Legislature(2013 - 2014)HOUSE FINANCE 519
04/15/2014 06:00 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB218 | |
| SB191 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 218 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | SB 191 | TELECONFERENCED | |
HOUSE FINANCE COMMITTEE
April 15, 2014
6:11 p.m.
6:11:34 PM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 6:11 p.m.
MEMBERS PRESENT
Representative Alan Austerman, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Mark Neuman, Vice-Chair
Representative Mia Costello
Representative Bryce Edgmon
Representative Les Gara
Representative David Guttenberg
Representative Lindsey Holmes
Representative Cathy Munoz
Representative Steve Thompson
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Suzanne Armstrong, Staff, Senator Kevin Meyer; Deven
Mitchell, Executive Director, Alaska Municipal Bond Bank
Authority, Department of Revenue; Brian Rogers, Chancellor,
University of Alaska Fairbanks; Laura Pierre, Staff,
Senator Anna Fairclough and the Legislative Budget and
Audit Committee; Deven Mitchell, Debt Manager, Department
of Revenue.
PRESENT VIA TELECONFERENCE
Laura Comer, Self, Fairbanks; Christina-Alexa Liakos, Self,
Fairbanks; Carson Chavana, Self, Fairbanks; Kelsi Swenson,
Student, University of Alaska Anchorage; Elisabeth Allard,
Self, Wasilla; Carly Wier, Self, Anchorage; Elizabeth
Shoeffler, Self, Anchorage; Kaitlynd Ward, Student,
University of Alaska Anchorage.
SUMMARY
CSSB 191(FIN)
GENERAL OBLIGATION BOND FUND TRANSFER
CSSB 191(FIN) was HEARD and HELD in committee for
further consideration.
CSSB 218(FIN)
MUNI BOND BANK; UAF HEAT & PWR PLANT
CSSB 218 (FIN) was HEARD and HELD in committee
for further consideration.
CS FOR SENATE BILL NO. 218(FIN)
"An Act relating to financing; relating to the Alaska
Municipal Bond Bank Authority; authorizing the
University of Alaska to issue bonds to finance the
design, construction, acquisition, and equipping costs
of the University of Alaska Fairbanks heat and power
plant; authorizing the University of Alaska to borrow
money from the Alaska Municipal Bond Bank Authority to
finance the design, construction, acquisition, and
equipping costs of the University of Alaska Fairbanks
heat and power plant; and providing for an effective
date."
6:12:27 PM
SUZANNE ARMSTRONG, STAFF, SENATOR KEVIN MEYER, provided
introductory remarks on the legislation. She explained that
the bill accomplished three objectives. First, SB 218
increased the borrowing limit of the Alaska Municipal Bond
Bank (AMBB) from $1 billion to $1.5 billion. She informed
the committee that the AMBB was a public corporation of the
state and was established in 1975. The bond bank was
created to aide Alaskan communities with financing capital
improvement projects. She read exerts from the sponsor
statement:
The AMBB was able to use the state's credit support in
the form of a moral obligation pledge backed with an
annual appropriation to achieve AA+ credit ratings.
The AMBB was able to leverage those ratings into lower
interest rates than municipalities would be able to
borrow independently.
Ms. Armstrong announced that every AMBB loan has been
repaid. She continued with the sponsor statement.
The AMBB has saved an estimated $67 million in
borrowing costs over the last five years through the
issuance of $578 million of bonds. Following the most
recent bond issue, there were bonds outstanding in the
amount of $908 million, leaving a remaining capacity
of $92 million. Bond issues currently underway are
anticipated to exceed $80 million and will use most of
the remaining cap.
Without the proposed increase in the borrowing limit,
it is likely that over the next 12-18 months the AMBB
will have fully utilized the current borrowing limit
and municipalities may be subjected to borrowing funds
at higher rates. The borrowing limit for the AMBB was
raised most recently in 2010 from $750 million to $1
billion. In 2006, the borrowing limit was raised from
$500 million to $750 million.
Ms. Armstrong continued with the second provision of the
bill.
CS SB 218 (FIN) further provides that the University
of Alaska (UA) may utilize the AMBB for the
purpose of issuing debt, in an amount not to exceed
$150 million.
Ms. Armstrong delineated that statute authorized AMBB to
loan to municipalities or "municipal joint insurance
arrangements" under AS 21.76. The legislation expanded the
authority of AMBB to loan to UOA for construction a
combined heat and power plant on the Fairbanks campus.
She concluded with the third provision of the legislation.
CS SB 218 (FIN) also provides the legislative
approval, required under AS 14.40.253, for the
issuance of University of Alaska revenue bonds and for
the University of Alaska to borrow money and enter
into a loan agreement with the AMBB for the purpose of
design, construction, acquisition, and equipping a new
heat and power plant at the University of Alaska
Fairbanks.
Co-Chair Stoltze wondered how close $1.5 billion was to the
state's capacity. He noted that the limit had been
increased almost annually in a short period of time. The
limit was approximately $300 million 10 years ago. He
wondered what the "ceiling" was.
DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL BOND
BANK AUTHORITY, DEPARTMENT OF REVENUE, explained that the
bond bank operated as a "true moral obligation program."
The bond bank never experienced a loan default by a
borrower. Therefore, none of its loans can be included in
the states net tax supported debt for purposes of
calculating the debt capacity of the state. If a number of
AMBB loans ended in default and relied on the state to
repay the loan obligations some or all of the bond banks
obligations would be counted as net tax supported debt. He
observed that determining a limit on the bond banks'
lending authority was more of an "art" than a calculation.
He believed the credit limit increase requested in SB 218
was a safe amount and would not result in a rating action.
Co-Chair Stoltze wondered whether a proposal of $500
million in the following year would alert the rating
analysts.
Mr. Mitchell replied that it depended on the "nature of the
moral obligation" and cautioned that a loan associated with
risk would raise alarms.
Co-Chair Austerman pointed to page 6, line 4.
(1) the anticipated annual payment amount is
$7,000,000;
He wondered who would make the annual payment of $7
million.
Mr. Mitchell answered that the legislation allowed the bond
bank to purchase bond issues with the University for an
amount up to $150 million. Under Section 9 of the bill the
university's loan limit would be $87.5 million. The loan
would be secured by a "subordinated revenue pledge" by UA.
The amount collected by UA would be obligated minus certain
operating costs. He alluded to the fiscal note FN1 (UA) and
explained that the state would assist with the university's
obligations, which aligned with the states past practice.
6:21:06 PM
BRIAN ROGERS, CHANCELLOR, UNIVERSITY OF ALASKA FAIRBANKS,
added that the original fiscal note had provided for a
state appropriation of $7 million per year of general funds
to repay the AMBB loan and for the university to pay the
costs through fuel savings and additional fees for the
repayment of the portion of the $70 million bond issue
authorized with university receipts. He revealed that the
university was working on a revised fiscal note "to put
them in balance." The revision depended on the adoption of
an amendment that had not been offered yet.
Co-Chair Austerman wanted clarification regarding bond
repayment.
Mr. Rogers responded that there were two bonds; an $87.5
million bond issue that would be paid by the state and a
$70 million university bond that would be paid by
university revenues and savings generated from lowered fuel
costs.
Co-Chair Austerman clarified that the state would pay the
$7 million from the general fund.
Mr. Rogers replied in the affirmative.
Representative Gara ascertained that the state would pay $7
million per year; the university would pay the other $70
million with savings and university receipts. He wondered
who paid the debt service.
Mr. Mitchell replied that the underlying borrowers paid the
debt service. He emphasized that the obligation belonged to
the university.
Representative Gara asked whether historically the
municipalities paid the debt service on the bonds and the
state had not paid any debt service costs.
Mr. Mitchell replied in the affirmative.
Representative Costello wondered where the remainder of the
$245 million total costs for the power plant would come
from.
Ms. Armstrong replied that SB 119>Budget: Capital]; the
capital budget bill contained a university appropriation
for $37 million and a reappropriation of $50 million for
the balance.
Representative Costello inquired about the $50 million
reappropriation. She wondered what the original source of
the funding was.
Ms. Armstrong answered that it originated from the
Sustainable Energy Transmission Solutions (SETS) fund
established in SB 25>Aidea: Sustainable Energy/ Interest
Rate - Enacted September 2012] in 2012.
Representative Costello asked if the $37.5 million amount
was undesignated general funds (UGF).
Ms. Armstrong replied that the amount derived from
designated general funds (DGF).
Co-Chair Stoltze asked whether the SETS fund had been a
loan program in the past.
Ms. Armstrong remembered that SETS was formed to be a loan
and loan guarantee program under the Alaska Industrial
Development and Export Authority (AIDEA).
Co-Chair Austerman understood that the SETS program had
been originally designed as a loan program. He asked for
verification that the $50 million was not a loan but a
deduction from the fund.
Ms. Armstrong answered in the affirmative. She indicated
that the money was a reappropriation of funds from SETS to
the power plant project.
Representative Wilson inquired whether UAF students were
exclusively being assessed the university's portion of the
bond repayment in the form of higher tuitions fees.
Mr. Rogers responded that the additional university receipt
revenue would be derived from other receipts and student
receipts. The Board of Regents made decisions regarding
tuition increases. He believed the Board of Regents would
consider that the plant benefitted the Fairbanks campus.
Representative Wilson thought that the university system
was unified and that tuition increases were assessed system
wide.
Mr. Rogers replied that board policy conventionally
expended the funds on the campus where the tuition was
raised.
Representative Wilson wondered whether the Fairbanks campus
would still be able to compete with other branches of the
university if tuition costs were much higher due to bearing
the cost of such an expensive project alone.
Mr. Rogers replied that tuition decisions were made by the
Board of Regents and he could not speak to the issue.
Representative Wilson believed the issue was important to
determine prior to passing the legislation. A much higher
tuition increase for the Fairbanks campus would be
alarming. Expenses could be absorbed better if the entire
university system was working together. She hoped the board
understood the repercussions of such a decision.
Co-Chair Stoltze referred to his college education
experience at the UAF campus. He remembered paying student
fees on indebtedness. He wondered whether allocating
tuition fees to pay a bonded indebtedness was common.
Mr. Rogers reported that the student recreation center on
the Fairbanks campus was a student financed facility. The
bonded indebtedness was currently being paid by student
fees. He was not aware of other student financed facilities
with the exception of student housing; a portion of the
debt was paid by student housing fees.
Co-Chair Stoltze clarified that since he attended college
it was uncommon for students to pay for the university's
bonded indebtedness.
Mr. Rogers affirmed and replied that it had only occurred
at the Fairbanks campus.
6:33:05 PM
Representative Holmes referred to the $37.5 million in
designated general funds. She inquired about the source of
the funds. Ms. Armstrong responded that the funds were set
aside for the Alaska Capital Income Fund.
Representative Holmes understood that typically the
municipalities repaid its debt back to the bond back. She
wondered whether SB 218 was the first instance where the
state would be paying the bonded indebtedness.
Mr. Mitchell answered that there were other municipal joint
insurance agreement allowances in statute but was never
acted upon. He restated that "from the AMBB perspective"
the university was repaying the loan not the state. The
bond banks commitments were directly from the university
and the state's role was "through the back door."
Representative Holmes wanted to understand the university's
and the state's role in repaying the bonds. She wondered
what the state's actual or moral obligation was.
Mr. Rogers answered that the $70 million was referred to in
the legislation. He explained that the legislature
authorized the university to issue $70 million with a
notice of debt payment in SB 218.
Mr. Mitchell replied that the moral obligation applied to
any bonds issued by AMBB. He was uncertain whether bond
analysts would want the university bonds counted as net tax
supported debt. He said the same argument could be made for
all of the university's outstanding debt because of the
existing financial relationship with the state. Through
AMBB's potential authorization the university had a conduit
to access the capital market at the highest ratings (AA+)
that it would not normally be able to attain through its
own senior lien debt. The state would benefit through the
use of the bond bank which allowed the university much
better leverage.
Representative Holmes wondered what the payments on the $87
million were.
Mr. Mitchell answered that the interest rate and term were
the primary factors in determining repayment. The actual
amount depended on the final structuring of the debt. The
payments were referred to in the university's fiscal note
FN1 (UA).
Representative Holmes clarified that the fiscal note
appropriated approximately $7 million per year for payment.
Mr. Mitchell answered in the affirmative and recalled that
the payment was based on a 20 year amortization and
relatively high interest rate compared to rates that were
currently available.
Representative Holmes surmised that the payment was based
on a conservative estimate.
Mr. Mitchell answered in the affirmative.
Co-Chair Stoltze asked if the money for the SETS fund was
classified as DGF.
Ms. Armstrong expressed uncertainty and would follow up on
the question.
Co-Chair Stoltze believed that there was a "much broader
vision for the SETS fund." He recounted that when the SETS
fund was established only two years ago it was capitalized
with unrestricted general funds through the capital budget.
The SETS funding was a major component for the Fairbanks
gas trucking bill [SB 23 AIDEA: LNG Project; Dividends;
Financing - Enacted June 2013] for the Interior last year.
He thought the funds were being "swept out" and that the
SETS fund should have lasted longer than two years.
Representative Guttenberg asked for an explanation of the
total power plant financing package.
Mr. Rogers replied that the total project cost was $245
million. He detailed that the board's initial request was
for $195 million from the state and $50 million self-
financed through the fuel cost savings by the university.
The $50 million had grown to $70 million factoring the use
of new fees and other income leaving the remainder the
obligation of the state. The current UAF heat and power
plant provided heat and electricity to the entire
university campus; it was built in 1962 and was anticipated
to have a useful life of 50 years. The current project
upgrade replaced two old coal boilers, substantially
reduced emissions, and increased efficiency which resulted
in fuel cost savings. He summarized that the financing
package used state operating and capital funds, university
receipts, and fuel savings.
Representative Guttenberg communicated that the plant was a
heating plant that provided power but was not a "power
plant."
Co-Chair Austerman thought that statewide tuition would be
used to repay the bond debt.
Mr. Rogers answered that the Board of Regents had not
decided on any repayment portion being paid by tuition. He
thought that an opportunity to use other funds was
possible. The decision would be made in 2017 when the first
bond payment was due. He reiterated the board policy that
tuition generated at a particular campus was used at the
campus.
Co-Chair Austerman commented that the fiscal note, FN1 (UA)
described a 20-year payoff at 5 percent interest totaling
$140 million over time. He wondered whether there had been
discussion about paying the entire $87.5 million.
Ms. Armstrong replied that there had been multiple
conversations about how to fund the project. The
discussions with members of the Senate Finance Committee
and university lead to the current financing package.
Mr. Mitchell interjected that the current bond bank 20 year
rate was 3.45 percent.
Representative Munoz asked for further clarification about
the amount of the AMBB loan.
Ms. Armstrong answered that the bond bank issuance would be
$87.5 million. She referred to an amendment the sponsor
hoped to offer that would clarify the issue.
Representative Munoz understood that the university also
incurred a bonded indebtedness of $70 million.
Ms. Armstrong answered in the affirmative.
Representative Munoz asked how the university intended to
repay the debt.
Mr. Rogers responded that the $70 million would be paid by
fuel cost savings and new revenues. The university spent
approximately $10 million per year and the upgrade would
decrease the cost to under $6 million per year. Currently
the university used coal, diesel, and purchased electricity
for heat. The new plant would generate the entire campus'
heating needs.
Representative Munoz asked for verification that the $87.5
million would be paid back by the general fund.
Ms. Armstrong replied that the debt service would be an
item in the university's operating budget. She referred to
the discussions regarding financing the project and shared
that student fees other than tuition such as, a facility
fuel surcharge may be assessed to students and others using
the building as well. A tuition increase was not specified
in the discussions and the board had the discretion to
examine all options that may be available to repay the debt
service.
6:50:15 PM
Representative Munoz asked for verification that the bond
indebtedness would be repaid through a combination of
university receipts and general fund supports.
Ms. Armstrong answered in the affirmative.
Representative Munoz clarified that the $70 million would
be repaid through fuel cost savings and a possible tuition
increase.
Ms. Armstrong answered in the affirmative and stressed that
"other fees" could be assessed in lieu or addition to
tuition.
Representative Munoz asked whether the [other] $87.5
million from SETS and the Alaska Capital Income Fund were
grants.
Ms. Armstrong replied that the funds were a direct state
appropriation.
Representative Costello referred to the university's aging
heat and power plant. She wondered what the university's
emergency backup plan was.
Mr. Rogers answered that in addition to two coal boilers
there were two oil boilers that had the capacity to heat
the campus. If employed, the fuel bill would rise from $10
million up to $30 million annually. He did not want to be
in a situation to employ the oil boilers when the coal
boilers broke down.
Representative Edgmon wondered whether the university
completed the design work.
Mr. Rogers answered that the conceptual design was
completed sufficient to obtain a permit. The next step
would be to purchase the main boilers and turbines through
competitive bid. Once the vendors were chosen the plant
would be designed around the fixed equipment.
Representative Edgmon asked whether a partial funding
package could move the project forward.
Mr. Rogers responded that the university could not issue
the university bonds until the entire project was secured
since there would be no fuel savings for repayment.
Uninterrupted construction of the plant was the most
efficient way to carry out the project.
Co-Chair Stoltze gave the university credit for convincing
people in a university environment that solar and wind
would not be the answer.
Mr. Rogers agreed. He informed the committee that there had
been no adverse public comment during the permitting
process with the acknowledgement of the project's increased
fuel efficiency.
Representative Holmes asked about the timing of the
project. Mr. Rogers answered that the university would
begin site preparation in the current year. The
construction would begin in 2015 and would conclude in
2018.
Representative Holmes wondered how the phase in of the new
plant would work.
Mr. Rogers answered that the upgrade would not disrupt
operations of the current plant.
Vice-Chair Neuman wondered whether the bond bank would
issue bonds if the borrower was unable to repay them.
Mr. Mitchell answered that AMBB had a rigid process for
analyzing loans. The bank utilized an independent third
party financial advisor that reviewed applications in
addition to the AMBB board. Due to the rigorous approval
process all of the loans had been repaid. The bank had a
100 percent expectation of repayment.
Co-Chair Austerman OPENED public testimony.
LAURA COMER, SELF, FAIRBANKS (via teleconference), spoke in
opposition to the bill. She was astonished that the Board
of Regents had not determined the student's contribution
towards payment for the power plant. She felt that many
questions that arose during the hearing remained unanswered
and that the student body was burdened by increased
financial costs. Residents of Fairbanks were already
leaving the community because of health concerns due to
poor air quality. She believed that requiring students to
shoulder the burden of a coal plant and tying the campus to
"outdated" technology for 50 years was "absurd." She
advocated for spending on alternative energy solutions. She
thought that most banks would not finance coal plants and
believed that the plant would not pay for itself. She
questioned the financial and environmental repercussion of
constructing the power plant and reiterated that many
questions were not answered. She urged the committee not to
support the project, deeming it an "incomplete idea."
CHRISTINA-ALEXA LIAKOS, SELF, FAIRBANKS (via
teleconference), opposed the legislation. She believed
questions remained about the plants financing and wanted
answers. She was concerned that the Board of Regents had
not yet met to discuss solutions or the students expected
financial participation. She thought the burden of
repayment might drive up tuition costs and increase the
dropout rate. She wondered whether other options were
explored. She understood that there was geothermal
potential in the Fairbanks area. She believed there were
more sustainable options. She wondered whether the Usebelli
coal company financially influenced the decision.
Co-Chair Stoltze remarked that the donations of the
Usebelli family were appreciated by the university.
7:04:22 PM
CARSON CHAVANA, SELF, FAIRBANKS (via teleconference), spoke
to her overwhelming student debt as a recent graduate due
to growing tuition costs. She sympathized with students
that may not support the project. She wished alternative
solutions were explored. She believed that there may be a
substantial funding gap even with tuition or fee increases.
She urged the committee to retrofit the existing plant
while looking into "viable" renewable energy options.
KELSI SWENSON, STUDENT, UNIVERSITY OF ALASKA ANCHORAGE (via
teleconference), spoke against the bill. She referred to
the phrase "moral obligations." She felt that it was a
moral obligation for the university to provide for the
welfare of students. She spoke in strong opposition to the
project. She believed the coal plant was a "despicable"
option in the face of climate change and the poor air
quality in Fairbanks. She wanted the university to "pave
the way" for clean renewable energy options. She was upset
the hearing had been scheduled with short notice during
finals week. She thought that the student body was being
burdened with environmental and financial costs of the
project. She implored the university to place more value on
its student body
ELISABETH ALLARD, SELF, WASILLA (via teleconference), spoke
against the project. She commented that Fairbanks had poor
air quality. She felt that the university's decision was to
choose a coal fired plant instead of healthier energy
options was unacceptable. She reported that she experienced
nine air quality advisory days in Fairbanks in the last six
months. She believed that the Usebelli coal plant
contributed to poor air quality in Fairbanks and was
lobbying the university to construct the plant. She
discussed that the university was an intellectual "hub" and
should be at the forefront of alternative solutions. She
believed it was shameful that the university was seeking to
build a coal powered plant when other campuses around the
country were divesting from coal. She considered the
project "egregious", "fiscally irresponsible" and not
worthy of the increased financial burden on the student
body. She stressed that increased tuition equated to
increased student debt. She vehemently opposed the project
and suggested the university retrofit the current plant,
reduce energy consumption, and utilize alternative energy
to offset coal use.
CARLY WIER, SELF, ANCHORAGE (via teleconference), spoke in
opposition to the bill. She was deeply concerned about the
state's financial future. She was concerned that using coal
as an energy solution was a "resounding step backward" in
finding clean energy solutions for the Interior. She
referred to prior public testimony on the capital budget
concerning alternative energy solutions. She felt the
budget items were a strong and wise investments that would
support healthy communities. She felt compelled to testify
about the $245 million coal plant because the costs were
too high. She asked how the funds would be paid back. She
believed the students should have a right to weigh in on
how the funds, derived from increased tuition or student
fees, would be spent. She understood that the plant would
be constructed to burn coal and biomass and how that would
affect air quality. She believed many of her friends in
Fairbanks were considering moving due to the city's poor
air quality. She wondered if the plant should be built to
accommodate natural gas. She believed it was "shocking and
irresponsible" to rush into an exorbitant project with
unanswered questions.
ELIZABETH SHOEFFLER, SELF, ANCHORAGE (via teleconference),
opposed the legislation. She spoke against using funding
for renewable energy options to help finance the coal
plant. She believed the coal plant was unhealthy for the
students and did not want to help fund the plant through
increased tuition or fees. She asked the university to
consider alternative energy sources.
KAITLYND WARD, STUDENT, UNIVERSITY OF ALASKA ANCHORAGE (via
teleconference), spoke in opposition of the project. She
was concerned about potential increases in tuition. She
felt unanswered questions remained about repaying the
project and the impact on student fees and tuition. She
wondered how the project could move forward without the
Board of Regents meeting. She spoke to the importance of
clean and renewable energy.
Co-Chair Stoltze CLOSED public testimony.
Representative Wilson noted that there was a reason the
university had opted against using natural gas. She asked
for a reiteration about what the plant would do to current
emissions.
Mr. Rogers answered that during the planning process the
university examined twelve different options that included
a wide range of technologies and fuels for the project. The
coal option had been selected based on the environmental
benefits, the economics, and the ability to permit the
project.
Mr. Rogers spoke to the environmental benefits; the plant
would reduce pm 2.5 (particulate matter 2.5 microns or
less) emissions by 45 percent, oxidized nitrogen by 64
percent, and oxidized sulfur by 60 percent. Every regulated
emission would be lower than it was at present. Carbon
dioxide would also be lower. The capital costs of the
natural gas plant were significantly lower, but the
lifespan was also significantly lower. A natural gas boiler
would actually increase pm 2.5 through the exhaust stream
by secondary products of combustion. Extra costs to
mitigate pm 2.5 would be incurred by using natural gas. The
fuel costs would be $10 million higher annually if a gas
plant was constructed due to the projected costs of trucked
in natural gas. The new coal plant could be retrofitted to
use natural gas at a cost of $3 million to $5 million for
natural gas provided the university could obtain the permit
and mitigate the particulate matter emissions.
7:20:11 PM
Representative Wilson asked about retrofitting the current
boiler.
Mr. Rogers answered that the university could not retrofit
the current boilers to use natural gas. The university did
retrofit an oil boiler to use both oil and natural gas.
Representative Wilson wondered if the two old boilers could
be removed and the new ones installed in the existing
facility as a cost savings.
Mr. Rogers replied in the negative. He detailed that the
current boilers were necessary year around and could not be
shut down.
Representative Wilson recalled that the $25 million
appropriated from the SETS fund for natural gas trucking in
the interior was a loan and not a grant. She asked if the
university explored extending the loan repayment period to
lower costs.
Mr. Rogers answered that the university had looked at the
municipal bond bank extending out the payment schedule
which reduced the current fiscal note.
Co-Chair Austerman spoke to prior testimony by Patrick
Gamble, President of the University of Alaska, who had
spoken about a deferred maintenance fund. He pointed to
deferred maintenance funding in the governor's capital
budget totaling $37.5 million. The Senate Finance Capital
Budget had removed the funds. He wondered about the
connection.
Mr. Rogers noted that the Senate Finance Committee budget
had reduced only the UAF capital budget deferred
maintenance funds.
Co-Chair Austerman asked for clarification; the reduction
appeared to apply to all of the districts and not just the
Fairbanks campus.
Ms. Armstrong replied that the $37.5 million only impacted
districts 1 through 5 which only included the Fairbanks
campus.
CSSB 218(FIN) was HEARD and HELD in committee for further
consideration.
7:27:25 PM
AT EASE
7:28:30 PM
RECONVENED
CS FOR SENATE BILL NO. 191(FIN)
"An Act relating to the authority of the Legislative
Budget and Audit Committee to approve the temporary
transfer of money from the general fund to
construction funds or accounts; and providing for an
effective date."
SUZANNE ARMSTRONG, STAFF, SENATOR KEVIN MEYER, discussed
the legislation. She announced that SB 191 provided an
administrative fix, established parameters for transferring
general funds to General Obligation Bonds (GO) construction
funds, and enabled better flexible management of GO bond
construction funds and accounts by the State Bond
Committee. She delineated that when the GO bond
construction fund was temporarily exhausted the
commissioner of the Department of Administration (DOA) on
recommendation by the bond committee and Legislative Budget
and Audit Committee (LBA) approval may temporarily transfer
funds from the general fund into the bond fund. Under SB
191, if the transfer did not exceed 25 percent of the amount
of the GO bond, the Commissioner did not need LBA approval.
In addition, SB 191 authorized a 15-month loan period when
advanced funds were transferred from the General Fund to a
GO Bond construction fund. The change aligned with Internal
Revenue Service (IRS) requirements that "advance fund bond
issuance loans were repaid by bond proceeds within 18
months." She noted the proposed shorter timeframe than
required by the IRS. She added that the legislation enabled
more certainty in project schedules and cash flow and
greater capability for the State Bond Committee to "respond
to unforeseen increases in project expenditures." In
addition, SB 191 facilitated greater flexibility in
implementing bond sales. The statute change "eliminated the
negative carry costs of borrowed funds sitting in
construction funds for extended periods of time."
Representative Holmes asked for clarification about how a
transfer from the general fund could occur without any
legislative oversight.
LAURA PIERRE, STAFF, SENATOR ANNA FAIRCLOUGH AND THE
LEGISLATIVE BUDGET AND AUDIT COMMITTEE, replied that SB 191
eliminated the LBA authorization requirement if the amount
of the transfer did not exceed 25 percent of the authorized
bond amount however, notification was still required.
Representative Holmes wondered what amount of money 25
percent of the authorized bond amount typically was.
DEVEN MITCHELL, DEBT MANAGER, DEPARTMENT OF REVENUE,
replied that the authorization required was technical in
nature. The legislature currently granted the
administration the authorization to borrow up to the full
amount of the bond for the same purpose without terms of
repayment. The flexibility currently existed but must be
reauthorized each year in the operating budget. He offered
that a situation could occur where the debt was not sold
over a certain time period and was not included in the
operating budget. He continued that the only outstanding
bond debt authorization happened with the Transportation
Act of 2012 which amounted to approximately $450 million.
Twenty five percent of approximately $110 million could
have been authorized for cash flow purposes for up to 15
months.
Mr. Mitchell discussed instances when the flexibility to
transfer funds without approval would have been
advantageous. He detailed that the state did not issue GO
bonds for a long period of time but had the authorization
in 1984 and 2003. The federal and IRS requirements and
restrictions currently were much more stringent on tax
exempt debt than they had been in 1984. The bill allowed
the state to meet the restrictions; one such restriction
required the state to spend the proceeds from the sale of
tax exempt bonds within three years which, had proven
problematic. In 2003 the state sold approximately $450
million in transportation bonds and did not expend all of
the funds until 2012. The three year limit was
unattainable. In 2008 the Transportation Act was approved,
but a portion of the funds had been replaced with general
funds. The state was only able to sell approximately half
of the bond authorization of $165 million in April 2009 to
fund 18 months of cash flow. The American Recovery and
Reinvestment Act (ARRA) had been approved and the funds
were not expended until 2013. The $165 million was borrowed
at a 4 percent interest rate amortized for 20 years. The
state could not reinvest the proceeds over the long term
therefore; the department was very conservative about the
reinvestment of proceeds. The negative carry associated
amounted to millions of dollars. The department learned
that it needed to approach the bond issues differently and
to the extent possible sell "just in time" rather than
upfront in anticipation of a project.
7:38:02 PM
Representative Holmes ascertained that due to the three
year limit, which the state was not able to consistently
meet, from the time that the state sells the bonds to the
time the state must expend the funds, the state would
rather borrow it from the general fund and pay it back with
bond funds. She asked for verification.
Mr. Mitchell concurred. He elaborated that there was a
potential for certain cash flow issues to arise when
funding projects "just in time." A project can speed up and
the state cannot execute a bond issue in one month; more
time was needed to structure the loan. The legislation
provided the flexibility to meet the need on time.
Representative Holmes wondered if it had been a problem
obtaining Legislative Budget and Audit approval in the
past. She wondered why LBA should be "taken out of the
picture."
Mr. Mitchell replied that the timing element was a factor.
Co-Chair Stoltze asked about the discussion regarding the
issue in LBA committee.
Ms. Pierre answered that prior to the drafting of the bill
Senator Fairclough had met with the Department of Revenue
and Mr. Mitchell to discuss the legislation in particular.
She relayed that Senator Fairclough "had no problem" with
the legislation. She cited page 2, line 8, of the
legislation and related that Senator Fairclough requested
that LBA be notified when such transfers occurred. The
allowance was in line with other funds such as the Disaster
Relief Fund and the DEC Spill Response Fund.
Co-Chair Stoltze asked if the Legislative Budget and Audit
Committee had taken formal action to support the bill.
Ms. Pierre replied in the negative.
Vice-Chair Neuman asked whether the flexibility would allow
the department to save the state money by watching interest
rates and borrowing money later or earlier depending on the
interest rate.
Mr. Mitchell replied that there could be an opportunity to
save money by not borrowing money as quickly and obligate
the negative carry in the construction fund. He exemplified
that if the state lost 3 percent of $100 million the state
would pay $3 million in interest expense just to have the
money sit in the bank. He pointed to another example. He
reported that market disturbances like the crash in 2008
potentially caused losses. At the time of the market crash
he was working on a transaction with the Matanuska Susitna
Borough on a correctional facility. He attempted to "price
the deal" on December 7, 2008. At the time, the statutory
limit on the debt service was $17.8 million annually. The
interest rates were too high at the time to meet the limit.
The design and build contractor was ready to begin and
could terminate the contract on December 31st. The state
ultimately sold the bonds on December 31, 2008 for fewer
than 6 percent and three months later it would have been 5
percent. He believed that the situation led to the state
paying a higher interest rate, and exemplified the need for
granting the department the increased flexibility.
Vice-Chair Neuman surmised that the flexibility to maneuver
had the potential for considerable savings.
Mr. Mitchell answered that that would be a goal of the
legislation. He voiced that the "easily defined" goal was
meeting the IRS code limit for the tax exempt bond issues.
Co-Chair Stoltze wondered why LBA had not taken committee
action on the matter. He believed it would have been
"cleaner."
Representative Gara asked what provision in the state
constitution permitted money withdrawals from the general
fund without legislative authorization.
Mr. Mitchell answered that GO bond debt did not require an
appropriation for repayment. He was not certain whether an
appropriation was required for using general funds as
liquidity for an anticipated general bond issue.
Representative Gara wanted the state to have the
flexibility to borrow as inexpensively as possible but he
thought a constitutional prohibition against general fund
withdrawal without legislative approval existed.
Mr. Mitchell responded that other instances were cited
earlier where authority to use general funds existed. He
reiterated that the AMBB had the authority to borrow from
the general fund. The bond transfer would borrow funds from
the general fund for the purposes of liquidity and the
general fund would be replenished.
Representative Gara restated that general constitutional
rule stated that money could not be withdrawn from the
general fund without legislative approval. He wondered how
the provision was legal. He wondered if the bill would help
reduce the student loan interest rate.
Ms. Pierre answered that the bill he was referring to was
SJR 23.
7:49:39 PM
Representative Munoz asked if there were examples when the
LBA committee had slowed down the process.
Mr. Mitchell replied in the negative. He offered that there
was an instance when timing with the LBA meetings was an
issue in resolving a cash flow matter.
Co-Chair Stoltze OPENED public testimony.
Co-Chair Stoltze CLOSED public testimony.
Co-Chair Stoltze pointed to the zero fiscal note, FN1 (REV)
from the Department of Revenue.
Representative Gara wanted someone to point to the location
in the constitution that authorized the provision.
Co-Chair Austerman cited Article 9 [Finance and Taxation]
Section 13 of the Alaska Constitution and referred to the
words "appropriated by law." He surmised that SB 191 was a
law allowing the appropriation.
Representative Edgmon referred to the previous bill [SB 218
Muni Bond Bank; UAF Heat & Pwr Plant] and asked whether
passage of SB 191 affected SB 218.
Mr. Mitchell replied in the negative.
Co-Chair Stoltze wondered whether the 25 percent was an
absolute maximum or was the 25 percent limit allowed for
each transfer of funds.
Mr. Mitchell replied that it was the intent of the
administration that the limit was up to 25 percent of the
total bond authorization. He exemplified that a $100
million bond allowed borrowing of up to $25 million at any
point in time for to 15 months for the purposes of
liquidity.
Co-Chair Stoltze cited page 1 line 11:
If the amount of the transfer exceeds 25 percent of
the amount …
Co-Chair Stoltze inserted the word "cumulative" in front of
transfer and wondered if that would more clearly indicate
the intent of the 25 percent limit and not "harm" the
legislation.
AT EASE
7:55:40 PM
RECONVENED
7:56:25 PM
Mr. Mitchell pointed out that once employed for a
particular authorization the language would eliminate the
ability to use the provision for future potential bond
issue use. He suggested using language that indicated that
the 25 percent was "rolling."
Representative Holmes wondered whether it was possible to
hold the bill until the proper language could be
identified.
Representative Costello asked if adding the word,
"initially authorized" after amount to read, " If the
amount of the transfer exceeds 25 percent of the amount
initially authorized."
Co-Chair Stoltze wanted to ensure clarity in the language
and thought the issue was a "very important policy" matter.
Representative Holmes believed that the committee needed
more time to find the proper language.
Ms. Armstrong stated her willing to work with the committee
to ensure that the language was correct and that the impact
would affect the intent of the provision.
Co-Chair Stoltze wanted to prevent future abuses of the
provision via clarification and to ensure that the intent
of the sponsor was met.
Co-Chair Austerman asked about the full paragraph on page 1
beginning on line 6. He read:
"When a construction fund or account established to
receive the proceeds of state general obligation
bonds…"
Co-Chair Austerman wondered whether the words "a
construction fund or account" met the intent of the
legislation. He thought that the language was not specific
enough.
Mr. Mitchell answered that when general obligation bonds
were authorized a fund was simultaneously created to
deposit the proceeds. The language referred to that
particular fund. He suggested the amendment language "at
any time" after the word transfer to read:
"If the amount of the transfer at any time exceeds 25
percent of the amount authorized"
Mr. Mitchell explained that the 25 percent limit could not
be exceeded without approval from LBA.
Co-Chair Stoltze asked whether the suggestion matched the
intent of the sponsor.
Ms. Pierre replied in the affirmative.
ADJOURNMENT
8:04:04 PM
The meeting was adjourned at 8:04 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| sponsorstatement.sb218.pdf |
HFIN 4/15/2014 6:00:00 PM |
SB 218 |
| sectional analysis.sb218fin.pdf |
HFIN 4/15/2014 6:00:00 PM |
SB 218 |
| SB 218 Amendment #1 Thompson.pdf |
HFIN 4/15/2014 6:00:00 PM |
SB 218 |