Legislature(2011 - 2012)CAPITOL 17
03/10/2011 01:00 PM House TRANSPORTATION
| Audio | Topic |
|---|---|
| Start | |
| HB57 | |
| HB158 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 57 | TELECONFERENCED | |
| *+ | HB 158 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 158-KNIK ARM BRIDGE AND TOLL AUTHORITY
2:01:22 PM
CHAIR P. WILSON announced that the final order of business would
be HOUSE BILL NO. 158, "An Act relating to the authority and
obligations of the Knik Arm Bridge and Toll Authority, to bonds
of the authority, and to reserve funds of the authority;
authorizing the state to provide support for certain obligations
of the authority; relating to taxes and assessments on a person
that is a party to an agreement with the authority; and
establishing the Knik Arm Crossing fund."
2:01:40 PM
REPRESENTATIVE MARK NEUMAN, Alaska State Legislature, stated
that HB 158 would provide for a successful procurement for the
Knik Arm Crossing project and would generate the best value for
the state. This bill would reduce the cost of financing the
project and facilities and would expedite opening the Knik Arm
Bridge for traffic in 2015. He pointed out that information in
members' packets identifies the Matanuska-Susitna Borough as
fastest growing area of the state. He indicated the population
is 88,000 and is increasing. The Knik Arm Crossing would
provide an additional route to Anchorage. Anchorage's current
population is 300,000. The Knik Arm Bridge and Toll Authority
(KABATA) project would create economic growth through jobs and
would help diversify the economy. He thanked the committee for
touring the highway system last summer. He expressed concern
about safety, due to the bumper-to-bumper traffic on the Glenn-
Parks Highway. He reported the completion of $50 to $70 million
for the Glenn Highway rut rehabilitation program. The road is
250 percent over carrying capacity. One solution is to find
different routes and the Knik Arm Crossing project would offer
an alternative route. He said that three constituents died in
traffic fatalities on Knik/Goose Bay Road. This project would
connect the Parks Highway, Knik/Goose Bay Road, and the Seward
Highway, including three highway safety corridors. He stressed
the need to expand the highway system.
2:04:53 PM
REPRESENTATIVE NEUMAN referred to members' packets to
statistics, including that since 1977, 38 fatalities occurred on
Knik/Goose Bay Road. He related that 93 major accidents
involved injuries. Sixteen fatalities and 51 major crashes
occurred on the nine mile stretch between Wasilla and Big Lake
alone. He stated it is critical to support expansion. He
highlighted the state's resource expansion, including mines.
The Matanuska-Susitna Valley is connected to Anchorage, with the
largest port in Alaska. Currently, freight is transported via
the Eagle River Bridge. He expressed concern that if a major
earthquake impacted the bridge transportation could cut off
freight transportation north of Anchorage, including to the
Matanuska-Susitna Valley area. He suggested that an alternate
route with a modern bridge, rated to withstand an 8.0 earthquake
is critical to move freight throughout Alaska, including to
military bases. He related that about 30,000 commuters travel
to Anchorage each day. The Parks and Glenn Highways cannot be
expanded. This Knik Arm Bridge and Toll Authority (KABATA) was
created in 2003 and has undergone extensive planning and
numerous state studies. On December 15, 2010, the Federal
Highway Administration (FHWA) signed the record of decision for
the KABATA project which provides environmental clearance to
move this project forward.
REPRESENTATIVE NEUMAN said the KABATA would not have received
the decision without the project being sound. He pointed out
that in 2009, the KABATA cost was estimated at $687 million.
The Department of Transportation & Public Facilities (DOT&PF)
asked for an independent analysis, with cost estimated at $682
million. This speaks to the level of professionalism shown by
the KABATA. He referred to letters of support from the Alaska
Trucking Association, the Alaska Support Industry Alliance, the
Matanuska-Susitna Borough, the City of Wasilla, the Municipality
of Anchorage, and various trade groups.
2:09:42 PM
REPRESENTATIVE NEUMAN reported that 60 percent of Alaskans
support the project. He related that the rate is much higher
for Matanuska-Susitna commuters. He said it is critical to move
forward with the public-private partnership since project costs
for roads continue to rise. He stated that public-private
projects are also on the rise. The state will own and operate
the Knik Arm Bridge but will partner with the private sector.
The KABATA staff will provide details. He summarized that this
project is an investment in Alaska's future. The project can
benefit the economic welfare of the state. He pointed out that
he has served on the KABATA board as a non-voting member.
2:11:47 PM
ANDREW NIEMIEC, Executive Director, Knik Arm Bridge and Toll
Authority (KABATA), stated that KABATA is committed to moving
forward with the Knik Arm Crossing project which will provide
sustainable jobs and economic opportunities for generations of
Alaskans. The purpose of KABATA is to develop, stimulate, and
advance the economic welfare of the state, and further the
development of transportation systems in the vicinity of the
upper Cook Inlet by constructing a bridge between the
Municipality of Anchorage (MOA) and the Matanuska-Susitna
Borough (MSB). The environmental impact statement confirms that
the proposed crossing is an essential project that would improve
regional transportation infrastructure, national highway
connectivity for the movement of people and goods from
Southcentral Alaska to the Interior, and the North Slope of
Alaska. It would provide a safe alternate route to Alaska's
most populated areas for disaster relief and emergency response.
The Knik Arm Bridge crossing is being developed as a FHWA
project. The FHWA is the lead federal agency and has provided a
build recommendation, a build record of decision. KABATA is
currently continuing with environmental permitting and right-of-
way acquisition. The first phase of the project is estimated to
cost $716 million for construction of a minimum 8200 foot toll
bridge, 18 miles of approach roads, and an 800 foot cut and
cover tunnel through Government Hill. The project would be
delivered under a public-private partnership or PPP agreement.
2:14:57 PM
MR. NIEMIEC related that the main statutory changes outlined in
HB 158 encompass four areas: increase KABATA's bonding
authority, clarify property tax language, address contractual
monetary obligations, and add language to establish and manage a
reserve fund. The increase in bonding authority from $500 to
$600 million matches the $600 million allocation of private
activity bonds as the capacity provided by DOT&PF for the
purpose of the project and to KABATA. It is important to note
that any private activity bonds issued are the liability of the
borrower, the private partner and not the State of Alaska (SOA).
The property tax language specifies that the bridge and
associated connections are not subject to property tax if
operated by a private developer on behalf of the state. That is
similar to any other state facility that is operated by the SOA.
Alaska statutes (AS) 19.75 would be modified to clarify that any
monetary obligation under public-private partnership for the
purposes of constructing the facility are obligations of the SOA
and satisfaction of these obligations are subject to
appropriation. He reiterated that this change applies to
monetary liabilities associated with the public-private
partnership. There could be other liabilities of KABATA and
those obligations remain separate from the state. Prior to
approval of a public-private agreement, a comprehensive
evaluation process involving the DOT&PF, the Department of
Revenue (DOR), and the Department of Law (DOL) must be
accomplished. The changes necessary to attract lower cost debt
and equity to finance the project will reduce the availability
payments that the KABATA and the SOA must make to the private
developer and will help keep tolls affordable.
2:17:16 PM
MR. NIEMIEC related that the project reserve fund provisions
were added to allow KABATA to properly manage toll revenues and
are contractual obligations of the agreement. The reserve fund
will apply sources of revenue, including tolls and any
appropriated funds, for specific purposes such as compensation
to the private partner. Surplus funds are available for
capacity improvements and other federally eligible
transportation projects. The statutory language provides that
any appropriations made will be held separately by the DOR until
the public-private partnership is in place and then will be
deposited into the reserve fund. The KABATA has advisors under
contract by the DOL who have reviewed HB 158. This project has
continued to have strong support. A January survey shows 60
percent of Alaskans support the Knik Arm Bridge project and say
now is the time to build the bridge. He added that 75 percent
of Alaskans believe the bridge will lead to more jobs and
economic growth.
2:18:38 PM
KEVIN HEMENWAY, Chief Financial Officer, Knik Arm Bridge and
Toll Authority (KABATA), gave a brief history of his career and
related his background includes a 25-year career in the private
sector in public accountancy as well as having served as the
chief financial officer of two publicly traded corporations,
including Alaska Communications Systems. He related that in
1999 he came to Alaska and has since completed several billion
dollars in transactions. He related that he became interested
in this project because it is a toll bridge that will generate
revenue, which is different than most state projects. It will
be the first new major highway since the Parks Highway and the
Dalton Highway were built. It has been at least 30 years since
any signature transportation project has been completed in
Alaska. This project will be a public-private partnership
project which transfers substantial project risks to the private
sector and manages the full life cycle of the project. Thus,
all of the costs for maintenance and operations (M&O) are
recognized, acknowledged, and built into the partnership up
front.
MR. HEMENWAY related that Mr. Niemiec mentioned a significant
milestone was reached in December 2010, when the Federal Highway
Administration (FHWA) issued a Record of Decision that permits
KABATA to move forward with procurement of a private partner.
The KABATA plans to have the bridge open by 2015-2016. He
explained the public-private partnership structure. The private
sector will design, build, operate, and maintain the facility
for 35 to 40 years under strict contractual terms in exchange
for periodic payments, most likely annual payments. The private
partner will raise debt and equity and borrow debt to finance
the project, not the SOA or KABATA. The periodic payments will
be used by the private partner to pay for M&O, the connecting
roads, and to repay the project financing. At the end of the
term, the facilities will be handed back to the SOA's control in
a near new state as required by the contract. The SOA, through
KABATA will own the bridge facilities at all times over the life
of the structure, not the private partner. The SOA will set
tolls and own the toll revenue stream.
2:21:20 PM
MR. HEMENWAY explained that the toll revenue will be used to
make the periodic payments to the partner and any surplus will
be used to fund project improvements and other transportation
infrastructure around the state. Competition for the project,
from the private sector perspective, will be providing the SOA
the lowest annual payment offer. The proposals from prospective
partners will be evaluated by a committee by a rigorous criteria
evaluation, which will be performed by the DOT&PF, the DOR, the
DOL, KABATA, and industry experts. Final approval will be made
by the KABATA's Board of Directors (BOD), comprised of two
members from the legislature, one from each body; the
commissioners of the DOR, the DOT&PF, and three public members.
2:22:17 PM
MR. HEMENWAY related that financing cost is the most important
component the private sector will need to consider when
proposing the SOA's annual payment. Lowering the cost of
financing for the private partner will result in the best value
for the SOA since "they will sharpen their pencils" and give the
SOA lower proposals. This bill, HB 158, is important to
achieving that best value since it will reduce financing for the
private partner and will provide the mechanisms required and
expected by the private marketplace to establish a contractual
structure that is workable from their perspective. The KABATA
is working to lower the cost of capital and has recently
submitted a request to participate in a program established by
the U.S. Department of Transportation as a result of passage of
the Transportation Infrastructure Finance and Innovation Act
(TIFIA) of 1998. This is a low-cost loan program for federal
projects. This is a federal project since the FHWA has been
involved since the beginning. This program will allow KABATA's
prospective partners to borrow that low cost capital. He
reiterated that the KABATA has been allocated $600 million of
private activity bond capacity by the U.S. Department of
Transportation which allows the state's partner to borrow money
on a tax exempt basis, which equates to lower interest rates and
more refined proposals. One of the items in HB 158 is to
increase issuance capacity of the authority since private
activity bonds require a public issuer but the public is not the
borrower of that debt. He stressed that the private partner and
not KABATA will be the borrower of any project financing under
the public-private partnership structure proposed by KABATA.
2:23:57 PM
MR. HEMENWAY stated that the KABATA recognized early on that
this project is a financing project in terms of delivery, beyond
the infrastructure needs of the public. The KABATA hired Wilbur
Smith, Associates, as its consulting engineer. This firm is the
preeminent traffic and toll forecasters in the nation and
studies are investment grade, which means Wall Street will
accept them for bond issuance. Their dependability is high, he
said. Their track record for forecasting is exceptional. Their
studies have supported about $88 billion of toll revenue
financings, with $22 billion in the last five years. They
conducted 22 studies for startup toll roads. Of those, 96
percent reached the base forecast, and nearly all of the
projects have been within plus or minus of 25 percent. He
referred to the proposed Knik Arm Bridge project, and estimated
that 67 percent or better will meet the obligations over the
term of the contract. In February 2011, Wilbur Smith &
Associates updated the 2007 study to reflect the downturn in the
economy and a more conservative population forecast. Those
figures are reflected in the KABATA's financial models. The
authority is very confident in the independent traffic and toll
revenue forecast and the project's ability to meet its
obligations. Over the life cycle of the Knik Arm Bridge, the
KABATA will recover the investment, as well as generate returns
that could result in lower tolls or in additional investment n
the state.
MR. HEMENWAY concluded that HB 158 would establish the
mechanisms needed to develop the public-private partnership
contract under the terms the marketplace expects. Thus, HB 158
should attract the most competitive proposals at the lowest cost
and best value to the SOA. This bill, HB 158, does not commit
the SOA to anything unless the private sector proposals are
accepted and finalized and acceptance is subject to a rigorous
procurement process, with the final decision of whether to
accept any proposals being made by the board. This bill
demonstrates that the state is serious about the essential
nature of the project, its role in the public-private
partnership as project owner, and it signals "Alaska is open for
business and confident in our future." Over time the project
will generate a surplus toll revenue stream that can be used to
fund other needed transportation improvements or to reduce
tolls. This project is needed to support economic development,
provide access to land for population and industrial growth, to
facilitate the movement of people and freight, and for safety.
This project will benefit generations of Alaskans. He urged the
committee to move HB 158 on to the next committee of referral.
2:27:25 PM
REPRESENTATIVE PETERSEN related his understanding that the ferry
being built to serve Port MacKenzie and is behind schedule. He
stated that significant funds have been expended thus far.
Historically, ferry operations are used until the population
density reached, such as was done for the Golden Gate Bridge.
He asked for clarification.
REPRESENTATIVE NEUMAN answered that the ferry in Ketchikan is
funded by the U.S. Navy. This $60 million world class vessel
will not only provide service between Anchorage and Matanuska-
Susitna Borough, but it will serve whole Cook Inlet Area. This
project will work well as a complement to the proposed Knik Arm
Bridge project.
2:29:36 PM
REPRESENTATIVE PETERSEN asked whether the ferry will begin
operations soon. He recalled a problem with either hauling
people or cars, not both.
REPRESENTATIVE NEUMAN stated that this ferry can haul trucks,
people, and vehicles. He offered that the Municipality of
Anchorage supports the project. Currently, docks are being
built at Port MacKenzie. He explained that Anchorage is a
container port and Port MacKenzie is an industrial port. The
project will complement the two ports. In response to Chair P.
Wilson, Representative Neuman stated that the state and federal
funding for the docks is ongoing and the ferry will provide
service in both directions.
2:31:39 PM
REPRESENTATIVE FEIGE referred to page 2, line 17 of HB 158. He
expressed concern about the risk. He asked how much risk and
obligation the SOA would incur.
MR. NIEMIEC asked whether he was interested in specific figures.
REPRESENTATIVE FEIGE referred to the language, which read,
"...the monetary obligations incurred by the authority under the
partnerships or contracts are obligations of the state..." He
asked whether the cost of building the bridge was part of that
obligation.
MR. NIEMIEC answered that the cost of bridge is part of that
amount. He said the language would basically clarify that a
contract for authority to construct the crossing is basically
stating the private industry would be conducting business with
the state. Under this agreement, the SOA and KABATA are
responsible for the payment to the private developer. The
private developer would be procuring the construction contract.
Normally the state would contract directly with the private
sector for constructing a facility, and paying a contractor for
that construction. Typically, the owner takes on the
construction risk. In this case, the private developer has the
design build contract which is not the SOA's contract. The
SOA's responsibility is to make the payment. When the KABATA
receives proposals from the developers and the SOA accepts them,
it represents the SOA's exposure.
2:34:22 PM
REPRESENTATIVE FEIGE asked for clarification on whether the
private entity would have the bonding authority to raise funds
for the actual construction of the bridge.
MR. HEMENWAY explained the financing structure: the private
sector is responsible to design, build, finance, operate, and
maintain the facility. The contracts for design build will be
between the private entity and their contractors. The contract
with lenders, whether through TIFIA or private activity
bondholders, or a bank credit facility, will be between them and
their lenders on a nonrecourse basis to the state. He said that
whether the private partner directly performs the operations and
maintenance or subcontracts it out, the responsibility will be
theirs. The private entity's responsibility to the state is to
build the infrastructure on the state's behalf and maintain it
to a quality standard over the agreement. The private entity
will return the facility at the end of the agreement in exchange
for the annual payment. He said, "So the state's risk will be
knowing when those proposals are received, he said. The state's
primary source for meeting those obligations in the form of the
annual payment is the toll revenue. Just to be clear, he
reinforced that all of the focus from a financial perspective
for this project should surround the proposals that KABATA will
receive and whether the toll revenue be sufficient.
2:36:41 PM
MR. HEMENWAY explained that this has been modeled on a pro forma
basis, which means "as if we were standing in the shoes of the
developer with very good information on cost estimates,
operations and maintenance cost, toll collections, etc." He
stated that those items will actually be contracts of the
private partner. The state would enter into a contract once the
evaluation process is completed. The state would commit to
making the annual availability payments. He added that if the
private partner under performs there would be reductions to the
payment up to the point of potentially losing the agreement.
The KABATA and the state would not have any obligation related
to the debt or to the private partner's design-build contract,
which are the primary cost elements in the entire project, he
said.
2:37:29 PM
CHAIR P. WILSON related her understanding that the authority
may, under Section 1, AS 19.75.111 (a)(5): make and execute
agreements, contracts, and all other instruments with any public
or private person... for the purpose of... subparagraph (B),
which read:
"entering into public-private partnerships or service
contracts in any form; the monetary obligations
incurred by the authority under the partnerships or
contracts are obligations of the state, and
satisfaction of those obligations from funds other
than authority funds is subject to appropriation;
CHAIR P. WILSON asked for clarification as it did not seem to
match up with the explanation just given.
MR. HEMENWAY answered that the primary contractual obligation of
the state will be to make the annual payment. He explained that
as with other contracts, some components will add clauses to
address such items as early termination. In those instances the
contract would add a provision to ensure compensation to make
the parties whole if the early termination occurred. Presuming
KABATA moves forward with the contract, the state's primary
obligation will be to make the annual availability payment or
the annual lease payment, whichever term is preferred, under
that agreement. He offered his belief that sometimes contracts
attempt to think of everything that may happen. "The fact is
that is the real state obligation under the contract", he said.
The state will not know what the offer is until proposals are
received. The models that have been run are pro forma so KABATA
will have a very good idea of what the proposals will look like,
he said.
2:39:33 PM
CHAIR P. WILSON reiterated that the monetary obligations
incurred by the authority under the partnership or contracts are
the obligations of the state. She related her understanding
that says that the obligations of the partnership will now be
obligations of the state. She asked if that is true.
MR. HEMENWAY answered yes, since the state is the owner of the
bridge and the private sector will expect to know the state will
meet its obligations.
CHAIR P. WILSON restated her understanding that under the bill
KABATA as the authority will make agreements with partners, but
once KABATA makes an agreement with the state, the state will
ultimately be responsible.
MR. NIEMIEC responded that KABATA is a state public
organization. People understand that when they are doing
business with KABATA they are doing business with the State of
Alaska (SOA). He related that KABATA was advised that it would
be better to have it more clearly defined in the bill. The
state and KABATA are one and the same. This language clarifies
that the SOA is entering into the agreement. It is a SOA
facility and a SOA contract, he said.
CHAIR P. WILSON recapped that essentially since the SOA
designated KABATA as the authority to "figure all this out."
She related her understanding that when KABATA has been
discussing a public-private partnership, the public is the SOA
and private is anyone else.
REPRESENTATIVE NEUMAN said that is correct. He related that
KABATA is a state entity, just as the Alaska Railroad
Corporation is a state entity. He stated that KABATA is the
state. However, in terms of cost overruns in a public-private
partnership, the private entity will contract out any cost He
said, "But when we look at cost overruns, because this is going
to be a public-private partnership, the private partner will do
the contracting out." If there's cost overruns "that's their
problem. It's not the state's problem." He explained that when
the proposal comes to the state for approval, KABATA, DOT&PF,
the attorney general's office must approve the plan and any
financing. Once that is completed, that is the state's
position. As to cost overruns, that is the private partner's
problem since they will execute the contract for construction,
he further stated. He affirmed that the state is KABATA.
2:43:23 PM
REPRESENTATIVE JOHNSON asked who wanted the clarification in the
bill and whether it was the financiers, KABATA's board, the SOA,
or the Attorney General.
MR. NIEMIEC answered that KABATA's advisors are asking for
clarification. He stated that KABATA has not put forth a
request for proposal (RFP) so it is not coming from industry.
He said he also does not have an official attorney general's
opinion on this issue. He elaborated that KABATA has advisors
under contract with the Department of Law. The KABATA wants to
ensure that the contractual agreement does not have any weakness
that may affect the state. Our advisors suggested areas of
clarification, including to the property tax provisions.
REPRESENTATIVE JOHNSON understood the necessity for
clarification of the property tax provisions.
2:45:09 PM
REPRESENTATIVE JOHNSON asked for the annual payment.
MR. HEMENWAY answered that the annual payments that are being
modeled, which are pro forma, would be approximately $32 million
at opening. The availability payments are typically structured
so the payment increases over time as traffic increases and
additional maintenance is needed. The KABATA has modeled an
increase of four percent for the first 15-20 years and as
traffic levels out the increase is about the rate of inflation.
At the end of agreement, the final payments would be
approximately $140 million, which could be significantly lower.
He pointed out that the revenue forecast for the same period is
$285 million. This represents a ratio of two.
2:46:37 PM
REPRESENTATIVE JOHNSON asked for the toll assumption.
MR. HEMENWAY answered that the toll for the Knik Arm Bridge at
opening would range from $5 for a passenger vehicle, with an
average of $18 for commercial vehicles, depending on the number
of axles. He stated that this is based on constant dollars,
which means in nominal dollars it will grow at about the rate of
inflation with an annual increase of 2 to 2.5 percent. He
advised this is slightly lower than the Anchorage consumer price
index over the past few years.
2:47:28 PM
CHAIR P. WILSON commented that most people's income does not
increase. She asked whether the toll charges are reasonable
since the tolls would range from $10 to $13 per day for
passenger vehicles, especially given the gas price increases.
MR. HEMENWAY responded that KABATA used Wilbur Smith &
Associates to model the traffic and revenue forecast for tolls.
The rationale they use is based on their traffic and revenue
models. He pointed out that the average new single family home
in the Matanuska-Susitna costs $189,000 less than the average
new single family home in Anchorage since Anchorage is out of
land. The average single family home, including resale, in the
Matanuska-Susitna is $140,000 less than the average single
family home in Anchorage. Today the population growth is moving
to the Palmer and Wasilla area. He concluded that with the
bridge people could live 10 miles from downtown Anchorage. He
stated that even if gas raises to $5 to $7 per gallon will the
fewer miles roundtrip the better off the consumer will be.
Traffic will be fairly low in the opening years, predicted at
3,000 roundtrips per day or 6,000 crossings. However,
population predictions increase over time and with the bridge in
place, considering the wages in Anchorage are 36 percent higher,
the most economic scenario in Southcentral Alaska today is to
live in Matanuska-Susitna valley and work in Anchorage. Today,
that translates into a 60 mile roundtrip, but with the bridge in
place the trip is reduced to 10 miles. Using a 2.5 percent
inflation rate the $5 toll today increase to $5.10 next year,
and $5.22 the following year. He offered his belief that the
Knik Arm Bridge and toll would equate to a great value for
consumers.
2:51:13 PM
REPRESENTATIVE PETERSEN asked whether anyone has done a study to
determine how the Knik Arm Bridge project would affect home
prices in Anchorage. He expressed concern that if home prices
were adversely affected it could affect property taxes in
Anchorage.
MR. HEMENWAY offered his belief that the socio-economic studies
done for the Knik Arm Bridge indicate that the tax increment is
at a break-even point in Anchorage with or without the bridge.
He recalled the projection was based on 20 years. The tax
increase in the Matanuska-Susitna increases by about $1.2
billion to pay for infrastructure needs to support that growing
population. He said he is not a realtor and the scope of the
authority is more limited. He related his sources do not see
any impact on Anchorage home values but homes in the Matanuska-
Susitna area closer to Anchorage would have higher values due to
their close proximity to Anchorage.
2:52:56 PM
REPRESENTATIVE PETERSEN stated that very few people in the
Matanuska-Susitna valley would live 10 minutes from downtown
Anchorage if the Knik Arm Bridge was currently in place. He
asked how long it would take to build up a bedroom community
that would be within the 10 minute drive to Anchorage. He also
thought it would take time develop schools, hospitals, and other
infrastructure. He offered his belief that it would be very
taxing for the Matanuska-Susitna Borough residents.
REPRESENTATIVE NEUMAN offered his belief that the property tax
valuation would be neutral, but the value of Matanuska-Susitna
valley homes would increase since they are close to Anchorage.
He stated that his home in Big Lake would be about 25 miles to
Anchorage if the proposed Knik Arm Bridge was in place whereas
it currently is 60 miles to Anchorage. He stated that is a
considerable amount. He asked what options are available to the
30,000 people who commuters who drive the Glenn and Parks
Highways, which are 250 percent above capacity.
CHAIR P. WILSON equated the Knik Arm Bridge project as similar
to ferry system. It costs a lot to build a ferry, ridership is
hoped for, but the project is never going to pay for itself.
She said the toll makes the project feasible. She initially
thought of a public-private partnership as between the private
sector and the public, not the state, but she realizes the
"public" is the state.
2:56:24 PM
REPRESENTATIVE JOHNSON asked who owns the land across the
proposed Knik Arm Bridge and the percentage of private and state
ownership.
MR. HEMENWAY stated that the traffic and revenue areas impacted
by the Knik Arm Bridge include approximately 3,000 private
landowners. The SOA, native corporations are also landowners
and the Matanuska-Susitna Borough owns significant land.
REPRESENTATIVE JOHNSON asked for clarification that no single
landowner would benefit.
MR. HEMENWAY answered that the largest landowners are the
Matanuska-Susitna Borough, the University of Alaska, the SOA,
and Cook Inlet Region, Inc. (CIRI). Some private landowners own
between several hundred acres to partial acreage.
REPRESENTATIVE NEUMAN explained the largest owners are farmers,
but farmers cannot subdivide the agricultural land. The
proposed Knik Arm Bridge will deposit revenues back to the
general fund.
2:58:30 PM
REPRESENTATIVE MUNOZ related her understanding that $500 to $600
million in state bonding authority would roughly match the
private bonding authority.
MR. HEMENWAY responded that the bonding authority requested in
HB 158 is to permit the private partner to fully utilize the
$600 million from the FHWA to this project. He explained the
last federal highway authorization had a $15 billion national
cap and Alaska received $600 million of that for this project.
Private activity bonds under the Internal Revenue Service (IRS)
tax code require the bonds be issued by a public entity, but the
public entity is not the borrower, the private entity is the
borrower. The KABATA wants to increase the bonding capacity so
the private partner can fully utilize the $600 million in tax
exempt financing if the private partner determines it is the
optimal financial plan in proposing the annual availability
payment. Financing is the single biggest part and is probably a
more expensive piece over the life of the project than the
construction costs. He said:
What we're trying to do is get us or another public
issuer in the state to be able to do on a conduit
issuance basis, to issue that debt for the private
partner as the borrower. The 35 years after
substantial completion that we've talked about is
because that matches the type of long-term financing
that the private partner needs to build this kind of
infrastructure and operate and maintain it to make it
an attractive contract for them. But from the state's
perspective, we are not the borrower of that debt.
REPRESENTATIVE MUNOZ asked him to identify the private partner.
MR. HEMENWAY answered that the private partner will be selected
through a procurement process. Current, the KABATA has "short
listed" two entities. Typically, the private partner would
establish a limited liability corporation (LLC) or limited
liability partnership (LLP). The private partner would bring in
the equity money and borrow the funds from the lenders, which
could be bonds, TIFIA, or bank credit. The private partner
would hire the design builder, who would be involved during the
construction period and any warranty period. The private
partner would either operate and maintain the facility or
contract it over term of the agreement. The state's obligation
under the contract would be to make an annual payment to the
private partner since it will build and maintain the Knik Arm
Bridge. He said:
We're not the borrowers of the debt. We're not the
parties in the design-build contract or anything else.
What we really are doing is simply establishing the
contract standards they need to operate and maintain
at through the public-private agreement and what
happens behind that is left to them as long as they
meet our performance standards.
3:02:13 PM
REPRESENTATIVE MUNOZ asked him to address the profits once the
tolls bring in significantly more than the bond payments.
MR. HEMENWAY answered that the excess toll would first replenish
any reserve fund established by HB 158. Secondly, it would be
used on improvements needed for traffic growth, and finally it
would go to other eligible projects in the state. This is a
FHWA highway project, which is subject to a Section 129 tolling
agreement. This would require that any excess toll revenues
after paying project financing be reinvested in eligible
transportation projects as defined under the federal statute,
including roads, bridges, bike paths, or ferries.
3:03:30 PM
CHAIR P. WILSON asked whether the state would ever be obligated
to repay the bonds.
MR. HEMENWAY agreed they would not. He explained that if the
private partner underwent a Chapter 11 bankruptcy, their
creditor would work out the Chapter 11 terms without recourse to
the state.
3:04:09 PM
CHAIR P. WILSON suggested that the monetary obligation incurred
by the state under the public-private partnership or contract,
are obligations of the state. She surmised the state would be
obligated to pay if the private partner did not.
MR. HEMENWAY answered no. The state would only be obligated to
pay the annual payment to the private partner so long as the
private partner operates to the performance standards agreed to,
and what happens between lenders and the private partner would
not be state business. In further response to Chair P. Wilson,
he reiterated that the state would only pay the private partner
if they meet the performance requirements between the state and
the private partner. If the availability payment is not enough
to repay the bonds, that is a different issue, but as long as
the private partner meets the requirements for the facility and
maintenance, the private partner will earn the annual payment.
There is a clear contractual distinction.
3:05:52 PM
The committee took an at-ease from 3:05 p.m. to 3:10 p.m.
3:10:13 PM
JAMIE KENWORTHY, Financial Analyst, related that he previously
operated a state agency and is a financial analyst. In response
to what is the state's liability, he stated that in the pro
forma statement before the committee, based on a recent
estimate, the obligation is $3.2 billion. The KABATA would sign
a contract with the winning private partner for the current
estimate. These bills would guarantee that contract. That
language is contained in HB 158 and HB 159. The bill states
that the obligations of KABATA are the obligations of the state.
In response to Representative Johnson, who previously asked who
wanted the clarification on the monetary obligations incurred by
the authority, he answered:
Who wants this clarification? I have a different
answer. The people who are bidding on this project
want this qualification because under KABATA's
original statute, they could not issue debt that were
obligations of the state. They were like AIDEA. They
could issue bonds and would have moral authority to
the state, but they were basically only the
responsibility of the agency. They were not like
general obligation bonds: direct obligations of the
state. That's why I came to Juneau to testify because
the estimates of the total revenue shortfall on this
are huge. They have used population numbers that are
50 percent higher than the Institute of Social and
Economic Research (ISER) and 64 percent higher than
the state's demographer. So once they sign a contract,
those become your obligations because you have changed
the rules of the game. The game was, and this was the
Dittman poll of three years ago, 'If the private
sector pays for 70-90 percent of this deal, the
private sector takes the risk. That's why the
Anchorage Assembly approved this, based upon no
further state funds. [Anchorage Metropolitan Area
Transportation](AMATS) had the same decision. This
changes everything. And you don't know the costs of
that change. You have KABATA's current estimate on
this.
3:12:50 PM
MR. KENWORTHY related a scenario in which a bankruptcy occurred.
It happened last year in San Diego. One of the two bidders on
the project created a subsidiary in San Diego. The toll revenue
was too low to pay the bonds so they defaulted on the loan. The
subsidiary, which was an LLC, had no recourse to the huge
financial institution in Australia, the Macquarie Group. He
related a scenario in which he bought bonds of the private
partner, Macquarie Knik Bridge and they stop making payments,
perhaps because they get into a dispute with KABATA, perhaps
because the state refused to give $100 million, which he
referred to as a number he pulled out of a hat. He sues the
private partner. The first thing my attorney will do is go
after the "deep pockets" the SOA. My attorney will try to get
the state involved in its bankruptcy case and they'll have good
cause. The first "Exhibit A" of that would be these bills,
because the obligations of KABATA, the availability structure of
$3.2 billion over 35 years in the pro forma. He said, "I came
here to walk you through those pro formas."
3:14:31 PM
MR. KENWORTHY pointed out that last year, when KABATA submitted
a similar application on March 1, 2010 they estimated the
availability payment, not to be $3.2 billion but $6.3 billion.
Since then KABATA has picked up a $150 million appropriation
from the general fund, which lowers the figure. Secondly, the
KABATA has lowered the return from 14 to 12 percent. He
expressed concern that last year KABATA's estimate of the
contract it would sign with the private partner is now $3
billion more than this year's estimate. This is nearly double
the cost projection of the availability payment. It is not a
trivial matter that someone the state contracts with could
default on a loan, even if the state came out of the bankruptcy
process still owning the bridge asset. The bridge is another
asset the court could consider. He expressed further concern
that if a state agency defaults on an obligation, whether it is
called a bond or a contract for $3.2 billion, the credit markets
will take notice. The first thing Moody's and Standard & Poor's
(S&P) will do is place the SOA under review for possible
downgrade. When the Alaska Housing Finance (AHFC), the
Municipal Bond Bank, or Alaska Industrial Development & Export
Authority (AIDEA) wants to upgrade a dock or a mining
opportunity materializes, similar to the Red Dog Mine project,
and the state wants to finance the project at a reasonable cost,
all of a sudden the state could face higher interest rates. If
one state agency defaults on its obligations, another could, he
said.
3:16:52 PM
MR. KENWORTHY suggested that the bonds are technically moral
obligations of the state and not direct obligations. When AIDEA
or AHFC issues bonds that is what the bonds say on the cover
sheet. However, investors understand there is a moral
obligation if not a legal obligation attached. If agencies
default on contracts or bond issues of this size it will have an
impact on the credit ratings for all state agencies. He
recalled the state has a triple AAA credit rating, which he
would like the state to keep. He said, "You have to care about
the number in the pro forma sheet."
3:17:40 PM
MR. KENWORTHY said he has some red flags for the committee. He
referred to page 1 of the document in members packets titled,
"Knik Arm Bridge and Toll Authority, Federalization of Sections
2-5, with TIFIA Optimization, Private Model - Availability
Payment Structure - Current Market." He referred to the $150
million under Sources listed as State Grant. He stated that is
not a reserve fund in any standard meaning for financial
analysts. Instead, the KABATA is directly committing that $150
million to the project "from day one."
3:18:48 PM
MR. KENWORTHY brought up a second concern. He referred to the
pro forma financial plan, to the heading Capital Accretion
Bonds, under the same section, for $40,792,688. He then
referred members to page 5 of the pro forma document to the
Annual Debt Service. He offered his belief that Capital
Accretion Bonds are a fancy way of saying, :We can't afford the
interest in the early years; we're going to add it to the
principal." Thus, the state would pay interest on interest.
The question should be, "How good is this deal? When can they
pay off those Capital Accretion Bonds?" He pointed out that the
answer to this question is found on the second column of page 5,
of the pro forma document under the heading, Tax-Exempt CAB
Annual DS. He said that the state will pay $248 million to pay
off $41 million of principal. Thus, the state will pay over
$200 million in interest. In response to Chair P. Wilson, he
agreed that it would fall in the latter stages. He related a
scenario in which in which a person takes out a mortgage for
$300,000, the bank provides as statement that shows the
homeowner will repay $450 thousand. The bank does not say you
will repay $1.2 million, which is a factor of 4. He said,
"That's what this deal shows." He recapped the state would pay
basically six times the amount. This is his second red flag, he
said.
3:21:18 PM
MR. KENWORTHY stated that in financial markets it is called
negative amortization or negative equity. He asserted that this
has an eerie similarity as to what caused the housing crisis.
He stated there are low down payments, negative amortization, or
in other words "you owe significantly more in year two. Most
mortgages you owe less." With KABATA, the toll revenue is not
yet available to make the availability payments. Ten days ago,
the KABATA projected it would earn $16 million in toll revenue
in 2016, but must make a $38 million availability payment.
3:22:17 PM
MR. KENWORTHY referred to page 6, of the pro forma financial
plan to the amount of the availability payments, which is $3.2
billion. He directed his comment to Representative Feige, who
earlier asked for the amount of availability payments, and he
answered that based on KABATA's current estimates. The KABATA
would sign a contract committing itself to the $3.2 billion.
The private partner would take the contract to the rating agency
that, "Hey, I've made a deal with the State of Alaska." The
availability payment is subject to annual appropriation by the
legislature, and that would give the private partner an asset,
which is the state's commitment.
3:23:41 PM
MR. KENWORTHY predicted that there would be too little revenue
in the early years to make the toll payments, which is why the
numbers are so bad. He said, "Another warning sign, you see, is
what's called balloon payments." With a mortgage, the fixed
amount is paid, and each year less and less interest is paid.
Most of the successful private partnerships with state
governments are ones that are based on fixed amounts. These are
balloon amounts. He added that the KABATA did not obtain a
TIFIA loan last year. He predicted they would not get it this
year because other deals are better, such as existing congestion
and demonstrated population increases. He referred to page 3,
to the cost of the Knik Arm Bridge project. He said, "My simple
message to you is: believe those cost numbers, the availability
payment, the maintenance and operation cost, the tolling
operations, the sinking fund for capital expenditures." He
stressed that members should not believe the revenue numbers.
The reason for this is that in 2007, ISER predicted the
Matanuska-Susitna Valley population would be 204,000, in 2030.
Instead of using that figure the KABATA went to Texas and bought
research.
3:25:09 PM
MR. KENWORTHY said, "I'm here to tell you they shopped the
numbers so the financials would look better." The test of that
is that ISER's current population figure for 2030 for the
Matanuska-Susitna valley is 169,000. He stated in December, the
state demographer came out with a new population projection for
the Matanuska-Susitna valley of 156,000 in 2034. He pointed out
that KABATA's number is 64 percent higher. Currently, the
Department of Transportation & Public Facilities (DOT&PF) has a
traffic model for trips are estimated for the Glenn Highway and
the proposed Knik Arm Bridge project for 2030. The DOT&PF
refuses to release the figures. He's been told the department
does not have them, they are too variable, or too low, and we've
been referred to KABATA. This week a public information request
was filed to obtain the figures.
3:26:37 PM
MR. KENWORTHY related that the figures would be helpful to the
legislature. The legislature will guarantee the contract.
Currently, the census figures list the Matanuska-Susitna valley
population at 91,000. He suggested that if the population
increases to 150,000 in 20 years, the toll revenue numbers
"really slide off." The KABATA is counting on tolls to pay off
the availability payment but if the population predictions are
skewed, the toll revenue is also skewed by 50 percent. He said
when the figure in question is $3.2 billion the amount is
significant and constitutes "real money."
3:27:22 PM
REPRESENTATIVE FEIGE shared some of his concerns over the
population projections. He asked for a brief description of Mr.
Kenworthy's background.
3:27:44 PM
MR. KENWORTHY stated that he was the executive director of the
Science and Technology Foundation for seven and a half years.
He mainly worked on early stage risk capital businesses that
were technology-based businesses. He did a similar job in
Michigan, he said. He stated that he does not have a financial
credential but has been rating business plans for 20 years. He
said he saw the housing bust coming. The symptoms were balloon
payments, overestimated and undocumented income, and negative
amortization. He also said:
I'm a citizen who's looked at this deal, who's taken
it around to three bond geek friends who also don't
think this makes sense, but they still do some
business with the SOA. You need someone who has no
financial interest in this at all. I have no
financial...I'm a volunteer. I live in South
Anchorage. It's going to compromise the Government
Hill neighborhood that I work with but I live in South
Anchorage. It won't affect my neighborhood. I am not
getting any money from this deal. I think I'm just
trying to prevent the state from making a billion
dollar mistake.
3:29:30 PM
CHAIR P. WILSON asked about the population predictions.
MR. KENWORTHY stated that the Department of Labor & Workforce
Development's newsletter, prepared by the state demographer
shows the current population projection for the Matanuska-
Susitna valley in 2034 is 156,436, which adds an additional four
years out from 2030. He stated that the slight adjustment to
the Wilbur Smith Associates study. He referred members to look
at their website, which has a very strong non warranty
provision. Typically, the boilerplate states something like,
"Don't hold us responsible for this." Theirs basically says not
to count on the population estimates due to the quick
preparation. He stated that people have been raising the
population issue at the Anchorage Metropolitan Area
Transportation Study (AMATS) and other hearings, and in a
"grudging way" Wilbur Smith Associates knew it must redo the
numbers. He said, "You can't have financial information based
upon overly optimistic assumptions. Been there, done that."
3:30:45 PM
MR. KENWORTHY stated the last warning flag is the unlimited
government guarantee. He stressed that HB 158 captures it
precisely. It says that obligations of the KABATA will be
obligations of the state. That is not language that AIDEA or
AHFC have in their statutes. They issue paper under their own
credibility. He said, "I think there will be heartburn the day
that deals go south if you're trying to run those agencies and
you're counting on the good credit of the state and its
agencies." He suggested the committee should consult with
bankruptcy lawyers, and he is not a lawyer, but when creditors
go after the SOA, "when things go south" as it did for San Diego
in its second year of operation, the entire floor of the
Attorney General's office will be concerned about this, because
of the bad precedent. He predicted the downside risks are so
high, that having the "veil pierced" the state will settle. He
also predicted everyone would take a hit, and the creditors
would not get paid right away but the payments would be
stretched out. He further predicted the State of Alaska would be
advised it must keep making payments. This happens every day
and when you pick up the Wall Street Journal and read
"restructuring." He feared this would be the projected scenario
for Alaska.
[HB 158 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB57 State Farm letter of support.pdf |
HTRA 3/10/2011 1:00:00 PM |
HB 57 |
| HB057-DOA-DOF-03-04-11.pdf |
HTRA 3/10/2011 1:00:00 PM |
HB 57 |
| HB 57 opposition ltr Roberts.htm |
HTRA 3/10/2011 1:00:00 PM |
HB 57 |
| CSHB57 2-18-11.pdf |
HTRA 3/10/2011 1:00:00 PM |
HB 57 |
| HB0158A.pdf |
HTRA 3/10/2011 1:00:00 PM |
HB 158 |
| HB 158 Sponsor Statement.docx |
HTRA 3/10/2011 1:00:00 PM |
HB 158 |
| HB 158 KABATA pro-forma.pdf |
HTRA 3/10/2011 1:00:00 PM |
HB 158 |
| hb57 NFIB ltr of opoosition.pdf |
HTRA 3/10/2011 1:00:00 PM |
HB 57 |
| HB158 Jan 2011 KABATA survey (2).pdf |
HTRA 3/10/2011 1:00:00 PM |
HB 158 |
| HB 158 Knik Arm Crossing Summary.pdf |
HTRA 3/10/2011 1:00:00 PM |
HB 158 |
| HB158 Houston Resolution 09-05 KABATA.pdf |
HTRA 3/10/2011 1:00:00 PM |
HB 158 |
| HB 158 Knik Arm Crossing White Paper.pdf |
HTRA 3/10/2011 1:00:00 PM |
HB 158 |
| HB158 Knik Arm Crossing TIFIA-LOI.pdf |
HTRA 3/10/2011 1:00:00 PM |
HB 158 |
| HB158 Knik Arm Crossing TIFIA Cover (2).pdf |
HTRA 3/10/2011 1:00:00 PM |
HB 158 |