Legislature(2009 - 2010)HOUSE FINANCE 519

04/03/2009 01:30 PM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Bills Previously Heard/Scheduled TELECONFERENCED
Heard & Held
Moved CSHB 121(FIN) Out of Committee
HOUSE BILL NO. 161                                                                                                            
     "An  Act  relating to  the  Alaska Mental  Health  Trust                                                                   
     Authority  Subport  Office   Building;  authorizing  the                                                                   
     issuance   of   certificates    of   participation   for                                                                   
     construction of the building  and authorizing the use of                                                                   
     up to $25,000,000 from the  mental health trust fund for                                                                   
     construction  of the building;  approving leases  of all                                                                   
     or   part  of  the   building  by   the  Department   of                                                                   
     Administration; and providing for an effective date."                                                                      
REPRESENTATIVE  KATHY MUNOZ,  SPONSOR,  requested that  Deven                                                                   
Mitchell    present    information   on    Certificates    of                                                                   
Participation (COP's).                                                                                                          
DEVEN  MITCHELL, EXECUTIVE  DIRECTOR,  ALASKA MUNICIPAL  BOND                                                                   
BANK  AUTHORITY, DEPARTMENT  OF  REVENUE,  described how  the                                                                   
Alaska Mental Health Trust (AMHTA)  assets currently invested                                                                   
in  the Permanent  Fund  would be  used  in combination  with                                                                   
state COP's in  a favorable partnership to fund  a new office                                                                   
facility on land  the Trust owns in Juneau.   The state would                                                                   
provide  a title interest  lease  to a trustee  bank for  the                                                                   
COP's.  He described the way the  lease would be divided into                                                                   
blocks that are equivalent to  $5,000 bonds which are sold to                                                                   
individual  investors.   It is a  "subject to  appropriation"                                                                   
commitment.   He  continued  to discuss  the  pricing of  the                                                                   
Mr. Mitchell related  that the expectation is  that the bonds                                                                   
would receive an AA rating.  Currently,  the interest rate on                                                                   
general  obligation  bonds is  4.04  percent.   He  discussed                                                                   
market conditions.                                                                                                              
1:41:27 PM                                                                                                                    
Co-Chair  Stoltze asked  which  of the  Mat-Su projects  were                                                                   
sold.   Mr.  Mitchell reported  that  there was  a cash  flow                                                                   
issue.    For  the bonds  sold  in  2003  for  transportation                                                                   
projects,  about 7  percent  was spent.    The project  would                                                                   
eventually be fully funded.                                                                                                     
Mr. Mitchell  commented  further about  the COP's and  talked                                                                   
positively  about the  partnership.   He said  it was a  good                                                                   
opportunity  for the  state to  meet its  mission to  provide                                                                   
adequate  space for state  employees and  an opportunity  for                                                                   
the AMHTA  to meet its  mission.  Use  of the state's  credit                                                                   
for a portion of the funding would benefit the transaction.                                                                     
Co-Chair  Hawker voiced  appreciation for  the high  level of                                                                   
liquidity.    He  asked  Mr.  Mitchell,  as  the  state  debt                                                                   
manager, if  he was comfortable  with this legislation.   Mr.                                                                   
Mitchell agreed that  it was a policy decision as  to how the                                                                   
project  might  be  funded,  and   said  there  would  be  no                                                                   
detriment  to the  state's credit  rating by  the use of  the                                                                   
Mr. Mitchell commented on COP's,  the rating reports, and the                                                                   
low debt burden of the state.   He talked about percentage of                                                                   
unrestricted  revenue.   A large  portion of  revenue is  not                                                                   
derived from  the state.  The  revised forecast for  FY 10 at                                                                   
$56 per barrel  would be just over 5 percent  as a percentage                                                                   
of unrestricted  revenue  for state  supported debt  service.                                                                   
He gave examples.                                                                                                               
1:46:10 PM                                                                                                                    
Co-Chair Hawker summarized that  the debt increment would not                                                                   
detrimental to  the state and  the state would not  suffer in                                                                   
its credit rating.  Mr. Mitchell agreed.                                                                                        
Co-Chair Hawker inquired  if there was a better  mechanism or                                                                   
way  to structure  this  proposal than  a  50/50 debt  equity                                                                   
using COP's.  Mr.  Mitchell replied that the only  way to get                                                                   
a lower  interest rate  would be  to sell general  obligation                                                                   
bonds.    For  state  supported  financing,  COP's  are  best                                                                   
because they are  understood by those outside of  Alaska.  He                                                                   
used  the Mat-Su  Borough as  an example  of outsiders  being                                                                   
unfamiliar with the area's bonds.                                                                                               
1:47:59 PM                                                                                                                    
Co-Chair  Hawker asked  what the  difference between  general                                                                   
obligation bonding and COP debt  was.  Mr. Mitchell explained                                                                   
that  general  obligation  bonds  cannot be  issued  in  this                                                                   
instance because it would require a statewide election.                                                                         
Co-Chair  Hawker  stated that  the  advantage  of going  with                                                                   
COP's is the timing.  Mr. Mitchell agreed.                                                                                      
Co-Chair  Hawker pointed  out that  it is  presumed that  the                                                                   
public  would  have  the  option   to  weigh  in  on  general                                                                   
obligation  bonds.     He  wondered  of  the   use  of  COP's                                                                   
circumvents  that  process.    Mr. Mitchell  related  that  a                                                                   
Supreme Court ruling allows for  COP financing.  He discussed                                                                   
the disadvantages of using general obligation bonds.                                                                            
Co-Chair Hawker wondered  if using COP's is a  way of getting                                                                   
around  needing  the  entire  state's  approval  of  a  local                                                                   
project.  Mr. Mitchell said that was correct.                                                                                   
1:51:04 PM                                                                                                                    
Co-Chair Hawker  asked if this  process is circumventing  the                                                                   
people's  right to have  a say  as to  where the state  makes                                                                   
capital investments.   Representative  Munoz emphasized  that                                                                   
this process  is addressing a need.   She used the  prison as                                                                   
an example,  which allowed the  state to move  prisoners back                                                                   
to Alaska.  She listed the benefits  of this project: it is a                                                                   
top priority  of the AMHTA,  it provides a long-term  revenue                                                                   
stream for the  beneficiaries of the Trust, and  it meets the                                                                   
critical space needs in Juneau.                                                                                                 
Co-Chair Hawker concluded that  the legislature has to make a                                                                   
call in the public's interest.                                                                                                  
Co-Chair  Hawker asked  Mr. Mitchell  what "the  price to  be                                                                   
paid" was.  Mr. Mitchell explained  that in today's market, a                                                                   
subject to appropriation credit,  versus a general obligation                                                                   
credit,  would be  in the  range of  25 to  50 basis  points,                                                                   
depending on  the day.  That  is going to change  from market                                                                   
to market.   He  questioned if  this issue  should come  to a                                                                   
vote.  It is in the interest of  the state to accomplish that                                                                   
project  rather  than  create   a  large  capital  budget  of                                                                   
projects  that  might not  be  "on  the  same plane"  as  the                                                                   
project that is being proposed.                                                                                                 
Co-Chair  Hawker  called  it  strategic  and  surgical.    He                                                                   
pointed out  that "25 to 50 basis  points" is a quarter  to a                                                                   
half  percent  difference in  the  rate  the state  would  be                                                                   
paying on  the debt.  Mr.  Mitchell agreed.   Co-Chair Hawker                                                                   
asked what a good rate might be.   Mr. Mitchell offered to do                                                                   
the math.                                                                                                                       
1:54:54 PM                                                                                                                    
Co-Chair Hawker  related that the  mechanics of the  bill are                                                                   
rigid due to the 50/50 ratio of  debt to equity.  He inquired                                                                   
if there  would be an  advantage in the  market if  there was                                                                   
more  flexibility.   He  gave a  hypothetical  example of  75                                                                   
percent debt  equity.  Mr.  Mitchell agreed that  flexibility                                                                   
is always  an advantage.   He  thought the  real benefit  was                                                                   
that there was  an equity position in the project.   There is                                                                   
a  commitment to  provide equity  in  the legislation,  which                                                                   
allows creditors to feel more comfortable.                                                                                      
Co-Chair Hawker asked  if there was anything  else that would                                                                   
enhance  the   bargaining  position   when  approaching   the                                                                   
markets.   Mr. Mitchell  thought that additional  flexibility                                                                   
in  the amount,  rather  than  in the  participation  levels,                                                                   
might  be  an  advantage.   If  there  is  a  cost  override,                                                                   
flexibility would be built in.                                                                                                  
Co-Chair  Hawker  thought  that  might  be  looked  at.    He                                                                   
wondered how significant  that issue might be.   Mr. Mitchell                                                                   
thought it  was unlikely that  the flexibility would  be more                                                                   
attractive to the  market.  Co-Chair Hawker  pointed out that                                                                   
if it doesn't work, it would be  another year before it could                                                                   
be taken up again.                                                                                                              
2:00:22 PM                                                                                                                    
Mr. Mitchell  emphasized it is  the "market of the  day" that                                                                   
is more important.  Co-Chair Hawker  shared that he had found                                                                   
his  own comfort  zone.   He noted  that this  amount is  not                                                                   
large on Wall Street.                                                                                                           
Co-Chair  Stoltze  thought  there  might  be  more  awareness                                                                   
recently regarding Mat-Su issues.                                                                                               
Representative  Kelly brought up  the prison issue  and asked                                                                   
for  a response  about  prison debt  financing  timing.   Mr.                                                                   
Mitchell thought  the legislative  discussion on  the project                                                                   
did not change the timing of the financing.                                                                                     
Co-Chair Stoltze  did not  like COP's  and thought  that they                                                                   
should be used infrequently.                                                                                                    
2:05:07 PM                                                                                                                    
Co-Chair Hawker  said it appears  that the construction  cost                                                                   
on the project would be about  $300 per square foot.  Typical                                                                   
commercial grade  costs are generally $500 -  $600 per square                                                                   
foot.   He concluded that  it was a  mid-grade building.   He                                                                   
wondered if it was under-designed.                                                                                              
Representative Munoz agreed that  the square footage estimate                                                                   
was about  $315.  However, it  does not include the  price of                                                                   
land, which was donated.                                                                                                        
2:08:07 PM                                                                                                                    
WAYNE JENSEN, JENSEN, YORBA, &  LOTT, INC., JUNEAU, explained                                                                   
that  the  cost  estimates,  done   by  a  professional  cost                                                                   
estimating firm  in Anchorage,  were based on  the conceptual                                                                   
design,  the  site  development  costs,  and  comparisons  of                                                                   
similar  projects built  in the  state.   The  wide range  of                                                                   
costs depends  on many  factors.   His company gave  criteria                                                                   
based  on space  standards,  size of  building,  and date  of                                                                   
construction,  and  the  estimating   firm  came  up  with  a                                                                   
reasonable  cost estimate.    The Trust  came  up with  "soft                                                                   
costs" or  development costs.   He  concluded that  the costs                                                                   
are  reasonable and  construction costs  are favorable  right                                                                   
Co-Chair Hawker agreed with the timing.                                                                                         
2:10:40 PM                                                                                                                    
Co-Chair  Hawker asked  what  the state  is  getting for  its                                                                   
money.  He requested a life quality comparison.                                                                                 
Mr.  Jensen reported  that  he  researched "class  of  space"                                                                   
because of  a previously-asked question.   He found it  to be                                                                   
an  ill-defined  term  because   it  tends  to  depend  on  a                                                                   
comparison with other  projects in the community,  the age of                                                                   
the buildings, the tenant, and  the finish materials, as well                                                                   
as use  of space.   This  building follows  the Alaska  Space                                                                   
Standards,  which   are  not  generous.    The   building  is                                                                   
efficient and functional, with not a lot of wasted space.                                                                       
Mr.  Jensen explained  that  the building  would  be made  of                                                                   
structural  steel, have  a good  life  expectancy, be  energy                                                                   
efficient, have  good internal environmental  conditions, and                                                                   
have life-safety  systems.  It would be  long-term, requiring                                                                   
little maintenance,  and be  energy efficient.   It  would be                                                                   
functionally efficient, as well.                                                                                                
2:14:39 PM                                                                                                                    
Co-Chair  Hawker summarized  that  class  designations are  a                                                                   
function of the real estate industry.  Mr. Jensen agreed.                                                                       
Co-Chair  Hawker  termed  the  building low  on  the  opulent                                                                   
scale.   Mr. Jensen  agreed.   Co-Chair Hawker  asked if  the                                                                   
building was designed  for flexibility.  Mr.  Jensen reported                                                                   
that was  a high priority  and was  reflected in  the state's                                                                   
space standards.                                                                                                                
Co-Chair  Hawker asked  if  the project  was  over or  under-                                                                   
designed and if it would fit into  the community's portfolio.                                                                   
Mr.  Jensen thought  it would  fit  into the  city's and  the                                                                   
state's  portfolios.    Design  codes have  changed  and  the                                                                   
building  will  have modern  features  not found  in  current                                                                   
office buildings.                                                                                                               
2:17:15 PM                                                                                                                    
Co-Chair Hawker noted that the  proposal was quite rigid.  He                                                                   
asked Mr. Jensen how high his  cost overrun anxiety was.  Mr.                                                                   
Jensen reported  that there are contingencies  built into the                                                                   
project: time, budget, and space requirements.                                                                                  
Representative  Crawford recalled  pictures  of early  Juneau                                                                   
when all  the buildings had pitched  roofs.  After WW  II the                                                                   
trend was for flat  roofs that leaked.  He wondered  what the                                                                   
roof would be like on the new building.                                                                                         
Mr. Jensen  thought it  would be  a low,  sloped roof  with a                                                                   
membrane.   He  shared the  difficulties of  having a  sloped                                                                   
roof on such a large building.   A large consideration is the                                                                   
snow/rain  damage  potential.    Those factors  will  all  be                                                                   
Representative Crawford  suggested designing a  building with                                                                   
sloped roofs.                                                                                                                   
2:22:15 PM                                                                                                                    
Co-Chair Hawker  addressed the "lease  or buy" question.   He                                                                   
discussed square  foot modeling which, for this  building, is                                                                   
$4.07 per square  foot.  He wondered about  alternatives such                                                                   
as leased space elsewhere in the state or in the community.                                                                     
Representative Munoz  reported that the most  recent estimate                                                                   
was $3.50  per square  foot and would  probably be  less than                                                                   
that.  For all state-leased facilities,  the market rate does                                                                   
not take  into account  the investments  Alaska must  make to                                                                   
come up to code.   She noted that extensive  examples of this                                                                   
were included  in the estimate.   She mentioned  the Frontier                                                                   
Building in Anchorage,  which leases for about  $3 per square                                                                   
foot.  The state had to invest  about $1 million to bring the                                                                   
facility up to standards.                                                                                                       
2:25:22 PM                                                                                                                    
Co-Chair  Stoltze  requested  information  about  the  fiscal                                                                   
Mr.  Mitchell   reported  that  the  fiscal   note  from  the                                                                   
Department of Revenue contains  an appropriation required for                                                                   
debt service  and cost of issuance  for FY 10  for $1,001,500                                                                   
and debt service  in FY 11 through the balance  of the fiscal                                                                   
note for $1,866,000  per year based on a  20-year certificate                                                                   
of participation being issued at a rate of 5.5 percent.                                                                         
Co-Chair    Stoltze   reported    on   the   Department    of                                                                   
Administration  fiscal note.   Mr. Mitchell noted  that there                                                                   
would be two  separate leases.  He discussed  the possibility                                                                   
of deferring the fiscal impact in FY 10.                                                                                        
2:29:08 PM                                                                                                                    
Co-Chair  Hawker   noted  a  third   fiscal  note   from  the                                                                   
Department of Natural  Resources.  He thought  the RDU leases                                                                   
on  the  Department  of  Administration's  fiscal  note  made                                                                   
sense.    It  is  $1.3  million  out  of  general  funds  for                                                                   
contractual services (paying the  rent) beginning in FY 2013.                                                                   
He commented  that the  Department of  Revenue's fiscal  note                                                                   
expenditure is debt  service in the out years  and questioned                                                                   
the  source of  funds.   He  wondered  if they  were  general                                                                   
funds.   Mr. Mitchell reported  that they were  general funds                                                                   
subject  to appropriation.   He  did  not want  the funds  to                                                                   
"float through another agency".                                                                                                 
2:30:28 PM                                                                                                                    
Co-Chair   Hawker  addressed   the   Department  of   Natural                                                                   
Resources (AMHTA)  fiscal note to  support debt service.   He                                                                   
asked for further clarification.                                                                                                
AT-EASE:       2:31:17 PM                                                                                                     
RECONVENED:    2:40:18 PM                                                                                                     
JEFF JESSEE,  CHIEF EXECUTIVE  OFFICER, ALASKA MENTAL  HEALTH                                                                   
TRUST AUTHORITY, offered to answer questions.                                                                                   
Co-Chair Hawker asked if Mr. Jessee  could address the fiscal                                                                   
notes.   Mr. Jessee  reported on  his understanding  that the                                                                   
Department  of  Natural  Resources  fiscal  note  funded  the                                                                   
actual  operations and  maintenance  costs  of the  building.                                                                   
Co-Chair Hawker related  that the fiscal note  shows a change                                                                   
of revenues  of $5.7 million per  year for the  Mental Health                                                                   
Lands Administration  beginning in FY  2013.  He  pointed out                                                                   
that the Department of Administration  leases, the tenant, is                                                                   
spending only $1.3 million.                                                                                                     
Mr. Jessee could not answer the  question without viewing the                                                                   
fiscal notes.                                                                                                                   
Co-Chair  Hawker  explained that  it  shows  MHTAAR paying  a                                                                   
contractual expense  of $1.5 million  to the general  fund to                                                                   
pay the  debt service.  His  concern was that  the Department                                                                   
of Administration is only paying $1.3 million.                                                                                  
2:42:46 PM                                                                                                                    
REMOND  HENDERSON,  DEPUTY  DIRECTOR,   DIVISION  OF  GENERAL                                                                   
SERVICES,  DEPARTMENT OF ADMINISTRATION,  reported  that rent                                                                   
funds will  also be received  from the leasing  of commercial                                                                   
space,  which  may  account for  the  difference.    Co-Chair                                                                   
Hawker  needed  assurance  in  the  matter.    Mr.  Henderson                                                                   
clarified   that   the   amount  that   the   Department   of                                                                   
Administration would  be paying in FY 13 is  $5.4 million; in                                                                   
FY 14 it is $5.424;  in FY 15, $5.450; in FY  16, $5.476.  He                                                                   
thought the  money beyond  the $5.4  million amount  would be                                                                   
from commercial  leases.  Co-Chair  Hawker wondered  why that                                                                   
was not reflected in the cover sheet.                                                                                           
2:44:27 PM                                                                                                                    
Mr.  Mitchell  explained that  the  amount reflected  in  the                                                                   
cover  sheet is  the difference  between what  would be  paid                                                                   
under the status quo versus moving into the new building.                                                                       
Co-Chair Hawker asked if $300,000  was the anticipated amount                                                                   
of commercial rent revenue.                                                                                                     
Mr.  Jessee  did  not  know  if   that  was  the  anticipated                                                                   
commercial space revenue.                                                                                                       
2:45:32 PM                                                                                                                    
Representative Munoz recalled  that it was anticipated rental                                                                   
revenue.   She  also recalled  $20,000 per  year in  property                                                                   
tax.  She suggested having confirmation from Mr. Noah.                                                                          
Co-Chair Hawker  suggested setting  the bill aside  until the                                                                   
fiscal notes are cleared up.  Co-Chair Stoltze agreed.                                                                          
Co-Chair  Hawker  requested  further  information  about  the                                                                   
interrelationship of the fiscal notes.                                                                                          
HB  161  was   heard  and  HELD  in  Committee   for  further                                                                   
2:48:51 PM                                                                                                                    

Document Name Date/Time Subjects
CSHB 121 Amendment 1.doc HFIN 4/3/2009 1:30:00 PM
HB 121