Legislature(2011 - 2012)BUTROVICH 205
02/15/2011 01:00 PM Senate TRANSPORTATION
| Audio | Topic |
|---|---|
| Start | |
| SB79|| SB80 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 79 | TELECONFERENCED | |
| *+ | SB 80 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 79-APPROP.: KNIK ARM CROSSING FUND
SB 80-KNIK ARM BRIDGE AND TOLL AUTHORITY
1:01:31 PM
CHAIR KOOKESH announced the consideration of both SB 79 and SB
80.
SENATOR MENARD, sponsor of SB 79 and SB 80 said these bills will
ensure a private/public partnership procurement (P3) for the
Knik Arm Crossing Project that generates the best value to the
state of Alaska. The passage of this legislation will facilitate
the Knik Arm crossing being open for traffic in the year 2015,
thus expediting for Alaska the benefits generated from the
crossing. Both bills were written in consultation with the Knik
Arm Bridge and Toll Authority (KABATA), which has been recently
successful in its assurance of the Record of Decision (ROD) from
the federal highway administration. She said that a project is
only as good as the person behind it, and introduced Michael
Foster, chair of the KABTA board and engineer behind the Red Dog
Mine. She also introduced Kevin Hemenway and Andrew Niemiec.
SENATOR MENARD explained that SB 80 will accomplish 4 things:
First, an increase in KABATA's bonding authority from $500
million to $600 million; second, property tax relief for the
crossing and associated facilities; third, contractual monetary
obligations; and fourth, a project reserve fund.
1:03:52 PM
She also explained that SB 79 will appropriate $150 million into
the project reserve fund created by SB 80. The fund will be
housed in the Department of Revenue (DOR). This bill is
supported by many, including the Alaska Trucking Association,
the Alaska Support Industry Alliance, the Mat-Su Borough, City
of Wasilla, and the Municipality of Anchorage It also has wide-
spread public support, and the project is ready to go.
1:05:01 PM
SENATOR KOOKESH asked why there is no fiscal note associated
with the bills.
SENATOR MENARD cited the memo from Legislative Legal Services,
which says that a fiscal note shall be attached to a bill or
resolution, unless it is an appropriations bill, before it
passes the first committee of referral.
SENATOR THOMAS said he supports infrastructure and he believes
that the question now is the legal liability of the state for
completing or maintaining the bridge. However, SB 80, page 2,
line 17, states "the monetary obligations incurred by the
authority under the partnership or contracts are obligations of
the state and satisfaction of those contracts from funds other
than authority funds is subject to appropriation." He hopes to
be assured about the amount that could be at risk.
1:08:49 PM
MICHAEL L. FOSTER, Chair, KABATA Board, said he would give an
overview and address SB 79.
He assured the members that the federal department of highways
supports the Knik Arm project, and said that KABATA received a
Record of Decision in December. The project has been listed
under the National Highway System and lane miles are already
listed.
He noted the article in the Anchorage Daily News, as well as a
Dittman survey which shows overwhelming public support for the
project. Mayor Sullivan also sent a letter encouraging the
Legislature to pass these bills in a timely manner.
1:12:34 PM
MR. FOSTER noted there has been discussion about the
appropriation to KABATA; he clarified that the actual
appropriation was $229 million. In 2006, $128 million of that
was reappropriated to other projects throughout the state. If
that money was still allocated to the Knik Arm crossing, they
would be asking for less. That $128 million represented the
reserve fund needed for the public/private partnership. The
reserve fund would be managed by DOR, and allows KABATA to go
out to market and obtain private capital. The infrastructure and
revenue stream is owned by the State of Alaska. The capital to
build the project is private sector capital; no state or federal
capital will be used to construct the facility. The reserve fund
is not to operate KABATA today; it is to be used when the bridge
is open for use. During the first several years, the revenue
stream may be less than the payment stream, and KABATA
anticipates it will need the reserve at that time and for
several years thereafter. After that, they expect that excess
revenue will pay that reserve back, and they project over a 60
year time frame, $8.6 billion will roll back into the reserve
fund. This money can be used for Title 23 services statewide,
which includes marine highways, boardwalks, bridges, ports, and
infrastructure. He again pointed out that the money appropriated
by these bills would not be used until 2015 or 2016, and is only
used in the initial years to cover the currently projected
shortfall. It is not a capital appropriation, but a short-term
use with a payback based on revenue stream.
1:16:20 PM
ANDREW NIEMIEC, Executive Director, Knik Arm Bridge and Toll
Authority, said that SB 80 will aid in the successful
procurement of the Knik Arm Crossing, reduce the cost of project
finance, and generate the best value to the state. Passage of SB
80 will facilitate the project being opened to traffic by 2015.
The bill is designed to increase KABATA's bonding authority,
address contractual monetary obligations, and establish and
manage a reserve fund. An increase in bonding authority from
$500 million to $600 million matches the $600 million allocation
of private activity bond capacity (PABS) that was provided by
the U.S. Department of Transportation. That allocation remains
with the project. Any PABs issued are a liability of the private
borrower, not the state. The property tax language clarifies and
clearly specifies that the bridge and associated connectors are
not subject to property tax if operated by a private developer
on behalf of the state. Any private facilities installed along
with the project, but not for transportation use, would be
subject to local property tax.
1:18:21 PM
AS 19.75.111(a) would be modified to clarify that monetary
obligations under a public/private partnership for the purpose
of constructing this project are obligations of the state, and
satisfaction of those obligations is subject to appropriation.
This only applies to those obligations that are subject to the
public/private partnership, and not other contractual or
corporate obligations of KABATA. This change is necessary to
attract investors, and will keep tolls affordable.
The reserve fund will apply sources of revenue, including tolls
and any appropriations, for specific purposes such as providing
the annual payment to the private partner. Surplus funds would
then be available for capacity improvements and other federally
eligible transportation purposes. Surplus funds would be held by
the DOR until a private partnership agreement is signed, at
which time the funds would be available for deposit into the
reserve fund. Procurement advisors under contract with the
Department of Law have reviewed the proposed legislation for
consistency with AS 19.75 and other related statutes. These
provisions will enhance project credit and allow the developer
to obtain the lowest cost capital, thereby providing the
greatest benefit to the state.
1:20:32 PM
KEVIN HEMENWAY, Chief Financial Officer, Knik Arm Bridge and
Toll Authority (KABATA), said this toll bridge will generate
revenue. The Record of Decision was a significant milestone,
which allows KABATA to move forward with procurement. Under the
proposed structure, the private sector will be responsible for
the design, construction, financing, operation and maintenance
of the facility for approximately 35-40 years. The private
sector, not the state, will raise the equity and borrow the debt
to finance the project. That debt will be non-recourse to the
state. The private sector will also be responsible for the
design-build contract and substantially all of the construction
risk. They will do this in exchange for payments that will be
used to repay their financing and to pay for operations and
maintenance of the facility. At the end of the term, the
facility will be returned to the state.
The state, through KABATA, will own the bridge facilities and
will receive the toll revenue. That toll revenue stream will be
used to make the periodic payments; in the event the revenue
stream is insufficient, the reserve fund is there to provide
credit enhancement to the creditors' lenders, but they do not
have a direct interest in that account.
The competition for the project will be based on the lowest
annual periodic payment and technical specifications. The
proposals will be evaluated by a committee that includes input
from the departments of law, transportation and revenue. Final
approval will reside with the administration and KABATA board,
many of whom are legislators. This is a regimented, disciplined
procurement strategy. SB 79 and 80 establishes a framework to
attract the proposal, but actual commitments don't occur until
the contractual arrangement is entered into. The cost of
financing is clearly a significant component.
1:24:10 PM
To the extent that capital cost is reduced, it will attract
better proposals at a lower periodic payment. SB 79 and 80 are
important to achieving that, precisely because they will lower
the cost of financing and provide the mechanisms required to
establish the contractual structures that the marketplace
expects. KABATA is also working to lower the cost of capital
through the Transportation Infrastructure Finance and Innovation
Act (TIFIA) program. KABATA feels there is a good possibility of
receiving TIFIA financing for the project. KABATA has also
obtained, through DOT, $600 million of private activity bond
capacity that the developers can choose to use that allows them
to borrow funds at tax exempt rates. This is directly related to
the request to increase, under SB 80, the $500 million bonding
capacity to $600 million. If developers choose to use the entire
capacity in their proposals, KABATA want to be in a position to
accommodate them as a conduit issuer, but not a borrower.
There are numerous successful P3s in the U.S. and throughout the
world. Failures have been rare, but in those cases the
demonstrated risk transfer proves that P3 works. In none of
those cases was the state obligated for the debt or other
obligations of the private partner. Some examples are SR125 and
the Dulles Greenway. In both instances of bankruptcy, there was
no recourse to the state for project financing, and the state
continued to own the assets.
1:27:20 PM
Traffic and toll revenue is a place where the state retains
ownership, and there is front end risk. The base case forecast
over the 35 year term of operations indicates that toll revenue
would cover annual payment obligations by a factor of 1.7 times.
There is about $20 million over the first three years that gets
repaid under the base case. He cautioned that the models are pro
forma, prepared by KABATA and other consultants using best
available market indicators. The real model won't be available
until they attract proposals through the RFP process. Wilbur
Smith Associates is the preeminent traffic control revenue
forecaster; their studies are bankable on Wall Street, and their
track record is exemplary. Over the last ten years their traffic
and revenue studies have supported approximately $33 billion
worth of toll road financing, and the last five years represents
about $20 billion of the total. KABATA is confident that over
the life of the crossing the state will recover its investment
and earn a substantial return.
1:29:41 PM
In conclusion, SB 79 and 80 establish a framework to attract the
most competitive proposals at the lowest cost and best value to
the state. They do not commit the state to anything unless the
private sector proposals are accepted and finalized, which would
occur in the first half of 2012, at the earliest. Appropriations
under SB 79 will be held by the Department of Revenue as
fiduciary until acceptable proposals have been received for the
project. Amendments under SB 80 serve to establish mechanisms to
develop a successful public/private contracting framework, and
the funds appropriated under SB 79 will serve as a project
reserve, demonstrating to prospective private partners that the
state is serious about the essential nature of the project and
its role in the public/private agreement as project owner. Funds
will be paid back over the term of the project. The project will
produce a continuing revenue stream that will support other
infrastructure projects throughout the state, and is needed to
support economic development, jobs, access to land for
population and industrial growth, and for safety. It will
benefit generations of Alaskans.
1:31:08 PM
SENATOR THOMAS said he is still struggling with page 2, line 17.
The $150 million is potentially obligated, but the toll revenue
is obligated to pay the debt service first.
MR. HEMENWAY responded it is actually not paying the debt
service, but instead is paying an annual availability fee. This
is an annual payment to the developer that he uses to repay his
financing and to pay for the operations and maintenance of the
project. So the state's major contractual obligation is the
commitment to make that payment.
SENATOR THOMAS asked if there was federal participation.
MR. HEMENWAY replied there is some federal participation. As of
today there is about $65 million available for right-of-way and
construction phases of the project. Some of that will be
acquired prior to the partnership, so the remainder will likely
go into some component of construction.
SENATOR THOMAS asked if there was federal participation.
MR. FOSTER replied the state's commitment to its private partner
is the annual payment; as toll revenue exceeds payments, the
revenue would pay back the reserve fund
1:34:10 PM
SENATOR THOMAS said his understanding is that if there is
federal participation, the first thing to be repaid would be
debt service, then reasonable return on investment, and then any
private financing of the project.
1:34:39 PM
MR. HEMENWAY said the toll revenue would fund the lease payment
to the developer and they will use that revenue for repayment of
their financing, operations and maintenance, and reasonable
returns of their equity investors. The toll agreement stipulates
that any surplus toll revenue remaining after meeting the
contractual obligations will be used for Title 23 eligible
projects.
SENATOR THOMAS said he's looking at the potential for problems
if things don't go according to plan. In that case, he is
looking for what the state's obligation would be. Construction
costs are increasing, and costs overruns could impact toll fees.
He said he would like a simple answer to what happens if the
worst situation occurs. Would the state only be out $150
million, or would more funds be needed?
MR. FOSTER replied the toll is set by KABATA, and the capital
cost is the private partner's responsibility. The state's
responsibility is the annual payment to the private partner. If
the private partner underestimates the cost, that is part of his
business model. His annual payment does not get adjusted because
it costs him more than he expected.
1:39:40 PM
SENATOR THOMAS asked why the page 2, line 17, language is
necessary if that's the case.
MR. NIEMIEC responded that the major contractual obligation of
the state is the commitment to make that annual payment.
SENATOR THOMAS asked if it wouldn't it be the same if the
bonding wasn't sufficient to pay for the last third of the
construction.
MR. NIEMIEC responded generally that is the responsibility of
the private developer, not the state.
1:42:14 PM
JAMIE KENWORTHY, former executive director, Alaska Science and
Technology Foundation, said the project will lead to a $250
million liability on the state's balance sheet; with interest it
would easily be over $1 billion. SB 80 does not just transfer
$150 million to cover KABATA's current estimate of the first
three years of the bridge deficit, it also says that KABATA can
enter into partnerships that would become obligations of the
state. That is AS 19.75.111. The current statute allows KABATA
to issue $500 million in bonds in its own name, but not the
state's name. If these bonds that KABATA issues after the
partnership agreement is made are obligations of the state, the
state is on the hook for them. He suggested the committee ask
the directors of AHFC about moral obligations; if the bonds
fail, it would affect the agency's credit rating. It would also
affect the state's credit rating.
The original definition of the public/private partnership was
for a private sector firm to finance, build, and operate the
Knik Arm project. Under these two bills the state would be
responsible for the full bonding. If the Legislature is to sign
that blank check, shouldn't that check at least be based on
accurate traffic numbers? Wilbur Smith is now redoing the
traffic numbers, more based on a Mat-Su population forecast.
All the revenue projections that KABATA has used are based on a
2030 Mat-Su population number nearly 50 percent higher than
today. That projection was developed in 2007 by a Texas firm
under contract to KABATA. The projected deficit for the first
ten years of the bridge is $25 million per year. Since March
three events have occurred that make the projects finances much
worse. First, they discovered the population error that caused
revenue to be overestimated by 50 percent. Second, in November
KABATA was turned down for a federal TIFIA loan for one-third
project cost. KABATA is going to reapply, but he estimates their
chances are between slim and none.
Third, rates for investment grade bonds are up to 5 percent;
without a state guarantee, the bonds will not receive an
investment grade and will not find a market. Attaching a
guarantee to such iffy bonds would jeopardize the state's credit
rating. The payments on a $650 million bond at five percent
interest, amortized over 37.5 years, would be $38.3 million per
year. You would need 20,900 one-way trips per day at five
dollars each just to make the annual bond payment.
1:48:37 PM
The current traffic to and from the Mat-Su Valley is 29,000
trips per day, and most of the valley would continue to take the
toll-free trip on the Glenn Highway. The KABATA estimate for
bridge trips in 2030 is about 40,000. We are having trouble
getting DOTPF current traffic estimates for the bridge and the
Glenn Highway for the same year. He expects it will be about
half of KABATA's estimate. Trip forecasts should account for the
fact that a toll reduces demand. There will not be enough
traffic to repay the bonds, even if they are interest free.
MR. KENWORTHY questioned how KABATA can project a huge return.
He suggested that the private sector should decide if this
project is feasible. Perhaps in 30 years this will become
feasible, but right now it is speculative. If the RFP process
goes forward, the Legislature should repeat the conditions that
the Anchorage Assembly originally set, to make sure this project
does not crowd out other projects. One, no further state funds;
two, no state guarantee; and three, a private sector willing to
finance, build, and operate the project.
1:51:23 PM
He also pointed out that last year the TIFIA application said
that all shortfalls would be covered by annual appropriations by
of the state Legislature to make the bond payments and cover
operating funds.
1:52:12 PM
SENATOR THOMAS asked what interest rate he was using to come up
with $38 million.
MR. KENWORTHY replied five percent.
SENATOR THOMAS stated that conduit financing isn't using state
bonding authority, just state employees.
MR. KENWORTHY said the businesses backed by the banks are taking
the risk. If AIDEA does its own appropriation and is not using a
conduit, then they are putting the bonds on the street and it is
not an obligation of the State of Alaska. However, everyone
understands that it is a moral obligation. The interest rates on
those bonds are higher than a state general obligation bond, but
significantly lower than if just a private sector firm came to
the marketplace. AIDEA cares about its credit rating, and the
State of Alaska cares about AIDEA's credit rating.
1:54:40 PM
JEFF OTTESEN, Director, Program Development, Department of
Transportation and Public Facilities (DOTPF), said the TIFIA
issue isn't dead. Yesterday President Obama announced a $450
million allocation for TIFIA in the federal budget. He also
announced a $5 billion per year infrastructure bank that would
be $5 billion for six years. This would be a new opportunity for
KABATA coming from the federal side. Last summer Secretary
LaHood visited the site, so there is clearly some federal
interest.
MR. OTTESEN said that this state was built on risk and who would
be a better risk than the state itself. The traffic from the
North Slope and the Interior would pay for this bridge. Mat-Su
isn't the only source of traffic. It's a bridge for Fairbanks,
the North Slope, and tourism traffic. But the growth that does
occur in Mat-Su will be reflected by this bridge. If this isn't
built there will be a need for more highway improvements.
1:58:49 PM
He confirmed that this project was accepted by the FHWA as part
of the National Highway System. This is important, because the
project doesn't compete with AMATS.
Finally, P3 is becoming a way of life in transportation, and not
for just infrastructure. In Europe P3s are being used to develop
vaccines, for example. In Washington State a P3 is developing a
toll bridge that will replace an existing bridge and tolling
will start prior to the bridge being built.
2:01:06 PM
SENATOR THOMAS said he doesn't mind risk he just wants to know
what it will be. If the risk is $150 million that's one set of
circumstances, but it's another if it's $700 million. The
language in the bill is unclear. The explanation seemed to
clarify that there is more potential risk.
MR. OTTESEN responded the risk is on the P3, and it boils down
to traffic. He said it is important to look at the next traffic
predictions being done by Wilbur Smith.
SENATOR THOMAS asked if there is a guarantee on the numbers.
MR. OTTESEN replied there is no guarantee, but Wilbur Smith has
a reputation of being credible.
2:03:57 PM
CHAIR KOOKESH asked for a response from the project with regard
to Mr. Kenworthy's testimony.
MR. FOSTER said the reserve fund allows KABATA to go to market
and obtain the best available annual payment to take the initial
risk. A lot is based on traffic modeling. The consultant is
doing a new model. But the real test is to get a private
partner. Passing these bills allows KABATA to go to market and
attract proposals. However, if the risk is disproportionate it
won't move forward. KABATA believes it will get attractive
proposals. He said the idea of the P3 partnership is shared
responsibility. The risk to the state depends on the reliability
of the traffic model.
CHAIR KOOKESH asked about the TIFIA application.
MR. FOSTER explained that they submitted the application and
were encouraged. This is a DOT project. Initially they didn't
expect approval because KABATA didn't have a record of decision,
but now they do. There is $450 billion, which is threefold the
previous TIFIA. They feel confident they will get that TIFIA and
therefore the ability to get the loan for financing for the
private partner.
2:10:15 PM
CHAIR KOOKESH announced a brief t ease
2:14:17 PM
CHAIR KOOKESH reconvened the meeting.
SENATOR MENARD introduced Janet Kincaid, KABATA board member.
CHAIR KOOKESH stated that he intended to move the bills today;
two of the members are on the finance committee and will have an
opportunity to address the finance issues. He closed public
testimony and asked the will of the committee.
2:15:13 PM
SENATOR MENARD moved to report both SB 79 and SB 80 from
committee with individual recommendations and attached fiscal
note(s). There being no objection, SB 79 and SB 80 moved from
the Senate Transportation Standing Committee.
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