Legislature(2019 - 2020)ADAMS ROOM 519
05/11/2019 09:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB139 | |
| HB87 | |
| SB74 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 139 | TELECONFERENCED | |
| + | SB 74 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 87 | TELECONFERENCED | |
HOUSE FINANCE COMMITTEE
May 11, 2019
9:00 a.m.
9:00:21 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 Colleen Sullivan-Leonard
Representative Cathy Tilton
MEMBERS ABSENT
Representative Kelly Merrick
ALSO PRESENT
Representative Jennifer Johnston, Sponsor; Angela Rodell,
Executive Director, Alaska Permanent Fund Corporation; Lynn
Gattis, Staff, Representative Tammie Wilson; Maridon
Boario, Staff, Senator Lyman Hoffman; Heidi Teshner,
Administrative Services Director, Department of Education
and Early Development, Office of Management and Budget;
Christine O'Conner, Executive Director, Alaska Telecom
Association; Patience Frederickson, Director, Alaska
Division of Libraries, Archives, and Museums, Department of
Education and Early Development.
PRESENT VIA TELECONFERENCE
Mike Coons, Association of Mature American Citizens (AMAC),
Palmer; Herman Morgan, Self, Aniak; Dan Britton, Interior
Gas Utility, Fairbanks.
SUMMARY
HB 87 LIQUEFIED NATURAL GAS STORAGE TAX CREDIT
CSHB 87(FIN) was REPORTED out of committee with
four "do pass" recommendations and six "no
recommendation" recommendations and with one new
indeterminate fiscal note from the Department of
Revenue.
HB 139 AK PERM. FUND CORP. PROCUREMENT EXEMPTION
HB 139 was HEARD and HELD in committee for
further consideration.
CSSB 74(FIN)
INTERNET FOR SCHOOLS
CSSB 74(FIN) was HEARD and HELD in committee for
further consideration.
HOUSE BILL NO. 139
"An Act providing an exemption from the state
procurement code for the acquisition of investment-
related services for assets managed by the Board of
Trustees of the Alaska Permanent Fund Corporation."
9:00:52 AM
REPRESENTATIVE JENNIFER JOHNSTON, SPONSOR, read from a
prepared statement to introduce the bill:
Thank you for your willingness to consider House Bill
139 this morning. House Bill 139 grants an additional
exemption to the state's procurement code to the
Alaska Permanent Fund Corporation (APFC) for the
purposes of evaluating and managing investments. The
types of investments this exemption would apply to are
often very profitable for our state. Under existing
law, the corporation exempt from the states
procurement code when it requires income producing
assets or delegates its investment authority. However,
they must comply with the state's procurement code
when evaluating and managing the assets in which they
invest. The change proposed in this bill would allow a
timeline that better aligns with the pace of the
market in which APFC works and would result in a more
streamlined process.
9:02:15 AM
Representative Sullivan-Leonard asked for an example of why
changing statute would be important for the Alaska
Permanent Fund Corporation (APFC). Vice-Chair Johnston
answered that the corporation was involved in private
equity investments. She indicated that without the
exemption, the cost of evaluating private equity was paid
to an investment manager that may charge more than the
state would thorough contracts with internal expertise.
ANGELA RODELL, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, agreed that there were numerous private
investments made by APFC that required subject matter
expertise or going through the procurement process to
directly invest. Currently, the corporation hired outside
managers to swiftly move the transaction forward. The bill
would streamline the process and reduce the costs that was
necessary to act on the types of investments.
Representative Sullivan-Leonard asked for verification that
there was a time element involved and by sidestepping the
procurement process the investments were quickly secured.
Ms. Rodell affirmed the statement.
Vice-Chair Ortiz asked how long APFC had been without the
exemption. He wondered if there was any downside to making
the adjustment. Ms. Rodell answered that they had begun
private equity investments in the 2008 to 2009 timeframe
and was a more recent development. Vice-Chair Ortiz asked
if there was any downside to allowing the change. Ms.
Rodell answered in the negative.
9:05:29 AM
Representative Knopp considered how the procurement code
applied to the work done by APFC. He deduced that the
exemption would allow the corporation to enter into short
term contracts with external fund managers. He asked how
the state's procurement code exemption related to sole
source contracts. Ms. Rodell responded that presently the
corporation was fully subject to state's procurement code,
apart from purchasing investments. She exemplified that the
corporation could expend $250 million to buy an office
building but it could not directly hire an engineer to
inspect the building without going through the state
procurement code. She detailed that the code had a timeline
for an open bid process that tended to be 14 to 21 days. In
addition, a committee to evaluate and score the bids along
with a 10-day notice of intent to award was required. The
notice time allowed for grievances by the bidding parties.
She explained that if a building was for sale that had a
30-day open period to complete the inspection the current
procurement process would miss the purchasing window. She
added that that the code included a limited process for
contracts that were less than $100,000, but in many cases
the subject matter requirements were in excess of that
amount, which did not make the limited process feasible for
APFC. Representative Knopp asked whether the APFC was
limited to investments up to $250 million. Ms. Rodell
answered the corporation was permitted to purchase any
investment of any size. Representative Knopp verified that
the exemption was for subject matter analysis with costs
exceeding $100,000. Ms. Rodell answered that the $100,000
limit had just been one example. She furthered that any
type of expertise; i.e. doctors or medical researchers for
a biotech investment - any expertise that was not the
acting fiduciary fund managers were the third-party
outsourcing referred to by Vice-Chair Johnston. She stated
that the exemption was an effort to allow direct
investments while eliminating fund manager fees and having
the expertise at the table to act within a timely manner.
Many investment purchases operated on a short timeframe of
up to 3 months. Representative Knopp asked whether the
investments operated under earnest agreements.
9:09:30 AM
Ms. Rodell replied that earnest agreement features were not
part of private investment transactions.
Co-Chair Wilson asked how much business the APFC had lost
because it lacked the exemption. Ms. Rodell replied that
the answer was difficult to quantify. She shared that APFC
looked at 6 to 10 investment opportunities each year that
required the process and had passed on roughly five to ten
investments each year. Co-Chair Wilson asked whether APFC
had passed on the investments because they did not have the
exemption or if other reasons applied. Ms. Rodell responded
that the reasons varied and when the corporation identified
the process as a problem, they hired a fund manager to
handle the process. Co-Chair Wilson understood that the
APFC could bypass the state's process, but it was more
costly without the exemption. Ms. Rodell replied in the
affirmative and confirmed that it was much more expensive.
Co-Chair Wilson asked for documentation showing the costs.
Ms. Rodell answered that the documentation was difficult to
provide but would comply. She explained that when APFC
sought investments through a fund manager, the manager was
entitled to a share of excess profit and a threshold of
performance was added to the contract. In the case of
excess profit over and above the expected return, the
excess was referred to as "carried interest." The fund was
entitled to a percentage; the industry standard was 20
percent of the excess profit went to the manager and 80
percent to APFC. The exemption would mean APFC captured all
the excess profit through direct investing. She accentuated
that the process made it difficult to quantify to costs.
The corporation had been attempting to make more direct
investments through internal managers. The bill did not ask
for a full procurement code exemption. The bill would
provide expanded authority when considering direct
investments allowing APFC to bring in expertise and return
more excess profit to the state. Co-Chair Wilson asked for
information on the process they used in the past five
years. She wanted to determine how often APFC had to use
the outside process Ms. Rodell just described. Ms. Rodell
agreed to follow up.
9:13:02 AM
Representative Carpenter deduced that the corporation could
do what it wanted to do; it just took longer. Ms. Rodell
affirmed. Representative Carpenter asked whether there was
a higher risk involved in doing things in a shorter time
period. Ms. Rodell answered that when APFC conducted due
diligence on an investment the window was open for a
specific time period - typically 30 to 45 days. The state
procurement code did not enable APFC to act within the
timeframe. She detailed that in terms of risk, the ability
to hire subject matter experts within 10 days and work
closely with them for 30 days versus relying on outside
investors created a different risk profile. There were
risks to both processes, but the effort was to provide more
comfort in the due diligence process, not increase risk.
Representative Josephson construed that APFC paid a fee for
an expert through an investment manager and subsequently
paid them a share of the profits from a successful
investment. He asked for verification. Ms. Rodell responded
affirmatively. She recapped the process she had explained
earlier. Representative Josephson restated his question
whether the manager profited from Alaska's investments. Ms.
Rodell responded in the affirmative. She furthered that the
investment manager acted as the fiduciary and needed to
evaluate the investment and access risk for their
investors. The investor was at risk and did not serve their
interests to "rubber stamp" an investment.
9:17:16 AM
Representative Josephson gave an example of APFC wanting to
purchase a building in Manhattan. He asked whether what the
corporation paid for the investment was a matter of public
record. Ms. Rodell answered in the affirmative and added
that all the expenses associated with investments were
reported quarterly. Representative Josephson asked whether
the process could be taken advantage of. He hypothesized a
situation where the state had always hired the same
architect in Denver. Ms. Rodell thought it was a fair
question. She believed that it was necessary for the
corporation to continue to maintain an internal process
that scrutinized and distributed contracts. The corporation
used a number of outside consultants to weigh in and ensure
a procedure "passed the smell test." She elaborated that
the performance of the funds portfolio was an indicator of
the quality of the due diligence undertaken by APFC. She
expected that the investments would perform well.
Representative LeBon thought the discussion was "mixing
apples and oranges." He elaborated that the issue was about
the global market for venture capital investments and
working with a fund manager to invest in a business. Ms.
Rodell answered that all the issues encompassed in the
entire discussion were relevant and included his example as
well as an engineer evaluation of a building and a market
assessment to sell "widgets in Europe." Representative
LeBon asked for verification that APFC would still have the
fiduciary responsibility to perform diligence and was not
trying to shortcut the process. Ms. Rodell replied in the
affirmative. Representative LeBon surmised that the
corporation was attempting to build a base of expertise in
order to make many types of investments and was seeking the
flexibility to call on the experts quickly in a timeline
that fit the opportunity to make the investment and respond
to market opportunities. He asked whether his statement was
"fair." Ms. Rodell agreed with his summation.
Co-Chair Wilson asked whether it mattered if there was an
in-house versus external manager. Ms. Rodell replied that
if APFC undertook the process they had to operate through
the procurement process versus when the corporation hired
an external manager and invested in a fund the transaction
was exempt from the procurement process. Co-Chair Wilson
asked whether the arrangement was exclusive to buildings.
Ms. Rodell reiterated that the process was for any type of
investment.
9:22:44 AM
Co-Chair Foster believed a similar bill had been before the
legislature in the past. He asked if there were any
negatives that they should be aware of. Ms. Rodell answered
that the prior bill provided a full procurement exemption
like the full exemptions allowed the ARM Board, Alaska
Housing Finance Corporation (AHFC), AIDA, and all other
quasi-agencies like APFC. She elaborated that the current
bill was a compromise and had been developed by the
corporation at the request of the trustees. The change was
a priority of the board. She did not see any negative
aspects to the bill and ideally would prefer a full
exemption. Co-Chair Foster surmised that the answer to the
concern was a more targeted procurement exemption. Ms.
Rodell affirmed.
Representative Carpenter did not want to defend a
procurement process that exceeded 50 days, but he did not
know the process. He asked what parts of the process would
be omitted by the exemption.
Co-Chair Wilson interjected that she was trying to
understand if the overall procurement system was broken.
She felt that it was not the problem of APFC if the whole
system was broken.
9:25:41 AM
Ms. Rodell answered that the state procurement code was in
place to purchase everything state government needed to
operate - from pencils to furniture and all other items.
She observed that the code was written more for commodity
acquisitions than services. The code was designed to give
comfort to the public that a competitive process was in
place. In APFC's case, the code caused the corporation to
pay more for services because they were forced to use an
alternative method for necessary investment related
services. She believed the balance point had to be weighed.
She could not speak to the procurement code and how it
worked for other departments like the Department of
Transportation and Public Facilities (DOT). The board
wanted the corporation in charge of the decision making
process to more align with the fund's investment goals. The
exemption offered an opportunity for APFC to create more
value for the state. She offered that 4 years ago the fund
totaled $52 billion and was currently $66 billion after a
$2.7 billion transfer in FY 19 to the states Treasury. The
corporation took its stewardship seriously and looked for
ways to save costs. She believed that the exemption
provided the tools for APFC to tap into expertise that was
not needed daily and reduced the investment costs thereby,
increasing returns.
9:28:55 AM
Representative Carpenter needed more clarity on what parts
of the process would be eliminated by the exemption. He
thought the person in charge of the procurement process was
better suited to answer the question. He was concerned
there was an "unwieldy" procurement process but did not
favor providing exemptions when the process was
challenging. He felt that the procurement code served a
purpose. He determined that the process needed to be fixed
or improved but was not a justification to make exemptions
from the process. He concluded that without understanding
the process that was being exempted he was unable to
support the legislation.
Co-Chair Wilson noted that the committee could hear from
the Department of Administration (DOA) at a future hearing.
Co-Chair Foster referenced Representative Carpenter's
concern. He suggested a chart illustrating how the
procurement process works.
Ms. Rodell referenced a document provided in members'
packets [titled "APFC Legislative Initiative: Procurement
Streamlining"] (copy on file). She communicated that the
timeframe information was included in a chart format. She
pointed to the timeline information with and without the
procurement code process.
Co-Chair Wilson interjected to reference the document. She
asked Ms. Rodell to speak to what was eliminated via the
exemption. Ms. Rodell responded that the 21 day notice, and
the 10 day protest period would be eliminated. Co-Chair
Wilson asked what would happen if the protest period was
removed. She deemed that the ability to protest a contract
award would be eliminated.
9:33:03 AM
Ms. Rodell confirmed her conclusion. She maintained that
the idea of the exemption was to enable the corporation to
hire a subject matter expert without much bidding. She
delineated that the contracts would not be sole source
contracts but were considered limited source contracts.
Very few individuals had the expertise for much of the
subject matter. Co-Chair Wilson reiterated her concern that
if someone disagreed with the process there would be no
period for protest. She suggested shortening the protest
period.
Vice-Chair Johnston noted that the bill requested a degree
of flexibility. She referenced private equity investment
and the speed at which the market was operating at present.
She pointed to Silicon Valley and the biomedical field as
examples. She observed that in order for APFC to get in on
the "ground floor" of some of the investments without a
fund manager "it was necessary to be good and somewhat
flexible." She provided a historical example of a
biomedical fund investment that had done well for the
Permanent Fund (PF) and the investment manager. The
corporation invested directly before the company went
public on the stock market and garnered large profits for
the state but also the fund manager. The APFC was starting
to get sophisticated enough to do some of the work itself
that would involve hiring a small group of market analysts.
The question to the committee was whether they wanted to
stay with the status quo and be dependent on fund managers
and make less on the investment by following the
procurement code. Alternatively, did they want a process
for APFC to hire someone with strong expertise and bring
the corporation to the private equity table. She asked Ms.
Rodell how often the option would be used annually.
9:37:30 AM
Ms. Rodell answered the fund would use the option
approximately 10 to 12 times per year. She reported that
APFC was spending $1.2 billion or so on private equity
investments per year and guessed the answer based on the
calculation.
Co-Chair Wilson believed that the committee's due diligence
required determining whether the timeframe in the bill was
accurate. She thought everyone wanted the fund to have the
ability to purchase investments but maintained her concern
over relinquishing "checks and balances" that were in
place.
Representative Knopp shared that prior exemptions from the
procurement code with the Department of Corrections (DOC)
and the recent sole source contract issues with the new
administration created concerns over procurement code
exemptions. He wanted to understand the implications. He
remarked that managing assets and acquiring them were two
separate processes. He wondered whether external fund
managers had the discretion to acquire assets or if the
decision was made initially through the APFC board. He
asked who performed the due diligence. Ms. Rodell answered
that external fund managers conducted their own due
diligence. Representative Knopp deduced that the exemption
would apply to investments by APFC and their internal
management. Ms. Rodell replied affirmatively.
Representative LeBon surmised that a venture capital firm
would already have performed its own due diligence before
offering an opportunity to a potential client. Ms. Rodell
agreed with the statement.
9:41:37 AM
Representative LeBon communicated that a venture capital
firm valued its offering and divided the amount into shares
that were purchased by a group of investors. He asked
whether his statement was correct. Ms. Rodell answered in
the affirmative. Representative LeBon stated that when the
opportunities were offered time was of the essence. He
stated that if a ninety day window of opportunity was
offered the bill would be unnecessary. Ms. Rodell affirmed
his conclusion. Representative LeBon stated that the
investor set the clock. Ms. Rodell agreed with the
statement. Representative LeBon was attempting to "frame
the discussion" and pointed out the need for the
legislation.
Representative Josephson noted that there were 50 existing
exemptions to the procurement code. The bill would create
the fifty-first exemption. He asked how to avoid any sort
of long-term "coziness" between the contractor and APFC.
Ms. Rodell answered that if the corporation was fortunate
to get the exemption the process would be imbedded in the
investment policy process that was reviewed frequently by
the APFC board. There was a regular review trustees
conducted on performance and existing investment manager
relationships. The boards reporting requirements extended
to the public. She reassured the committee there would be a
process in place with the intent to avoid "coziness."
9:45:08 AM
Representative Josephson emphasized that along with APFC's
ability to be nimble and act quickly the corporation would
retain more of the profit that currently went to fund
managers. He deduced that the exemption was about
increasing profit for the state. He asked for more
information regarding the increased profitability under the
exemption. Ms. Rodell replied that APFC would report the
size of the investment manager fees in total at its
upcoming board meeting. She detailed that currently, the
carried interest profit sharing piece was in excess of $100
million. The asset class was approximately $9 billion at
present and had returns of almost 33 percent in FY 18. The
entirety of the fund was not invested in the asset class
because it was too high risk and illiquid. She furthered
that the goal was a balanced asset portfolio and the
current discussion included roughly 12 percent of the fund.
When the fees were paid, APFC received 80 percent, but the
corporation would like to capture more of the lucrative
returns. She explained that the method to capture more of
the lucrative returns was to "reduce the levels" - either
directly or through a fund. The corporation had used a fund
called a "fund to funds." The fund to funds encompassed
hiring a fund to choose the funds for APFC that chose the
underlying investments or portfolio companies. The
corporation initially employed the fund to fund method, but
over time APFC had gotten rid of most of the fund to fund
categories to reduce expenses and was additionally
considering how to reduce reliance on fund managers and
allow the corporation to examine portfolio opportunities
and invest more directly. The bill would provide a resource
to engage in the process more directly.
Co-Chair Wilson wondered how the legislature would know
whether the exemption was the wrong way to go. She
trusted Ms. Rodell but inquired how the legislature could
judge whether reinstating the "extra parameters" embedded
in the procurement code was necessary if the exemption was
unsuccessful.
9:49:39 AM
Ms. Rodell answered that she would judge success in the
return metric. She explained that APFC determined its
returns by measuring itself against a passive benchmark; as
if a computer was choosing the investments, and a
performance benchmark that indicated how the active
managers were performing. The two benchmarks indicated how
well the internal staff was performing over and above the
external managers. She added that market influences created
poor performance and the benchmarks eliminated the "market
noise" from the performance to understand where investment
selection was driving value to the fund. She noted that
each asset class had its own performance benchmark that
assessed whether the fund was consistently underperforming.
If the corporation was awarding too much to one contract
that lead to bad investments it would be reflected in the
numbers on a quarterly basis.
Representative Sullivan-Leonard stated her support of the
bill.
9:51:40 AM
Representative Carpenter asked about the value of the
investment decision procurement example on the left side of
the table on page 2 of the APFC document that illustrated
the review process. He noted the inclusion of a Proposal
Evaluation Committee (PEC) under the existing procurement
process and felt that it was indicative a good review
process. He observed that good management of public funds
was not adversarial to flexibility for the corporation. He
wondered whether a partial exemption "may be at odds with
good management." He suggested the committee examine why
the procurement process was necessary and answer the
question of what exactly was going to be exempt.
Co-Chair Wilson noted that an employee from the procurement
office at DOA would address the committee at a future
meeting. She thought it would be interesting to find out
why the procurement steps were initially implemented.
Representative Josephson asked what value came from the RFP
(Request for Proposals) process. He wondered how the
corporation was guided to "names that were predictable" to
the corporation. Ms. Rodell replied that the corporation
had a network of people it interacted with that held a
variety of expertise for the different types of
investments. For example, if APFC was looking to invest in
an Australian infrastructure project it would probably call
for recommendations on expertise from the managers of the
two Australian sovereign wealth funds that APFC invested in
and had experience with. The RFP process would "make it
difficult" to proceed in the manner she just described.
9:55:11 AM
Representative LeBon indicated that the opportunity costs
that were lost if the corporation never had the chance to
follow up on an investment were difficult to measure. Ms.
Rodell agreed with the statement. Representative LeBon
suspected the procurement process had been written before
the inception of APFC. He asked how many other agencies had
asked for the same modification from the procurement
process. He suspected the answer was very few or none. Ms.
Rodell replied that the Alaska Retirement Management Board
(ARMB) was completely exempt from the state procurement
code.
Co-Chair Wilson OPENED public testimony.
9:56:25 AM
MIKE COONS, ASSOCIATION OF MATURE AMERICAN CITIZENS (AMAC),
PALMER (via teleconference), opposed the legislation. He
recounted Ms. Rodells testimony that previous requests for
the exemption was not granted. He stated that his faith in
the Permanent Fund process was extremely low. He thought
once the current Permanent Fund issues were taken care of
and the trust of the public had been regained perhaps, he
could support the bill.
Co-Chair Wilson asked if Mr. Coons would be sending a
letter in from AMAC. Mr. Coons replied that he would try.
Co-Chair Wilson asked what AMAC stood for. Mr. Coons
answered that it stood for the Association of Mature
American Citizens. Co-Chair Wilson asked if he was speaking
on his own behalf or the organization. Mr. Coons indicated
that he was speaking on behalf of the chapter and agreed to
send a letter.
10:00:50 AM
HERMAN MORGAN, SELF, ANIAK (via teleconference), did not
support the bill. He did not trust the legislature. He did
not support using money from the Permanent Fund for a
gasline. He thought the legislature needed to listen to the
people of Alaska.
Co-Chair Wilson clarified that the bill was about
procurement and not the dividend.
Co-Chair Wilson CLOSED public testimony.
Ms. Rodell reviewed the zero fiscal note from the
Department of Revenue, APFC. She believed the legislation
would not increase costs.
Co-Chair Wilson asked if the Department of Administration
would have to write any regulations related to the
proposal. Ms. Rodell answered in the negative.
Co-Chair Wilson noted the bill would be heard again.
HB 139 was HEARD and HELD in committee for further
consideration.
HOUSE BILL NO. 87
"An Act extending the liquefied natural gas storage
facility tax credit; and providing for an effective
date."
10:04:21 AM
Co-Chair Wilson referenced the document she distributed
earlier in the member's packets titled "Interior Alaska
Natural Gas Utility Schedule of Sustainable Energy
Transmission and Supply (SETS) Loan Funds as of May 9,
2019" (copy on file). She emphasized that the SETS funds
were a loan fund. She questioned where the funding to move
the tanks from Fairbanks to the North Pole would come from
and if the project would only supply Fairbanks if funding
was insufficient.
DAN BRITTON, INTERIOR GAS UTILITY, FAIRBANKS (via
teleconference), reviewed the formerly cited document. He
pointed to the SETS fund totaling $125 million. He read the
following from the document:
Uses
Projects:
North Pole Distribution System $29,346,778
Fairbanks Distribution System $14,806,184
Fairbanks 5.25M Gallon Storage Facility
$37,026,281
North Pole Storage Facility $678,542
Pentex Acquisition $21,208,913
Total Proceeds Used $103,066,697
Remaining Loan Proceeds $21,933,303
Remaining Committed Project Uses
Fairbanks 5.25M Gallon Storage $18,147,587
Fairbanks and North Pole Customer Service
Connections $1,992,250
North Pole Storage Facility $993,466
Titan 2 & 3 FEED $800,000
Total Remaining Committed Project Uses
$21,933,303
Remaining Loan Proceeds $0
Mr. Britton indicated that the Interior Energy Project
(IEP) had the ability to issue Conduit Revenue Bonds
through Alaska Industrial Development and Export Authority
(AIDEA) that was backed by the moral obligation of the
state of up to $150 million. The project hired a financial
advisor and began the process of preparing the bond
package. The initial bond issuance would total $75 million
to cover the cost to construct the liquefaction plant and
Fairbanks Gas Storage Facility. The IEP secured a
commitment of $14 million in funding from a local bank and
requested access to a $7.5 million line of credit from the
Fairbanks North Star Borough who assessed whether to allow
the line of credit to proceed. He concluded that the short
term funds and the bond funding he described were the funds
IEP would employ to fund the projects.
10:09:23 AM
Co-Chair Wilson asked for verification that the project was
over $200 million in debt. Mr. Britton answered in the
negative. He clarified that the total indebtedness was the
$125 million in SETS funding. The bond issuance would
subsequently create a total indebtedness of $200 million.
The SETS loans had a 15-year deferral accruing no principal
payments or interest along with an additional 5 year
further deferral if the conversion process was slower than
anticipated. The $125 million was flexible debt put in
place by the legislature to remove some of the risk
associated with the conversion.
Representative Knopp asked about the construction timeframe
and total cost associated with the liquefaction plant. Mr.
Britton answered that the liquefaction expansion cost $50
million. He explained that construction was on a two-year
timeframe beginning in the fall of 2019 and an RFP was
issued for liquefaction and pretreatment equipment that was
part of the front end engineering and design process.
10:11:28 AM
Vice-Chair Johnston MOVED to ADOPT the proposed committee
substitute (CS) for HB 87, Work Draft 31-LS0619\U (Nauman,
5/9/19). There being NO OBJECTION, it was so ordered.
Co-Chair Wilson asked for her staff to review the changes
in the CS.
LYNN GATTIS, STAFF, REPRESENTATIVE TAMMIE WILSON, reviewed
the changes in the CS. She relayed that on page 1, line 7
the date was changed from January 30, 2021 to January 1,
2021 and on page 2, line 9 (a) $7.5 million was changed to
$5 million. She added that on page 2, lines 10 (b) through
11 were deleted.
Representative LeBon discussed that the North Pole facility
tanks were currently located in South Fairbanks and were
previously owned by Fairbanks Natural Gas. He asked whether
he was correct. Mr. Britton affirmed the statement. He
furthered that the North Pole facility would allow the
tanks to be moved to that location. The relocation required
the installation of vaporization equipment to vaporize
liquid natural gas (LNG). Representative LeBon ascertained
that the IEP had two parts: The Fairbanks component that
included the 5.25 million tank that was currently under
construction and the North Pole component that was not
connected to the Fairbanks market. He wondered whether his
statement was accurate. Mr. Britton responded in the
affirmative. He elaborated that the two systems were not
connected at present but would eventually be connected and
the same rates would be charged. They would be managed as
one service area but were currently independent. The only
way to provide gas service in North Pole was to add the
storage facility that would provide LNG to pipes that were
currently under nitrogen pressure. Representative LeBon
asked how large the North Pole piece was in comparison to
the Fairbanks component. Mr. Britton answered that the IEP
had installed 72 miles of the distribution system in North
Pole and Fairbanks had over 140 miles of the distribution
system with plans to expand the North Pole system. He
elucidated that the demand primarily came from the
Fairbanks area. North Pole would account for around 35
percent of the total demand versus the core area of
Fairbanks at 65 percent.
10:16:47 AM
Representative LeBon asked if the LNG supply lines were
almost completed. Mr. Britton answered that the Interior
Gas Utility (IGU) had completed most of the Phase 1 planned
distribution system and the next phases of expansion for
North Pole would come in future years when expansion
estimates were confirmed, and the demand increased.
Co-Chair Wilson asked why the two systems were separate.
Mr. Britton answered that until June 2018 the two systems
had been under separate ownership. They were currently
under common ownership through the purchase of Pentex by
IGU, which provided the opportunity to connect the two
systems. The original system was not designed for expansion
into the North Pole. Providing service to the North Pole
required proper pressure that necessitated the storage
facility in North Pole.
10:18:39 AM
Vice-Chair Ortiz asked whether HB 87 extended the tax
credit program for up to $15 million. He asked for
clarification.
Co-Chair Wilson replied in the negative. She detailed that
the project was extended for one year and the cost could
not exceed more than $5 million; any additional amount was
not covered under the tax credit program and the project
had to be completed to the point of commercialization to
qualify for the credit. She clarified that that the "old
program" that included the $15 million tax credit program
expired on the date as planned. The bill provided a one-
year extension and lowered the credit to $5 million. She
added that if the IGU could commercialize its storage
plants by December 31, 2019 they would still be eligible
for the $15 million tax credit, failing that they would
fall under the $5 million plan. Vice-Chair Ortiz
appreciated the clarification.
Co-Chair Wilson offered that the Fairbanks areas energy
costs were not equalized with of the cost of energy in
Anchorage, but she desired an eventual end of the tax
credit program. She learned that areas of the Mat-Su and
bush still heavily relied on diesel fuel.
Representative Carpenter wondered about the length of time
it would take to repay the tax credit. Co-Chair Wilson
answered that the project would not generate revenue to the
state. The project was a benefit to the Interior for paying
a high cost for energy for many years.
Vice-Chair Ortiz asked if the $5 million would be a part of
the bonding option. Co-Chair Wilson answered in the
negative and added that bonding would come first in order
to complete the Fairbanks project. The IEP had to be ready
for commercialization by the deadlines to be eligible for
the tax credit. She noted that there was a chance IEU would
not complete the program in time; therefore, the tax
credits would be void.
10:23:47 AM
Vice-Chair Johnston asked about the fiscal note.
Co-Chair Wilson answered that the bill reduced the maximum
amount of the credit to $5 million of the costs incurred to
establish or expand the facility if the facility commences
commercial operation on or after January 1, 2020 and before
January 1, 2021. She explained that the tax credit depended
on the timing of the projects completion and whether the
Department of Revenue (DOR) bond issuance for the tax
credits was sufficient to include the credits for IEP. The
project would have to wait in line behind other tax credits
or may never receive it, since it ultimately depended on
appropriation by the legislature.
10:25:04 AM
Vice-Chair Johnston MOVED to REPORT CSHB 87(FIN) out of
committee with individual recommendations and the
accompanying fiscal note.
CSHB 87(FIN) was REPORTED out of committee with four "do
pass" recommendations and six "no recommendation"
recommendations and with one new indeterminate fiscal note
from the Department of Revenue.
10:25:52 AM
AT EASE
10:27:25 AM
RECONVENED
CS FOR SENATE BILL NO. 74(FIN)
"An Act relating to funding for Internet services for
school districts; and providing for an effective
date."
10:27:28 AM
Co-Chair Wilson reported the companion bill HB 75 had been
heard previously and public testimony had been taken.
MARIDON BOARIO, STAFF, SENATOR LYMAN HOFFMAN, , discussed
the sponsor statement for SB 74 (copy on file):
SB 74 increases the broadband requirement for schools
from 10 megabits per second (Mbps) to 25 Mbps of
download speed and provides funding to help schools
reach the 25 Mbps through the School Broadband
Assistance Grant (BAG).
Districts that qualify for discounted rate for
internet services under the Federal Universal Services
Program are eligible.
The Universal Service Administrative Company, Schools
and Libraries Program, commonly known as "E-rate,"
provides discounts of up to 90 percent to help
eligible schools and libraries in the United States
obtain affordable telecommunications and internet
access.
The School BAG was established in 2014 and created to
assist schools to reach internet download speeds of 10
Mbps. Currently the grant funds may be used to cover
eligible costs incurred by the school districts for
schools that have less than 10 Mbps each fiscal year.
Since 2014 new and improved technologies and increases
to internet services have allowed for more and faster
delivery of internet services. Because the cost of
internet in some rural districts has decreased, the
annual internet costs have fallen below the 2014
benchmark established by state law. To allow school
districts to utilize these advances, SB 74 will
increase the minimum requirement of Mbps from 10 to 25
which will increase the amount of Broadband Assistance
Grants (BAG) that the state can pay to school
districts.
In 2019, 80 schools in 20 school districts will
benefit from the school BAG awards.
The funding leverages federal E-rate funds at
approximately 8:1. The program allows for leverage for
up to 9:1 based on a formula for free and reduced
lunch calculation by district.
Thank you for your consideration of SB 74 to help
bring improved broadband services to rural Alaska and
improve service for schools across the state.
I urge your support of this legislation to provide
Alaskan students, classrooms and teachers and all
educators better access to the digital world.
10:30:25 AM
Ms. Boario indicated that the state BAG (Broadband Access
Grant)program was designed to help schools cover their
share of the E-rate costs of approximately 20 percent. The
legislature implemented the program to increase internet
speeds by helping school districts cover their broadband
expenses after the federal E-rate subsidy was applied. She
added that the program was voluntary, and the grants were
awarded in August each year. She noted that the grant could
serve up to 170 schools in 30 school districts totaling
over 20 thousand students.
Co-Chair Wilson asked for an explanation of the changes in
the Senate Finance Committee Substitute version. Ms. Boario
explained that a question arose about whether the increased
funding for the grant program would impact the disparity
test for the federal impact aid. In addition, the funding
was not distributed equally across the districts which
could affect the disparity test. Co-Chair Wilson asked what
districts were included in the disparity test. Ms. Boario
replied that because the funding was different due to the
higher broadband costs in some districts; districts paying
more received higher federal subsidy and BAG grant awards,
which could affect the disparity test. The districts did
not receive equal funding. Co-Chair Wilson asked Ms. Boario
to cite where in the bill the changes were made. Ms. Boario
answered that on page 1, line 10, Section 2 and page 2,
line 6, Section 3 additional conditional effect language
was inserted as follows:
Sec. 2. The uncodified law of the State of Alaska is
amended by adding a new section to read:
CONDITIONAL EFFECT; NOTIFICATION. (a) Section 1 of
this Act takes effect 13 only if, on or before January
1, 2020, the Department of Education and Early
Development has received certification from the United
States Department of Education that E-rate funding
under the federal universal services program may be
excluded from the federal 1 disparity test 2 under 34
C.F.R. 222.160-169, as amended.
Sec. 3. If, under sec. 2 of this Act, sec. 1 of this
Act takes effect, it takes effect the day after the
date the commissioner of education and early
development receives certification from the United
States Department of Education.
Co-Chair Wilson asked how long it took to get the
certification and whether it was requested in the past. Ms.
Boario answered that it had never been request for the E-
rate program. However, she was aware that the Department of
Transportation and Public Facilities (DOT) funds were
exempted from the disparity test.
HEIDI TESHNER, ADMINISTRATIVE SERVICES DIRECTOR, DEPARTMENT
OF EDUCATION AND EARLY DEVELOPMENT, OFFICE OF MANAGEMENT
AND BUDGET, answered that the certification waiver
requested from the United States (US) Department of
Education asked if the E-rate funding that districts
received could be moved to a special revenue fund or
removed completely from the calculation for the disparity
test.
Co-Chair Wilson asked how long the waiver process would
take. Ms. Teshner hoped that the certification would be
issued in several weeks. Co-Chair Wilson spoke to the BAG
awards for 2019. She observed that the grants were mostly
awarded to rural schools. She asked whether most urban
schools paid for their own internet.
10:34:40 AM
Ms. Boario answered yes "conditionally." Primarily rural
schools were affected due to the high cost of internet and
urban schools were able to obtain high speed internet much
cheaper than in rural areas and the grants applied to
schools only receiving 10 Mbps. Technically the grants
applied to all schools, but some schools were ineligible
due to better connectivity. Co-Chair Wilson had never known
her school district to not want money. She knew Fairbanks
had problems with its internet service at times and could
not perform testing in all schools on the same day. She
asked for clarification regarding eligibility for the
grant. Ms. Boario replied that the e-rate funding federal
subsidy was utilized by all schools in Alaska. The BAG
grant only provided additional funding to schools that
qualified to help increase their speeds to 25 Mbps. Co-
Chair Wilson wondered why the fiscal note was $7 million.
She determined that the $7 million would be added to the
$1 million and cover a number of years. Ms. Boario affirmed
her statement.
10:37:38 AM
Co-Chair Wilson stated that she misspoke. She reported that
the BAG grant covered 172 schools which increased the
megabit threshold for each School from 10 megabits to 25
megabits per second and continue paying the $7 million
amount for years to come. Ms. Boario affirmed her
statement. She acknowledged that it was a grant program,
but costs were expected to decline over the years as the
coverage increased. Co-Chair Wilson had heard from prior
testimony that most of the areas had more than one
provider. She did not believe the information was accurate.
She wanted to know what private company would be receiving
$7 million of state funds. Co-Chair Wilson wanted the
committee to understand that the state was paying an
additional $7 million each year with passage of the bill.
She was interested in information regarding the competition
that existed among internet providers for the $7 million.
10:40:10 AM
CHRISTINE O'CONNER, EXECUTIVE DIRECTOR, ALASKA TELECOM
ASSOCIATION, answered that there was a minimum of two
providers in every area according to a survey of the
association's members. There was a satellite provider that
covered the entire state and was very active in bidding on
e-rate contracts. In addition, all locations had existing
landline providers that bid on fixed broadband services.
She stressed that the e-rate rules required that all
landline providers bid on E-rate RFPs. In many areas there
were three or four providers. She offered the example of
vigorous competition among 4 providers in Nome for bidding
to provide E-rate service, which drove down the rates. She
noted a 37 percent decrease in broadband rates for schools.
The competition created new partnerships amongst the
providers and e-rate rules encouraged schools to bid
together as consortiums. She reported that the factors
happened within the last few years and were driving rates
down. However, gaps in service still existed due to the
need for and more infrastructure. Co-Chair Wilson asked for
more information. She had not seen a drop in internet costs
for schools. She wanted to better understand the
competition.
Representative Carpenter asked how the FY 19 10 mbps
program numbers predicted the FY 21 25 mbps numbers. Ms.
Teshner answered that the note used the average FY 19 BAG
grant in order to determine a cost if all 172 schools
applied for the grant. She mentioned that the average was
the best data the department had to approximate the cost to
raise speeds from 10 mbps to 25 mbps. Representative
Carpenter referred to the following language in the fiscal
note analysis:
This $1,487.5 will need to be funded in all of the out
years, in order to pay for 0-10mbps internet coverage
in tandem with current fiscal note that covers
10-25mbps. The entire program will continue as one
application for up to 25mbps.
Representative Carpenter wondered whether the actual total
was $8.6 million versus $7.1 million, which was not
reflected in the fiscal note. Ms. Teshner replied in the
affirmative.
Co-Chair Wilson asked why FY 20 did not show the over $1
million currently awarded to grants. Ms. Teshner answered
that when the department was told to only report the costs
necessary for the speed increase from 10mbps to 25mbps and
the $1.4 million figure was included in the analysis to
show that amount was needed to continue the 0 mbps to 10
mbps program as well. Co-Chair Wilson thought the entire
amount should be reflected in the FY 20 cost. She reported
that before the change from 10 mbps to 25 mbps the school
districts were asked to show how they were able to fund the
25 mbps increase. She asked why the grant was increased if
the school districts demonstrated they were able to fund
the increase. Ms. Teshner answered that the fiscal note was
an estimate. Co-Chair Wilson restated her question. She
clarified her question and asked why the grants would be
necessary. Ms. Teshner answered that the program was
voluntary and based on a baseline number and if costs went
below the baseline level the school district would no
longer qualify because the overall cost would decrease. She
deferred to Patience Frederickson, from the Division of
Library, Archives, and Museums who ran the program for
further clarification.
10:48:13 AM
Co-Chair Wilson was not blaming any school district for
getting funds. She pondered why the grants amounted to up
to $8 million when many districts could pay for internet
service.
PATIENCE FREDERICKSON, DIRECTOR, ALASKA DIVISION OF
LIBRARIES, ARCHIVES, AND MUSEUMS, DEPARTMENT OF EDUCATION
AND EARLY DEVELOPMENT, responded that the E-rate
application asks the school to certify that they can repay
the remaining portion of the bill. Therefore, school
districts only applied for the E-rate if they know the BAG
grant was available. The districts could not apply for 25
mbps in the current year because the bill did not exist
during the application period. Districts would be able to
apply for 25 mbps during the next application period
knowing that the BAG grant was available to pay for the
remainder of the E-rate. She reiterated that the
certification was not on the state application, it was on
the federal application. Co-Chair Wilson surmised that all
the bill was essentially doing was securing E-rate BAG
grant funding in the outyears. Ms. Frederickson answered in
the affirmative. She furthered that the program had been
designed to increase levels of internet speeds. Co-Chair
Wilson wondered why the legislature would not just increase
the Base Student Allocation (BSA).
10:51:13 AM
Ms. Frederickson replied that she was not conversant on the
BSA program. She suspected the reason was because it
included the federal E-rate funding. She detailed that the
genesis of the BAG program came out of the OWL (Online With
Libraries) program, which helped libraries achieve a
certain speed of internet to enable them to participate in
a video conference network. The idea behind the OWL program
was to combine E-rate, library, and grant funding to
increase the internet speeds. The BAG program was based on
OWL.
Co-Chair Wilson remarked that the OWL funding was
appropriated in all school districts. She asked whether she
was correct. Ms. Frederickson answered in the negative. The
OWL program video conference network was available in every
public library, but the subsidy went to approximately 20
public libraries. Co-Chair Wilson requested the list of
libraries involved in OWL.
Vice-Chair Johnston remembered that the Nome bidding war
happened because it was cheaper to provide the higher speed
25 mbps than the lower speed internet. She asked for
confirmation.
10:53:46 AM
Ms. O'Conner answered that she was unfamiliar with the
details but thought Ms. Fredericksons recounting made
sense. She acknowledged that Nome had relatively good
connectivity and multiple providers. Relatively large
bandwidth was purchased "in bulk" and 10 mbps was a very
small amount. Vice-Chair Johnston considered the fiscal
note and improved technology. She thought the scenario
could be repeated in the rest of the state with improved
satellite technology and as competition increased. She
deduced that the fiscal note was currently high, but it
could decrease with improved technology in the future. Ms.
O'Conner agreed with her conclusion. She indicated that
multiple projects were coming online in the near future in
Alaska. Every company was taking advantage of newly
stabilized federal funding for increased connectivity. She
noted that the lower orbit satellite technology was
untested and was not imminent.
10:55:57 AM
Ms. Frederickson concurred with Ms. O'Conner's assessment
and noted she had experienced lower costs with the BAG
program. She pointed out that in the program's early years
the average BAG grant was $30 thousand and fell to $17,000
within 5 years. She determined that as the cost of internet
decreased to get to 10 mbps the mathematical formula to
qualify remained at the 2014 benchmark and districts fell
out of the program due to decreased costs; in FY 19 awards
declined from 119 to 80.
Co-Chair Wilson pondered whether the funds belonged in the
BSA as an ongoing cost.
Representative Carpenter noted that the federal
government's standard was 100 mbps. He deemed that 100
mbps was currently cost prohibitive in Alaska. He imagined
that once districts obtained 25 mbps there would be later
discussions about increasing the speed to 50 mbps and
higher. He asked if currently low earth orbit satellites
were over Alaska. Ms. O'Conner answered in the negative.
Representative Carpenter recounted that in previous
testimony a school district testifier had been unaware of
what the cost had been to increase from 10 mbps to 25 mbps.
He inquired how it was known that the program would cost
$7.1 million. Ms. Frederickson answered that the fiscal
note was estimated from current costs. She observed that
the problem was the competitive bid process for the e-rate
application.
10:59:10 AM
Representative Carpenter understood the process of how it
was purchased but "we don't put a bid in to find out if we
can afford it." Ms. Frederickson replied that the process
was confidential, and she did not have access to the
information.
Co-Chair Wilson asked whether the information was
confidential to the school districts. She commented that
the school districts were queried about the costs and one
response was received. She hoped the districts knew how
much their portion of the E-rate costs would be when
applying for the BAG grant program since it was a separate
process from the federal E-rate program. Ms. Frederickson
responded that with passage of SB 74 she would establish
new benchmarks based on what the school districts were
paying in January 2020. Subsequently, the school BAG
program schools would never pay more than what they were
paying in January 2020. The costs would be frozen the
districts would rely on the BAG program for the remainder
of costs. She acknowledged that she was not answering the
question correctly.
11:00:46 AM
Representative Carpenter interposed an analogy to
illustrate the question. He exemplified a business that
wanted to increase its bandwidth from 10 mbps to 25 mbps.
The business would go to a provider for a quote to know if
it had the money available to pay for the increase. He
declared that the state had the opposite process and paid
over $8 million without knowing the actual costs. He
characterized the process as "backwards." He contended that
a district should know what the increased service would
cost. He wanted to know what the actual cost was but
discerned that the costs were unknown. Ms. Frederickson
agreed that the costs were unknown. She restated that the
cost was based on the current program "and some cocktail
napkin figures" and noted that "it was the best they could
come up with."
Ms. Boario understood the statements and questions by
Representative Carpenter. She explained that the confusion
sprang from receiving federal funding first. She thought
that knowing how the E-rate contracts went to bid might
provide more clarity.
Co-Chair Wilson stated that her issue was why the BSA did
not cover the costs. Additionally, the federal e-rate
program required to know whether the districts could cover
the remaining costs. It was her understanding the school
districts had the money for the increased bandwidth and
they relied on the BAG program to cover the remaining
costs. Ms. Boario clarified that it was rural school
districts that could not cover the costs on their own. Co-
Chair Wilson cited prior districts' testimony that they
could cover the costs. In addition, she was unaware that
the costs were ongoing each year.
11:05:03 AM
Representative Josephson asked for clarity regarding the
proprietary information. Ms. Frederickson answered that
when the school districts utilize the E-rate computer they
enter each school and the amount of broadband service
desired for each school. The internet service providers
submitted the bids for each school, which was the
proprietary information the state did not have. They could
not tease out the information that answered what the actual
costs were. She added that in the first year of the program
they had received $5 million from the legislature and only
$3.5 million had been used.
Co-Chair Wilson requested that the sponsor provide further
information regarding the committees questions.
Representative Josephson asked whether Regional Educational
Attendance Area (REAA) schools absorbed internet costs
through the BSA or if they dropped out of the BAG program.
Ms. Frederickson replied in the affirmative, but asked
members to bear in mind that if a district chose not to
apply it was because the competition had driven cost down.
Co-Chair Wilson recognized the many questions and concerns
about the bill. She asked members to keep an eye on the
schedule for future hearings.
CSSB 74(FIN) was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
11:08:34 AM
The meeting was adjourned at 11:08 a.m.