Legislature(2005 - 2006)HOUSE FINANCE 519
02/02/2006 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB361 | |
| HB381 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 361 | TELECONFERENCED | |
| *+ | HB 381 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 381
"An Act relating to the financing of construction,
major maintenance, and renovation of facilities for the
University of Alaska; relating to the financing of
construction of a correctional facility; authorizing
the commissioner of revenue to sell the right to
receive a portion of the anticipated revenue from a
tobacco litigation settlement to the Northern Tobacco
Securitization Corporation, with the proceeds of that
sale to finance construction, major maintenance, and
renovation of facilities for the University of Alaska
and to finance the construction of a correctional
facility; providing for the establishment of funds for
deposit of those proceeds; authorizing the issuance of
bonds by the Northern Tobacco Securitization
Corporation for the purpose of acquiring the right to
receive a portion of anticipated revenue from a tobacco
litigation settlement; and providing for an effective
date."
MS. CHERYL FRASCA, DIRECTOR, DIVISION OF MANAGEMENT &
BUDGET, OFFICE OF THE GOVERNOR, spoke of the need for HB
381. She referenced a handout "Tobacco Bond Refinancing
Fact Sheet" (copy on file), which provides information on
previous tobacco bond bills. She explained that this fall
the Department of Revenue approached the governor's office
about an opportunity to refinance tobacco bonds. The amount
of revenue that could be generated would be between $80 and
$140 million. The current proposal would authorize using at
least $89.3 million of the proceeds to be spent on
University of Alaska projects. She pointed to the projects
on page 2 of the bill. These same projects are also listed
in the FY 07 capital budget. Any proceeds greater than
$89.3 will be available for construction of the Mat-Su jail.
Co-Chair Meyer asked if the bill has an impact on the 20
percent that goes toward the tobacco cessation program. Ms.
Frasca replied that it does not. Representative Weyhrauch
asked why that is so.
2:17:26 PM
DEVON MITCHELL, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL BOND
BANK AUTHORITY, DEPARTMENT OF REVENUE, noted that HB 381 is
taking advantage of a current market opportunity that has
not been available for several years. It is a further
leveraging of the 80 percent of the Master Settlement
Agreement (MSA) that was already sold to the Northern
Tobacco Securitization Corporation. It is selling an
additional portion of that settlement to raise further
capital for projects in the state. It does not impact the
20 percent that is currently used for other programs, but is
a future obligation.
Mr. Mitchell shared previous history of the tobacco bonds.
In 2000-1 the first tobacco bonds were issued. Payments
from participants in the MSA are now being sold. The money
is coming from a separate credit from the State of Alaska.
He noted a previous discussion of market saturation with
this type of debt. In 2001 tobacco transactions required
that the makers put in additional credit support forward,
such as a moral obligation pledge. Since then, there has
been favorable legislation that has allowed stand alone
tobacco transactions to occur, plus more aggressive
securitization of the revenue stream further into the
future. Now the state can take advantage of an opportunity,
which is market driven and fluid. He explained the
flexibility built into the bill.
2:22:35 PM
Co-Chair Meyer asked if the tobacco bonds are secure to
investors. Mr. Mitchell anticipated that ratings would vary
and that there would be some risk. The MSA, itself, has a
lot of risk. There is a cost for passing that risk, but it
is reasonable.
Co-Chair Meyer asked about the range of proceeds. Ms.
Frasca indicated that the range is between $80 million to
$140 million, as determined in late November, but the
numbers could change. Co-Chair Meyer inquired if the money
could be used for other projects. Ms. Frasca replied that
it could be used for other capital projects.
Representative Joule spoke about the growth of the
university and the need to maintain it. He talked about the
need to also fund rural projects in addition to this prison
and this university. He mentioned the need for money for
new school construction. He hoped that there could be
consensus on funding for all needs.
Co-Chair Meyer asked when the bonds would be marketable.
Mr. Mitchell replied that depends on the date the bill is
passed. Co-Chair Meyer asked about the impact on the bonds
of future court decisions.
MICHAEL BARNHILL, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF
LAW, spoke of litigation in Illinois regarding cigarette
liability. A $10 billion award was made against Philip
Morris, which was recently overturned by the Illinois
Supreme Court. That created a better climate for tobacco
bonds.
2:30:51 PM
Representative Weyhrauch noted that a large amount of money
was saved by not selling these bonds last fall. Mr.
Mitchell replied that their value increased after December
15, the date of the Illinois court ruling. There are also
several other cases pending. Mr. Barnhill concluded that it
is hard to say how much money has been saved. He related a
court decision from Oregon with a smaller judgment in favor
of a tobacco company. Representative Weyhrauch asked what
the increased value of the bond is today.
Ms. Frasca reported that the estimate went from $140 million
at the top, to $180 million, with the potential of being
$194 million. Representative Weyhrauch commented that it
argues for some prudence on taking action on the bill.
Co-Chair Meyer inquired about the length of the MSA
agreement. Mr. Barnhill restated that the MSA provides for
an indefinite stream of payments. Representative Joule
asked why and how. Mr. Barnhill said that's the way it is.
Co-Chair Meyer asked if the proposal is until the year 2040.
Mr. Mitchell replied yes.
Mr. Fauske clarified that the bonds are a windfall to the
state, not a legal or moral obligation. Through an AHFC
subsidiary, the Northern Tobacco Securitization Corporation,
the bonds are issued at a premium to private investors who
assume all of the risks. It is a moving target, but in a
friendlier environment because of recent lawsuits. The risk
to the state is minimal. AHFC buys the cash flows from the
state. The state, through the Commissioner of Revenue,
releases to Northern Tobacco the right, with legislative
approval, to accept those revenues. The first issuance of
bonds was $300 million, which went to schools.
2:36:09 PM
Representative Kelly questioned if the design and
construction of all projects still go through the
legislature. Mr. Mitchell said yes.
Representative Kerttula requested information about the
financing of the Mat-Su prison.
2:37:24 PM
Ms. Frasca responded that several options are being
considered. Representative Kerttula inquired if naming one
prison project in the bill may impact other prison projects.
Ms. Frasca related that SB 65 did provide for a mechanism to
enter into a lease purchase agreement with the state for
jail construction to proceed. She maintained that how the
Mat-Su prison fits into the whole picture is a separate
subject for discussion. It is an appropriation that will
come before the legislature again.
Co-Chair Meyer recalled that SB 65 also included private
prisons, which are not currently under consideration.
Representative Kerttula asked for a cost estimate for the
Mat-Su prison. Ms. Frasca responded that there are several
approaches that are being considered, such as the design
built finance option. Co-Chair Meyer recalled that is how
the Anchorage jail was built.
2:40:27 PM
Representative Joule referred to the title of the bill,
which is very specific. He inquired if projects not named
would be precluded. Mr. Barnhill asked Representative Joule
if the question is, if the legislature wants to use the
funds for other purposes, can it.
Mr. Mitchell observed that an amendment would be required to
change the title. Representative Joule inquired how school
construction could be included in this bill. Mr. Mitchell
reported that a change in the use of the proceeds would
cause problems because when bonds are issued the projects
have to be defined. Now would be the time to make such a
change.
Representative Kelly observed that he wants to think about
this issue. Ms. Frasca responded that the Mat-Su prison was
already authorized by the legislature, but as a different
mechanism. There will be further discussion about it. Co-
Chair Meyer noted that the title states, "finance the
construction of a correctional facility", which could be any
correctional facility in the state.
HB 381 was heard and HELD in Committee for further
consideration.
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