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Walker orders new spending on Alaska megaprojects stopped

  • Author: Nathaniel Herz
  • Updated: September 28, 2016
  • Published December 27, 2014

New Alaska Gov. Bill Walker announced Saturday that he'd put six high-profile state infrastructure projects on hold, citing Alaska's $3.5 billion budget deficit that's grown as oil prices have steeply dropped.

Walker issued an order Friday halting new spending on six contentious projects, after stripping funding from several of them in the capital budget he proposed earlier this month.

The projects include a small diameter gas pipeline project from Alaska's North Slope that Walker has said is too pricey -- though supporters view it as crucial competition to spur development of a larger pipeline. The others are the bridge over the Knik Arm, the Susitna-Watana hydroelectric dam, the Juneau access road, the Kodiak rocket and missile launch complex, and the Ambler road.

All are controversial and have faced criticism that they're too expensive given the state's financial predicament. A spokeswoman for Walker referred questions to Pat Pitney, the governor's new budget director, who responded by email.

"The state's fiscal situation demands a critical look and people should be prepared for several of these projects to be delayed and/or stopped," Pitney said.

Spending reports due in January

In Friday's order, Walker directed state agencies overseeing the projects to stop signing new contracts, hiring new employees, or committing any new funding from the federal government or other sources. Payment of employee salaries and contractually required spending will continue until further notice.

The order also asks each agency working on the projects to submit by early January a report showing personnel costs, operating costs, and spreadsheets breaking down different types of project spending -- as well as an accounting of potential costs of delaying or canceling contracts or other payments.

The halt in spending is "pending further review," according to the order. Pitney said the administration aims to decide on its project priorities close to the start of the state legislative session Jan. 20, but no later than a legal budgeting deadline on Feb. 18. Ultimately, the Legislature has final authority to decide whether to keep funding the projects, Pitney said.

Walker's order Friday followed a back-and-forth earlier in the week with the Legislature's Republican leadership, which on Tuesday sent the governor a letter urging him to immediately reduce spending levels in light of the budget shortfall.

The state currently has ample savings, projected at some $9.6 billion by the end of the 2015 fiscal year in June. But the longevity of those savings depends on the pace of state spending and the unstable price of oil -- this year, Alaska was expected to derive nearly 90 percent of its unrestricted general fund revenue from oil taxes and royalties.

While Walker was long a Republican, he won election in November by running as an independent with the endorsement of the state Democratic party, unseating incumbent Republican Gov. Sean Parnell, and Parnell's allies in the Legislature have said they're eager to see Walker live up to the budget-cutting rhetoric he used on the campaign trail.

In phone interviews, two key Republicans praised the move by Walker as the first step in a fiscal conversation between the governor's office and the Legislature.

Walker ‘making the hard announcement’

"The governor's definitely stepped right out there in front of it," said Rep. Steve Thompson, R-Fairbanks, who co-chairs the House's finance committee. "I give him credit for that -- he's stepping forward and making the hard announcement."

But Thompson and the Senate's majority leader, John Coghill, R-North Pole, both said they wanted to be cautious about curtailing the state's progress on a gas line.

Proponents of the small gas line identified in Walker's order view the project as a way to push progress along on a larger pipeline that the state is pursuing with big oil companies -- and it's also seen as a backup plan if the big pipeline falls through.

Critics, including Walker, have said pursuing two pipelines is too expensive, and they argue the cost of building the small pipeline would actually drive up energy costs.

Following Walker's order, the state agency responsible for the smaller pipeline, the Alaska Gasline Development Corp., plans to only continue work that's transferable to both projects, said Miles Baker, vice president for external affairs.

"We're trying to really become project agnostic," Baker said.

Some of the work associated solely with the smaller pipeline, like filings with utility regulators, will be postponed, while other tasks applicable to both projects will continue, Baker said. That includes environmental assessments, permitting, and certain pipeline engineering and analysis.

Of the $300 million the Legislature has already granted to AGDC for small pipeline work over the next two years, Baker estimated that at least half will still be needed.

Pitney couldn't immediately provide a breakdown of how much money had been budgeted for each of the six projects in the last year. As one example, she said $193 million had already been invested in the Susitna-Watana dam project, which has been projected to cost $5.2 billion.

Mixed reactions from stakeholders, opponents

The Alaska Aerospace Corp., which runs the Kodiak launch complex targeted in Walker's order, has some $20 million in state grant funding that was being eyed as an incentive to recruit business from a private aerospace company.

Craig Campbell, AAC's CEO, said the corporation is now not planning on entering into any contracts to spend that money.

Campbell said Walker called him Friday to inform him of the executive order.

"If you're looking for me to say I'm concerned about it, I'm not," he said. "I think we have a good story to tell about what we're doing at the Kodiak launch complex, and I'm looking forward to explaining that to (Walker). But I also understand that we have a budget crisis and that he's looking to make sure the projects under his administration (are ones) he agrees can work."

While the agencies affected by Walker's order will likely have to fight for their projects' preservation, at least one opponent was celebrating Saturday.

Stephanie Kesler, who has fought the Knik Arm bridge in her role as president of the Government Hill neighborhood's community council in Anchorage, referred to the project in a phone interview as if it had been completely shut down, rather than simply targeted for review.

She said a majority of residents would be "extremely pleased," and that they plan to submit background information to Walker that illustrates the "tremendous fiscal liability" the state would incur by building the bridge, in an effort to rebut justifications from project managers.

"It would be ludicrous and not just irresponsible but financially disastrous to consider such a project," Kesler said.

Shannon McCarthy, a spokeswoman for the state Department of Transportation, which is overseeing the bridge project, said simply, "We're going to continue working with the governor's office on how the specific order affects the project."

‘None of these projects are going to be dead’

While Walker's administration reviews the big capital projects, the governor has also asked commissioners for analyses of the impact 5 and 8 percent reductions would have on state departments.

The Republican legislators said they were looking forward to scrutinizing the departments' operating budgets, though House finance committee member Rep. David Guttenberg, D-Fairbanks, argued against cuts.

"There's not enough money to get you there without seriously hurting the economy," he said.

Cuts to the big infrastructure projects are, in fact, less likely to have a significant economic impact than cuts to the operating budget, said Gregg Erickson, a Juneau economic consultant.

Money budgeted for the projects is more likely spent on products like steel and concrete, or on contracts with outside engineering companies, he said. Money in the operating budget -- Erickson cited Medicaid spending as an example -- flows more directly into local economies through payments to doctors, hospitals, and service providers like ambulances, he said.

Erickson praised the Walker administration for "biting the tough bullet" and reviewing the infrastructure projects. But he added that "none of these projects are going to be dead because of this move."

"They're still alive," he said. "And the supporters, I'm sure, will fall back and do their best to try to weasel more money out of the budget in the future."

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