Alaska News

Goose Creek prison hits speed bump

Water and sewer utilities to the state's new Goose Creek prison are months behind schedule and slipping even further, with officials still unclear how to finance the expensive, brand-new systems as the prison itself rises at a remote Point MacKenzie site.

It's the second financial setback for the $240 million prison, which earlier faced a shortfall when officials tried to sell tax- exempt bonds for prison construction just as the markets were collapsing in 2008. They sold the bonds but had to pay so much interest that prison construction required a special legislative appropriation in 2009.

The Matanuska-Susitna Borough is managing prison construction under a 2004 legislative mandate. Its decision to build the prison miles from existing utilities meant the new site would have to be served by a new water and sewer plant.

Rather than build and run the systems itself as a municipal utility, the borough sought a private, for-profit builder and operator, a decision with consequences only now becoming apparent:

• The borough chose Valley Utilities LLC, a Wasilla company set up specifically for the project by several well-connected Valley developers. The borough rejected a bid by a much larger Anchorage team that included two regional Native corporations and developer JL Properties. Five months after their bid was rejected, the losers have yet to receive an explanation of why from the borough.

• Between profit, debt service and construction costs, the Wasilla company is proposing to charge the state more than 10 times what it pays for water and sewer at its Hiland Mountain prison near Eagle River, according to borough officials.

• One of the owners of the winning Wasilla company was president of the engineering firm that helped the borough prepare its water and sewer bid package. He said in an interview that he wasn't privy to inside information.

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• A plan by the borough and the company to finance utility construction through tax-exempt bonds was halted last month when state revenue department officials raised concerns that it could put the state's top-notch credit rating at risk. The financing remains in limbo.

When the borough administration asked the Mat-Su Assembly last month to ratify its choice of Valley Utilities, two assembly members complained that the matter was being rushed without a proper public hearing and with numerous questions unanswered. But their calls to slow down the process were silenced by the vote of five other assembly members in favor of the deal.

THE COSTS

The prison, being built to contain more than 1,500 felons, is now more than a third done, with final completion set for the end of 2011. By September, the design and construction contractor, Neeser Construction Inc. of Anchorage, will be ready to commission its new plumbing -- so long as there is fresh, clean water to hook up to.

"Yes, we're concerned, but the state's got to figure out what they want to do," said Mat-Su Borough Manager John Duffy. While the borough is the official owner of the prison in a lease-back deal with the state, he blamed state government for the delays.

"It's the state's operation," he said.

Officials say the delay in starting construction of the $28 million water-sewer utility is fast approaching the point where it could spell trouble for the much larger, $240 million prison project.

"Everything is good today, but we're burning up some critical schedule," said Ted Trueblood, an engineer and one of four owners of Valley Utilities. "The clock is ticking."

The water and sewer contract among the borough, the state and Valley Utilities, originally scheduled to be signed in October, remains only a draft. State officials say they hope to resolve the issue over the next few weeks, but haven't explained how.

State Department of Corrections officials are also concerned about the proposed water and sewer rates of Valley Utilities, a recurring cost that would come out of prison operations each year.

"The costs are quite high, and DOC knows this," the Mat-Su Borough purchasing official, Rustin Krafft, told the borough assembly last month. Assuming Valley Utilities could finance the project with low-interest, tax-exempt bonds, the state would be paying a daily charge of about $5.35 for each inmate for water and sewer, Krafft said.

The comparable number for Hiland Mountain Correctional is about 53 cents, Krafft said.

BAD TIMING

The Mat-Su Borough's involvement in prison construction stems from 2004 legislation authored by the Valley's most powerful politician at the time, Sen. Lyda Green, R-Wasilla, the finance committee co-chair.

Her Senate Bill 65 created a catch-all prison construction and staffing program authorizing expanded correctional facilities in Anchorage, Bethel, Fairbanks and Seward, none for more than 200 beds. The kicker was an earmark for a major new state prison that could be built only in the Mat-Su Borough and which would hold between 1,200 and 2,251 inmates.

Green's bill removed state officials from a central role in building the new prison. Instead, it required the prison be built and owned by the borough and capped construction costs at $135,000 a bed, adjusted for inflation. The state would be required to lease and operate the facility, paying off the construction through rent. At the end of 25 years, the state would own the facility.

What followed was a location battle inside the borough, with boosters who cited jobs and business opportunities clashing with residents who didn't want a prison anywhere near their backyard.

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One proposed site was a gravel pit southwest of Palmer. Rick Koch, Palmer's former public works director and now city manager in Kenai, said the spot was near a hospital, the state courthouse in Palmer, an airport and existing housing. Palmer's water and sewer lines ran by the property, as did other utilities.

Others touted an undeveloped site south of the Goose Bay State Game Refuge just off Point MacKenzie Road. There were few neighbors to bother and Anchorage was less than 20 miles away -- by way of a new ferry then on order that otherwise would be hurting for traffic. (The ferry is due to arrive this year after finishing trials in Ketchikan. Otherwise, it's nearly 80 miles from Anchorage, twice the distance to the Palmer site.)

Koch said that rather than try to negotiate a solution with irate Palmer neighbors, the borough, with the blessing of Lyda Green and state officials, favored the remote site. The borough drilled a deep test well at the site in 2007 and proclaimed the water adequate, the last hurdle to choosing the Point MacKenzie site.

"When we get a well that pumps almost 16,000 gallons an hour for 10 hours and recovers in five minutes, that's tons of water," Borough community development director Ron Swanson said in a statement sent to reporters at the time.

The prison was named the Goose Creek Correctional Center and on Oct. 27, 2008, the borough announced it selected Neeser Construction to design and build the project. The borough planned to go to the tax-exempt bond market to finance construction, paying back the bonds over 25 years with the lease revenue from the state.

Deven Mitchell, debt manager in the state Department of Revenue, said the borough's plan couldn't have come have come at a worse time.

"If you remember in October of 2008, the financial markets were just devastated," said Mitchell, who helped the borough prepare the bond package. "There were days in late October when you couldn't sell bonds. The market was just frozen."

It didn't get much better. In early December of that year, Mitchell said, the borough tried to sell the prison bonds but pulled them when interest rates demanded by investors were too high.

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But another clock was ticking, Mitchell said. To keep its deal with Neeser, the borough had to get the money by the end of the year, he said.

"There had been an extensive design-bid process conducted by the Mat-Su Borough," Mitchell said. "It was very time consuming, very detailed, and the commitments that contractor made were going to go away if the deal wasn't consummated."

The borough went back to the market and sold $244 million in bonds Dec. 21, Mitchell said. The interest rate was still high -- almost 6 percent.

"And after that, the market started to improve a little bit," Mitchell said. "If we could sell those bonds today, we'd be below 4 (percent)." The difference amounts to tens of millions of dollars over 25 years, he said.

But the prison could go ahead. In 2009, according to Deputy Corrections Commissioner Dwayne Peeples, the Legislature provided another $6 million for the project to cover some of the money eroded by high interest. On June 17, then-Gov. Sarah Palin led the ground-breaking celebration.

THE CONTRACTORS

The Anchorage engineering firm of Tryck Nyman Hayes was hired by the borough's prison consultant to study conditions for water and sewer in the vicinity of the site. On June 6, 2008, a senior associate with the firm, Michael Wolski, submitted a 90-page report which he said "can be used for prison water and wastewater utility RFP (request for proposals) support documents."

At the time, the president of Tryck Nyman Hayes was Ted Trueblood of Anchorage. On July 24, 2008, seven weeks after Wolski's report, Trueblood joined three prominent Valley developers and contractors to create Valley Utilities LLC.

The other owners listed in state corporation papers:

• Howard Nugent of Wasilla, whose Howdie Inc. built the Wasilla sports complex.

• William C. Prosser, an owner of Prosser-Dagg Construction Co. of Wasilla, a former board member of Cook Inlet Region Inc. and co-owner of Golden Horn Lodge, a remote fishing camp in Wood-Tikchik State Park, with three of Alaska's best connected businessmen (developer Bob Penney, former banker Edward Rasmuson, and insurance broker Carl Brady Jr.).

• Richard Besse of Besse Engineering of Wasilla, who was general manager of the Anchorage Water & Wastewater Utility 20 years ago.

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On Aug. 31, 2009, Valley Utilities was one of two companies to submit proposals to the borough under the RFP. The other was also well connected, though based in Anchorage: JL Properties, the developer of several Anchorage midtown office towers.

"From our standpoint, we assembled what we thought was truly an all-star team," said JL Properties vice president David Germer, himself a former Mat-Su Borough official. "The financial direction and support of this thing was three leading project developers in the state -- it was ourselves, Pfeffer Development, and Arctic Slope Regional Corp. Between the three of us, we have done virtually all design-build projects in the past 15 years."

The JL bid had NANA Management Services as the operator of the water and sewer plant. The company, a Native corporation subsidiary, operates facilities around the state, Germer said.

"We were just shocked, surprised that we lost," Germer said. Other than being told that Valley Utilities won the bid in November, Germer said he's been unable to get a meeting with Mat-Su officials to find out why he lost.

Krafft, the borough purchasing officer, told a Daily News reporter three weeks ago that the JL team "just didn't score as high -- qualifications were part of it." John Duffy, the borough manager, said of JL last week: "I don't believe it was anywhere close in terms of the strength of the proposal."

But this week, Krafft said in an interview that both teams "were equally qualified to do the work" and that Valley Utilities scored better with the borough evaluation team because it chose to get freshwater from shallower wells on a farm a mile from the 2007 test well. The water from the farm, though further to pipe, had fewer minerals and would need less treatment, Krafft said.

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Germer said the JL Properties partners would have purified water from the deep well using established technologies.

The competing bids weren't available -- Krafft said he wouldn't provide details until a contract was signed. The price of the treatment plant and recurring treatment costs in the JL Properties proposal versus the cost of constructing a mile-long pipeline and pumping water that distance couldn't be determined.

Corrections would pay similar rates under both proposals, Krafft said, though he declined to provide details.

Krafft said Valley Utilties didn't receive an unfair advantage because of Trueblood's dual roles with Tryck Nyman Hayes and Valley Utilities. The 2008 Tryck Nyman Hayes engineering report was given to both bidders, Krafft said.

Trueblood himself said he didn't directly supervise the work of his engineers on the prison-related contracts and got no inside information.

"That was all handled by staff," he said. "I almost never got involved."

The state is troubled by how Valley Utilities and borough planned to finance the project with tax-exempt bonds, according to state Revenue Department officials.

Jerry Burnett, the deputy commissioner of Revenue in charge of the state treasury, said the bonds, as originally structured, pledged the state's credit and were backed by the state's lease payments. If Valley Utilities ever failed to pay bond holders from money it received from the state, the bond market would view it as a state default, Burnett said. The deal, as structured, put the state's good credit -- an asset worth tens of millions of dollars -- in the hands of a private company, Burnett said.

The situation is different from the prison. While the borough sold bonds to construct the prison and pledged to pay them back through lease revenue from the state, the borough is also a government, and the state would own the prison after paying off the bonds through its lease. Governments around the country have been using that kind of structured deal for decades.

In the case of the utility, Krafft told the assembly that he "stole" a financing model from a California city, Santa Paula, population 27,500. Unlike the borough-owned prison, the utility is privately owned. In 30 years, after the state finishes paying off Valley Utilities' financing through the rates, the borough, not the state, would own it.

'THE BUM'S RUSH'

State officials in the departments of Corrections, Revenue, Law and the governor's office have been meeting for weeks to try to resolve the problem, but haven't announced a solution yet. A corrections spokesman, Richard Schmitz, said Friday that several options were still under consideration, but he couldn't say when the matter would be resolved.

Meanwhile, some members of the Mat-Su Borough Assembly have been getting restless.

On March 16, the borough administration asked the assembly to approve the deal with Valley Utilities without a public hearing. Two members, Jim Colver and Mark Ewing, protested that the matter was much too big to be pushed through in one evening. They were voted down, 5-2, but continue to press their points.

"They ramrodded this thing down our throats," Ewing said in a recent interview. "Five dollars and 35 cents per inmate," he said, referring to the proposed charges to the state, "that's a lot of money to take a shower and a shave."

Colver said he felt like he got "the bum's rush" and planned to slow down the pace April 6, when another related item was on the agenda: a proposal to lease borough land below market value to Valley Utilities for its facilities.

But just as the ordinance was read to the assembly, Borough Manager Duffy pulled it from the agenda.

"Right now the state is looking at a number of other approaches than the one that we thought that they agreed and had wanted to begin with," Duffy said.

Find Richard Mauer online at adn.com/contact/rmauer or call 257-4345.

By RICHARD MAUER

rmauer@adn.com

Richard Mauer

Richard Mauer was a longtime reporter and editor for the Anchorage Daily News and Alaska Dispatch News. He left the ADN in 2017.

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