Legislature(1995 - 1996)

03/27/1996 09:15 AM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
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       CS FOR SENATE BILL NO. 163(FIN)                                         
       "An Act approving  the University of Alaska's  plans to                 
  enter     into long-term obligations with the Alaska Housing                 
  Finance   Corporation to borrow  money from the  corporation                 
  for the   construction  of  new student  housing facilities,                 
  and  authorizing the  Alaska Housing Finance  Corporation to                 
  issue     its  debt  obligations and  to  make loans  to the                 
  University of  Alaska  to  finance  construction   of  those                 
  student housing     facilities;   and   providing   for   an                 
  effective date."                                                             
                                                                               
  Senator Rieger introduced SB 163.  Senator Donley moved CSSB
  163()  work   draft  for  discussion  purposes  and  without                 
  objection it was adopted.                                                    
                                                                               
  Wendy  Redmond  said  that  the  bill  was  changed  at AHFC                 
  suggestion to  give them  some flexibility  to issue  bonds.                 
  The current language in the CS  would not disallow them from                 
  looking  at  other options  if  they  felt that  was  in the                 
  corporation's best interest.                                                 
                                                                               
  John  Bitney, AHFC testified before  the committee.  He said                 
  the way the debt schedule as set up was to look at how  much                 
  was annually  required to  pay off  the bonds  or raise  the                 
  funds to construct  the facility.  The  university's portion                 
  is  predicated on  what  they expect  to  generate from  the                 
  student fees there.   AHFC would provide the subsidy  on the                 
  remaining cost of those  funds on an annual basis.  This was                 
  more the criteria looked at than  any type of interest rate.                 
  The  way this is arranged presently no arbitrage funds would                 
  be  used  based  upon  the  advice  received  from  counsel.                 
  Senator Rieger asked if when  bonds were issued the interest                 
  rate  would  be  higher  than  3%.     Would  the  arbitrage                 
  provisions allow the  3% to  be a blended return coming back                 
  to AHFC on this  project with other higher yielding  returns                 
  on the proceeds of  a bond issue for another  investment and                 
  if the overall aggregate came out within bounds would you be                 
  fine?   Mr. Bitney said  this was not  correct.  He  noted a                 
  memorandum from  legal counsel,  Ken Vassar  to Dan  Fauske,                 
  dated 22 March 1996.  The way it is arranged now is that the                 
  IRS code does not look at a loan or grant of arbitrage funds                 
  to  the university as  an obligation.   Therefore  the funds                 
  cannot be counted in  terms of what is being  blended to try                 
  and  stay within  the  1-1/2% target  number  that is  being                 
  blended down to maintain  the tax exempt status.   Since the                 
  loan or arbitrage  funds are being  given to another  entity                 
  within the State  it does  not incur that  obligation.   The                 
  subsidy from those  funds annually used would be  applied to                 
  our net profits on  an annual basis that otherwise  are used                 
  to pay for capital projects in the state transfer plan.                      
                                                                               
  Senator  Sharp  referred  to  page  2,  line  2  annual debt                 
  service.   Without knowing what  the actual debt  service is                 
  going to be how  can exact figures be loaded  into the bill?                 
  Does  this  annual  debt service  include  interest?   Wendy                 
  Redmond  said that the university is  required by statute to                 
  provide to the legislature on  revenue bonded facilities the                 
  full cost of  the facility including  the debt service in  a                 
  piece of legislation  that must be passed  separately.  This                 
  meets our statutory requirement.   It is exactly known  what                 
  the amount will be that is being  bonded for with AHFC.  The                 
  rate is fixed  through a  25-year period based  on what  the                 
  rental revenues  are expected  to be  with annual  increases                 
  that will be assessed for the fees.  AHFC will subsidize the                 
  balance of that based on however the rates go up.                            
                                                                               
                                                                               
  Senator Sharp referred to lines 6 and 7  $30,000,000 will be                 
  financed   throughout   AHFC   under   a   subsidized   bond                 
  authorization and combined with lines 2 and  3 what interest                 
  rate was used to arrive at these figures of $2,767,000.  Mr.                 
  Bitney advised  it was  6%.   The  estimated annual  subsidy                 
  would be  $1 million  and that  is based  on the  difference                 
  between  what  is  generated  by  the  University  from  the                 
  facility.   Senator Sharp asked  if line  3 established  the                 
  exact  amount the  university would pay for debt  service at                 
  $1,751,515 no matter  what the  bond interest rate  is?   Is                 
  that  a guaranteed  amount to  the university?   Mr.  Bitney                 
  concurred.  Senator  Rieger referred to  line 3, page 2  and                 
  said the  phrase should read including "...an  amount not to                 
  exceed..." and  that way the issue could be explored further                 
  for  flexibility  and  not  prevent  the  bill  from  moving                 
  forward.    He  moved  this   amendment  and  Wendy  Redmond                 
  concurred.  She stated  that in addition to the  $30 million                 
  that  is  being assigned  specifically  to the  dormitory an                 
  additional $3 million  was being collected from  a community                 
  group  doing private  fund-raising for  the dorm.   If  that                 
  money  is  collected  ahead  of  time  it  will  reduce  the                 
  $1,751,515 each year.  The basic dorm rental portion of this                 
  is $1.5 which is fixed in  for 25 years.  Senator Sharp  has                 
  no  objection to  the  amendment of  Senator  Rieger but  is                 
  concerned the amount could  go to zero and that  would leave                 
  much  room for  negotiation.   Ms.  Redmond  said she  never                 
  considered that  an  option.   Mr.  Bitney said  he  assumed                 
  whatever  loan  agreement  would  be   negotiated  with  the                 
  university  would basically  follow  the  structure  of  the                 
  subsidized loan as it is laid out here.  Senator Sharp feels                 
  the exact amount should  be written in.  Wendy  Redmond said                 
  the amount was in the loan documents themselves.                             
                                                                               
  Senator Rieger said  they should find  a better way to  make                 
  use of  arbitrage and give  a break to the  students for the                 
  rates at  the  dorm.   This  is leaving  the  door open  for                 
  possible creative finance it  if turns out there is  any way                 
  it could be done.  Co-chairman Halford concurred.                            
                                                                               
  Co-chairman Halford re-iterated   Senator Rieger's amendment                 
  and with objections  being duly  noted it was  adopted by  a                 
  vote of 4 - 3.                                                               
                                                                               
  Senator  Zharoff commented on the debt  service.  Mr. Bitney                 
  explained the AHFC subsidy.   Wendy Redmond said it  was not                 
  being done with any other projects  around the state at this                 
  time.                                                                        
                                                                               
  Senator Rieger moved  CSSB 163  (FIN) and without  objection                 
  the bill  was reported  out with individual  recommendations                 
  and accompanying fiscal notes zero (previous) DOR(AHFC); and                 
  University at Anchorage zero.                                                
                                                                               

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