Legislature(2019 - 2020)ADAMS ROOM 519

04/16/2019 09:00 AM FINANCE

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Audio Topic
09:00:04 AM Start
09:00:39 AM HB38
09:00:41 AM Capital Projects Review Presentation: Village Safe Water
09:58:59 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to 4/17/19 at 9:00 am --
Bill Postponed to 4/17/19 at 9:00 am
+ Capital Projects Review TELECONFERENCED
+ Presentation: Legislative Finance Fiscal Plan TELECONFERENCED
Review by David Teal, Dir. , Legislative
Finance Div.
<Above Item Removed from Agenda>
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                      April 16, 2019                                                                                            
                         9:00 a.m.                                                                                              
9:00:04 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Wilson called the House Finance Committee meeting                                                                      
to order at 9:00 a.m.                                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Neal Foster, Co-Chair                                                                                            
Representative Tammie Wilson, Co-Chair                                                                                          
Representative Jennifer Johnston, Vice-Chair                                                                                    
Representative Dan Ortiz, Vice-Chair                                                                                            
Representative Ben Carpenter                                                                                                    
Representative Andy Josephson                                                                                                   
Representative Gary Knopp                                                                                                       
Representative Bart LeBon                                                                                                       
Representative Kelly Merrick                                                                                                    
Representative Colleen Sullivan-Leonard                                                                                         
Representative Cathy Tilton                                                                                                     
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Ruth Kostik, Acting Administrative Services Director,                                                                           
Department of Environmental Conservation, Office of                                                                             
Management and Budget                                                                                                           
PRESENT VIA TELECONFERENCE                                                                                                    
Marty Brewer, Director, Village Safe Water Program,                                                                             
Department of Environmental Conservation                                                                                        
HB 38     APPROP: CAPITAL BUDGET                                                                                                
          HB 38 was HEARD and HELD in committee for further                                                                     
CAPITAL PROJECTS REVIEW PRESENTATION: VILLAGE SAFE WATER                                                                        
Co-Chair Wilson reviewed the meeting agenda.                                                                                    
HOUSE BILL NO. 38                                                                                                             
     "An  Act   making  appropriations,   including  capital                                                                    
     appropriations,       supplemental      appropriations,                                                                    
     reappropriations,  and   other  appropriations;  making                                                                    
     appropriations to  capitalize funds; and  providing for                                                                    
     an effective date."                                                                                                        
9:00:39 AM                                                                                                                    
^CAPITAL PROJECTS REVIEW PRESENTATION: VILLAGE SAFE WATER                                                                     
9:00:41 AM                                                                                                                    
RUTH  KOSTIK,   ACTING  ADMINISTRATIVE   SERVICES  DIRECTOR,                                                                    
DEPARTMENT   OF   ENVIRONMENTAL  CONSERVATION,   OFFICE   OF                                                                    
MANAGEMENT  AND BUDGET,  provided a  PowerPoint presentation                                                                    
titled "Village  Safe Water Funding Overview,  Department of                                                                    
Environmental  Conservation,   Presentation  to   the  House                                                                    
Finance  Committee," dated  April 16,  2019 (copy  on file).                                                                    
She  began on  slide 2  and detailed  that the  Village Safe                                                                    
Water (VSW)  Program under  the Department  of Environmental                                                                    
Conservation    (DEC)    funded   water    and    wastewater                                                                    
infrastructure  projects in  rural Alaska.  The program  was                                                                    
divided into two  allocations: 1) first time  service and 2)                                                                    
expansion,  upgrade, and  replacement  of existing  service.                                                                    
She  communicated that  the projects  were not  allocated by                                                                    
community or  project - the multiyear  priority list allowed                                                                    
the department  to ensure funding was  allocated to projects                                                                    
that were  ready to  go and  did not  get stuck  in projects                                                                    
that may get stalled out along the way.                                                                                         
Ms. Kostik  reported that  at any  given time  the multiyear                                                                    
priority  list  included  roughly   three  years'  worth  of                                                                    
project  funding   need.  The  funding  shown   on  slide  2                                                                    
reflected  75 percent  federal and  25 percent  General Fund                                                                    
(GF) and statutory designated program receipts.                                                                                 
Co-Chair  Wilson asked  where the  designated receipts  came                                                                    
from. She wondered who paid for the program.                                                                                    
Ms. Kostik  answered that  often times  DEC and  the program                                                                    
brought  heavy equipment  into villages.  For example,  when                                                                    
DEC brought an  excavator into a village,  the community may                                                                    
end up buying the machine.  She elaborated that the scenario                                                                    
was more cost  effective for the community  because they did                                                                    
not have  to pay  to ship the  machine. Under  the scenario,                                                                    
the money  was considered  program income and  was deposited                                                                    
back into the program for other project costs.                                                                                  
9:02:39 AM                                                                                                                    
Ms. Kostik  turned to a  bar chart  on slide 3  and reviewed                                                                    
the funding for  rural water and sewer  improvements from FY                                                                    
15 to FY  19. The green portion of the  bar reflected the GF                                                                    
match  provided  by the  state,  the  yellow portion  showed                                                                    
funding  from  the  Environmental  Protection  Agency  (EPA)                                                                    
infrastructure   grants  (IG),   and   the  purple   segment                                                                    
reflected  the  United   States  Department  of  Agriculture                                                                    
(USDA)  rural development  (RD) grants.  She noted  that the                                                                    
EPA and USDA  funds were matched with state  funds. The blue                                                                    
portion of  the bar  showed funding  from the  Indian Health                                                                    
Service  (IHS) and  the brown  portion was  EPA tribal  set-                                                                    
aside funds - neither required state matching funds.                                                                            
Co-Chair   Wilson  asked   if   there  was   a  match   from                                                                    
Ms.  Kostik  answered  in  the  negative.  By  statute,  the                                                                    
program was  not allowed to  require a community  match. She                                                                    
continued  to  review  slide 3.  She  highlighted  that  EPA                                                                    
funding had  more than doubled  from FY 16  to FY 17  due to                                                                    
the hard  work of the state's  congressional delegation. She                                                                    
reported the  expectation for an  increase of $5  million in                                                                    
FY 20.                                                                                                                          
9:04:02 AM                                                                                                                    
Ms.  Kostik  turned to  slide  4  and reviewed  the  primary                                                                    
sources  of  Alaska  sanitation rural  facility  improvement                                                                    
funding.  The slide  showed a  three-year annual  average of                                                                    
federal  fiscal years  2016  to 2018.  She  shared that  DEC                                                                    
partnered with  the Alaska  Native Tribal  Health Consortium                                                                    
(ANTHC) on  the projects.  She detailed  that VSW  and ANTHC                                                                    
staff  managed the  construction  projects for  communities.                                                                    
She  noted  that the  communities  tended  to not  have  the                                                                    
capacity to manage large scale  projects. The slide included                                                                    
the various pots  of money flowing into  the program through                                                                    
VSW  and   ANTHC.  The  funding   on  the  left   in  yellow                                                                    
represented  state match,  USDA-RD,  and  EPA-IG funds.  The                                                                    
blue and  purple shown in  the middle reflected IHS  and EPA                                                                    
tribal set-aside funding  - the state did  not provide match                                                                    
funding for  these categories; the funding  was eligible for                                                                    
Native  villages only.  Funding on  the right  of the  slide                                                                    
included   additional   funding  ANTHC   pursued   including                                                                    
Department of Energy and other funds for Native villages.                                                                       
Representative  Josephson asked  for  clarification on  what                                                                    
constituted a non-Native village.  He asked if the community                                                                    
of Pelican was an example.                                                                                                      
Ms. Kostik deferred the question to a colleague.                                                                                
Representative  Josephson highlighted  the  IHS fund  source                                                                    
shown in  purple (on slide  4) that went to  Native villages                                                                    
only. He asked for the  distinction between a non-Native and                                                                    
Native village.                                                                                                                 
MARTY   BREWER,  DIRECTOR,   VILLAGE  SAFE   WATER  PROGRAM,                                                                    
DEPARTMENT     OF     ENVIRONMENTAL    CONSERVATION     (via                                                                    
teleconference),   replied   that   ANTHC   defined   Native                                                                    
communities  as  those  with a  Native  population  over  55                                                                    
Co-Chair  Wilson  asked  whether there  were  administrative                                                                    
costs  (e.g.  10 to  20  percent)  associated with  the  VSW                                                                    
Ms.  Kostik  responded  that administrative  costs  for  the                                                                    
program were  referred to  as EMT  (engineering, management,                                                                    
and travel costs);  a certain percentage of  every grant was                                                                    
allocated  for EMT  costs to  allow  VSW or  ANTHC staff  to                                                                    
manage the projects.                                                                                                            
Co-Chair Wilson asked if there was a range in the cost.                                                                         
9:07:16 AM                                                                                                                    
Ms. Brewer replied there was an 8 percent [EMT] cap for RD-                                                                     
funded projects.                                                                                                                
Co-Chair Wilson asked if the cap applied to all grants.                                                                         
Ms. Brewer answered that the cap only applied to RD grants.                                                                     
Co-Chair Wilson  asked if  there was an  EMT cost  range for                                                                    
the other grants.                                                                                                               
Ms. Brewer replied  that the EMT cost  was typically between                                                                    
8 and 15 percent.                                                                                                               
Representative Josephson  noted that the  administration had                                                                    
taken  the position  that it  should  not necessarily  fully                                                                    
invest state  funds to achieve  the largest  match available                                                                    
under federal law. However, he  did not believe that was the                                                                    
case  with the  state  GF  shown in  green  on  slide 3.  He                                                                    
observed  there  was  $1.5  million less  and  asked  if  it                                                                    
reflected some diminishment of state contribution.                                                                              
Ms. Kostik  answered that the  department took  advantage of                                                                    
every federal  dollar appropriated for the  VSW program. The                                                                    
amounts  appropriated  by  the federal  government  annually                                                                    
could fluctuate.  She noted that the  federal government was                                                                    
currently deciding  the budget that would  fund VSW projects                                                                    
in the coming  fiscal year. She elaborated  that the program                                                                    
often ended  up with "old"  money. She explained  that other                                                                    
states were not  as good as Alaska at spending  all of their                                                                    
federal money.  She furthered  that if  the VSW  program did                                                                    
not  have  enough  federal  rewards in  one  year  to  fully                                                                    
utilize its  match, it  sometimes received  prior-year money                                                                    
left over from other states.                                                                                                    
9:09:38 AM                                                                                                                    
Representative Josephson  where the  state was  in providing                                                                    
water and wastewater for all of the states 230 villages.                                                                        
Ms.  Kostik  replied that  she  would  address the  question                                                                    
later in the presentation.                                                                                                      
Co-Chair Wilson  asked if all  of the GF  money had to  be a                                                                    
match to federal dollars.                                                                                                       
Ms. Kostik  answered that the previous  year the legislature                                                                    
had  appropriated   match  funding  above  and   beyond  the                                                                    
required amount -  the program was doing some  work that was                                                                    
funded by GF match only.                                                                                                        
Co-Chair Wilson surmised it was not all GF match.                                                                               
Ms. Kostik agreed.  She turned to slide 5  and reported that                                                                    
it  cost  approximately $250,000  to  $500,000  per home  to                                                                    
provide first time service  via traditional pipe centralized                                                                    
service   in  villages.   She  explained   that  communities                                                                    
remaining unserved  were the most challenging.  She detailed                                                                    
that houses may  be spread farther apart, they  did not have                                                                    
a great  identified source of  water to begin with,  and the                                                                    
cost  of   getting  supplies  to   remote  areas   was  very                                                                    
expensive.  She  elaborated  that most  people's  homes  had                                                                    
buried  pipes,   whereas,  some  of  the   more  challenging                                                                    
locations  had permafrost  and it  was not  as easy  to bury                                                                    
pipes and run them to  houses. She furthered that there were                                                                    
other logistical  challenges including  freezing conditions.                                                                    
She would discuss what DEC was  doing to bring the cost down                                                                    
later in her presentation.                                                                                                      
9:11:46 AM                                                                                                                    
Representative LeBon  would not characterize the  systems as                                                                    
self-contained, but as community systems.                                                                                       
Ms. Kostik  answered in the  affirmative. She  detailed that                                                                    
the systems  were traditional  structure with  a centralized                                                                    
water  point  or  wastewater  collection  point  with  pipes                                                                    
running to individual houses as  opposed to a self-contained                                                                    
system that served only one home or small group of homes.                                                                       
Representative LeBon  asked if  the program looked  at self-                                                                    
contained systems.                                                                                                              
Ms.  Kostik answered  in the  affirmative and  would further                                                                    
address the question later in the presentation.                                                                                 
Co-Chair Wilson  asked how the  state justified the  idea to                                                                    
communities that had their own  individual home systems. She                                                                    
pointed out  that there was only  a small group of  homes in                                                                    
the Fairbanks North Star Borough  that had water and sewer -                                                                    
most of the  homes had wells and  individual septic systems.                                                                    
She asked  why it  was acceptable to  use federal  and state                                                                    
money to  pay for water in  sewer in areas when  there was a                                                                    
bulk of residents  who were required to put  in and maintain                                                                    
systems themselves.                                                                                                             
9:13:06 AM                                                                                                                    
Ms. Kostik  replied that it was  more of a policy  call. Per                                                                    
statute,  VSW-eligible  projects  went to  communities  with                                                                    
populations  of  1,000  or less.  The  federal  funding  was                                                                    
available specifically  for those types of  communities. She                                                                    
stated  that part  of it  was it  was where  the money  was.                                                                    
There had  been a big  push to eliminate honey  buckets from                                                                    
villages and the program was the outgrowth of that push.                                                                        
Co-Chair Wilson  agreed with the  effort to  eliminate honey                                                                    
buckets;  however, she  believed  there  were other  systems                                                                    
people could  put in and  may be  able to better  afford the                                                                    
maintenance compared  to what VSW  was installing  for free.                                                                    
She did not  know whether communities were  able to maintain                                                                    
the systems.                                                                                                                    
Ms.  Kostik answered  that DEC  currently had  an initiative                                                                    
pertaining to the issue.                                                                                                        
Representative Carpenter  asked if Ms. Kostik  would provide                                                                    
a cost comparison between  city-wide or village-wide systems                                                                    
with individual site systems.                                                                                                   
Ms.  Kostik answered  that one  of the  goals of  the Alaska                                                                    
Water Sewer  Challenge Project was  to design a  system that                                                                    
would  cost no  more than  $125,000 per  home. The  cost was                                                                    
still expensive but represented a  fraction of the cost of a                                                                    
centralized system.                                                                                                             
Representative   Tilton   asked   how  DEC   addressed   the                                                                    
maintenance and operations of systems after installation.                                                                       
Ms. Kostik  responded that when  VSW funded a  project, part                                                                    
of   the  criteria   was   ensuring   the  community   could                                                                    
demonstrate it  had the capacity  to operate and  manage the                                                                    
project, which included looking  at potential utility rates.                                                                    
The department worked on the  frontend to ensure communities                                                                    
had  the capacity  prior  to installing  a  system that  the                                                                    
community would not be able to use.                                                                                             
Ms. Kostik  turned to  slide 6  and reviewed  grant projects                                                                    
that had been  funded in FY 18 in addition  to projects that                                                                    
had  been  identified and  added  to  the list.  There  were                                                                    
currently 173  active VSW  projects throughout  rural Alaska                                                                    
with the  oldest dating  back to  2014. The  active projects                                                                    
included  117 construction  projects, 43  planning projects,                                                                    
and 13 design projects.                                                                                                         
9:16:25 AM                                                                                                                    
Ms. Kostik  moved to slide  7 and addressed  the eligibility                                                                    
criteria.  She  shared  that  projects  were  added  to  the                                                                    
multiyear priority  list and identified for  funding through                                                                    
an   application   process.  Applications   were   submitted                                                                    
annually  - the  application period  was currently  underway                                                                    
and ended on  May 10. Once the application  period closed, a                                                                    
committee made up of individuals  from DEC, ANTHC, IHS, EPA,                                                                    
and  USDA  met and  scored  applications  based on  criteria                                                                    
shown  on slide  7.  She elaborated  that  a scoring  matrix                                                                    
assigned points  to the different criteria.  She highlighted                                                                    
that the ability  for a community to operate  and maintain a                                                                    
project was  weighted heavily  (the component  reflected the                                                                    
second largest points available).                                                                                               
Representative  Carpenter asked  about current  construction                                                                    
projects listed  on slide 6.  He asked if the  projects fell                                                                    
under  the  $500,000  per  home  solution  or  the  $125,000                                                                    
standalone solution.                                                                                                            
Ms.  Kostik answered  that  it  was a  mix.  There were  two                                                                    
allocations     including     first-time     service     and                                                                    
expansion/upgrade/replacement   of  existing   systems.  She                                                                    
explained  that  many  of  the   listed  projects  were  for                                                                    
critical upgrades  to existing  systems. The  department was                                                                    
not currently adding new first-time  service projects to the                                                                    
multiyear priority list due to the high cost.                                                                                   
Representative  Carpenter   understood  from   Ms.  Kostik's                                                                    
earlier testimony that  the program's focus in  the past had                                                                    
been on  a centralized system  and it was  currently looking                                                                    
at an alternative  with individual systems. He  asked if the                                                                    
current project  planning was focused on  individual systems                                                                    
or centralized systems.                                                                                                         
Ms.  Kostik  answered  that  DEC   was  not  ready  to  fund                                                                    
individual decentralized systems  for new construction. They                                                                    
were currently in  the pilot testing phase.  The program was                                                                    
not currently adding any new  first-time service projects to                                                                    
the multiyear priority list.                                                                                                    
Co-Chair Wilson asked  why the state was  doing upgrades and                                                                    
replacements if  communities were  vetted for  their ability                                                                    
to maintain  the systems after installation.  She thought it                                                                    
should have been part of the initial plan.                                                                                      
Ms. Kostik answered that many  of the systems were aging and                                                                    
had been  built when  the state  had substantial  funds. She                                                                    
explained that perhaps  they had not been as  careful at the                                                                    
time compared  to current  day. She  relayed that  there had                                                                    
been some critical failures, things  that had not been built                                                                    
as well,  and some projects may  not have met the  need of a                                                                    
community  or  were  oversized.   She  elaborated  that  the                                                                    
program was had to go back to fix those issues.                                                                                 
Co-Chair  Wilson  asked  if  the  department  was  requiring                                                                    
communities to provide  a plan showing they  would put money                                                                    
into future upgrades.                                                                                                           
9:20:35 AM                                                                                                                    
Ms. Brewer answered that the  program required an assessment                                                                    
of  a  community's  financial  and  managerial  capacity  to                                                                    
operate and maintain a system -  even if the VSW program was                                                                    
just  making improvements.  She  reported that  some of  the                                                                    
systems were aging out and  were decades old and communities                                                                    
did not have the money to make the major upgrades required.                                                                     
Co-Chair  Wilson  stated it  was  her  point. She  found  it                                                                    
disturbing that in the past  the state had installed systems                                                                    
any way it  wanted because it had a lot  of money. She spoke                                                                    
about the  current methods dealing with  best practices. She                                                                    
provided  a  scenario  where  upgrades  were  needed  but  a                                                                    
community  could not  show its  ability  to make  additional                                                                    
upgrades in  10 to 15  years. She  wondered if VSW  would do                                                                    
the upgrade and hope for the best 15 years down the road.                                                                       
Ms. Brewer responded  that a business plan  was required for                                                                    
each  project to  assess a  community's capacity  to operate                                                                    
and  maintain the  system.  Part of  the  plan required  the                                                                    
community  to  set  funding aside  for  future  repairs  and                                                                    
Co-Chair  Wilson asked  for  verification  that a  community                                                                    
would  have to  prove it  could  fund the  future work.  She                                                                    
wondered if a community did  not have the funding, the state                                                                    
would not do the upgrades.                                                                                                      
Ms. Brewer answered  that a community had  to demonstrate it                                                                    
had the capacity to operate and maintain the systems.                                                                           
Co-Chair Wilson asked if a  community had to demonstrate its                                                                    
capacity to make updates in the future.                                                                                         
Ms. Kostik affirmed.                                                                                                            
Co-Chair Wilson shared that North  Pole had 2,000 residents,                                                                    
but  only 500  residents  were on  the  septic water  system                                                                    
(those  individuals  did  not qualify).  She  explained  the                                                                    
individuals had to  bond for over $2 million  because of DEC                                                                    
rules about  where they were releasing  sewage. She stressed                                                                    
that the  individuals did not  qualify for the  VSW program,                                                                    
but they had a very small tax  base of 500 people who had to                                                                    
maintain  the system  (it  was not  possible  to charge  all                                                                    
residents   because  they   were  not   all  receiving   the                                                                    
services). She did not know  how the statute originated. She                                                                    
reported that  the 500 individuals  also had  to demonstrate                                                                    
their capacity to make upgrades  on their own; they had also                                                                    
received some federal funding.                                                                                                  
9:23:19 AM                                                                                                                    
Ms. Kostik moved to slide 8  and reported that the past year                                                                    
the  legislature funded  $4 million  in additional  GF above                                                                    
the required  federal match. The  funds were used  for "band                                                                    
aid" projects  to address minor  health threats  through the                                                                    
repair  and replacement  of existing  systems that  were not                                                                    
otherwise  eligible  for  federal  rewards.  The  department                                                                    
reviewed the  grants quarterly and would  make approximately                                                                    
$1.5  million  in  FY  19  to  fund  20  new  projects.  She                                                                    
highlighted that  the state operated the  Alaska Clean Water                                                                    
and   Drinking    Water   State   Revolving    Loan   Funds.                                                                    
Traditionally, the loans  had been used to  make large loans                                                                    
to  municipalities  and  other qualified  organizations  for                                                                    
infrastructure  work.  The  funds were  funded  annually  by                                                                    
capitalization grants  from the  EPA. She detailed  that DEC                                                                    
was required  to issue  a certain amount  of subsidy  in the                                                                    
term  of loan  forgiveness  annually.  The department  would                                                                    
begin issuing  microloans to VSW-eligible communities  up to                                                                    
$50,000  for   system  upgrades  that  were   not  otherwise                                                                    
eligible. She  noted the loans  would be  highly subsidized.                                                                    
She  relayed that  communities  could take  out  a loan  for                                                                    
larger upgrades that arose.                                                                                                     
Co-Chair  Wilson asked  for  an example  of  what would  not                                                                    
Ms.  Kostik  asked  if  Co-Chair  Wilson  was  referring  to                                                                    
federal funding.                                                                                                                
Co-Chair Wilson affirmed.                                                                                                       
Ms. Kostik provided  a scenario where the roof  over a water                                                                    
tank  was leaking  and it  would eventually  deteriorate the                                                                    
building.  She explained  that the  situation was  not at  a                                                                    
critical point,  but perhaps in  five or ten years  it would                                                                    
fail if  the problem was  not addressed at  present. Federal                                                                    
funding  was  not  available  under   the  scenario,  but  a                                                                    
community could  use the infrastructure grants  or microloan                                                                    
program to replace the roof.                                                                                                    
9:26:02 AM                                                                                                                    
Representative  Carpenter  asked  if the  microloan  program                                                                    
came out of the state revolving loan fund.                                                                                      
Ms. Kostik agreed.                                                                                                              
Representative  Carpenter asked  if  the  subsidy came  from                                                                    
general funds.                                                                                                                  
Ms. Kostik answered  in the negative. She  explained that it                                                                    
was  loan  forgiveness  -  a  requirement  by  EPA  for  the                                                                    
capitalization funds received annually.  There was a certain                                                                    
portion of  loans issued  by the  program annually  that VSW                                                                    
was required to subsidize (or basically not write off).                                                                         
Representative Carpenter  asked if  the revolving  loan fund                                                                    
received  an annual  appropriation. His  understanding of  a                                                                    
revolving loan  fund with forgiveness  was that  money would                                                                    
go out  and at  some point,  it would not  come back  in. He                                                                    
imagined  the fund  depleted eventually.  He  asked for  the                                                                    
funding source.                                                                                                                 
Ms. Kostik  answered that there were  several appropriations                                                                    
related  to the  revolving  loan funds.  She detailed  there                                                                    
were  language appropriations  in  the  capital budget  that                                                                    
allowed the  program to  accept the  federal capitalization.                                                                    
The state  was required  to match the  capitalization, which                                                                    
the EPA allowed DEC to do  by issuing one-day bonds from the                                                                    
interest earnings  on the  loan fund.  The program  also had                                                                    
two capital projects for the  subsidies. She explained there                                                                    
was  a  clean  water  and  drinking  water  subsidy  capital                                                                    
appropriation in the  budget, which was from  the loan fund.                                                                    
For accounting purposes, the subsidy  was like a grant - the                                                                    
program  recorded  the expenditure  of  the  subsidy in  the                                                                    
capital appropriations.                                                                                                         
9:28:30 AM                                                                                                                    
Representative Carpenter found  it hard to call  a fund that                                                                    
was not being  repaid, a revolving loan fund.  He thought it                                                                    
sounded like a grant.                                                                                                           
Ms. Kostik answered that the  loans were repaid for the most                                                                    
part. There was  a percentage of loans  that got subsidized.                                                                    
The program's  largest customer from  the loan fund  was the                                                                    
Municipality of  Anchorage, which  was large enough  that it                                                                    
did not receive  any subsidy and fully paid  back its loans.                                                                    
Most  communities  received  small subsidies.  She  detailed                                                                    
that the  subsidy amount for normal  loans was approximately                                                                    
10 to 20 percent of the  loan amount. Most of the loans were                                                                    
repaid and second-cycle  money in the loan fund  - the money                                                                    
was  replenishing  itself  and received  new  capitalization                                                                    
funds annually.                                                                                                                 
Representative   Carpenter  asked   for   a   list  of   the                                                                    
outstanding  loans  to see  what  was  repaid and  what  was                                                                    
Co-Chair Wilson  requested the current  balance of  the loan                                                                    
fund as well.                                                                                                                   
Ms.  Kostik  replied  that  she would  follow  up  with  the                                                                    
Vice-Chair Johnston  shared that  she was familiar  with the                                                                    
revolving  loan funds  because of  her  experience with  the                                                                    
Municipality  of Anchorage.  She  explained  that for  years                                                                    
Anchorage was  the only place  using the funds  because most                                                                    
other  projects were  grants. She  detailed  that the  loans                                                                    
were low  interest and the  Municipality of Anchorage  had a                                                                    
large number  of them.  She stated that  the rate  of return                                                                    
was likely sufficient to cover any subsidy.                                                                                     
9:30:37 AM                                                                                                                    
Vice-Chair   Ortiz   asked   if    there   was   an   annual                                                                    
recapitalization  of the  revolving loan  fund. He  asked if                                                                    
there was a regular funding source.                                                                                             
Ms. Kostik answered in the  affirmative. She explained there                                                                    
was  a federal  EPA grant  that came  in through  a language                                                                    
appropriation  in the  budget to  capitalize  the fund.  She                                                                    
detailed that  it was not  a regular  capital appropriation;                                                                    
it  was   an  annual   language  appropriation   under  fund                                                                    
Co-Chair Wilson clarified that the  legislature gave DEC the                                                                    
authority  in  the  capital budget  to  accept  the  federal                                                                    
Vice-Chair   Ortiz   asked   for   verification   that   the                                                                    
recapitalization fund source was federal, not state.                                                                            
Ms. Kostik agreed.                                                                                                              
Co-Chair  Wilson remarked  it  was still  the state's  money                                                                    
because it paid taxes.                                                                                                          
Representative  Josephson  asked   if  the  Municipality  of                                                                    
Anchorage  borrowed $50,000  or less  through the  microloan                                                                    
Ms. Kostik answered in the  negative. She clarified that the                                                                    
microloan   program   specifically   targeted   VSW-eligible                                                                    
communities. The  Municipality of  Anchorage took  out loans                                                                    
of $3 million or more at one time.                                                                                              
Representative Josephson asked  for verification the subject                                                                    
was beyond the information on slide 8 of the PowerPoint.                                                                        
Ms. Kostik agreed.                                                                                                              
Co-Chair  Wilson asked  if any  subsidies were  done on  the                                                                    
loans mentioned by Representative Josephson.                                                                                    
Ms. Kostik answered in the  affirmative. She elaborated that                                                                    
there  were   numerous  eligibility  requirements   for  the                                                                    
subsidies   related   to   a  community's   poverty   level,                                                                    
population, and other.                                                                                                          
Co-Chair Wilson  surmised that although the  Municipality of                                                                    
Anchorage may  be a low  income area within a  community, it                                                                    
was  not considered  because eligibility  was  based on  the                                                                    
entire  population and  not on  an  individual's ability  to                                                                    
repay the loan.                                                                                                                 
Ms.   Kostik  replied   it   was   her  understanding   that                                                                    
eligibility was based  on a municipality as a  whole and not                                                                    
on a specific  area. She would have to  confirm with program                                                                    
staff and follow up.                                                                                                            
Vice-Chair Johnston  explained that  the areas  were service                                                                    
areas. She explained  that even if an area  within a service                                                                    
area  had high  needs and  low income,  the general  service                                                                    
area paid. For example, Girdwood  had a small population and                                                                    
had  to completely  redo its  system. She  relayed that  the                                                                    
whole Municipality  of Anchorage was paying  for the project                                                                    
because it was one large service area.                                                                                          
Co-Chair  Wilson pointed  out the  inequality. She  remarked                                                                    
that people outside of villages  also struggled to pay their                                                                    
bills. She thought  it may be necessary to  look at existing                                                                    
statute  and consider  that other  areas  struggled and  may                                                                    
need the grants as well.                                                                                                        
9:34:27 AM                                                                                                                    
Ms.  Kostik  moved to  slide  9  and  relayed that  the  VSW                                                                    
program did not provide  ongoing funding for maintenance and                                                                    
operations  of programs.  She  shared  that DEC's  operating                                                                    
budget  included an  operator,  training, and  certification                                                                    
program that  trained water and wastewater  system operators                                                                    
who  took  a test  and  received  certification to  run  the                                                                    
systems.  The program  also partnered  with regional  health                                                                    
corporations to  provide remote  maintenance workers  (15 to                                                                    
16  throughout  the  state serving  different  regions)  for                                                                    
technical assistance or in the  case of emergency (e.g. when                                                                    
pipes froze in the winter).  The program worked closely with                                                                    
partners (regional health  corporations, RUBA, and community                                                                    
leaders)  to ensure  the state  was providing  assistance to                                                                    
communities  to help  build their  financial and  managerial                                                                    
Co-Chair Foster  looked at the  RUBA acronym on slide  9. He                                                                    
wondered if  there were efforts to  address communities that                                                                    
did not have  the capacity to pay for  system operations. He                                                                    
realized  there were  various systems,  with pipe  being the                                                                    
most expensive. He  asked what efforts were made  to look at                                                                    
a situation  where a  community had a  low capacity  to pay,                                                                    
yet under  the RUBA scoring  system it received  more points                                                                    
for having more capacity to pay  for the system. He noted it                                                                    
was a  difficult situation where communities  had no service                                                                    
or needed  an upgrade but were  the least likely to  get the                                                                    
Ms. Kostik  replied that it  was her understanding  in terms                                                                    
of  scoring for  the systems,  the VSW  program did  not use                                                                    
RUBA  scoring.   The  program  had  been   reevaluating  its                                                                    
9:37:33 AM                                                                                                                    
Ms. Brewer  augmented that RUBA's  primary function  was not                                                                    
scoring,  but capital  improvement. She  explained that  DEC                                                                    
used  RUBA scoring  as  one component  of  its overall  best                                                                    
practice  scoring to  evaluate a  community's financial  and                                                                    
managerial capacity to take on  new projects. The RUBA score                                                                    
was only  one component in  the overall scoring  matrix. The                                                                    
scoring  matrix also  included whether  a  community had  an                                                                    
operator certified  at the appropriate  level to  manage the                                                                    
system in addition to a community's financial capacity.                                                                         
Co-Chair Foster  asked how much  weight was put  towards the                                                                    
financial capacity of a community to maintain a system.                                                                         
Ms. Kostik  answered that  a community's  financial capacity                                                                    
was heavily  weighted. She  noted that it  was not  only the                                                                    
RUBA  scoring  component and  included  all  of the  various                                                                    
pieces of the managerial and operating capacity.                                                                                
Co-Chair Foster would  continue to work with  the program on                                                                    
the issue.                                                                                                                      
9:39:46 AM                                                                                                                    
Vice-Chair Johnston asked what RUBA stood for.                                                                                  
Ms.  Kostik  replied  that  RUBA  stood  for  Rural  Utility                                                                    
Business Advisor.                                                                                                               
Co-Chair  Wilson asked  who paid  for operator  training and                                                                    
Ms. Kostik  answered that the operators  taking the training                                                                    
paid fees to take certification classes and tests.                                                                              
Co-Chair  Wilson asked  if remote  maintenance workers  were                                                                    
state employees or individuals hired by the communities.                                                                        
Ms. Kostik replied  that it was a mix. Three  to four of the                                                                    
remote  maintenance workers  were  state  employees and  the                                                                    
other  11 were  employees of  regional health  corporations.                                                                    
The  department passed  through  funding  for the  non-state                                                                    
9:40:53 AM                                                                                                                    
Ms. Kostik  moved to slide  10 and reported that  86 percent                                                                    
of rural homes  had indoor plumbing and  sewer. She reported                                                                    
that the figure had grown by  30 percent in the past decade.                                                                    
She   highlighted   a   bar   chart   showing   there   were                                                                    
approximately 2,600 unserved homes  in rural Alaska, most of                                                                    
which  were  located  in  communities  targeted  for  future                                                                    
Representative  Josephson commended  the department  for its                                                                    
progress. He noted  that Ms. Kostik had  testified there was                                                                    
currently a  hiatus on moving  into communities that  had no                                                                    
service at  all. He asked  why and  assumed it was  to cover                                                                    
and complete projects in the gray area status.                                                                                  
Ms. Kostik  responded that the hiatus  was primarily related                                                                    
to the  $500,000 cost  per home. The  next slide  would show                                                                    
that  the  overall cost  to  provide  the centralized  piped                                                                    
service to the homes was  high. The department wanted to get                                                                    
farther down the  path of the Water  Sewer Challenge Project                                                                    
to look  at the  decentralized options  in a  less expensive                                                                    
way  rather  than  continuing   to  build  large,  expensive                                                                    
Representative Josephson  could imagine what it  looked like                                                                    
for  other communities  [without  service].  He stated  that                                                                    
essentially, the  unserved communities drew water  from some                                                                    
location that was  tested from time to time.  He believed it                                                                    
was  the case  for a  location  without a  water system.  He                                                                    
asked if his statements were accurate.                                                                                          
Ms.  Kostik  answered that  she  would  have to  check  with                                                                    
drinking  water   program  staff.   She  stated   that  many                                                                    
communities  without in-home  service  had  a washeteria  or                                                                    
central watering point, which  would be tested and regulated                                                                    
as a public drinking water system.                                                                                              
Representative  Josephson  addressed  wastewater  and  noted                                                                    
there was typically  a dumping site separate  from a garbage                                                                    
site.  He  remarked  on  concern  with  bath  tissue,  fecal                                                                    
coliform  and  other related  issues.  He  asked if  he  was                                                                    
Ms. Kostik answered there would  be a sewage lagoon or other                                                                    
similar dumping  point where communities dumped  their honey                                                                    
9:44:27 AM                                                                                                                    
Vice-Chair Ortiz understood that  the $500,000 per household                                                                    
price tag was important to  consider. He wondered if holding                                                                    
off  and reassessing  or working  on a  superior alternative                                                                    
had  ongoing opportunity  costs  in terms  of public  health                                                                    
(i.e. higher rates of illness) that should be considered.                                                                       
Ms. Kostik  responded in the affirmative.  She detailed that                                                                    
running  water  in  a  home   promoted  better  hygiene  and                                                                    
cleanliness.  She  elaborated  that running  water  meant  a                                                                    
person was  more likely to  wash their hands and  do laundry                                                                    
and  dishes more  frequently. The  issue was  about managing                                                                    
the cost of the system over the health needs.                                                                                   
Co-Chair  Wilson commended  DEC for  working to  determine a                                                                    
more affordable  option for  communities. She  reasoned that                                                                    
although it may delay  installation for some communities, in                                                                    
the  long run,  something  more  cost-effective with  easier                                                                    
maintenance was preferable.                                                                                                     
Ms. Kostik  moved to slide 11  showing a pie chart  of rural                                                                    
Alaska sanitation  funding need of $1,420,503,024.  The blue                                                                    
portion  of the  chart reflected  communities with  a first-                                                                    
time service  need based on  the cost of a  centralized pipe                                                                    
system  to  unserved  homes. The  yellow  portion  reflected                                                                    
areas  needing  minor updates  that  were  not eligible  for                                                                    
federal funding under the current  model. The orange portion                                                                    
represented upgrades  to address substantial  health threats                                                                    
funded  by upgrades/replacements  funding included  in DEC's                                                                    
9:46:35 AM                                                                                                                    
Co-Chair Foster looked at slide  10 showing a total of 2,600                                                                    
unserved  homes. He  noted  that there  were  650 homes  not                                                                    
targeted for  future service. He  asked if the  $850 million                                                                    
shown  in blue  on slide  11 was  based on  the 2,000  homes                                                                    
getting pipe service.                                                                                                           
Ms.  Kostik  answered in  the  affirmative;  the amount  was                                                                    
based on the number of unserved homes.                                                                                          
Co-Chair Foster  asked if it  was likely all of  the [2,000]                                                                    
homes would get pipe service.                                                                                                   
Ms. Kostik  replied that the  plan was  for the homes  to be                                                                    
served by  some form  of running  water, but  it may  not be                                                                    
piped service. She detailed that  there may be a centralized                                                                    
system that included a water  recycling system in homes. The                                                                    
goal going  forward was to  avoid building new  pipe systems                                                                    
for the remainder of the 2,000 unserved homes.                                                                                  
Co-Chair Foster  looked at the  $1.4 billion total  on slide                                                                    
11 and  asked if  it had  been held  fairly constant  or was                                                                    
increasing substantially in the past 5 to 10 years.                                                                             
Ms. Kostik answered  that the number had  decreased over the                                                                    
past five years since she  had been with the department. She                                                                    
explained  that   much  of  the  decrease   was  related  to                                                                    
finishing some of the projects  that were currently underway                                                                    
- as those came online the number decreased.                                                                                    
Representative Carpenter looked at  the $1.4 billion need on                                                                    
slide 11. He  reasoned that the figure  could be interpreted                                                                    
as  a $325,000  need  if  the cost  per  home decreased.  He                                                                    
reasoned that  the $1.4  billion would  look like  less than                                                                    
Ms. Kostik answered that if the  VSW program moved to a less                                                                    
expensive  system, the  number  would decrease,  but not  to                                                                    
$500,000.  She relayed  that  the cost  would  be closer  to                                                                    
$125,000 per home for first-time service.                                                                                       
Representative Carpenter  corrected that  he had  meant $500                                                                    
Ms. Kostik agreed.                                                                                                              
Co-Chair Wilson  asked if the  $1.4 billion figure  on slide                                                                    
11 was based  off of $500,000 [per home].  She reasoned that                                                                    
if  the  cost  per  home  decreased  to  $125,000  it  would                                                                    
substantially lower the $1.4 billion figure.                                                                                    
Ms.  Kostik  agreed.  The  current   math  was  based  on  a                                                                    
traditional centralized pipe system  and not a new approach.                                                                    
The math had  not yet been done, but the  reduction per home                                                                    
would dramatically decrease the $1.4 billion.                                                                                   
9:50:21 AM                                                                                                                    
Ms. Kostik  moved to  slide 12 related  to the  Alaska Water                                                                    
and Sewer  Challenge Project. She detailed  that the project                                                                    
had  started five  or six  years earlier  as a  research and                                                                    
development  project. She  reported  that there  had been  a                                                                    
capital  appropriation by  the legislature  about six  years                                                                    
back that  kicked the project  off. The project  had started                                                                    
off with  six teams  that were given  criteria for  what the                                                                    
system needed  to do,  and they had  all worked  up designs.                                                                    
The  department had  selected two  or three  teams that  had                                                                    
developed  prototypes.   One  successful  system   had  been                                                                    
selected pertaining  to water recycling  - it  was currently                                                                    
under a  testing phase. The hope  was to test the  system in                                                                    
villages in the coming year.  In addition to having a system                                                                    
that met  the needs and  recycled a certain amount  of water                                                                    
every  day, it  was important  to ensure  the community  had                                                                    
buy-in and  would use the  system. She explained  the system                                                                    
would be  installed in  some homes  to determine  how people                                                                    
liked it and if it worked.                                                                                                      
Ms.  Kostik explained  that the  system  required a  minimal                                                                    
amount  of  water each  day  and  recycled gray  water  from                                                                    
laundry,  dishes, showering,  and washing  hands. The  water                                                                    
would be  recycled for use  on those types of  services. She                                                                    
clarified  that  the  system  was  not  currently  meant  to                                                                    
recycle  the water  into drinking  water,  but perhaps  they                                                                    
would reach that point in the future.                                                                                           
Co-Chair  Wilson  asked why  a  community  would not  use  a                                                                    
Ms. Kostik answered that the system  had not been shown to a                                                                    
community  or installed  in  a home.  She  explained that  a                                                                    
person may  be unsure  about using  recycled water  that may                                                                    
look different than drinking water.                                                                                             
Co-Chair Wilson asked  what the other option would  be for a                                                                    
community. She  wondered if the department  would still look                                                                    
at  another  more  expensive pipe  water  option  if  enough                                                                    
individuals were opposed to a recycled water system.                                                                            
Ms. Kostik  did not believe they  had gotten that far  as of                                                                    
yet; the system had not yet been tested in homes.                                                                               
Vice-Chair Johnston asked if DEC  would test available space                                                                    
and  maintenance  in  homes  and   whether  a  system  could                                                                    
modernize a washeteria  for a group of  homes. She explained                                                                    
that perhaps the system may  not be in individual homes, but                                                                    
it would be less expensive than the cost of piping.                                                                             
9:53:47 AM                                                                                                                    
Ms. Kostik replied  in the affirmative. She  detailed that a                                                                    
system may not be in a single home  but may go to a group of                                                                    
four homes that  share one system. She  highlighted that DEC                                                                    
wanted to  ensure a  system could  be easily  maintained and                                                                    
repaired by homeowners, which was  included in the challenge                                                                    
Co-Chair Foster  referenced Ms. Kostik's statement  that the                                                                    
water  and sewer  challenge project  had  started six  years                                                                    
earlier. He asked how the  challenge was funded. He recalled                                                                    
being told several years earlier  that the system was in the                                                                    
testing phase. He  realized it may take years  to obtain all                                                                    
of the data. He wanted to  ensure that DEC had the resources                                                                    
to make sure  the project was actively  pursued. He observed                                                                    
that $1.4  billion was substantial.  He thought it  would be                                                                    
better  if  the number  could  be  decreased. He  wanted  to                                                                    
ensure the challenge resulted in  service to individuals who                                                                    
currently  had no  service to  partial service.  He believed                                                                    
improving the  health in communities  should be  done sooner                                                                    
rather than later. He asked  if there was a separate funding                                                                    
line item.                                                                                                                      
Ms. Kostik replied  that six years earlier,  the VSW program                                                                    
had  received a  capital appropriation  of about  $3 million                                                                    
GF. The program had finished off  the funds about one to two                                                                    
years back. In the meantime,  the department had worked with                                                                    
federal  funding partners  to receive  additional funds  for                                                                    
the project.  The department currently  had fund  sources to                                                                    
continue its work.                                                                                                              
Co-Chair  Wilson asked  if the  work would  qualify for  the                                                                    
same  funding  that was  going  to  pipe water  system.  She                                                                    
wondered if the program had  to be proven prior to receiving                                                                    
federal funds.                                                                                                                  
Ms. Kostik deferred the question to her colleague.                                                                              
Ms.  Brewer  answered  that  DEC   had  to  demonstrate  the                                                                    
efficacy and safety  of a system before  federal funding was                                                                    
received. The  department was currently entering  stage four                                                                    
of the  gray water recycling  project. The next step  was to                                                                    
install the  system into  a home-based  system and  use real                                                                    
gray  water with  no human  exposure.  The department  would                                                                    
treat and  test the  gray water to  ensure it  met treatment                                                                    
standards.  The  next  phase would  include  human  exposure                                                                    
(skin contact for  washing hands and other,  but no drinking                                                                    
water). The  department was  getting through  the challenges                                                                    
of  the  liability of  exposing  human  subjects to  treated                                                                    
9:57:43 AM                                                                                                                    
Co-Chair Wilson asked how long  they anticipated the current                                                                    
phase lasting.                                                                                                                  
Ms. Brewer  answered that the initial  phase was anticipated                                                                    
to last through  FY 20. Based on the success  of the initial                                                                    
phase with no  human exposure, the department  would move to                                                                    
the second phase including human exposure in FY 21.                                                                             
Co-Chair Wilson asked  if some of the communities  may be on                                                                    
hold for the next two to three years.                                                                                           
Ms. Brewer answered in the affirmative.                                                                                         
HB  38  was   HEARD  and  HELD  in   committee  for  further                                                                    
Co-Chair  Wilson recessed  the meeting  until the  following                                                                    
9:58:59 AM                                                                                                                    
RECESSED UNTIL 9:00 a.m. April 17, 2019                                                                                         
[Note:  See  separate minutes  dated  April  17, 2019,  9:00                                                                    

Document Name Date/Time Subjects
HB 38 VSW Multi Year Priority List Oct2018.pdf HFIN 4/16/2019 9:00:00 AM
HB 38
HB 38 HFC 04.16.2019 VSW program updates.pdf HFIN 4/16/2019 9:00:00 AM
HB 38