Comments for State Chamber Board Meeting - March 11

PRIVATE OR PUBLIC?

PROBLEMS WITH THE PRESENT RAILROAD STRUCTURE

by Representative Terry Martin

• To be or not to be--What should the Alaska Railroad be? Private or public? It cannot be both---or can it be?

• It is imperative that we review the history of the transfer of the railroad from the federal gov’t to the state. When one puts the present debate in the correct historical context, it is clear that history supports privatization.

• The Alaska Institute for Social and Economic Research issued a report in 1981 that clearly concludes that privatization is the best option for the railroad.

• Legislative record clearly shows the people of Alaska favored privatization of the line after acquistion from the federal gov’t.

• The original state legislation required this transitional agency to seek to offer the railroad for sale to at least three buyers every five years and report back to the legislature. This provision was changed in 1988, at the request of the ARRC. Thus, the burden of privatizing the line was handed off to the legislature; however, even the CEO agreed at that time that privatization would be the natural future for the survival of the railroad.

• The Alaska Railroad Transfer Advisory Commission, in 1983, held hearings throughout the state to find out what the people wanted to do with the railroad. Their number one recommendation was that "the railroad should eventually be owned and/or operated by private industry." Their report had the support of the State Chamber of Commerce at that time.

• Legislative intent language directed railroad corporation to stick to operating and managing the transportation line and not use its subsidized position to compete unfairly with private business.

• Clearly, the Legislature and the public were in a feverish mood to get the railroad and let private industry make it a valuable asset of the state, to the point where we ignored the warnings of negating our constitutional responsibility.

• Three years ago, legislation was introduced that would recognize the state’s fulfillment of a commitment made in 1984 to the people of Alaska and the federal government, who at that time desperately wanted to get rid of an albatross, known as the Alaska Railroad, from around its neck. In January 1995, we quietly celebrated our fulfullment of that obligation to keep the railroad running for 10 years.

• Now is the time to realize what our investment of more than $34 million for the railroad got us. Did the state get its money’s worth?

• Not until we transfer the approximately 38,000 to 43,000 acres of land to the State of Alaska. If you consider only the land aspect, I would say it’s a good investment, for some of the most valuable land in the heart of Alaska’s growth regions. But it is of little value when it remains in the federal domain.

• Last November, professional railroad property consultants told the LBA committee that we are losing millions of dollars each year we delay transferring the land.

• Events of the last 3 or 4 years have made it quite clear that the public is becoming more and more concerned about the in-house dealings of ARRC. The audits performed for the LBA committee pointed out where the problems lay.

• How many here are in private business? Would you like to be exempt from paying corporate income tax? How about property taxes? Fuel taxes? Do you think it would be a help to your business not to have to pay vehicle license fees? Would you like to have a few thousand acres of state land to provide a subsidy for your business?

• If you live in Anchorage, would you like to be exempt from the Municipality’s zoning code? Here is a great example of how quickly the railroad can change from its private business hat to its public corporate hat. ARRC is accused of no less than eight separate zoning law violations and its defense is: 1) talk to the leaseholders, and 2) ARRC is a state agency and therefore exempt from zoning regulations. How many private business people here think they could be more successful in their businesses if they could ignore zoning regulations? Government agencies should not be exempt from regulations governing public nuisances and hazardous conditions.

• Ever since the effort for privatization was given serious attention last session, all across the state we have heard the cry from at least two members of the ARRC board to "keep politics out of the railroad." This is truly laughable, considering those shouting the message in every hamlet, local assembly and local chamber of commerce in the state are. . .political appointees, and in fact, former politicians from the highest level of state politics.

• The unbelievable hypocrisy of this effort to "keep the railroad clean of politics" is explicitly demonstrated in a draft letter recently written for Gov. Knowles, apparently by the current chairman of the board. For your own evaluation, have had the letter copied, along with my response to Gov. Knowles.

LET’S TALK ABOUT LEGAL ISSUES:

CONSTITUTIONAL & STATUTORY

CORRECTIONS TO BE ACHIEVED BY BRINGING THE RAILROAD UNDER THE EXECUTIVE BUDGET ACT

• This is the aim of the railroad bills the Legislature is currently considering.

• The most important issue today is to obey the constitution and the statutes of the State of Alaska

• Public confidence in the railroad, if there ever was any, has greatly eroded due to ARRC failure to comply with the constitution and statutory requirements, especially in the area of the disposal of publically-owned natural resources.

• On numerous occasions, the railroad has failed to follow applicable provisions of state law and the constitution at Article VIII, Section 10, requiring prior public notice and following required public procedures for the disposal or leasing of state lands or interests therein.

• The railroad has also failed to meet requirements for issuing contracts, such as are found in AS 36.30.015(e) , or following procurement procedures that are "substantially equivalent," required under the railroad’s procurement rules at section 2000.1(4).

• According to our legal services division--and the attorney general--the railrod enabling legislation in 1983 went too far in relieving the legislature of its oversight responsibilities.

• The director of legislative legal services writes, "The federal Alaska Railroad Transfer Act contains a provision dedicating revenue generated by the railroad to railroad purposes. I am not convinced that a dedication of revenue, however valid under Aricle IX, sec 7, places the revenues outside of the appropriation requirement of Article IX, Sec 13. It is possible that a court could conclude that, while revenue may be used only for railroad purposes, before it is so used it must be appropriated. In short, the legislature may still have the right and constitutional obligation to review proposed railroad expenditures and determine whether money will be spent for a particular railroad purpose, rather than another railroad purpose, and in what amount."

• It is also important to note that when the law dedicates railroad revenues to railroad and related purposes, this does not open the door for the railroad to become the state’s philanthropic giver. The former CEO, for example, had pledged $100,000 to the Native Heritage Park in Anchorage. The ARRC is in the second year of a five-year, $20,000 per year donation to the Seward Sealife Center. This is just part of the reason we are concerned about ARRC’s improper use of state resources.

• The LBA audits done last year clearly show where the railroad is not conforming to the open meeting act or statutory requirements for selling or disposing of state assets. That is, a contract such as the one with the Flamingo Brothers to remove gravel from state lands should have been negotiated in the open. And the leasing or selling of lands must be accomplished through an open bid process.

• These problems can be corrected by putting the railroad under the Executive Budget Act, if we choose to keep the railroad. [ AD LIB: SHOW HOW OTHER STATE CORPORATIONS ARE TREATED IN THE FRONT OF THE BUDGET].

• In reality, this would amount to a two or three line item in the Governor’s annual budget submission. It would appear either in the front section of the budget or on one page of the Dept. of Revenue budget along with all the other public corporations, such as AHFC or the Permanent Fund Corporation.

CONCLUSION

• Over the past 13 years, the Alaska Railroad has lost a most important element of the free enterprise system, and that is "trust." "Capitalism is a moral system because it is based on trust," writes Malcolm Forbes in a Sept., 1993 article titled, "Three Cheers For Capitalism."

• Over the years, legislators have heard numerous stories of favoritism involving the railroad, and they continue today, as documented in reports done by the LBA committee, plus others we chose not to investigate.

• From what I have seen, heard, or read in the last three years about the condition of the railroad, I would have to conclude that its tracks are weak and its bridges, some of which are more than 70 years old, are seriously in need of repair.

• Where is the financial backing to come from? The state treasury? The federal highway trust fund (which would take away from our other transportation system)? Can the railroad take on more debt without jeopardizing the state’s financial well-being? It was debt-free when we got it from the federal government.

• Or can we entice private enterprise to take the burden off the state’s future financial obligations?

• Keeping the railroad in its present state of limbo severely hampers individual innovation, creativity and upward mobility. The relatively little recent expansion of the railroad has been done through major government expenditures, such as the Seward coal-handling facility (and the loss of the five cents per ton state royalty); the Healy minemouth generation facility at $125 million; state subsidies to Mapco; and the $20 million over the last two years quietly given by the federal government.

• This unending subsidization is the very reason why the federal government wanted to get rid of the railroad. And yet, the criticism we hear so loudly today is to keep government and the Legislature out of this private business.

OTHER TIDBITS OF NOTE

(Not delivered at State Chamber due to a lack of time)

• Since the present railroad board began dedicating a high percentage of its time and energy to bringing the issue to the public, I and other elected officials have been receiving many interesting tidbits of disturbing information about the past and present use and abuse of state properties along the railroad line, some for personal benefits and some to help associates. These include:

• Engineer’s report--A very good thumbnail sketch of the history of the railroad-- "The Reality and the Future" -- which you can pick up in the back of the room. This was written by a railroad engineer with more than 22 years experience and it pointedly covers the escalating maintenance neglect and resulting environmental impacts.

• Railroad insiders have expressed concerns about ARRC commitments to Mark LoPatin -- Does he have exclusive rights for use of the original headquarters building? -- The $500,000 grant he received from ARRC (have we gotten anything from this investment?) -- Those who object to privatization warn us that the railroad could fall into Outsiders’ hands, yet Mr. LoPatin calls Minnesota his home. Has the railroad renewed its contract with Mr. LoPatin?

• How much severence pay did Frank Turpin receive when he left to take another high-paying, government position? What retirement benefits is he receiving? What severance pay and retirement benefits did Mr. Hatfield receive?

• How about the Flamingo Brothers gravel contract -- Who are these brothers? There are no such brothers--the name Flamingo doesn’t even appear in the Anchorage telephone book. So are they from somewhere in Florida? And why did the railroad believe it was okay to make a deal with them that ignores the public process that is supposed to control the disposal of state assets?

• Is the railroad union preparing to sue ARRC and the State of Alaska for a breach of contract, specifically for the distribution of railroad profits?

• And what about the aborted Crowley Maritime contract? -- We lost millions of dollars that could have been put to better use maintaining the railroad line.

• The three major users of the railroad--two of which are wholly-owned, out-of-state corporations--are heavily subsidized and in reality exercise complete control of this government-owned transportation system.