Legislature(1997 - 1998)
03/19/1998 04:09 PM House ITT
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON
INTERNATIONAL TRADE AND TOURISM
March 19, 1998
4:09 p.m.
MEMBERS PRESENT
Representative John Cowdery, Chairman
Representative Eldon Mulder
Representative Pete Kott
Representative Gail Phillips
Representative Joe Ryan
MEMBERS ABSENT
Representative Kim Elton
Representative Reggie Joule
OTHER HOUSE MEMBERS PRESENT
Representative Norman Rokeberg
COMMITTEE CALENDAR
HOUSE BILL NO. 432
"An Act relating to the bond authorization for international
airports revenue bonds; and providing for an effective date."
- HEARD AND HELD
(* First public hearing)
PREVIOUS ACTION
BILL: HB 432
SHORT TITLE: AIRPORT REVENUE BONDS
SPONSOR(S): REPRESENTATIVES(S) COWDERY
Jrn-Date Jrn-Page Action
2/18/98 2353 (H) READ THE FIRST TIME - REFERRAL(S)
2/18/98 2353 (H) ITT, TRANSPORTATION, FINANCE
2/24/98 (H) ITT AT 5:00 PM BUTROVICH RM 205
2/24/98 (H) MINUTE(ITT)
2/25/98 (H) ITT AT 5:00 PM BELTZ ROOM 211
2/25/98 (H) MINUTE(ITT)
3/05/98 (H) ITT AT 4:00 PM BUTROVICH RM 205
3/05/98 (H) MINUTE(ITT)
3/19/98 (H) ITT AT 4:00 PM BUTROVICH RM 205
WITNESS REGISTER
EDWARD MERLIS, Senior Vice President
Government Affairs
Air Transport Association of America
1301 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Telephone: (202) 626-4182
POSITION STATEMENT: Testified in support of HB 432.
CLIFF ARGUE, Staff Vice President of
Properties and Facilities
Alaska Airlines; and
Chairman, Anchorage/Fairbanks Airlines
Airport Affairs Committee
P.O. Box 68900
Seattle, Washington 98168
Telephone: (206) 433-3184
POSITION STATEMENT: Testified on HB 432.
DENNIS BIRD, Managing Director for
Alaska Operations
Federal Express
13421 Windrush Circle
Anchorage, Alaska 99516
Telephone: (907) 249-3173
POSITION STATEMENT: Testified in support of HB 432.
KURT PARKAN, Deputy Commissioner
Department of Transportation & Public Facilities
3132 Channel Drive
Juneau, Alaska 99801-7898
Telephone: (907) 465-6977
POSITION STATEMENT: Provided comments on HB 432.
MORT PLUMB, Director
Anchorage International Airport
Department of Transportation & Public Facilities
2120 Innes Circle
Anchorage, Alaska
Telephone: (907) 345-0800
POSITION STATEMENT: Provided comments on HB 432.
STEPHEN F. WELLS, Certified Internal Auditor
Address Not Provided
Telephone: (907) 258-8188
POSITION STATEMENT: Provided comments on HB 432.
ROSS KINNEY, Deputy Commissioner
Department of Revenue
P.O. Box 110405
Juneau, Alaska 99811-0400
Telephone: (907) 465-4880
POSITION STATEMENT: Answered questions on HB 432.
ACTION NARRATIVE
TAPE 98-7, SIDE A
Number 0001
CHAIRMAN JOHN COWDERY called the House Special Committee on
International Trade and Tourism meeting to order at 4:09 p.m.
Members present at the call to order were Representatives Cowdery,
Mulder, Phillips and Ryan. A quorum was present to conduct
business. Representative Kott arrived at 4:14 p.m.
HB 432 - AIRPORT REVENUE BONDS
Number 0014
CHAIRMAN COWDERY announced this was the fourth meeting of the
International Trade and Tourism committee on HB 432 and it was his
intention this would be the last meeting at which public testimony
would be taken. He expected to have one more meeting on Tuesday,
March 24 to consider amendments and hopefully move HB 432 to the
next committee of referral.
Number 0020
CHAIRMAN COWDERY said substantial effort has been made by many
parties to analyze and digest a lot of information about this
project. There's been cooperation among the airport staff, their
consultants, his office and this committee's consultants. He
acknowledged that Commissioner Perkins set the tone early on in the
Department of Transportation & Public Facilities for complete
disclosure and cooperation. Nevertheless, he said it had been
reported to him that certain people were concerned about
retribution from the nature of their testimony for or against
certain aspects relating to this project. For the record he had
checked with House Speaker Gail Phillips and Commissioner Perkins,
and neither they nor he would tolerate any hint of retribution
behavior toward anyone who testified before this committee or
participated in any way in this public process. He urged any
individual who felt threatened to speak with any committee member
or their respective staff regarding any complaint of this nature.
He believed such fears to be unwarranted; however, he wanted to
provide assurance on the record of the legislature's willingness to
protect the democratic process.
Number 0049
CHAIRMAN COWDERY asked Edward Merlis to come forward to present his
testimony at this time.
Number 0055
EDWARD MERLIS, Senior Vice President of Government Affairs, Air
Transport Association of America (ATA), testified in support of
HB 432. He explained the ATA is the principal trade and service
organization of the major airlines in the United States and their
members fly 95 percent of all the passengers and cargo flown on
U.S. flag airlines. The nine member airlines of ATA that fly to
Alaska have signed a letter in support of this project and this
legislation. He said the ATA believes the project is one which is
properly sized, financially prudent and meets both current needs as
well as anticipated near-term growth necessities. The Air
Transport Association has been involved in the planning process,
which Mr. Argue of Alaska Airlines will address, and found this
project has been designed in such a way that it will accomplish
ATA's needs for passengers and will be done in a very intelligent
way financially. He said the members who had signed the letter are
committed to paying for the cost of this - none of the cost will
ultimately be borne by the citizens of the state through tax
revenues; it will be borne by the airport users.
Number 0088
MR. MERLIS stated compared to similar airport expansion projects
ATA has been involved with in many communities across the United
States, they are pleased to say this project might be the most
intelligently designed, particularly from a price perspective. The
Air Transport Association of America is pleased to endorse this
project and urges the legislature to move expeditiously on HB 432.
Number 0101
CHAIRMAN COWDERY wondered what ATA's expectation would be of
increased costs for landing fees, terminal rent and other costs
incurred at the airport if this project were to be approved for
bonding at $180 million.
MR. MERLIS responded the key issue is what is referred to as cost
per enplanement. According to Mr. Argue of Alaska Airlines which
will represent about 50 percent of the costs at the airport due to
volume, it is their view the cost per enplanement would increase
somewhere in the $1.50 range. That figure is actually quite
modest, particularly when considering other airport expansion
projects where cost increases, such as Denver, have been $20 per
passenger. Passengers will not see much of that $1.50 rate when
it's spread across the wide array of fares.
CHAIRMAN COWDERY verified that Mr. Merlis was of the opinion that
the increased cost per passenger would be in the $1.50 range.
MR. MERLIS replied, "Well, I think it would range on a first class
ticket from Anchorage to Washington D.C., which might cost as much
as $2,000, an airline making that independent judgment might decide
to raise the cost by $7.00 and on a discounted fare 30-day advance
purchase for $100 ticket, they might put no increased cost for the
passenger. That's part of the system that exists where an airline
makes the decision of how to absorb the costs or pass the costs on
to individual passengers."
CHAIRMAN COWDERY asked if Mr. Merlis expected there to be some
fluctuations on the landing fees and costs?
MR. MERLIS said any new capital expenditure is going to necessitate
some increased costs that would be passed on as the individual
carriers see fit, depending on the category of ticket purchased.
Number 0136
CHAIRMAN COWDERY asked Mr. Merlis how this project compared with
others?
MR. MERLIS said there were a number of comparatives, but one in
particular in the same price range is the Baltimore-Washington
International Airport which built an international terminal for
$200 million at a time when international traffic had dropped 10
percent. On the other hand, this project is under $200 million at
a time where there is a growth projection. He said one of the
things that is most heartening is the consultation process that's
existed between the airport, the department and the airlines.
Number 0156
REPRESENTATIVE GAIL PHILLIPS asked if, based on the proposal for
the baggage expansion, would there be any of the problems
experienced by Denver.
MR. MERLIS said that was a guaranteed no. He added the Denver
baggage system alone cost $125 million.
CHAIRMAN COWDERY asked if there were other questions for Mr.
Merlis. Hearing none, he asked Cliff Argue to present his
testimony at this time.
CLIFF ARGUE, Staff Vice President of Properties and Facilities,
Alaska Airlines; and Chairman, Anchorage/Fairbanks Airlines Airport
Affairs Committee. He stated the Anchorage/Fairbanks Airlines
Airport Affairs Committee is made up of the signatory carriers;
that is those carriers that have signed operating agreements for
the two airports. Inasmuch as he had testified at previous
committee hearings, his testimony today would focus on three areas:
process, product and payments. He said he has been involved with
the process since the beginning and it is among the best he's seen
at airports throughout the country. First of all, a needs
assessment was completed which identified the deficiencies in the
terminal complex. That was taken to the next step which was the
development of 14 or 15 different concepts which were scored in
terms of how they met the needs of the airport which eventually led
to a preferred plan. The final product or preferred plan corrects
a deficiency that has long been in the Anchorage terminal and many
of the needs are now. In addition, the end product that has been
presented provides for reasonable and modest future growth. The
project as presented takes into account a modest growth rate that
economic planners at Alaska Airlines and other carriers all feel is
a very appropriate growth rate for the Anchorage area and for the
people traveling through the Anchorage airport.
Number 0215
MR. ARGUE stated the airlines are prepared to pay the bills. Mr.
Merlis had mentioned the increased cost to Alaska Airlines and
similar numbers are available for other carriers. He pointed out
the cost increases are extremely conservative and modest in looking
at the overall scheme of things. It keeps Anchorage as an airport
that is very competitive with other airports throughout the country
as far as rates, fees and charges, even after the bonds are sold.
Number 0226
REPRESENTATIVE JOE RYAN generalized if this was his business with
the given net revenues and losses over the past five or six years
and he took this project to a banker to borrow $305 million for
expansion, he thought he would have a difficult time selling it to
the banker. However, this proposal is coming before this body and
the state, who as the bonder, will be responsible for it. He asked
Mr. Argue to explain why the state should be willing to take on
this project.
MR. ARGUE said he would comment briefly and then ask the
Administration to follow-up. First, he had not seen the document
indicating net revenues and losses that Representative Ryan had
referred to, but he understood it was the published financial
reports for the International Airport Revenue Fund (IARF).
Additionally, he believes the problem arises in that the numbers
referred to are from a straight accounting standpoint and don't
take in to account the way in which the operating agreement works.
In reality, as he understands it, the operating agreements provide
that there really is no loss to the system; the landing fees and
rentals are set to assure that all costs are covered. It's what is
known as a residual agreement which means that whatever costs are
not covered from other sources - whether it be concessions or tie
downs, land leases or other fees are made up by the air carriers
serving the airport. So, from an accounting standpoint, this total
IARF deficit may be theoretically correct, but in practicality he
didn't believe it is. He noted there will be fee increases which
have been identified to help repay the bonds.
CHAIRMAN COWDERY thanked Mr. Argue for his comments and asked John
Ungar to stand by in Anchorage while other members of the Air
Transport Association presented their testimony.
Number 0280
REPRESENTATIVE NORMAN ROKEBERG asked Mr. Argue what the landing fee
for a 737 would be at the Anchorage International Airport and the
Fairbanks International Airport.
MR. ARGUE said it would be the same amount; however, he didn't know
the exact number. It's based on a rate per thousand pounds.
REPRESENTATIVE ROKEBERG asked if it was Mr. Argue's testimony that
the landing fee would be the same at Anchorage and Fairbanks.
MR. ARGUE confirmed that.
CHAIRMAN COWDERY asked Dennis Bird to come before the committee to
present his remarks at this time.
Number 0303
DENNIS BIRD, Managing Director for Alaska Operations, Federal
Express, testified that Federal Express represents one of the major
express cargo carriers atthe Anchorage International Airport. He
said in looking at the whole process, at first glance one would
think that perhaps Federal Express wouldn't have any interest in
seeing upgrades and improvements to terminal facilities,
specifically the project of the Anchorage International terminal
expansion 2005. That, however, is simply not the case; Federal
Express strongly supports HB 432 as well as the expansion for a
number of reasons. The first reason is that the customers that
come in to and exit that airport on a regular basis are also
customers of Federal Express as well as every other business and
business entity in the city of Anchorage and the state of Alaska.
He said quite honestly he didn't think those customers were
adequately serviced at this point in time. He pointed out that
Federal Express has a responsibility toward their employees and he
said, "Most certainly our employee base has grown to almost 1,008
in the state and of the 1,008, 350 plus - and soon to grow more -
are pilots and we certainly use that airport on a daily basis to
move our pilots in and out both for training as well as to position
them on the line, so it's very important that we have very time
definite, very certain service through that facility as well as on
the airlines that handle it." More importantly, Federal Express
looks at this as the opportunity to start building an
infrastructure that will support the growth into the global
operation he believes Anchorage International can become. He
believes that an airport facility plays a large role in the
decision of any international or multi-national company thinking
about doing business in an area and in his opinion, Anchorage
needs to make a better impression in order to move into the global
arena.
CHAIRMAN COWDERY asked if Mr. Bird expected there would be higher
landing fees with this project.
MR. BIRD replied he expected the fees would probably fluctuate and
increase somewhat.
CHAIRMAN COWDERY asked what effect the increased costs would have
on the shippers.
MR. BIRD said the way the pricing structure is set up, he didn't
see any immediate impact just from the standpoint of being an
Anchorage location.
CHAIRMAN COWDERY asked Kurt Parkan to come before the committee.
He noted the paperwork Mr. Parkan had given him had been
distributed to committee members and acknowledged receipt of a
letter from the Commissioner.
Number 0356
KURT PARKAN, Deputy Commissioner, Department of Transportation &
Public Facilities, noted he didn't have any testimony to present
today. He said the department had responded in writing to
questions that were raised at the previous meeting. In response to
Representative Rokeberg's question regarding the landing fee for a
737, he said at the current 46 cent rate, it's just under $60. He
said in terms of the letter, "Mr. Chairman, one of the questions
that you had raised was, is it possible to come up with a time line
and discussion of the project indiscrete contracts so that you
could get a sense of how the project would be broken out, so that
I understand your interest which are similar to our interest, is
that local contractors - Alaskan based contractors - would be able
to do the work. And in the letter from the commissioner, we do
include on the back page a preliminary contracting plan that shows
approximately 12 different contract bid packages with their
estimated value and an award date - a tentative award date ... And
clearly as we get closer to design, the fidelity of that schedule
will be made clearer; certainly there is a lot of factors to take
into consideration when you decide how to break up the project and
once you've developed a detailed, critical path schedule to show
where these projects are in that path, that helps you determine
whether or not you want to have a project that may be small, for
example if you had a $100,000 project that could hold up the rest
of the project because they had failed to complete on time, you
want to take another look at whether or not you go after such a
small contract to begin with."
CHAIRMAN COWDERY remarked the concern had been to assure the
participation of as many Alaska contractors as possible. He
referred to the $60 million for terminal C replacement and inquired
if that represented one contract or if there would be separate
contracts for demolition and construction.
MR. PARKAN said he was unable to respond with any specificity at
this point.
CHAIRMAN COWDERY said it was his hope that it could be broken into
more than one contract. He asked if there were other questions of
Mr. Parkan.
REPRESENTATIVE PHILLIPS remarked the big picture indicates that by
the time this project is completed, there's going to be a need for
more expansion and asked Mr. Parkan to reiterate why this project
addresses such a short time frame and isn't projected for a longer
and greater capacity.
MR. PARKAN suggested that Mort Plumb could more adequately address
that question. With respect to the question of de-icing which
Representative Phillips had raised at a previous meeting, he noted
the department is currently working on a report and will provide
it to her separately.
CHAIRMAN COWDERY asked Mort Plumb to come before the committee at
this time.
Number 0425
MORT PLUMB, Director, Anchorage International Airport, Department
of Transportation & Public Facilities, said in response to
Representative Phillips' question, he would like to tag on to the
comments of Mr. Merlis and Mr. Argue. He stated, "There's
certainly a lot of solutions to this issue and we worked, I think,
very hard at trying to reach a consensus as much as we could,
taking the inputs from all the people and just as we have seen, we
are having certainly a challenge to present the program we
currently have before you and to have presented a larger program
probably would have been a greater challenge. Having said that,
when we did our needs assessment, one of the things we thought was
important was to come up with a master plan that looked out at
least 20 years and we did that. And we incorporated many ideas to
include the greenfield (ph) approach that Speaker Phillips had
asked about before, I think that we had one of the premier
consultants in this - Mr. Gary Blankenship with L & B - and I think
that the people gathered in this room could testify to the
competence and the credibility of Mr. Blankenship. So, we did come
up with a proposal for the year 2015 and it was a phased approach
and we phased that program in accordance with what we thought was
reasonable from a financial possibility, for the lack of better
words. And this again was done in consultation with the airlines
as well as our own department. There were three possible break
points that appeared to have merit. One was to build all of it -
the 2015 solution. One was to build just what was needed to get to
about 2001 or one was to go ahead and break it about 2005 which
would incorporate taking care of the current deficiencies which we
have which as you know we're at about the 40 percent range in the
bag claim area and 43 in the ticketing area and without C concourse
at about 75 percent and when we get to the year 2000, that goes
down to 60 percent without C concourse. So, after a lot of
deliberation, we made the cut at about 2005. Certainly there are
other possibilities, but we arrived at that by using a matrix and
weighting the proposals and it appeared that that was about a good
break point to meet the current deficiencies, the forecast need and
to fall within a reasonable financial program."
Number 0458
REPRESENTATIVE ROKEBERG noted the costs for office space and
counter space at AIA and inquired what those costs are in the
Fairbanks airport?
MR. PARKAN said the rent would be the same at both airports because
it's part of the system and the operating agreement has the landing
fees as well as the rents for similar airports for similar uses.
REPRESENTATIVE ROKEBERG asked what the schedule was on the
operating agreement?
MR. PARKAN replied it comes due in June 2000.
REPRESENTATIVE ROKEBERG referenced his earlier inquiry regarding
the projected cost for the eight (indisc.) add-on that might be
prospective for 2005 or 2015.
MR. PARKAN didn't recall that inquiry and said the department would
respond to Representative Rokeberg personally.
Number 0473
CHAIRMAN COWDERY noted the committee had hired consultants and
asked Mr. Wells and Mr. Noon to address the committee at this time.
Number 0482
STEPHEN F. WELLS, Certified Internal Auditor, said that he and Dr.
Heinz Noonan were hired to take an independent review of some of
the questions that had been raised by committee members and to
develop additional information regarding the project. He explained
the approach taken had been to address the questions given to them
by the legislature and to then look at additional information that
may have come up during the process. That information was divided
into the 14-page draft report before the committee and a brief
summary of what he and Dr. Noonan determined to be important which
resulted in five key issues being presented in an executive summary
sent to the committee members today.
Number 0495
MR. WELLS said he and Dr. Noonan feel the overall process that the
airport has gone through with regards to the design has been
excellent and that all reasonable and possible alternatives were
examined and considered. He has been pleased with the overall
cooperation and courtesy of the airport personnel. He does,
however, think some of the informational data, particularly the
financial data, needs to be entirely accurate and complete. Their
review raised a couple of questions in their minds about whether
that process was as controlled as it might be and their suggestion
was that the international airport revenue fund controller and his
staff needed to be a significant part of that process and that at
the very least they review the financial information before it's
released. That review was not taking place in either Anchorage or
Fairbanks. He noted it could have a significant effect in the bond
due diligence process and that's why they think it's such a
significant issue.
CHAIRMAN COWDERY confirmed that it didn't necessarily mean the
information provided was wrong, but rather that it should have been
reviewed by the controller before the information was released.
MR. WELLS said that was correct; they were concerned about the
process. In a couple of instances they found the information wasn't
entirely accurate.
MR. WELLS continued with his summary and said, "We felt that when
we looked at the overall process with regards to what was being
designed specifically for the concourse C and main terminal area,
that we felt and saw in some of the testimony that there was
concerns about how it might affect air cargo in the future and
there seemed to be at certain points a lack of information with
regards to how this might impact air cargo and its future
development possibilities. We feel that because air cargo
represents 70 percent of the revenue that's generated out there at
the airport, that any significant - and since this is a very large
project, it's significant - how that might impact future air cargo
development is something that needs to be carefully considered and
since the air cargo master plan has not been completed, we're not
sure - and we need further information about how that might impact
the development of air cargo at Anchorage International Airport.
We see that as an unclear and somewhat undefined piece of
information at this point. We do know that the airport has done
some preparatory information in this regard because they did share
with us the LOI packet that they provided to FAA recently and we
see that there has been some work in regards to air cargo in that
document. But it still remains kind of unclear to us."
Number 0535
MR. WELLS further stated, "The other areas - there are two more -
and it has to do with cost control and we think that there are two
issues there and one has to do with certain aspects of this
project, particularly as regards the main terminal which is an old
building - not as old as concourse C, but it does have certain
problems. We feel because of that it represents a significant risk
and therefore potential exposure to increased costs as they get
into that project." This had been discussed with Don Ketner who
admitted that it was a risky portion of the project. So, from a
cost control standpoint, he concluded there needs to be some
oversight in this process to avoid the potential for increased
costs. There isn't any mechanism in place to ensure the packet
before the committee for approval is anything other than a total
cost concept. It is his feeling that any of the alternatives
considered by the airport could easily be implemented at any point
in time which would have a significant impact on the cost. He
recommended there should be some independent oversight throughout
the process which could be carried out in a couple different ways.
One would be through the international airport revenue funds
controller's office and the other would be with an independent
person reporting directly to the legislature.
Number 0554
MR. WELLS said finally, it is their feeling that the impact to
rates and fees is something that has been given a considerable
amount of thought, but that there's an apples and oranges type
comparison going on when a person looks at other airports around
the country - the landing fees, in and of themselves is probably
the wrong piece of information to try and compare. The reasoning
for that is that even the industry itself uses a very complicated
formula for determining what goes into landing fees and that can be
different from one airport to the next. He thought it would be
more appropriate to look at one or two aircraft and find out what
it would cost for that particular aircraft to land at different
airports. That may be a better way to compare how the rates will
impact each airport in each location.
Number 0565
CHAIRMAN COWDERY thanked Mr. Wells for his summary and said it was
his understanding the landing fees include the fuel flowage fees at
many of the airports; however, the landing fees the committee had
discussed did not include those fees.
MR. PARKAN referenced the comparative costs between airports and
said that Mr. Plumb had some information that may be helpful.
MR. PLUMB said, "As your consultants have identified, certainly in
two weeks it's very difficult to get a handle on something that's
as dynamic and complex as cargo operations at Anchorage
International Airport and I think some good questions are posed and
I think that there's certainly some very good and reasonable
answers. As Mr. Parkan said, it's probably more appropriate to
give a complete picture in a written response. I do have an apples
to apples comparison here for passenger and cargo for a 747-200 and
certainly we could get it for another aircraft and we can go - and
I will submit this for the record - but as an example with the
back-up material - at Anchorage for a 747-200, it's about $1,244 as
compared to say Seattle which would be $3,471 or JFK at $3,429.
And these are 1997 figures I might add, so some of these may have
to be adjusted for currency, but others such as Taipei is $3,900
plus, Seoul Korea is $5,000 plus, Hong Kong $3,100 plus and again,
that is down to - compared to the Anchorage price of $1,200 -- it's
actually $1,244. Our closest competitor and one that we monitor
very closely and very carefully and we certainly never want to lose
the window of opportunity is Vancouver which is $1,600. And
adjusted rates for 1998 which does have some currency adjustments
but does not have the fidelity of this other material - again, we
used $1,244 for Anchorage and $3,400 plus for Kennedy and I will
submit these and the airports are Kennedy, Seattle, San Francisco,
Los Angeles, Vancouver as compared to Anchorage. In Europe we have
Amsterdam, Heathrow and Frankfurt. In Asia we have Taipei, Seoul,
Hong Kong, Manila, Lumpur, Singapore and Sapporo and so I think
this is sort of a global comparison which the committee may find
interesting. We also have a comparison for passenger aircraft
which was not asked."
TAPE 98-7, SIDE B
Number 0001
MR. PARKAN said, "These fees - these comparative analysis - and the
source was I (indisc.) and several airport interviews that we've
have had people do - they not only incorporate the landing fee, the
fuel charge, the fuel flow, the taxes, but also what the handlers
charge to turn the airplanes." He said currently the Anchorage
International Airport is very competitive
REPRESENTATIVE PHILLIPS commented the report prepared by Mr. Wells
and Dr. Noonan is overall favorable to the project; however, they
do state that another expansion project will be needed shortly
after this project is completed. She asked Mr. Wells for his
comments.
MR. WELLS said in reviewing the different alternatives, they found
three significant dates - the 2005 date, the 2010 date and the 2015
date. It appeared that a lot of work had gone into the estimates
and projections as they applied to those three dates. He said,
"What resulted from all that work that we were able to read in the
short time frame was that it was quantifiable; you were able to
identify that in fact the estimates showed that there would be a
need for four additional gates at 2010, four more at 2015 based on
their estimates, and that the enplaning passengers would increase
from approximately four million to nine million, I believe. But we
saw a significant increase in the passenger activity which we
assumed would be the reason for the gates and what we see is that
the total passenger count went from - this is on enplanements only
- it's estimated three million in 2005 to four million before 2015,
so there's a significant growth. The total passengers grew from
six million in 2005 to nine million in 2015. So, we did see a
significant increase in the volumes just in that short time frame
and therefore we looked at what they had done to design for those
projections and they do, in fact, have designs for taking care of
that projected increase in traffic. So we questioned why they
hadn't chosen 2015 as their ultimate date for building and how they
were going to accommodate these projected needs. We didn't get all
the costs related to these alternatives but I do feel they have
that information available."
REPRESENTATIVE PHILLIPS said considering their recommendations on
cost control and instituting financial oversight, she wondered if
it would be their professional determination this would be a good
project to go forward with.
MR. WELLS stated he had anticipated this question and had given a
lot of thought about how to respond. He sympathized with the
committee's position of having to decide whether to move forward
with this project, but at the same time he can't take into
consideration everything that needs to be considered by the
committee, but rather he can only consider what he's seen so far
which is mostly from a financial and planning perspective. Based
on what he's seen overall, his response is yes, the state should
move forward with this project; however, he cautioned the committee
to move forward with some careful limits on the process. Having
cost controls and oversight is one aspect of it and how the bonds
are issued is another aspect.
Number 0055
REPRESENTATIVE ROKEBERG referred to the statement on page 10 of the
executive summary prepared by Mr. Wells and Dr. Noonan,
"Specifically, there has been no written assurance from either FHWA
or FAA that monies in specific amounts will be made available or
are even eligible on the part of the FHWA" and asked if his
interpretation was correct that any perspective funding through
either the letter of intent or the AIP that there is no written
assurance of federal funding nor is federal funding guaranteed.
MR. WELLS said that was correct and added that was a good question
for the staff of the Department of Transportation & Public
Facilities with regards to history on how FHWA, particularly has
participated in airport related projects.
REPRESENTATIVE ROKEBERG referred to question 16 in the executive
summary and asked Mr. Wells if it would be his recommendation to go
with a bond authorization of $304 million or $280 million.
MR. WELLS said first, he wasn't exactly sure where those numbers
came from, but they are not his numbers. He has been using the
round number of $200 million, but in actuality it's $204 million.
REPRESENTATIVE ROKEBERG noted there had been some previous
discussion regarding the possibility of $25 million of federal
monies available for this project. Based on his assumption that's
not an assured amount, he inquired if Mr. Wells would recommend
sticking with the $204 million.
MR. WELLS said there is no assurance for either the FAA or FHWA
funding at this time. So, any monies presented as coming from
either one of those two agencies is not guaranteed. He didn't
believe that should have any effect on the $204 million; the $204
is the estimated total cost of the project.
CHAIRMAN COWDERY asked Mr. Wells if he could expand on that.
MR. PARKAN interjected there is no assurance of getting the
additional FAA funding; application has been made for the LOI and
the department should know some time this summer whether or not
they were successful in getting those discretionary funds from the
FAA. In his opinion, a good package was submitted, but there are
some associated risk. On the other hand, he believes there is less
risk associated with the federal highway dollars. The road leading
to the airport is on the national highway system and does qualify
for federal highway dollars.
CHAIRMAN COWDERY said there had been some discussion regarding a
reduction of the bond if the FAA money did actually come about.
MR. PARKAN replied it would go to offset the debt, yes.
Number 0101
REPRESENTATIVE ROKEBERG referred to Mr. Wells' remarks regarding
interest rates on page 13 of the executive summary and asked, "Are
you recommending I go out and buy a bunch of bonds right now, sir?
Do you think the federal reserve will shave interest 100 to 125
basis points during the next 12 to 18 months -- I guess I should.
Are you?"
MR. WELLS remarked that he is a certified internal auditor, not a
financial consultant so, even he doesn't follow his own information
in this regard - he's much more conservative than that.
Number 0115
CHAIRMAN COWDERY asked if the international airport controller
would be required to provide the written assurances to go to bond?
MR. PARKAN said the controller is clearly a part of the team on the
entire project.
CHAIRMAN COWDERY asked if the controller would give a professional
opinion regarding the bond package.
MR. PARKAN said he hoped so, since that's what the controller is
there for.
REPRESENTATIVE PHILLIPS said it appears that's one of the areas
that needs to be improved upon. She asked, "Do you have in place
when you go to submit the bond package, a provision for the
controller to sign as a professional as his fiduciary
responsibility, to sign the bond package stating that this is a
true and clear picture as far as to the best of his knowledge ...."
MR. PARKAN deferred that question to Ross Kinney.
Number 0129
ROSS KINNEY, Deputy Commissioner, Department of Revenue, said the
committee should be aware that during this process there are two
financial advisers involved as well as a qualified bond counsel who
will have to opine on all documents related to the sale of this
issue; meaning that the auditing firm audits and opines on the
financial statements, the bond attorneys will opine that all the
documentation is legal, the legislature has approved it, the
airport people have approved it, John Ungar will have to sign
certain statements, the bond committee will have to sign certain
statements. There will probably end up being more than a dozen
individuals and about two dozen forms involved in the process
before the documents actually make it to market. He said there
will be more than enough eyes involved in the process. It's
important to remember that when dealing with the national financial
markets and getting involved with the Securities Exchange
Commission and institutions of that caliber, all the "t's" will be
crossed and "i's" dotted in order to ensure that it is a legal
financial instrument that's being sold and that all the material
included can be supported and documented.
Number 0149
REPRESENTATIVE PHILLIPS said, "With all these people giving all of
their opinions, and your last comment I think addressed my concern,
not only will they be making the statement and making the opinions,
giving their professional opinions that the documents are correct,
that everything is correct, that everything is valid, but that they
are also correct. So, when you say you want this dollar amount to
do this amount of a project, that that is absolutely true and
correct. And that is what that project is going to cost. So, you
can shade the issue by saying, yes, they will give their opinion
that everything is correct, everything is complete, everything is
saleable, everything is repayable, but what I want to get at is the
money that's being requested - is there going to be a financial
opinion that that is the true amount of money that is needed for
that part of the project or that project."
MR. KINNEY said going back in history, he wanted to share some of
the specific wording that was included in an official statement
from a bond issue for the airport system that was done in 1986 or
1987. He said, "This project included improvements in the main
domestic terminal, the international terminal area and the airfield
area at the Anchorage airport. It also included Fairbanks elements
and there were two pages - one for Anchorage, one for Fairbanks.
As I mentioned during the last testimony, there is a statement of
sources and uses and it talks about Anchorage elements - the main
terminal, the parking garage gave a specific dollar amount - public
parking lot - domestic terminal - expansion renovation - ramp area
construction and totaled it all up. At the end the statement that
was included in this particular document says, 'The Department
expects that the sources of funds as outlined in the previous table
will be sufficient to complete the project. In the event however
that currently anticipated revenues should be insufficient, it is
the intent of the Department to complete the project with some
combination of additional transfers of IARF net revenues and the
issuance of additional bonds, the completion bonds.' Having said
that, this was one of those projects that included a bunch of those
revenue sources that currently are unsure - same situation, same
scenario. Because what we're trying to do is provide to the
bondholder a level of certainty that we're going to have a project
that is completed so that in the event there is a problem, they've
got a fully completed project. It's just like you going to the
bank and borrowing money to build a house - the bank wants to make
sure that if they foreclose on this project, they've got a house
they can sell, not one that's half way built. So, we're going to
have to have some reasonable language in there, if you will, to
give the bondholders that level of certainty that we're going to
complete this project. So, we're not going to make a definitive
that absolutely in fact we will do it for $204 million or $180
million or whatever the number is, but we will give them assurances
that we will complete the project."
REPRESENTATIVE PHILLIPS referred to the statement pertaining to
going into the IARF fund and asked if that statement would be
required to be verified by the owner/operators of the airport
before it comes into the bond package?
MR. KINNEY said the air carriers are responsible for the retirement
of this debt and will have to be consulted all along, but they have
agreed to pay whatever is necessary through the user charges and
fees that the airport has the authority to establish through the
operating agreement to pay this debt. And obviously, there are
periodic adjustments made to landing fees and some of the other
things included in the process because we may be receiving LOI
money, federal highway money and other funds that would be used to
apply against that debt. So, yes they will be involved in the
process. He stated, "One other thing that we have to state is that
we feel assured that we can do that and that we do not contemplate
any other additional improvements will be made with this money
other than those undertaken in the normal course of maintaining and
operating the airport. Again, that's an assurance for the
bondholders or the investors ...."
CHAIRMAN COWDERY asked what length of time the vote of the airline
operator committee was valid for.
MR. PLUMB said it was his understanding it was to the end of the
agreement.
CHAIRMAN COWDERY asked then how long the term of agreement was for?
MR. PARKAN said the current operating agreement expires in June
1999 and airports throughout the country have operating agreements
that are five years which is not uncommon. Operating agreements
continue to be modified or rolled over into the term - certainly
the period during which the bonds for the existing project will be
paid off.
MR. PLUMB suggested that Chairman Cowdery's question was more of an
airline question and perhaps Mr. Merlis could respond in writing as
to how it's done in other areas for comparison. He added, "Our
information has been that we have such a broad diversified base
where we don't have a single carrier like you would as a Northwest
at Minneapolis or United at O'Hare, that when weighed in the
scales, we would come out very favorably because of our
diversification in that market."
CHAIRMAN COWDERY remarked there had been testimony that the
controller wasn't involved in the figures that were presented to
the committee and asked for clarification.
MR. PARKAN said, "Again, we haven't looked at the report and we've
only heard from Mr. Wells at this point, so we'd be happy to
respond. But, clearly as I said before, the controller is a part
of the team."
CHAIRMAN COWDERY asked John Ungar if he could provide some
clarification as to whether he was involved in the figures and the
accuracy of the numbers presented on this legislation.
Number 0248
MR. UNGAR said, "I guess the answer is yes and no. Typically, I'm
a one person staff - I don't have a staff, so when I hear that the
controller's office should be reviewing all these documents, I sort
of gag a little. I did work with the financial consultant very
closely making sure the rates and fee model worked similar to my
rates and fee model. There was one exhibit that I believe Mr.
Wells is referring to that went out in a package last week that I
did not get a chance to review before it went out. Typically, I
would never be involved in reviewing construction packages or
(indisc.) for capital projects. That's always been done by a
different arm within the Department of Transportation & Public
Facilities that has the expertise in design and construction and my
opinion of whether those numbers are accurate wouldn't buy us a cup
of coffee. I'm not an estimator; I'm not a contractor, so as I
said I do review the numbers that impact rates and fees. There was
one schedule that I know, as far as project cost, that I did not
review that possibly could have some minor errors. My role is more
of a historian than a planner and I account for things after they
happen, not before they happen."
CHAIRMAN COWDERY assumed that based on Mr. Ungar's testimony, his
involvement in this process is pretty normal from past involvement
in similar projects.
MR. UNGAR confirmed that.
Number 0270
CHAIRMAN COWDERY asked Mr. Ungar to explain the role of the state
bond commission in the airport fund.
MR. UNGAR said typically once a project is ready to go to bonding,
the Department of Revenue takes the lead - the airport is involved
and the airlines are involved, but it then falls into the
Department of Revenue's bailiwick. In response to the question
that was raised as to whether he signs off on something, he is one
of several people that have to make an attestation that the numbers
seem adequate and that we can afford to do this project - as Mr.
Kinney referred to, whether it's that the bonds are sufficient or
there is adequate funds in case there is a shortfall - that we can
guarantee the project will be complete. He said, "Quite honestly,
the information that's been presented to date is all rates and fee
model projections (indisc.) give the carriers an order of
magnitude; when we go forward with an offering statement to sell
bonds, the numbers are then put in to actual financial statements
of actual numbers and pro formas that have to comply with generally
accepted accounting principles. Not only myself, but our outside
independent auditors will have to sign off on these and at that
time, yes, I probably will get more involved looking and have some
assumptions were derived as far as future costs and projections and
revenues on the terminal."
Number 0293
CHAIRMAN COWDERY asked if Mr. Ungar had an opinion as to whether
the projected landing fee rate increase is sufficient to pay for
the bonds?
MR. UNGAR responded that under the current operating agreement,
that's not an issue. He said, "Whatever we need to make sure that
we can cover our operating, capital and debt service costs is how
we factor in what our landing fee has to be. So, as long as we
have the same principal agreement with a residual landing fee,
there is no concern whether we can pay the bonds. It's the matter
of the airlines and that's why they get a vote of what this does to
their rates and whether they still feel that they can afford our
rates and be competitive."
CHAIRMAN COWDERY asked if Mr. Kinney had anything to add to Mr.
Ungar's comments.
Number 0301
MR. KINNEY referred to Chairman Cowdery's question regarding the
role of the state bond committee and said essentially it's charged
with the responsibility for the issuance of all state debt. As the
statute currently reads with respect to this airport, the state
bond committee then has the responsibility to issue any debt on
behalf of the airport system. There are a couple reasons for that;
one being the state bond committee has the mechanisms in place with
the bond attorneys under contract; it's in the business of issuing
debt for various things throughout the state in addition to having
the contacts with the financial markets and all the players in the
broad scheme. He stated there are really three people involved in
the state bond committee - the commissioner of the Department of
Administration, the commissioner of the Department of Commerce and
Economic Development who has delegated that authority to the
director of the Division of Investments, and the commissioner of
Revenue who has delegated the authority to Mr. Kinney. The state
debt manager is staffed to the state bond committee.
Number 0320
REPRESENTATIVE ELDON MULDER said, "Looking in your crystal ball in
terms of bond rates - right now obviously they're very low - one of
the arguments about doing the entire package is the fact that you
could actually have far greater buying power because the bond
rates, bond sales are very low. What does the future look like -
looking into your crystal ball?"
MR. KINNEY replied his crystal ball is no better than anyone else.
He added that he is in a difficult position - he sits on both sides
of the fence in that one of his other jobs is the responsibility of
investment of state funds and in that position, he's not issuing
debt, but buying it. He added, "When we look at this thing, we
believe that currently we are experiencing some of the lowest rates
that we've seen in the last 20 to 25 years. When you take a look
at interest rates two days ago, we're looking at 3.8 percent in
year one and in year 20, we're looking at 5 percent. And I am of
the opinion - and it's kind of like John Ungar - what it'll get you
a cup of coffee maybe - is that we're not going to have an
opportunity to look at these rates again because we believe there's
going to be some other factors come into play such as the Asian
(indisc.), oil and a number of other things, that will have a
tendency to drive rates slightly higher as we go out longer. We
believe that if we have the opportunity, we should issue this debt
as a package at one time for a couple reasons - one because of
interest rates, but number two, when we get into a multi-issue
thing, we're paying for these opinions more than one time so that
gets to be expensive. The other thing that we have the advantage
of when we issue this debt is simply the fact that if we're wrong,
if rates are higher than they ultimately end up being, we do have
the ability to go in and refinance this debt which I think John and
other members of the administration of the airport as well as the
air carriers will tell you, we in fact have done. We currently
have two issues outstanding for the airport - one of those issues
will be retired prior to the time that we begin to make payments on
the new debt in the event that you authorize this, so we'll see a
reduction in the existing...."
Number 0355
REPRESENTATIVE RYAN asked if there were call provisions in these
bonds and if so, was a higher premium paid for those bonds?
MR. KINNEY replied the premium was higher for a call provision, but
in order to minimize that assurance is given to the bondholder that
they will be able to hold on to that instrument for a period of
time. In this case, it will probably be recommended the call
provision not take effect until ten years, so there would be a
period where the buyer of the bonds would have a guarantee to hold
on to that investment and wouldn't be penalized with a short term
deal.
REPRESENTATIVE RYAN inquired if his previous question in terms of
who would lend money with this kind of a pro forma.
MR. PARKAN said it was briefly discussed earlier and added he had
received the report just before the meeting and hadn't had an
opportunity to really look at it, so a response would be provided
at the next meeting.
MR. UNGAR interjected that he wasn't sure where these numbers were
coming from. The international airport revenue system has enlarged
$7 million a year; it's set up like a utility to break even and the
records reflect that money has been made every year or it's been a
break even situation before depreciation. He stated that rates are
always set to ensure that operating, capital and debt service
expenses are covered. In his ten year tenure, there has never been
a shortfall.
Number 0393
CHAIRMAN COWDERY asked how much does the insurance cost to raise
the rating from A to AAA?
MR. KINNEY said it varies and depends on market conditions and
spreads between the rates. He said, "What will happen is that we
will have to go in and make a judgment at the time as to whether or
not the premium we have to pay for the insurance is less than what
the spread reduction would be on the other side. On a bond issue
of this size, it's going to be a fairly substantial amount of money
- I wouldn't venture a guess. But if there's not a savings as a
result of reduction in interest rate that's greater than the cost
of the premium, we will not consider credit enhancement - I will
not recommend credit enhancement for this project. And that's a
judgment that we always make." He noted the spreads are extremely
narrow in the fixed income markets. He said with the rates as they
are, it just depends on how they're staggered and how much
principal comes in later rather than sooner. The commissioner of
the Department of Transportation & Public Facilities will have to
sign a statement to the effect that he will ensure there is debt
service coverage available in the international airport fund that
is equivalent to 1.3 or 130 percent of the annual debt service
payments and the carriers will be charged whatever is necessary in
order to do that. Those types of assurances make a difference in
the premium because the risk is perceived to be substantially less.
REPRESENTATIVE RYAN recalled seeing a figure of $20 some million
for insurance and wondered why the state couldn't arbitrage at it's
own.
MR. KINNEY replied, "What we're looking at is an assurance for an
individual investor or a major institutional investor and the state
of Alaska does not carry the same kind of weight that NBIA or AMBAC
would carry in guaranteeing that kind of debt. When you look at
our fiscal situation within the state of Alaska and the price of
oil and the budget deficit, people are going to say where are you
going to come up with the money to pay this debt in the event that
there's a default by the international airports? And that's a
difficult question to answer at this point because I wouldn't know
what to say."
CHAIRMAN COWDERY asked if there were any further comments at this
time?
MR. KINNEY noted that Mr. Plumb had just pointed out that the
booklet provided for the committee is pegged at 4.7 as an estimate
and it's his belief that would be a very conservative or a high
estimate in this case.
CHAIRMAN COWDERY thanked committee members and the participants for
their testimony. He announced the committee would meet again at
4:00 p.m. on Tuesday.
ADJOURNMENT
Number 0451
CHAIRMAN COWDERY recessed the House special Committee on
International Trade and Tourism at 5:32 p.m.
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