversight than state officials — a green light to borrow irresponsibly, particularly in a time when state funding support is dwindling. The lawsuit has prevented the state from selling the first tranche of bonds, which was initially planned for last August. Gov. Michael J. Dunleavy proposed $254 million for tax credit payments with Alaska Industrial Development and Export Authority funds in his budget released Feb. 13 as it is unlikely the suit will be resolved before the 2020 state fiscal year begins July 1. Elwood Brehmer can be reached at [email protected]

Fitch, Slope leaders weigh in on local revenue proposals

Gov. Michael J. Dunleavy’s plans to pull back the State of Alaska’s financial support to local governments could hamper the ability of cities and boroughs to finance future projects, according to a Fitch Ratings brief issued Feb. 20. To resolve the state’s roughly $1.6 billion budget deficit without tax increases or changes to the Permanent Fund dividend program the Dunleavy administration is proposing combination of deep budget cuts and ending several revenue sharing programs with local governments. One of the largest cuts would be to state education funding. Dunleavy’s budget calls for a $269.4 million cut to the state’s formula funding program to school districts as well as repealing a $30 million one-time, forward-funded appropriation boost to districts passed last year for the 2020 fiscal year. Fitch analysts speculate that the education cut, equal to about one-quarter of current General Fund support to districts, could require local governments to make up the shortfall through increased local taxes or by shifting funding away from other programs or projects. The administration is also seeking a statutory repeal of the state’s program to reimburse districts for a large portion of their school construction bond debt obligations. Doing so would save the state roughly $100 million per year, according to the Office of Management and Budget. In 2015 the state put a five-year moratorium on sharing the burden of school construction bonds with local governments; the latest proposal would cut state aid for bonds sold prior to 2015. The moratorium is set to end in July 2020 when the state would resume funding 40-50 percent of school bond debts depending on the size of a given community. “The loss of school bond reimbursement would prompt immediate increases in debt service property tax rates that support schools’ unlimited tax general obligation (GO) bonds,” Fitch states. “Higher debt service tax rates could make it more difficult to garner public support for tax increases that would be needed to offset losses in operating revenues and could decrease public appetite for school bonds to meet ongoing capital needs.” A Feb. 21 Legislative Research Division analysis concludes that the Municipality of Anchorage would have to increase property tax rates by 25 percent to generate enough additional local funding to offset the proposed state education reductions. Many legislators critical of parts or all of Dunleavy’s budget have characterized it as a cost-shift from the state to cities and boroughs The rating agency also notes the cumulative cuts could further strain the state’s economy, particularly in rural areas where government is often the largest employer. Additionally, the administration’s plan in Senate Bill 57 to repeal a law allowing cities and boroughs to assess oil and gas property taxes on exploration and production facilities would pull another roughly $420 million per year from local jurisdictions into state coffers to reduce the deficit, according to fiscal notes accompanying the legislation. The vast majority of that money, about $372 million in 2018, would come from the North Slope Borough. The City of Valdez — with the end of the Trans-Alaska Pipeline System and Alyeska Pipeline Service Co.’s marine shipping terminal — the Kenai Peninsula and Fairbanks North Star boroughs would absorb most of the remaining reductions. While the state conducts oil and gas property tax assessments, local governments are able to apply their mill rates on the state’s assessments to collect their portion of oil and gas property taxes. Companies then use the local tax payments as credits against the state’s 20-mill oil and gas property tax rate. The oil and gas property tax revenue accounted for 86 percent of the North Slope Borough’s total revenue in 2018, according to Fitch, which currently gives the borough an “AA” credit rating with a stable outlook. “If passed, the change in tax law would likely prompt a significant downgrade in the rating, absent offsetting policy actions to provide alternative revenues to the borough,” Fitch states, while also noting the North Slope Borough had $162.7 million in general obligation debt at the end of the 2018 fiscal year. A spokesman for Dunleavy did not respond to questions about the property tax plan in time for this story, but OMB officials have said the North Slope specifically could rely on its $708 million endowment fund and prospective federal grants from oil development in the National Petroleum Reserve-Alaska to offset the tax revenue loss. According to Fitch, it’s unlikely the borough would be able to cut expenses enough for other revenue streams to offset the potential loss. The North Slope Borough and the usually quiet Arctic Slope Regional Corp. put out a joint statement Feb. 21 rejecting the administration’s oil and gas property tax plan. ASRC President Rex Rock Sr. said the tax stream has supported “everything from public safety in our communities to even reliable power and heat” over more than 40 years. “These are services, let’s not forget, that are not provided by the state,” Rock added. “Trying to balance the budget on the backs of the Iñupiat people across the Arctic Slope is a wrong-sided attack on our region.” NSB Mayor Harry Brower Jr. said borough residents have generally supported responsible resource development because of the economic benefits it brings them. “As written, Senate Bill 57 makes us question that support. Is this what the governor is intending to do with this legislation — pit the Iñupiaq people of the Slope against industry?” Brower questioned. According to Fitch, the rating agency will follow the progress of SB 57 and affected local government ratings changes could be made if it appears likely to pass. Elwood Brehmer can be reached at [email protected]

Span Alaska to construct new freight terminal

One of Alaska’s largest shipping companies is investing in the state. Span Alaska Transportation Inc. announced Feb. 15 that it is constructing a new, 54,000 square-foot freight terminal in West Anchorage that will serve as the company’s primary service center. Span bills itself as the largest freight forwarder and less-than-container load shipper in the state. The company, which was purchased by integrated shipper Matson Logistics in 2016, handles roughly 180,000 shipments annually totaling more than 400 million pounds, according to President Tom Souply. “Anything that has a need to get from the Lower 48 up in to Alaska — on the average we’re running 160 to 200 containers per week to the Alaska market,” Souply said of the freight Span handles. The new facility will allow Span to consolidate its operations and provide greater efficiencies. Span currently works out of two South Anchorage warehouses. Souply said the new building, located off Electron Drive near Chugach Electric Association’s Southcentral Power Project, exemplifies Span’s commitment to the state. “We’re in it for the long run here, we really are. We’ve been in Alaska since ’78; 40 years we’ve been doing this. We know there’s going go to be highs and lows and we’ve all come together as a community here over the last three years dealing with the recession,” Souply said. “We’re really bullish on what we’re doing here. Our commitment here is a major commitment to Alaska, to our customers and to our employees.” Foundation work has begun and vertical construction is expected to start in the coming weeks. All 80 current Span employees will move into the new building once it is complete; and that is scheduled for the fourth quarter of 2019, according to Souply. “As the economy continues to recover we will have the capacity to grow our business which will allow us to add additional employment,” he added. The company declined to disclose a price on the project, which is being led by Anchorage-based Watterson Construction. Municipal records list the roughly 16-acre parcel as currently being appraised at nearly $6.4 million. Municipal officials have told the company “it’s the largest non-government related project for 2019” in Anchorage, according to Souply. In addition to bringing all of its work under one roof, which will help avoid duplication, he said the new facility will have an 8,100 square-foot covered area to protect flatbed freight loads, a larger loading dock and improved security. “We’re going to have everything we need to be as efficient and effective as possible, including creating a four-bay vehicle maintenance shop that will allow us to be very nimble when it comes to maintenance and repairs. We’ll be able to do that on-site; that’s a big piece for us,” he said. Elwood Brehmer can be reached at [email protected]

Capital budget trimmed as oil tax credits total $254M

Gov. Michael J. Dunleavy’s operating budget proposal has captured the attention of the state, but his capital budget is also smaller than in years past. At $95.7 million in unrestricted General Fund dollars, the discretionary spending portion Dunleavy’s fiscal year 2020 capital budget is the smallest in years. More than $61 million of that would go towards generating federal matching funds, mostly from the Department of Transportation for highway and airport maintenance programs. The administration’s capital budget plan totals about $1.2 billion when the unrestricted funds are combined with just more than $1 billion in federal money and $114 million in designated funds, which often consist of fees or other revenue sources directed for a specific purpose. The current capital budget for the 2019 fiscal year that ends June 30 spends more than $1.4 billion from all funding sources. Dunleavy’s budget cuts funding to the state’s Bulk Fuel and Rural Power Systems upgrades programs, which are managed by the Alaska Energy Authority. The rural energy programs have long been capital budget staples. They provide funds to AEA for diesel fuel storage facilities and electric powerhouse repairs and replacement in communities that lack the economic base to pay for the basic infrastructure upkeep. Former Gov. Bill Walker’s capital proposal — submitted by the Dunleavy administration shortly after the leadership transition in December to meet a statutory requirement for a budget plan — called for a total of $10.5 million in general funds for the Bulk Fuel and Rural Power Systems programs. That state money would have been matched with $20 million in federal grants from the Denali Commission. The latest budget also eliminates the Alaska Housing Finance Corp.’s home Weatherization Program offering financial assistance for qualifying low- and middle-income households to increase the energy efficiency of their homes. It was funded with a $6 million split of state and federal money in the fiscal 2019 budget, but also was not in the Walker administration’s proposal. The Alaska Travel Industry Association is allocated $7.4 million in general funds; the same for the Department of Education’s K-12 Major Maintenance program. Federal disaster relief funding of $4.5 million for the 2016 Gulf of Alaska pink salmon run also arrives via the capital budget. On other fisheries projects, the budget contains $1 million for a Cook Inlet stock assessment; half of what the Walker administration had proposed, and cuts a $1.85 million allocation for Chinook salmon research. The Walker administration’s Arctic Strategic Transportation and Resources, or ASTAR, initiative that seeks to develop a network of basic roads across the western North Slope would get $2.5 million under Dunleavy’s plan. The University of Alaska would receive $5 million for deferred maintenance. A $20 million appropriation for Port of Alaska repairs that Anchorage officials were hopeful for is not in the capital budget. The state approved $20 million for the beleaguered piece of critical infrastructure last year. Oil tax credits The Dunleavy administration is proposing to fund an additional $84 million in oil and gas tax credit payments in 2019 and $170 million for 2020. The money would come via the Alaska Industrial Development and Export Authority’s “excess funds,” according to OMB Policy Director Mike Barnhill. Barnhill told the Senate Finance Committee that the Revenue Department did a liquidity analysis of AIDEA’s funds and concluded the authority had undesignated money available. The $84 million is in addition to a $100 million backstop appropriation the Legislature made last spring to pay credits this year. It would bring the total 2019 credit payments to the statutory minimum calculation of $184 million based on how the department interprets the law. Some Democrat legislators insist the minimum payment should be much lower due to a different reading of how the state’s payment formula should be used. The $100 million was recently disbursed to credit holders, Barnhill said, after the state’s plan to bond for nearly $1 billion to pay the credits off in one lump sum was challenged in court. That case, with the state’s position of the bond sale being legal upheld in Superior Court in December, is expected to reach the Supreme Court. The $170 million meets the minimum payment for 2020. Democrat senators on the Finance Committee were critical of the plan for paying the credits contrasted with proposing significant cuts to education funding. Sen. Bill Wielechowski, D-Anchorage, noted that the 2019 appropriation may be an item for the supplemental budget and emphasized his contention that the state technically does not need to make the payments because they are “subject to appropriation” by the Legislature, according to the law. Barnhill said the credits are regarded as debt that must be paid even when the state is in a major financial bind. “It is important for the state’s credit story and reputation that we manage our debts appropriately,” he said. AIDEA spokesman Karsten Rodvik said the money would come out of the authority’s Revolving Fund and officials are discussing the plan with the governor’s office. The authority, with a $1.3 billion net position, has several real estate development and business loan programs in which it partners with private lenders. AIDEA also returns a dividend to the state each year; it is pegged at $10.3 million for 2020. Elwood Brehmer can be reached at [email protected]

Health care officials alarmed by proposed Medicaid cuts

Gov. Michael J. Dunleavy’s plan to cut upwards of $270 million from the state’s Medicaid budget would drastically reshape Alaska’s health care system and be a major blow to the broader economy, according to state health care leaders and economists. In his fiscal year 2020 budget released Feb. 13, Dunleavy is proposing to reduce the state’s portion of Medicaid funding, which is expected to be $677 million in the current 2019 fiscal year, by nearly 40 percent based on detailed Department of Health and Social Services budget documents. Dunleavy has pledged to eliminate the state’s $1.6 billion budget deficit without new taxes while restoring Permanent Fund dividend payments to their statutory calculation. The PFD payment for the upcoming budget year is expected to be about $3,000 per Alaskan for a total appropriation of roughly $1.9 billion. “This budget is going to impact all Alaskans; it’s too big not to,” Dunleavy said during a Feb. 13 press conference to announce his budget plan. Dunleavy has repeatedly said he wants to reduce state spending on Medicaid to a sustainable level. As of October, 210,276 Alaskans were enrolled in Medicaid or the Children’s Health Insurance Program, or CHIP, according to the Centers for Medicare and Medicaid Services, or CMS. Administration officials said immediately after the budget was released that they are proposing a $225 million cut to the state’s Medicaid appropriations. The $225 million figure is also cited in a 27-page informal budget summary provided by the governor’s office. That document also lists an additional $27 million savings by cutting Medicaid coverage for adult dental services, which is the optional service the state covers but one health care providers say is an important primary care service that can prevent more costly emergency procedures. A more detailed breakdown of the Department of Health and Social Services budget proposal shows a $271 million general fund cut to the state’s Medicaid services program. Office of Management and Budget Policy Director Mike Barnhill said in a press briefing following the release of the budget that most of the Medicaid cuts would come through reducing provider reimbursement rates. Barnhill emphasized that the administration is not proposing to eliminate coverage for anyone currently enrolled in the state’s Medicaid program; it’s working with the federal CMS on new ways of providing Medicaid coverage at a reduced cost to the state. “Alaska reimburses providers under the Medicaid program at a higher rate than any other state in the country so we’re taking a close look at that and then we’re looking at different ways of treating and providing access to the expansion (Medicaid) population for medical care,” Barnhill said. State Budget Director Donna Arduin said DHSS Commissioner Adam Crum is also working on legislation “to revise our entire Medicaid program.” A spokesman for DHSS referred a request to interview Crum on potential Medicaid policy changes to a phone line in OMB dedicated to press inquiries about the budget. The phone line was unattended. Medicaid reimbursement rates are set through regulations, meaning a rate reduction is one way the administration could potentially cut the Medicaid budget without the getting legislative approval needed to make major changes to the program. However, state Medicaid funds are tied to large sums of federal money. Costs from traditional Medicaid recipients are split 50-50 by the state and the federal governments, while Medicaid expansion recipients are covered 93 percent by the federal government and 7 percent by the state this year. The Medicaid expansion cost share will shift to 90 percent federal and 10 percent state for calendar year 2020 and beyond. Alaska Native Medicaid claims are paid 100 percent by the federal Indian Health Service for care provided at a Tribal health facility. According to the Legislative Finance Division, overall spending on Medicaid in Alaska has increased from $1.7 billion to more than $2.3 billion since fiscal year 2015, but the state’s portion of that has actually gone down from $724 million in 2015 to $677 million, which includes a $15 million supplemental budget request, in the current fiscal year. Those state savings have largely been attributed to shifting state costs to the federal government through Medicaid expansion and the Medicaid reform package the Legislature passed in 2016 with broad bipartisan support. Arduin said Feb. 13 that it’s unclear at this point exactly how much federal money the state would forgo with a major cut to the Medicaid program because the underlying details of the state’s plan are still being worked out. The department-specific breakdown of the budget lists a $477 million reduction in federal funding as a result of the proposed state cuts. Alaska State Hospital and Nursing Home Association CEO Becky Hultberg said in an interview the approximately $750 million cumulative cut to Medicaid funding would “fundamentally restructure” Alaska’s health care system. Hultberg was a commissioner of Administration under former Gov. Sean Parnell’s administration. While the proposed cuts may improve the state’s bottom line, they would be extremely damaging to hospitals, particularly rural hospitals, if they are implemented through provider reimbursement rate reductions, according to Hultberg. “There’s really no way that the health care system can absorb a cut of this magnitude and not look dramatically different. I feel very confident in saying we will have hospital closures. Our rural communities are particularly vulnerable, but even our mid-sized communities — hospitals outside of the Anchorage and Mat-Su area — don’t have big margins,” she said. “It means services and facilities won’t be available for everyone.” Alaska health care providers are reimbursed by Medicaid at some of the highest rates in the country because the state’s reimbursement rates are set to cover the cost of the service provided — which in Alaska are the highest in the country — while other states pay less than the cost to cover individual services, Hultberg said. Longtime Alaska economist Jonathan King wrote via email that the proposed cuts would likely result in at least 8,000 job losses in the state. Medicaid spending has helped insulate the health care sector from Alaska’s ongoing recession that has touched nearly every other industry in the state. According to King’s calculations, Alaska would lose one job for every $33,000 it doesn’t spend on Medicaid given the significant federal match every state dollar generates. The Hospital and Nursing Home Association also commissioned King to analyze the economic impacts of repealing Medicaid expansion in Alaska. Many political observes anticipated the Dunleavy administration would propose repealing expanded Medicaid coverage in the budget plan, but that proposal has not been made and the governor’s authority to do so unilaterally has been questioned by legislative attorneys. The state reduced Medicaid payment rates for professional services and hospitals by 5 percent to 8 percent in 2017. Further drastic reductions to provider payment rates would also result in fewer physicians and health care facilities accepting Medicaid patients, Hultberg added. “I think there’s either a lack of understanding of reality (by the Dunleavy administration) or a willingness just to make Alaska a poorer and less safe place,” Hultberg said. She added that while provider reimbursement rate changes can be done through regulation, CMS must also sign off on the reductions. “Essentially, you could cut provider rates to 25 percent and have a Medicaid program but no providers that take Medicaid and CMS won’t let you do that,” Hultberg said. “They don’t have a plan,” she concluded. Alaska Regional Hospital CEO Julie Taylor said significant Medicaid cuts would just exacerbate the current challenges Alaska’s health care system faces: extremely high costs and a lack of providers. Alaska Native Tribal Health Consortium CEO Roald Helgesen suggested that provider rate cuts could lead to higher local taxes in areas with community-owned hospitals if the rates don’t at least cover procedure expenses. “It’s a huge cost-shift to the community from the state,” Helgesen said, a view that has been echoed by many critics of varying aspects of Dunleavy’s budget plan. “What’s been presented just doesn’t make sense,” he added. A Legislative Research Services report dated Feb. 13 and conducted for House Democrats on the impacts of repealing Medicaid expansion and thus pulling $420 million — roughly 90 percent of which is federal money — out of the health care sector could lead to a 17 percent increase in private insurance premiums across the state. That’s because much of the care provided to the roughly 50,000 Alaskans covered under the expanded class of Medicaid recipients would then go uncompensated and hospitals would seek to cover those costs through other patients. “Big cuts to Medicaid don’t just affect Medicaid; they affect what the system looks like and they affect people with private insurance because when you consider health care as a system and you extract that much money from the system without a glide path there will be significant consequences to everyone,” Hultberg said. “That includes people who might feel like this doesn’t affect me because I have (private) insurance.” Other Alaska health care leaders have emphasized a similar sentiment. Alaska Primary Care Association Policy Director Jon Zasada said his organization is focused on the apparent consolidation — based on budget documents — of behavioral health, senior and disability services into the general Medicaid Services classification. APCA officials want to know if it is simply a budget reporting technique or an attempt to change or repeal the services. Zasada noted that Medicaid reimbursement rates for the federally qualified health care centers the APCA represents are calculated differently than rates for hospitals or private practice physicians; however, those rates have been frozen for four years, he added. APCA officials are also concerned about the cut to optional adult dental care coverage. Zasada said eliminating coverage for a preventative care program often just leads to more costly emergency care, which would then be covered by emergency service Medicaid funding. Critics of Alaska’s Medicaid program have often highlighted the fact that the state provides coverage for more optional services than nearly every other state as well. Elwood Brehmer can be reached at [email protected]

Study: Steep tariff hikes necessary for Port of Alaska repairs

Import charges on levied on basic commodities at the Port of Alaska could increase five-fold or more if the Municipality of Anchorage is forced to rebuild decrepit shore side infrastructure on its own dime, according to an analysis released Feb. 14. The analysis considered how much tariffs on refined petroleum products and cement would have to be raised to cover the cost of borrowing $200 million to pay for replacing the port’s petroleum and cement terminal. It was prepared by the Virginia-based economic consulting firm Parrish, Blessing and Associates Inc. and presented at a Port Commission meeting. Municipal Manager Bill Falsey said in a follow-up interview that the municipality will have to sell $200 million in revenue bonds in less than a year to stay on the construction schedule for the petroleum cement terminal. “I think we have to have some credible way to borrow approximately this amount of money by the year’s end or we can’t procure construction for 2020 so then we would be in a situation where we would have half constructed the petroleum cement terminal,” said Falsey, who discussed the situation at the Port Commission meeting. “How long could we have a half-constructed petroleum cement terminal in the water? I don’t know the answer to that but it’s certainly not anybody’s desire.” The cost for a new petroleum and cement terminal has been pegged at $223 million. About $20 million in funds left over from prior port construction appropriations would fund part of the work and the bonds would pay for the rest, Falsey said. The terminal must be done first in order to free up space for when the cargo docks are rebuilt and must be done while they are still being used by TOTE Maritime and Matson Inc., which provide container and roll-on, roll-off shipping services to Anchorage, according to Port Director Steve Ribuffo. It is also on the oldest part of the dock structure, he said. Some of the pile-supported docks have been in place since 1961 and have far exceeded their initial 35-year design life as the saltwater they stand in has gradually taken its toll and corroded the steel support pilings to the point where many resemble Swiss cheese. The port currently charges a tariff of 15.7 cents per barrel on petroleum products, which breaks down to 0.38 cents per gallon. Those rates would need to be increased by 45 percent per year until 2023 — when they would reach $1.01 per barrel and 2.4 cents per gallon — to cover the debt service on the bonds, according to the analysis. For cement, the tariff is currently $1.61 per ton. It would similarly increase 39 percent per year and hit $8.30 cents per ton in 2023. Falsey said the municipality believes the market price for cement is about $155 per ton now. The tariff rates would stabilize after 2023, according to Ribuffo. The bonds would be 40-year revenue bonds calculated at 4.1 percent interest, he said. State lawmakers approved $20 million for the port last spring, but the prospect of additional direct state appropriations is bleak given the state's ongoing budget deficits. Falsey said the state could either approve a general obligation bond sale to pay for the work and avoid the tariff increases or agree to backstop the port revenue bonds. The state’s guarantee would likely lower the interest rate on the debt somewhat. Federal funding has also been sought — although unsuccessfully to this point — given the Department of Defense classifies Anchorage as a strategic defense port and therefore requires large amount of dock space to be available for rapid deployments from Alaska’s military installations. Municipal officials hope an ongoing lawsuit agains the U.S. Maritime Administration, which oversaw the first, failed port construction project, will result in money for the current work. Attorneys for the city have said they are seeking upwards of $300 million from the federal government in the lawsuit. The tariff plan is a way to limit cost increases to pay for the petroleum and cement terminal to the customers that use it; similar plans could be used when the rest of the port’s infrastructure is finally reconstructed. Petroleum and cement tariffs and other sources generated $14.6 million for the port in 2018 and the rate hikes would lead to more than $24 million in annual revenue by 2023 if they don’t drive business away. Falsey said port and city officials will spend the next month talking with the customers that use the terminal to try and determine what impacts the tariff increases could have on business. The Port Commission is tentatively set to make its recommendation on the tariff changes to the Anchorage Assembly in mid-March; the Assembly would make the final decision. The ultimate fear is that the changes could slow the petroleum and cement business at the port to where there wouldn’t be enough revenue generated to pay for the bonds. The prospective tariffs could also have larger implications across the state economy from higher fuel prices, such as deterring cargo business at Ted Stevens Anchorage International Airport. Cargo carriers flying from Asia to the Lower 48 stop in Anchorage — and make it one of the busiest cargo hubs in the world — because it is slightly cheaper for them to haul more cargo and refuel here than it is to carry more fuel and fly over Alaska. Cargo industry experts say the cost difference is usually pennies on the gallon for jet fuel, so the potential impacts of the tariff changes is unknown at this point. “It’s pretty difficult to model that and we don’t have access to that kind of information that we would need to know,” Falsey said of how the suggested tariffs would impact some port customers and the broader economy. He said city officials are hopeful those customers will be forthcoming with the information they need to make an informed decision and help them minimize the impact of the tariff changes if they are made. Calls to several of those customers were not returned in time for this story. Regardless of those impacts, the work needs to be done, Falsey stressed. “Our view is that we need to have the new petroleum cement terminal and we are increasingly uncomfortable with the terminal we have rotting away into the ocean,” he said. The first port rehabilitation project, Port of Anchorage Intermodal Expansion Project started in 2003, was intended to greatly increase the size of the port but it came to a halt in 2010 after extensive damage to the Open Cell Sheet Pile being installed to support the new docks was discovered. That work, much of which has been or will be removed as part of the new plan, cost roughly $300 million from a consolidated pool of local, state and federal dollars. There was $128 million left when the expansion project stopped and Ribuffo said there is about $60 million left now after years of design work and some small-scale rehabilitation. The remaining money is being spread amongst the several phases of the port modernization project, he added. Anchorage officials for years have been trying to gain support from state officials and lawmakers to help pay for the port work. The Anchorage Assembly officially changed the name of the city-owned port in 2017 from the Port of Anchorage to the Port of Alaska in an attempt to highlight its importance statewide and possibly drum up support for funding the rebuild. It’s estimated that 90 percent of the goods destined for delivery across mainland Alaska are imported across the port’s docks. It is the epicenter of logistics and one of the foundational elements of the state’s economy. Funding for the port modernization project has been the municipality’s only capital request to the state Legislature since Mayor Ethan Berkowitz took office in 2015. Those requests have recently been in the $300 million range, although cost estimates for the total port modernization project have gone from about $500 million in 2014 to nearly $2 billion currently. The most recent cost projections from private consultants are for a 75-year design life and constructing one cargo dock to withstand shaking at least as severe as the 9.2 magnitude 1964 earthquake, according to Falsey. Those parameters were chosen in 2014 and are still flexible given design work on the rest of the port is ongoing. “We are going to pick up all of those assumptions in the face of now this revised $2 billion number and say, ‘Is this what we can afford? Is this what we want? What do those assumptions cost us?’” Falsey said. Elwood Brehmer can be reached at [email protected]

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

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

UA braces for budget cuts

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

Murkowski leads major lands bill through Senate

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

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

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

Fund value drops 3.19% in first half of FY19

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

BP aims for 40 more at Prudhoe

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

ConocoPhillips turns first annual profit since 2014

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

Construction spending forecasted to rise 10%

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

DEC nominee: Experience a plus, not a problem

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

Alaska Air Group reports drop in annual income

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


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