Legislature(2011 - 2012)SENATE FINANCE 532

03/26/2012 01:00 PM FINANCE


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01:03:33 PM Start
01:04:24 PM SB80
03:01:41 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ SB 80 KNIK ARM BRIDGE AND TOLL AUTHORITY TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
SENATE BILL NO. 80                                                                                                              
                                                                                                                                
     "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."                                                                                                   
                                                                                                                                
1:04:24 PM                                                                                                                    
                                                                                                                                
Senator Thomas MOVED  to ADOPT proposed CS SB  80, work draft                                                                   
27-LS0430\T, Martin, 3/23/2012.                                                                                                 
                                                                                                                                
Co-Chair Stedman OBJECTED for purpose of discussion.                                                                            
                                                                                                                                
MICHAEL ROVITO, STAFF, SENATOR  MENARD, explained the changes                                                                   
incorporated  in  the  current   bill.  He  stated  that  the                                                                   
entirety of Section 1 of the bill  had been deleted, removing                                                                   
the language  pertaining to the  obligation of the  state. He                                                                   
furthered that on  page 2, "must" was replaced  by "may", and                                                                   
remaining sections  were renumbered  to reflect the  deletion                                                                   
of Section 1.                                                                                                                   
                                                                                                                                
1:06:21 PM                                                                                                                    
                                                                                                                                
Senator  Ellis   asked  for   clarification  concerning   the                                                                   
deletion of the  language in Section 1 that  had detailed the                                                                   
state's financial obligation to the project.                                                                                    
                                                                                                                                
Mr. Rovito clarified  that what was deleted  was the explicit                                                                   
mention of  the obligation of  the state. He  maintained that                                                                   
the  moral obligation  of the  state would  remain since  the                                                                   
Knick  Arm Bridge  and Toll  Authority (KABATA)  was a  state                                                                   
corporation.                                                                                                                    
                                                                                                                                
Senator Ellis  thought that the  language in the  bill should                                                                   
more  clearly  detail  where   the  financial  responsibility                                                                   
would ultimately fall.                                                                                                          
                                                                                                                                
1:07:44 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  WITHDREW his  OBJECTION to adoption  of the                                                                   
committee substitute.  There being  NO OBJECTION,  work draft                                                                   
27-LS0430\T, Martin, 3/23/2012 was adopted.                                                                                     
                                                                                                                                
SENATOR   LINDA   MENARD   provided  a   breakdown   of   the                                                                   
legislation.  She  explained  that the  bill  would  increase                                                                   
KABATA's bond  authority from  $500 million to  $600 million.                                                                   
She  said  that the  bonds  would  be private  equity  bonds;                                                                   
federal,  tax exempt  bonds, issued  by a  state agency.  She                                                                   
stressed that the  state had no financial obligation  tied to                                                                   
the  bonds, but  would  be a  conduit  issuer. She  continued                                                                   
that the  bill required  the State  Bond Committee  to review                                                                   
the bonds and  make assurances that the bonds  conformed to a                                                                   
sound financial policy.  She furthered that Sections  4 and 5                                                                   
of  the bill  provided provisions  of for  a project  reserve                                                                   
fund established  under Section 7. She shared  that the fund,                                                                   
titled "The Knik  Arm Crossing Fund", would be  housed in the                                                                   
Department  of Revenue  (DOR) and  would be  used to  satisfy                                                                   
the  availability payment  during  the initial  years of  the                                                                   
bridge until  the toll revenue  was sufficient to  retire the                                                                   
fund. She  added that  Section 6  exempted the crossing  from                                                                   
state and  local property  tax, whether  public or  privately                                                                   
operated.                                                                                                                       
                                                                                                                                
Senator  Menard concluded  that cost of  not proceeding  with                                                                   
the bridge  could be $3 to  $4 billion based on  2008 figures                                                                   
to improve the  Glen and Park Highways, which  would come out                                                                   
of the Statewide  Transportation Improvement  Program (STIP).                                                                   
She shared  that the  new acronym for  the bridge  was Bridge                                                                   
of Statewide Significance (BOSS).                                                                                               
                                                                                                                                
1:10:53 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
1:15:11 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair  Stedman  noted  the   zero  fiscal  note  from  the                                                                   
Department   of   Transportation    and   Public   Facilities                                                                   
(DOT&PF). He  felt that the zero  fiscal impact to  the state                                                                   
reflected in the note was questionable.                                                                                         
                                                                                                                                
1:16:12 PM                                                                                                                    
                                                                                                                                
MICHAEL  FOSTER,   CHAIRMAN,  KNICK   ARM  BRIDGE   AND  TOLL                                                                   
AUTHORITY,  testified  in  support  of  the  legislation.  He                                                                   
observed  that  the  population  was  expected  to  grow  118                                                                   
percent   between  2010   and  2035.   He  stated  that   the                                                                   
Metropolitan  Transportation Plan (MTP)  showed a  74 percent                                                                   
traffic  growth  in the  area  from  Eagle River  to  Ekultna                                                                   
(39,000  to 68,000).  The  Anchorage bowl  would  grow by  15                                                                   
percent. He  said that available  land was being  depleted in                                                                   
the Anchorage  area. He furthered  that growth  was predicted                                                                   
in outlying areas.                                                                                                              
                                                                                                                                
Mr. Foster observed  that KABATA, state, and  MTP models were                                                                   
based  on the  Institute of  Social  and Economic  Research's                                                                   
(ISER) 2009  model. He concluded  that "without a  doubt" the                                                                   
South-central area of Alaska was growing.                                                                                       
                                                                                                                                
Mr.  Foster  spoke  to  traffic.  In  2010,  30,000  vehicles                                                                   
transited under  the Ekultna Bridge;  only 15,000  went under                                                                   
the bridge  in 1985.  He maintained  that the Ekultna  Bridge                                                                   
was the  first measuring  point of  north bound traffic  into                                                                   
Anchorage.  He pointed  to substantial  growth  from 1985  to                                                                   
2010, and  concluded that  similar growth  was expected  from                                                                   
2010  to  2025.  Traffic  models  suggested  that  the  Glenn                                                                   
Highway   Ekultna  overpass   would  grow   from  30,000   to                                                                   
approximately  65,000  vehicles.   He  stated  that  six-lane                                                                   
traffic on  the Glenn Highway  would increase from  52,000 to                                                                   
110,000  vehicles, based  on the population  model without  a                                                                   
bridge.  He   concluded  that   the  Glenn  Highway   was  at                                                                   
capacity. He  acknowledged that additional vehicles  could be                                                                   
added,  but  maintained  that traffic  delays  and  accidents                                                                   
would occur.                                                                                                                    
                                                                                                                                
1:19:50 PM                                                                                                                    
                                                                                                                                
Mr.  Foster  discussed  the financial  repercussions  of  not                                                                   
building  a  bridge. He  asserted  that  the cost  of  simply                                                                   
upgrading  the  Glenn  Highway   for  future  population  was                                                                   
estimated by DOT&PF in the 2008 STIP as $3 billion dollars.                                                                     
                                                                                                                                
Mr.  Foster observed  that  KABATA had  been  created by  the                                                                   
legislature  in 2003, with  the mission  to connect  the east                                                                   
and  west  sides  of  Cook  Inlet   through  a  crossing.  He                                                                   
observed  that  KABATA  was  in   private/public  partnership                                                                   
procurement  where a  private  partner would  be  responsible                                                                   
for financing,  designing,  building, operating,  maintaining                                                                   
and  toll collection.  The  public partnership  pertained  to                                                                   
the  toll  revenue.  The current  structure  worked  with  an                                                                   
availability payment;  as toll revenue came in,  KABATA would                                                                   
make a  payment on  a quarterly  basis to  the developer  for                                                                   
the cost  of financing,  designing, building, operating,  and                                                                   
maintaining  the  bridge.  He   concluded  that  the  state's                                                                   
obligation  would   be  to  pay   the  developer   for  their                                                                   
investment.                                                                                                                     
                                                                                                                                
Mr.  Foster observed  that the  cost estimates  were done  by                                                                   
different  independent  estimators:  DOT&PF,  Major  Projects                                                                   
Federal  Highways, and  two by  KABATA.  All estimations  put                                                                   
the  first  phase of  the  bridge  at  $720 to  $730  million                                                                   
dollars.  Phase  1 would  be  the  bridge, which  would  span                                                                   
92,000,  and would  have connections  on  both sides  (14,000                                                                   
foot crossing).                                                                                                                 
                                                                                                                                
1:22:51 PM                                                                                                                    
                                                                                                                                
Mr.   Foster  spoke   to  phase   2,  which   would  be   the                                                                   
Ingra/Gambell  connection that  would connect  the bridge  to                                                                   
Ingra/Gambell.                                                                                                                  
                                                                                                                                
Mr.  Foster observed  that the  bridge  would be  built as  a                                                                   
four lane foundation  for final completion. The  initial deck                                                                   
would be  two lanes, 44 foot  wide. Phase 2 would  expand the                                                                   
road to  four lanes  with pedestrian and  bike access  on the                                                                   
bridge.                                                                                                                         
                                                                                                                                
1:22:57 PM                                                                                                                    
                                                                                                                                
Mr. Foster  concluded that  the legislation  would allow  the                                                                   
state to  be a conduit  for the  private developer  to access                                                                   
tax exempt bonds.  He maintained that the bonds  would not be                                                                   
added to  the state's "book" or  be part of the  state's bond                                                                   
capacity,  but   would  be  strictly  pass   through  private                                                                   
activity bonds.  The legislation would increase  authority to                                                                   
$600 million in tax exempt bonds.                                                                                               
                                                                                                                                
Mr. Foster  spoke to property  tax. Private developers  would                                                                   
not be liable  for any property  tax. The bridge would  be an                                                                   
asset of the state  and controlled by KABATA or  the state of                                                                   
Alaska.  The  developer  would  only  have  the  availability                                                                   
payment obligation of the state.                                                                                                
                                                                                                                                
1:24:23 PM                                                                                                                    
                                                                                                                                
Mr. Foster  clarified that the  reserve fund would  represent                                                                   
the  moral  obligation   of  the  state.  Toll   revenue  was                                                                   
anticipated  to  be $100  million  short during  the  initial                                                                   
seven years. The  state needed to demonstrate  the ability to                                                                   
cover   the   shortfall   to  the   developer   through   the                                                                   
availability  payment.  The  availability  payment  would  be                                                                   
similar  to  a  lease payment.  The  reserve  fund  would  be                                                                   
subject to appropriation.  There would be a  moral obligation                                                                   
for the  state to appropriate  to the  fund, and pay  for the                                                                   
infrastructure.  The deleted  Section 1  had been subject  to                                                                   
the  $1 billion,  and  was changed  to  the moral  obligation                                                                   
relating to  the reserve fund;  subject to appropriation,  to                                                                   
handle the shortfall of toll revenue in the initial years.                                                                      
                                                                                                                                
Mr. Foster observed  that the state was estimated  to receive                                                                   
$1.1  billion  in  net  revenue  over the  35  years  of  the                                                                   
concession,  beyond   liabilities  of  KABATA,   to  pay  for                                                                   
operations  and make  availability  payments  to the  private                                                                   
partner. These  funds could be  used statewide for  a variety                                                                   
of  Title 23  projects: roads,  ports,  harbors, bridges,  or                                                                   
marine highways.                                                                                                                
                                                                                                                                
1:27:08 PM                                                                                                                    
                                                                                                                                
Mr. Foster estimated  that were the bridge to  be built, over                                                                   
60   years,    $9.9   billion   would   be    available   for                                                                   
transportation  needs statewide through  the reserve  fund or                                                                   
an  established transportation  fund.  He  added that  excess                                                                   
toll  revenue   would  go   to  the   reserve  fund   and  be                                                                   
appropriated  under title  23.  He stressed  that the  bridge                                                                   
would  be built  for the  needs  of the  future. He  observed                                                                   
that  the Glenn  Highway  adequately handled  current  needs,                                                                   
but without an  upgrade, maintenance costs would  increase $3                                                                   
to $4 billion, which would place a burden on STIP funds.                                                                        
                                                                                                                                
1:29:17 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman wondered  whether  the  committee would  be                                                                   
further   informed   of   the  financial   model   and   cost                                                                   
projections  for  the  project.  He requested  more  data  to                                                                   
assure  the committee  that  the exposure  to  the state  was                                                                   
worth the risk.                                                                                                                 
                                                                                                                                
Mr. Foster deferred the question to the available experts.                                                                      
                                                                                                                                
1:32:28 PM                                                                                                                    
                                                                                                                                
Senator Egan  desired a more  clear definition of  the "moral                                                                   
obligation  of the state"  written into  the language  of the                                                                   
bill.  He noted  that he  and the  Co-Chair both  represented                                                                   
Southeast  Alaska, and queried  the need  for either  of them                                                                   
to feel morally obligated to the project.                                                                                       
Senator  Ellis referred  to a memorandum  from the  Institute                                                                   
of  Social and  Economic  Research  (ISER), dated  March  22,                                                                   
2011(copy  on  file). He  noted  that  Mr. Foster  used  ISER                                                                   
research  as   a  justification   for  the  projections.   He                                                                   
observed  that the  letter strongly  objected to  the use  of                                                                   
ISER projections in KABATA's presentations on the project.                                                                      
                                                                                                                                
1:34:39 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
1:39:43 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Senator Ellis explained  that the ISER memo  was delivered in                                                                   
the interest of disclosure.                                                                                                     
                                                                                                                                
Mr. Foster  responded to  concerns presented  by the  letter.                                                                   
He  maintained  that  the 2009  ISER  numbers  were  accurate                                                                   
population  numbers.  He  clarified   that  when  attributing                                                                   
figures  to ISER,  he  used the  institute  figures, not  the                                                                   
bridge  authority's projections.  He  noted that  he had  not                                                                   
done  a   comparison  between   the  ISER   number  and   the                                                                   
authority's numbers.                                                                                                            
                                                                                                                                
Co-Chair  Stedman understood  that the  authority was  in the                                                                   
process of drafting  a written response to the  ISER memo. He                                                                   
requested copies be distributed to committee members.                                                                           
                                                                                                                                
Mr.  Foster  replied  in  the  affirmative.  He  assured  the                                                                   
committee  he would provide  the information  as soon  as was                                                                   
possible.                                                                                                                       
                                                                                                                                
1:43:46 PM                                                                                                                    
                                                                                                                                
DAVID  LIVINGSTONE, FINANCIAL  ADVISOR,  CITIGROUP, spoke  to                                                                   
the  development  of  the projections.  He  shared  that  for                                                                   
KABATA; he  had taken capital  costs and construction  costs,                                                                   
assumptions that  had been created  by HDR (a  national civil                                                                   
engineering firm,)  and audited  by several other  firms. The                                                                   
estimates  included a $62  million construction  contingency,                                                                   
which considered  any potential  cost overruns. He  said that                                                                   
traffic and  revenue projections  were done  by CDM  + Wilbur                                                                   
Smith   Associates.  He   added  that   Citigroup  had   been                                                                   
financing  toll  roads since  the  1950's  and had  used  the                                                                   
Wilbur Smith projections  many times. He relayed  that Wilbur                                                                   
Smith  also created  operation and  maintenance, and  capital                                                                   
expenditure  projections, for  the cost  of running the  toll                                                                   
systems.                                                                                                                        
                                                                                                                                
1:46:24 PM                                                                                                                    
                                                                                                                                
Mr. Livingston stated  that from the information  provided by                                                                   
Wilbur Smith a  financial model was created,  financed with a                                                                   
combination of equity  and debt. He stated  that conservative                                                                   
assumptions  of 12 percent  equity return  had been  used, as                                                                   
well as debt rates of 50 to 75 basis points.                                                                                    
                                                                                                                                
1:47:34 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  interjected that the stress testing  of the                                                                   
financial models should be discussed.                                                                                           
                                                                                                                                
Mr. Livingston  reviewed  a graph provided  to the  committee                                                                   
titled,  "60  Year  Cost  and   Revenue  Projection"(copy  on                                                                   
file).  He   stated  that  the   red  bars  represented   the                                                                   
availability   payments  made  by   KABATA  to  the   private                                                                   
developer  over the  next  35 years,  from  the beginning  of                                                                   
commercial   operations.   He   noted   that  in   2032   the                                                                   
availability  payments were  charted to  increase because  at                                                                   
that point  the developer would  add two additional  lanes to                                                                   
the  bridge and  connection  roads.  He referenced  the  navy                                                                   
blue  line, which  represented  KABATA administrative  costs;                                                                   
the  light  blue   bars  indicated  the  KABATA   total  debt                                                                   
service. He  furthered that in  2053 the bars  dropped; these                                                                   
bars detailed  the costs  after the  concession was  over and                                                                   
the  private developer  would  turn the  responsibility  back                                                                   
over to KABATA.  He concluded that the bars  were higher than                                                                   
the revenue  curve in the  first eight years;  as development                                                                   
progressed   availability  payments   were  expected   to  be                                                                   
greater that the  toll revenues, $100 million  would be drawn                                                                   
out  of  the  reserve  fund  during  the  initial  years.  He                                                                   
relayed  that surplus  revenues,  the  green area  above  the                                                                   
bars,  totaled  $9  billion  which  would  be  available  for                                                                   
future. He  added that the majority  of the surplus  would be                                                                   
reaped after  2052. He  asserted that  a conservative  set of                                                                   
assumptions  had   been  used  in  the  development   of  the                                                                   
projections  and that  the sensitivities  had been  run.   He                                                                   
said  that traffic  and revenue  probabilities  had been  run                                                                   
with  various  assumption  percentages.  He  maintained  that                                                                   
under all  the projections done  by KABATA the  project, over                                                                   
the first  term of  the concession,  would create a  positive                                                                   
cash-flow for the state.                                                                                                        
                                                                                                                                
1:52:24 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  queried the dollar amounts assigned  to the                                                                   
equity  return target  of 12  percent  and the  cost of  debt                                                                   
aggregate of 6.42 percent.                                                                                                      
                                                                                                                                
Mr.  Livingston replied  that it  had been  assumed that  the                                                                   
project  would be funded  with approximately  $80 million  of                                                                   
equity and $710 million of debt.                                                                                                
                                                                                                                                
Co-Chair   Stedman  asked   why  the   bank  was  not   fully                                                                   
underwriting the project.                                                                                                       
                                                                                                                                
Mr. Livingston  replied that the  state had banks  and equity                                                                   
investors  willing  to  lend approximately  $800  million  to                                                                   
build, finance,  operate,  and maintain  the road. In  return                                                                   
annual  availability payments  from KABATA  were expected  to                                                                   
cover the  cost of  the private parties  taking the  risk. He                                                                   
said  that the  private investors  would  be responsible  for                                                                   
any  cost  overruns.  He  explained   that  the  availability                                                                   
payments   provided    assurances   that    investors   would                                                                   
eventually  be paid for  the investment.  He maintained  that                                                                   
the project would require no future appropriations.                                                                             
                                                                                                                                
1:55:48 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  understood  that  projects  of  this  size                                                                   
often  had  cost overruns,  that  an  overrun of  20  percent                                                                   
could be considered  a success. He assumed that  overruns for                                                                   
the  project could  reach  into the  $100  million range.  He                                                                   
queried  where extra  funding  would come  from  and how  the                                                                   
state could be protected from overrun responsibility.                                                                           
                                                                                                                                
Mr. Livingston replied  that overrun funding would  come from                                                                   
the  concession company;  if the  private  investors did  not                                                                   
finish  the  project  on  time, and  on  budget,  they  would                                                                   
accept the risk.  He stated that KABATA selected  the funding                                                                   
approach specifically  to assure  that cost overruns  did not                                                                   
become a burden of the state.                                                                                                   
                                                                                                                                
Co-Chair  Stedman surmised  that there  would be  no risk  of                                                                   
state exposure,  overreaching $700 million in  debt issuance,                                                                   
and  that  stress  tests performed  by  the  committee  would                                                                   
mirror the numbers offered by KABATA.                                                                                           
                                                                                                                                
1:58:47 PM                                                                                                                    
Mr.  Livingston  replied  that  that  was  largely  true.  He                                                                   
qualified  that  there  were  "uncontrollable  circumstantial                                                                   
events" that  could require  additional funding from  KABATA.                                                                   
He shared  that if  there were  soil test  variations in  the                                                                   
different   areas   of   construction,    KABATA   could   be                                                                   
responsible for  additional payments.  He felt that  the sub-                                                                   
set of  financial risks  were relatively  small, compared  to                                                                   
the size of the project.                                                                                                        
                                                                                                                                
Co-Chair  Stedman   probed  the  potential  risk,   small  or                                                                   
otherwise, that could be deferred to the state.                                                                                 
                                                                                                                                
Mr.  Livingston replied  that if  the toll  revenues came  in                                                                   
lower  than the  projections, the  state could  be asked  for                                                                   
future appropriations to cover the availability payments.                                                                       
                                                                                                                                
2:01:15 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman asked  if  Citigroup had  performed  stress                                                                   
test on projects  under consideration. He wondered  where the                                                                   
stress test  information for  the project  could be  found so                                                                   
that the committee could assess the impact to the state.                                                                        
                                                                                                                                
Mr. Livingston  reiterated that conservative  projections had                                                                   
been   used.  He   said   that   there  was   a   significant                                                                   
construction     and    operation    maintenance     expenses                                                                   
contingencies  written  into  the  bill;  higher  rates  than                                                                   
current  markets,   and  higher  equity  returns,   had  been                                                                   
employed. He  maintained that 100's of  different projections                                                                   
for  KABATA had  been run,  including some  using lower  toll                                                                   
revenues  than  indicated in  the  chart.  He said  that  the                                                                   
project  presented  cash-flow  neutral  over  35  years  even                                                                   
under a 40 percent toll revenue shortfall.                                                                                      
                                                                                                                                
Co-Chair Stedman  pointed out that the figures  mentioned had                                                                   
not  been made  available  to  the committee.  He  maintained                                                                   
concern  that an  over run  in  the $100s  of millions  could                                                                   
result in  additional financial  obligation to the  state. He                                                                   
felt even minor exposure to the state should be avoided.                                                                        
                                                                                                                                
Mr.  Livingston could  not comment  on soil  testing bid  for                                                                   
engineers.  He asserted  that  if there  was  a $200  million                                                                   
cost  overrun, lenders  would  typically walk  away from  the                                                                   
project.  He  reiterated  that  the  obligation  of  payments                                                                   
would not occur if the bridge was not operational.                                                                              
                                                                                                                                
2:04:31 PM                                                                                                                    
Co-Chair Stedman  noted that $80  million in equity  and $700                                                                   
million   in  debt   would  give   the  lender   considerable                                                                   
leverage.                                                                                                                       
                                                                                                                                
Mr.  Livingston  clarified  that Citigroup  was  a  financial                                                                   
advisor  to  KABATA  and  could   not  be  a  lender  due  to                                                                   
conflicts of interest.                                                                                                          
                                                                                                                                
2:05:30 PM                                                                                                                    
                                                                                                                                
Mr. Foster spoke  to the procurement process.  He stated that                                                                   
the in  2011, 6  submissions were  received for  concessions.                                                                   
Concessions  were  made  up of:  equity  partners,  financial                                                                   
partners,    contractors,    designers,     builders,    toll                                                                   
collectors, and  operators. He  shared that three  submitters                                                                   
were  invited to  submit proposals.  He said  that the  draft                                                                   
request  for  proposal   (RFP)  was  being  created   by  the                                                                   
Department   of   Law.   He   added   that   DOA   also   had                                                                   
representation for  the contract process.  He  said that when                                                                   
the  RFP was  completed  the  three proposers  would  compare                                                                   
bids,  which  were primarily  the  availability  payment.  He                                                                   
believed  that  KABATA  would   commit  to  the  availability                                                                   
payment.  He  reiterated  that  cost overruns  would  be  the                                                                   
problem of  the builder and not  KABATA. He said  that KABATA                                                                   
would not  make any  payments until the  bridge was  open. He                                                                   
furthered   that  the   risk   to  the   authority  was   the                                                                   
availability payment  and that the state would  not be liable                                                                   
for cost overruns.                                                                                                              
                                                                                                                                
2:09:04 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  maintained  concern  with the  reality  of                                                                   
cost  overrun connected  to projects  of  this magnitude.  He                                                                   
opined  the  lack  of financial  impact  information  in  the                                                                   
presentation. He  stressed that the funding  under discussion                                                                   
was significant,  with sizeable exposure to the  state if the                                                                   
project should fail.                                                                                                            
                                                                                                                                
Mr.  Livingston commented  that  infrastructure  developments                                                                   
cost  money.  He said  that  the  state  could go  about  the                                                                   
project  on its  own,  but that  the  KABATA  plan should  be                                                                   
seriously considered.                                                                                                           
                                                                                                                                
2:12:05 PM                                                                                                                    
                                                                                                                                
GRANT  HOLLAND, VICE-PRESIDENT,  CDM SMITH,  stated that  CDM                                                                   
Smith  had been  conducting  traffic and  revenue  consulting                                                                   
since  1950,  and  was  considered  the  primer  traffic  and                                                                   
revenue consultant  in the industry investment  community. He                                                                   
shared  the  need  for traffic  and  revenue  consulting  had                                                                   
grown  out  of  general  lack  of  knowledge  concerning  the                                                                   
management  of  tolls.  He  elaborated  that  CDM  Smith  had                                                                   
worked   regularly   training   rating  agencies   and   toll                                                                   
authorities   on   the   intricacies   of   traffic   revenue                                                                   
projections.                                                                                                                    
                                                                                                                                
2:13:55 PM                                                                                                                    
                                                                                                                                
Mr.  Holland   explained  that   the  crossing  connected   a                                                                   
landmass  that  was  completely   bound  from  a  development                                                                   
standpoint to the  nearest area of developable  private land.                                                                   
He  remarked that  the alternative  to  the bridge  was a  90                                                                   
mile road,  so it seemed that  the project was  valuable from                                                                   
a logic point-of-view.                                                                                                          
                                                                                                                                
2:15:07 PM                                                                                                                    
                                                                                                                                
Mr.  Holland  stated   that  there  had  been   a  quick  and                                                                   
inexpensive initial  study of  KABATA in 2005.  Another study                                                                   
was  done in  2007,  and contained  every  piece of  analysis                                                                   
that  would  be  found  in  an  investment  grade  study.  He                                                                   
explained that  an upgraded  study had been  done in  2011 to                                                                   
reflect  current   market  conditions.   He  listed   several                                                                   
factors  considered   when  conducting  the   studies:  local                                                                   
forecasts, ISER  Studies (the basis  of the 2007  study), the                                                                   
Bureau  of   Labor  numbers,  and  independent   studies.  He                                                                   
detailed   that  the  studies   often  required   independent                                                                   
economic analysis to verify local bias in forecasts.                                                                            
                                                                                                                                
2:17:59 PM                                                                                                                    
                                                                                                                                
Mr.  Holland discussed  economic modeling.  One approach  was                                                                   
to  begin from  historical numbers  and  work downwards,  the                                                                   
other was to begin  at the bottom and work upwards.  He noted                                                                   
that the analyses  were not mutually exclusive.  He said that                                                                   
the CDM Smith  analysis started at a traffic  analysis level.                                                                   
The  firm  had  interviewed 23  people  responsible  for  the                                                                   
planning and management  of economic growth in  the Anchorage                                                                   
area.  He  furthered   that  they  had  talked   to  planning                                                                   
departments  for  further  collaboration.  He said  that  the                                                                   
analysis  was  then  built  form   the  bottom  up  comparing                                                                   
historical trends.  He noted that in the 2007  study the ISER                                                                   
forecast and the  CDM Smith forecast had  variations, however                                                                   
employment forecasts were virtually identical.                                                                                  
2:21:24 PM                                                                                                                    
                                                                                                                                
Senator Thomas  surmised that the projections  for population                                                                   
growth were the  anticipated numbers for the  Point MacKenzie                                                                   
area.                                                                                                                           
                                                                                                                                
Mr. Holland  clarified that the  estimation had been  for the                                                                   
breaking point for the Knick and Fairview areas.                                                                                
                                                                                                                                
2:22:25 PM                                                                                                                    
                                                                                                                                
Senator  Thomas  understood  that   a  doubling  of  vehicles                                                                   
crossing the Knick River was expected by 2035.                                                                                  
                                                                                                                                
Mr.  Holland replied  that  it was  an  undeniable fact  that                                                                   
economic  and population  growth would  occur in the  Mat-Su.                                                                   
He stressed that  the growth would generate  traffic. He said                                                                   
that  building  the  bridge  would  shift  where  the  growth                                                                   
occurred.                                                                                                                       
                                                                                                                                
2:23:59 PM                                                                                                                    
                                                                                                                                
Mr.  Foster interjected  that  in 1985  it  was counted  that                                                                   
15,000 cars  travelled  under the Eklutna  Bridge daily;  the                                                                   
number  rose to 30,000  in 2010.  He noted  that the  traffic                                                                   
would increase to  65,000 by the year 2035.  He stressed that                                                                   
without the  bridge, the traffic  on the Glenn  Highway would                                                                   
double.                                                                                                                         
                                                                                                                                
2:25:29 PM                                                                                                                    
                                                                                                                                
Senator  Thomas expressed  concern as  to how  the amount  of                                                                   
expected  increased activity  was  calculated.  He felt  that                                                                   
the toll should  be reduced once the bridge was  paid off. He                                                                   
wondered  what  recourse  could  be taken  if  the  projected                                                                   
numbers were wrong.                                                                                                             
                                                                                                                                
Mr. Holland  responded that the  bridge would  induce growth.                                                                   
He thought that  when the concession was removed  in 2035 the                                                                   
state could  determine then whether  or not the  tolls should                                                                   
be maintained.                                                                                                                  
                                                                                                                                
Senator  Thomas felt  that  the idea  that  the bridge  would                                                                   
spur growth  was conceptually  unclear. He questioned  the 89                                                                   
miles figure in the study.                                                                                                      
                                                                                                                                
2:28:54 PM                                                                                                                    
Mr. Holland  responded that  the 89  miles measured  from the                                                                   
edge  of a  planned  intersection  on the  west  side of  the                                                                   
crossing to  Central Anchorage.  He believed that  the growth                                                                   
would occur  in the area  because it  was a deep  water port,                                                                   
valuable for  shipping natural resources. He  understood that                                                                   
the isolation of  Port MacKenzie from Anchorage  had retarded                                                                   
growth in  the area.  He said  the bridge  would turn  the 89                                                                   
mile trip into a 15 mile trip.                                                                                                  
                                                                                                                                
2:30:33 PM                                                                                                                    
                                                                                                                                
Senator Thomas understood  that if the bridge  was not built,                                                                   
people  working in  Port  MacKenzie would  have  to drive  89                                                                   
miles to get to Central Anchorage.                                                                                              
                                                                                                                                
Mr. Holland replied in the affirmative.                                                                                         
                                                                                                                                
Senator Ellis  referred to the  Whittier Tunnel  toll charge,                                                                   
which  was a  smaller  project proposed  by  KABATA that  had                                                                   
used  CDM Smith  traffic projections.  He  asserted that  the                                                                   
traffic   projections  for   the  toll   facility  had   been                                                                   
overestimated,  and that someone  had "failed  spectacularly"                                                                   
in making accurate  estimates for the basis  of public policy                                                                   
and  budget decisions.  He believed  that  caution should  be                                                                   
taken  in using  the projections  established  by DOT&PF  and                                                                   
CDM Smith on an even larger project.                                                                                            
                                                                                                                                
2:32:30 PM                                                                                                                    
                                                                                                                                
Mr. Holland  replied that  he had  no information  concerning                                                                   
the Whittier Tunnel.  He said that since 1995  there had been                                                                   
22  green  field (new)  projects  had  been financed,  10  of                                                                   
which  had exceeded  projections  in the  first  5 years.  He                                                                   
furthered that 4 were within 95 percent of the projections.                                                                     
                                                                                                                                
2:33:46 PM                                                                                                                    
                                                                                                                                
Senator Olson  referred to  a March  2012 Dittman Research  &                                                                   
Communications survey,  page 5, which showed that  58 percent                                                                   
of people surveyed, did not want the bridge to be built.                                                                        
                                                                                                                                
Mr. Foster responded  that the survey asked  three questions:                                                                   
build it  now, build it later,  don't build it; the  build it                                                                   
later  numbers were  assumed as  positive. He  added that  in                                                                   
the most  recent Dittmen survey  65 percent of  Alaskans, and                                                                   
70  percent  of  South-central   Anchorage  said  the  bridge                                                                   
should be built now.                                                                                                            
Co-Chair Stedman  reminded the committee that  finance policy                                                                   
decisions were not dictated by polls.                                                                                           
                                                                                                                                
2:36:40 PM                                                                                                                    
                                                                                                                                
JEFF  OTTENSEN, DIRECTOR,  DIVISION  OF PROGRAM  DEVELOPMENT,                                                                   
DEPARTMENT   OF   TRANSPORTATION   AND   PUBLIC   FACILITIES,                                                                   
testified  that  the  KABATA project  was  important  to  the                                                                   
entire  state in  order to  provide redundancy  for a  single                                                                   
route  area.  He  spoke  to  the  states  responsibility  for                                                                   
projects necessitated  by the bridge.  He felt that  the need                                                                   
for  the project  was obvious  when  considering looking  the                                                                   
expected future  population growth. He added that  the growth                                                                   
had and  would continue to  create a  demand for roads  to be                                                                   
built  in Anchorage,  the Glen  and Parks  Highways, and  the                                                                   
Mat-Su  Borough. He  asserted that  the bridge  would not  be                                                                   
built  using  state  general  and  federal  funding  sources;                                                                   
ostensibly  bringing new  money to  the table.  He said  that                                                                   
the roads  that would  need to  be built as  a result  of the                                                                   
bridge were already needed in the area.                                                                                         
                                                                                                                                
2:40:57 PM                                                                                                                    
                                                                                                                                
Senator  Ellis  wondered  if   DOT&PF  could  wait  till  the                                                                   
Legislative Budget and Audit (LB&A) audit was complete.                                                                         
                                                                                                                                
Mr.  Ottensen  acknowledged  the  audit. He  stated  that  he                                                                   
would return to the committee with an answer.                                                                                   
                                                                                                                                
Senator  Ellis   asked  about   the  over  inflated   traffic                                                                   
estimations for the Whittier tunnel.                                                                                            
                                                                                                                                
Mr.  Ottensen recalled  the  project  was championed  by  the                                                                   
governor at  the time.  He said a  senior engineer  in DOT&PF                                                                   
had been  asked to  move forward  with the  project over  the                                                                   
objections of the rest of the department.                                                                                       
                                                                                                                                
Senator  Ellis  surmised  that experience  could  teach  that                                                                   
powerful  political  interests  could  pressure  DOT&PF  into                                                                   
giving   the   green-light  to   projects   under   dubiously                                                                   
projected assumptions.                                                                                                          
                                                                                                                                
2:44:32 PM                                                                                                                    
                                                                                                                                
Senator Thomas noted  letter from DOT&PF dated  April 7, 2011                                                                   
(copy  on  file)   which  summarized  the  numbers   for  the                                                                   
project.  He  queried  how a  possible  decrease  in  federal                                                                   
funding  would impact the  projected income  from the  bridge                                                                   
tolls.                                                                                                                          
                                                                                                                                
2:46:03 PM                                                                                                                    
                                                                                                                                
Mr. Ottensen read from the letter:                                                                                              
                                                                                                                                
     "The  total cost  of the  projects not  covered by  toll                                                                   
     revenue  that  influence   bridge  and  general  network                                                                   
     traffic flow  is $1.8 million (1.4 million  in Anchorage                                                                   
     and $400  million in  Mat-Su) to  be constructed  over a                                                                   
     period  of   20  years.  Regular  federal   highway  aid                                                                   
     funding requires  a 10 percent state match.  This leaves                                                                   
     $1,620  million   that  must  be  funded   from  regular                                                                   
     highway aid  dollars. Dividing  $1,620 over a  period of                                                                   
     20  years  results  in  a  hypothetical  annual  federal                                                                   
     highway funding  need for these projects  of $81 million                                                                   
     per year. The  state currently receives $400  million in                                                                   
     regular   federal   highway   aid  funding   per   year.                                                                   
     Allocating  $81  million   per  year  for  the  regional                                                                   
     network projects  would amount  to 20.25 percent  a year                                                                   
     of the overall amount."                                                                                                    
                                                                                                                                
2:48:01 PM                                                                                                                    
                                                                                                                                
Mr.  Ottensen  observed  that   future  federal  funding  was                                                                   
unknown. He  stressed that  need for transportation  projects                                                                   
were driven by  the population growth faced by  the state. He                                                                   
stated that  modern urban projects  often cost more  for non-                                                                   
construction  aspects of  the project  than the  construction                                                                   
part:  the right  of  way,  utility relocation,  and  traffic                                                                   
control collectively  cost more than actual  construction. He                                                                   
argued that  the continual upgrading  of the single  Glen and                                                                   
Parks Highway  corridor would end  up costing the  state more                                                                   
than the cost  of building the bridge and the  subsequent new                                                                   
roads.                                                                                                                          
                                                                                                                                
2:50:38 PM                                                                                                                    
                                                                                                                                
ANGELA  RODELL,   DEPUTY  COMMISSIONER,  TREASURY   DIVISION,                                                                   
DEPARTMENT  OF  REVENUE,  spoke   to  the  state's  financial                                                                   
exposure if  the legislation  was passed.  She felt  that the                                                                   
project  would  be  a  unique  opportunity  to  make  serious                                                                   
investment   in    major   projects.   She    believed   that                                                                   
understanding  the financial  impact of  all of the  projects                                                                   
that  could  be  generated  by the  building  of  the  bridge                                                                   
should  be  understood.  She thought  that  while  the  moral                                                                   
obligation  may  not  require  additional  funding  into  the                                                                   
future, outsiders  would be observing the  state's investment                                                                   
commitment on a global basis to grow the state.                                                                                 
                                                                                                                                
Co-Chair  Stedman  understood  that  the  off  balance  sheet                                                                   
financing mechanism would have potential impact.                                                                                
                                                                                                                                
2:53:30 PM                                                                                                                    
                                                                                                                                
Ms. Rodell believed  that it could have positive  impact. She                                                                   
thought that  it would be  viewed in  the big picture  of the                                                                   
state's overall fiscal health.                                                                                                  
                                                                                                                                
Co-Chair   Stedman  queried   whether   the  department   had                                                                   
reviewed  the financial  model and  performed stress  testing                                                                   
to determine exposure to the state.                                                                                             
                                                                                                                                
Ms.  Rodell replied  that  the department  had  not done  any                                                                   
stress testing,  but had reviewed  stress tests  performed by                                                                   
KABATA.  She stated  that the  department  had concerns  with                                                                   
some of  the revenue  forecasts pertaining  to what  the full                                                                   
impact would  be if a bridge was  built and no one  showed up                                                                   
to pay a toll.                                                                                                                  
                                                                                                                                
2:54:25 PM                                                                                                                    
                                                                                                                                
Senator Thomas referred  to a letter from  Commissioner Bryan                                                                   
Butcher,  dated March  8, 2012  (copy on file).  He asked  if                                                                   
the  department  maintained the  same  opinion  on the  moral                                                                   
obligation and responsibility of the state.                                                                                     
                                                                                                                                
Ms. Rodell replied  that the department  maintained agreement                                                                   
with  the  statements  in  the letter.  She  noted  that  the                                                                   
bridge  would belong  to  the  state from  day  1, and  would                                                                   
never  belong  to  the independent  third  party  that  would                                                                   
build it.                                                                                                                       
                                                                                                                                
2:55:49 PM                                                                                                                    
                                                                                                                                
JEFF STARK,  ASSISTANT ATTORNEY  GENERAL, DEPARTMENT  OF LAW,                                                                   
testified that he had not prepared testimony.                                                                                   
                                                                                                                                
Co-Chair Stedman  reiterated the  concern of the  exposure to                                                                   
the state under the project.                                                                                                    
Mr. Stark  replied that  it was  generally accurate  that the                                                                   
state would  be largely  protected. He  state that  if KABATA                                                                   
completed the  procurement process  that it was  currently in                                                                   
the middle  of, a contract would  be awarded to one  of the 3                                                                   
shortlisted developers.  He detailed  that then KABATA  would                                                                   
enter into a  public-private agreement (PPA)  with the chosen                                                                   
contractor,  which was  currently  being  drafted by  outside                                                                   
council.  He relayed  that PPA  agreements were  tremendously                                                                   
complex   documents;   nearly   1000   pages   of   technical                                                                   
provisions.   He   explained    that   PPA   documents   were                                                                   
comprehensive,  and  would  govern the  relationship  of  the                                                                   
parties for approximately  40 years: 5 years  of construction                                                                   
and 35  years of operation. He  stated that the  document was                                                                   
tightly drafted, taking care of  as many contingencies as was                                                                   
possible.  He  detailed  that  the  basic  structure  of  the                                                                   
agreement  stated that  the developer  would be obligated  to                                                                   
design,  build, finance,  operate, and  maintain the  bridge,                                                                   
and  would be  responsible for  most  of the  cost risks.  He                                                                   
furthered that  the geotechnical issues were  being carefully                                                                   
examined and  represented one  of the  largest risks  for the                                                                   
state. He believed  that in the end the risk  would be shared                                                                   
between the developer  and the state; the details  were still                                                                   
unknown. He said that the state  would bear the cost risks of                                                                   
possible  seismic activity.  He concluded  that seismic  risk                                                                   
should  be the  burden  of state  and  KABATA,  but that  the                                                                   
developer would also carry earthquake insurance.                                                                                
                                                                                                                                
Co-Chair Stedman asked about cost overrun exposure.                                                                             
                                                                                                                                
2:59:47 PM                                                                                                                    
                                                                                                                                
Mr.  Stark clarified  that  cost  overrun exposure  would  be                                                                   
carried  by  the  developer,  as  would  hazardous  material,                                                                   
except under the aforementioned specific events.                                                                                
                                                                                                                                
3:01:00 PM                                                                                                                    
                                                                                                                                
Senator Egan addressed  the document titled "Then  and Now: A                                                                   
History of  the Knik  Arm Crossing." He  took issue  with the                                                                   
caption under the photo on page 6, which read:                                                                                  
                                                                                                                                
     "This is what you will see as you drive back to                                                                            
     Anchorage from your day of business with the                                                                               
     legislature at the capital in Willow."                                                                                     
                                                                                                                                

Document Name Date/Time Subjects
SB 80 AGC Letter.pdf SFIN 3/26/2012 1:00:00 PM
SB 80
SB 80 Knik Arm Crossing PPP and Cost of Capital Overview.pdf SFIN 3/26/2012 1:00:00 PM
SB 80
SB 80 FHWA NHS Designation.PDF SFIN 3/26/2012 1:00:00 PM
SB 80
SB 80 Sectional Analysis.pdf SFIN 3/26/2012 1:00:00 PM
SB 80
SB 80 Knik Arm Crossing - Preliminary Design Photo rendering.pdf SFIN 3/26/2012 1:00:00 PM
SB 80
SB 80 Sponsor Statement.pdf SFIN 3/26/2012 1:00:00 PM
SB 80
SB 80 AK-Policy-Forum-Knik-Arm-Bridge-Kenworthy.pdf SFIN 3/26/2012 1:00:00 PM
SB 80
SB 80 Pages from Nov-30-2011 KABATA Legilsative Presentation Print.pdf SFIN 3/26/2012 1:00:00 PM
SB 80
SB 80 Dittman-Survey-Page-5-2012 AK Legislative Priorities Topline Results.pdf SFIN 3/26/2012 1:00:00 PM
SB 80
SB 80 KABATA-Model-PABs-Annotated.pdf SFIN 3/26/2012 1:00:00 PM
SB 80
SB 80 The Real Finances of the Knik Arm Bridge FINAL.pdf SFIN 3/26/2012 1:00:00 PM
SB 80
SB 80 Toll-Road-News-Wilbur Smith Assoc forecasting record slammed-Jan-27-2012.pdf SFIN 3/26/2012 1:00:00 PM
SB 80
CSSB 80 work draft version T.pdf SFIN 3/26/2012 1:00:00 PM
SB 80
SB 80 Knik Arm Handout for 3 26 12.pdf SFIN 3/26/2012 1:00:00 PM
SB 80
SB 80 Epstein Testimony 032612.docx SFIN 3/26/2012 1:00:00 PM
SB 80
SB 80 Knik Arm Bridge and Toll Authority History.pdf SFIN 3/26/2012 1:00:00 PM
SB 80
SB 80 KABATA & Sen. Thomas letters.pdf SFIN 3/26/2012 1:00:00 PM
SB 80
SB 80 KABATA DOT letters.pdf SFIN 3/26/2012 1:00:00 PM
SB 80
SB 80 KABATA AG letters.pdf SFIN 3/26/2012 1:00:00 PM
SB 80
SB 80 KABATA Dept. of Revenue letters.pdf SFIN 3/26/2012 1:00:00 PM
SB 80