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Photo by Andrew Cremata

‘Possessory interest’ adjustments ahead for all government leases

Skagway Fish Co. and Stowaway only corrections for ‘07; Henry did not know percentage was low, other values vary; Assessor to examine all next year, financial impact on city uncertain


Skagway property tax assessments were mailed this week, an annual ritual in which those with property get to see if their investments have grown. The assessments usually foretell if taxes will be going up on the property, though the tax bill doesn’t come until after the mill rate is set in June.
The notices go out to everyone who owns property in the city and any private entity that leases property from a government agency. Although government properties are exempt from taxation under state law, municipalities are allowed to assess “possessory interest” in the leased property for tax purposes.
Without this capability of taxing “possessory interest,” the city would miss out on taxing millions of dollars of worth of government property strewn about the city. Downtown, there are several National Park Service leased buildings where the interest is applied, but the really big ones are the docks and industrial facilities on city and state tidelands leased by White Pass and its various subleases.
A pair of smaller Congress Way waterfront properties leased by the city to restaurants came under scrutiny earlier this year. While the two restaurants, Skagway Fish Co. and Stowaway Cafe, had been assessed the full value for the buildings they had constructed on the lots, the land underneath them had been assessed at a much lower value.
The low valuations were brought to the attention of former City Manager Bob Ward when a lease extension was requested by Fish Co. owners Dan and Eileen Henry. Ward contacted city assessor Charles Horan in Sitka, and in a Feb. 22 letter to the city, Horan apologized for the oversight and attached the new assessments on the two leased parcels.
Because Dan Henry, a city councilman, was on one of the leases in question, there had been suggestions that there may have been some influence over the calculation, but Horan noted in his letter that, “No one on my staff has had any personal contact with any party of interest to these properties that would influence our values. I point out that these errors were made on both parcels that resulted in low values.”
Horan said they will start listing all the possessory interest properties on a separate spreadsheet each year, which “will be an adequate control to make sure this type of imbalance doesn’t occur again.”
The Skagway News recently examined all property cards at City Hall where “possessory interest” is assessed.
In state law, it’s just called “interest.” According to AS 29.45.030, “a private leasehold, contract, or other interest in the property is taxable to the extent of the interest.”
Horan defines possessory interest as “a significant private possession of tax exempt property.” Assessors look at “the taxable (party) whose possession has a taxable interest.”
Near the top of the cards, there is a calculation made when the lease starts, and then at various points when there are changes in lease values. The possessory interest calculation usually factors in a tax reversion discount of 10 percent and then a further discount on the land value based primarily on the length of the lease. A property’s use, size, and location also will affect values.
When the assessors come to Skagway each January, they check the cards and pencil in an updated value of land and improvements for a total assessment. The assessments go out, and the total is later multiplied by the mill rate to determine the taxes for the property.
In the Fish Co. case, the 1996 possessory interest calculation of 16 percent on the land was based on two years remaining in the lease, but it never changed over the years – even when the lease was renewed that year, when the parcel was expanded by 23 feet in 1999, and when it went through its five-year lease re-evaluation in 2004-05.
The Fish Co. assessment in 1996 was $3,000, rising over 10 years with annual citywide property value increases to $15,300, but Horan pointed out that the possessory interest calculation should have been upgraded from its low base value to 61 percent of fee simple appraisal. When that adjustment was made recently, the land assessment jumped to $41,700 for 2007. Coupled with a building value of $168,400, the Fish Co. has a total assessment of $210,100 for 2007 compared with $183,700 last year.
One critic of the process, Candice Wallace, said the errors should definitely have been pointed out earlier.
In a Feb. 5 letter to Mayor Tim Bourcy, she stated, “There are additional concerns that Henry, who has been a sitting council member since 1998, knew that his lease, as all other city leases, needed to be sanctioned by the council (for 2004 adjustment) and was not. It could be argued that he also was cognizant his tax assessment was below par (all other leases with terms have been reviewed at council table) and yet, he continued to enjoy the benefits despite it not serving the public interest as set forth in code.”
The Henrys were denied a lease extension request on March 1. Dan Henry was not at the meeting, but would not have been allowed to sit at the table during discussion and voting. Other council members present had questions about the valuations and the extension process, which is not addressed clearly in city code. The Henrys had wanted to extend the lease from 2012 to 2022 after Kim and Jim Long, owners of the Stowaway, had been given a 15-year extension in 2003.
When asked for this story if he had any prior knowledge about the wrong possessory interest calculations on the land, Dan Henry said, “Of course not. I had no idea.”
He also said re-evaluations don’t come before the council as part of ongoing leases, and that he looks at his tax bill just like anyone else.
“I receive my tax bill for property and our city lease just like Kim and Jim Long do for their home and the Stowaway, and I would be confident they approach it the same way I do,” Henry continued. “Open up your checkbook, fill it out and send it in to City Hall.”
The Stowaway case was a bit different. Its card was based on a 1994 possessory interest calculation with 10 years left on its lease. The values trended also missed the addition of 1,500 sq. ft. in 2003 with an extension of the lease. In 1996 the land value on the card was $10,200, rising to $26,700 last year. When recalculated with its longer lease to 2018, the Stowaway’s possessory interest percentage is 65 percent, resulting in a land assessment of $45,200. Coupled with a building value of $207,100, the Stowaway’s total assessment is $252,200 compared with $233,800 last year.
On both the Fish Co. and Stowaway cards, the 100 percent building valuations remained the same this year as last. Only the land values were adjusted up.
The Longs were not back in town and could not be reached to comment for this story.
The National Park Service leaseholdings are calculated differently because the land and buildings are owned and maintained by the park. The city lists six NPS properties, all with possessory interest calculations in the 61- 61.5 percent based on the length of their leases (10-15 years.) For example, The Skagway News Co., which leases the historic Boas Furrier building, gets the calculation on both the land ($159,800) and the building ($152,700) for a total of $312,500.

FULL DISCLOSURE – The Skagway News Co. is one of the leases being considered for adjustment. Here is its property card showing possessory interest calculations (top left) and recent assessments (lower left box) updated annually. JB

Other government-leased properties have different possessory interest calculations, depending on their use and term of the lease. Some examples:
Leaseholder P.I. Pct.
Pullen Creek RV Park 25%
H&H storage 75%
Petro Marine fuel plant 67-80 % (tanks, pipe, walls, building)
Skag. Terminal Co. docks 89.85%
Wings-LAB/Promech 61%
Jewell Gardens, Alaska Marine Lines, and Smith Propane also were reviewed but the possessory interest percentages were not easily found on the cards. All leases have assessments and are paying taxes, Horan noted, adding that “the cards need some work.” But that work will have to wait, he said.
“There’s always going to be a wide variety of percentage because of the different likely terms of possession,” Horan added. “Our plan is to check them annually in the future. It’s not affecting this year’s (assessments). Our position is to square it away next year.”
A bigger question remains: If the overall values of possessory interest leases are found to be too low, then how much tax revenue has the city been missing out on?
“I don’t know what that number would be, but I suspect it would not be significant,” Horan answered. “A couple of things: the numbers of properties impacted are not that big, and the interests are only fractions of market value. It’s an objective number that needs to be learned.”
Henry, as the city’s Finance Committee chairman, questioned why adjustments to other properties were not made for this year. “If any are going to be adjusted, all should be adjusted up or down,” he said.
On the horizon is the ore terminal, owned since 1998 by the state’s Alaska Industrial Development and Export Authority. At one time, before the old structure was torn down, it had a total value of $11.25 million, Without the building, the assessment was changed to $207,300, with a possessory interest calculation of 73.67 percent.
But a user of the facility in a new building may now be exempt under state law.
AS 29.45.030 states that “an interest created by a nonexclusive use agreement between the Alaska Industrial Development and Export Authority and a user of an integrated transportation and port facility owned by the authority and initially placed in service before January 1, 1999, is taxable only to the extent of, and for the value associated with, those specific improvements used for lodging purposes.”
Perhaps the city could call them the “Copper Condos.”

Skagway says ‘no’ to vote on limiting benefits

In a small turnout for Tuesday’s special election, Skagway voters said “No” to the court-ordered advisory question on whether the legislature should prepare a constitutional amendment that would prohibit employment benefits for same-sex partners.
The Skagway vote was 63 Yes and 118 No. The measure passed statewide with 56,372 Yes and 49,273 No, so the legislature will now look at placing a constitutional amendment on the 2008 ballot.
Voter turnout in Skagway was 19.8 percent, slightly less than the statewide turnout of 22.7 percent.

Value of ‘trophy lots’ in land sale worry potential local buyers

A discussion concerning the division and sale of land in and around the Dyea Point portion of the Taiya Inlet Subdivision drew comments and concerns from some Skagway residents at a recent Civic Affairs Committee meeting.
The area around Dyea Point will be the first of four separate tracts surveyed and offered for sale, but the details of the sale still remain undecided. Some other concerns include availability of water, a proposed trail running adjacent to the lots, and overall affordability to the average Skagwegian.
Councilmember L.C. Cassidy said the purpose of the March 21 meeting was to answer “questions that need to be answered before everything moves forward.”
Reed and Marlene McCluskey expressed concern over exactly how the lots would be offered up for sale. Reed McCluskey said people down south would be “thunderstruck” when the land hits the auction block, and could be motivated to buy the lots to build massive homes simply as a residence for only a few weeks during the summer.
“These would be perceived by some as trophy lots,” he said.
Marlene McCluskey, who works at the Convention and Visitors Bureau, said she sees many wealthy people come through her office during the summer asking the location of Skagway’s realtor’s office.
Reed McCluskey said he was hopeful the zoning could somehow limit the size of the structures built on the land and said, “People who care for the houses when the rich aren’t there can’t afford to live there.”
Bruce Weber, who has been in negotiations with the city for a land swap on Dyea Point, said current zoning laws would not prevent the construction of a “20,000 square foot house.”
Cassidy explained the new zone created by the city for the Dyea Point portion of the subdivision is called Low Density Residential.
Reed McCluskey said, “Density is not the issue.”
Concerning his negotiations with the city, Weber said, “We’re very happy with where the negotiations are right now.”
Weber said they are waiting on final appraisal values to complete the process, which will happen after the area is surveyed when the snow and ice have melted. The city entered into negotiations with Weber in the hopes of securing the better of two right-of-ways accessing the area. Currently, that right-of-way runs through Weber’s property.
Another issue concerned a walking trail that would run along the shoreline all the way around Dyea Point. At the end of the point would be a public area with picnic tables and parking.
Michael Yee said the trail should be a multi-use trail but was concerned it would include the “infernal combustion engine.”
Cassidy said motorized access could be restricted, but a 50-foot buffer from the shoreline was required by the state so ultimately the trail would be there whether people wanted it or not.
The method of the sale was also discussed. One potential method described by Cassidy would offer lots on the point through sealed bid and the rest of the lots in a lottery. She said this was assuming the property on the point would be more desirable than the lots to the north, but with the availability of water and other services unknown, that point of view could change after the survey was completed.
“I would like everyone to have equal opportunity to purchase, regardless of personal income,” said Cassidy.
She said it was hoped the selling of the lots in increments would prevent property values in town from falling, and some would undoubtedly sell their houses in town or use them for employee housing while building their new home in the Dyea area.
It is hoped the surveys will be completed before the start of the summer season.

SCHOOL: Draft school budget reviewed

The Skagway City School District will base its budget on a projected student count of 100 students for the next school year, down from the 107 used for the current year’s budget which resulted in a deficit after the final count came in at 99.5 students.
The dip below 102 students caused a loss of $122,365 in state funds. With additional unforseen expenditures for counseling services, copier maintenance, and grant writing fees, the district has asked the city to cover a total deficit of $157,704. Action on that request was expected at the April 5 Skagway City Council meeting.
At the school board’s March 27 meeting, the focus was on the year ahead.
Superintendent Michael Dickens said the whole idea of the state forcing districts to present budgets in April based on imaginary October student counts is “a joke,” echoing a cry for forward funding heard throughout the state. A bill to increase the foundation formula is before the legislature, but it would be a big gamble to budget on its passage, he noted, as sponsor Sen. Gary Wilken (R-Fairbanks) is not as powerful as he used to be, and the bill is being perceived as a bail-out for his home district’s budget woes. Dickens added that Gov. Sarah Palin does not support a foundation increase.
Dickens said the 2008 budget is “built on a smaller amount on purpose.” Starting with a projection of 100 students is safe, and if new students or foreign exchange students arrive in the fall, then there would be a positive impact.
Dickens credited business services manager Kathy Pierce for coming up with a proposed budget that would preserve existing programs. Last week, the draft budget expenditures were at $1.94 million, about $61,000 more than what will be spent this year. Pierce is working on narrowing that gap.
At the meeting, Pierce said about $15,000 can be saved just by switching to a “sweep” bank account. And she is looking at other areas for cuts. A big unknown is what the state will do about the unfunded PERS/TRS liability. The Palin Administration last week submitted cost-sharing legislation to place all cities and school districts at common contribution rates, with the state paying the rest.
A state chart lists the Skagway district as a “loser” under the proposed legislation to the tune of either $28,359 or $44,219 on PERS, but a “winner” on TRS by $52,813. The legisaltion is likely to go through more revisions before the session ends.
Board members said they had already heard rumors that they were thinking about cutting the pre-school program, but member Joanne Korsmo stressed that wasn’t true. There have been cost reductions in the food service budget, they noted, and the initial activities budget has been pared down to this year’s level.
What will be missing next year – though not reflected in the budget – are the Spanish and physical education programs. The federal grants that funded those programs the past two-three years will run out at the end of this school year.
The board will meet in a work session April 10 at 7 p.m. to finalize details in the budget, and then convene a special meeting to pass it. By law, it must be delivered to the city by April 15.

Representatives from Southeast cities were on hand for the signing of the governor’s order. From left are Skagway’ City Councilman Mike Korsmo and Mayor Tim Bourcy, Pelican Mayor Patricia Phillips, Gov. Sarah Palin, Ketchikan Mayor Bob Weinstein, and Haines Mayor Fred Shields. Governor’s Office

Ferry system advisory board given new life by Palin

JUNEAU - Governor Sarah Palin last week signed Administrative Order 233, reauthorizing the Alaska Marine Transportation Advisory Board.
The MTAB advises the state on issues related to the Alaska Marine Highway System. Administrative Order 233 reconstitutes the board as a nine-member advisory committee made up of representatives from communities served by state ferries.
Mayor Tim Bourcy and City Councilmember Mike Korsmo, head of the Southeast Conference Transportation Committee, were present during the signing ceremony.
The governor said the new board would not be ignored.
“The Alaska Marine Highway System faces many challenges in the coming years, and I will look to this board to offer meaningful contributions to meet these demands,” said Governor Palin. “A dependable and sustainable ferry system benefits the entire state, and I want this board to have a voice in what is done to meet that goal.”
Korsmo and other MTAB members have said the board’s suggestions were basically ignored by former ferry system deputy commissioner Robin Taylor during the Murkowski Administration.
Dennis L. Hardy, P.E., has been appointed to serve as the new Deputy Commissioner of Marine Operations to replace Taylor, who left his position in January. DOT Commissioner Leo von Scheben appointed Hardy to the post effective April 2. Hardy will reside in Juneau.



H&H workers set one of the new culverts under the railroad tracks for the Pullen Creek restoration project being coordinated by the Taiya Inlet Watershed Council. Jeff Brady

• DDF Marshall Islands update: Interview with Senator Juda

• OBITUARIES: Charlene Matthews, John Feero, Amy Flint

Buckwheat Ski Classic 2007 Results (pdf)

Andrew Cremata PhotosFeature StoryJeff Brady Photos

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