02/07/1998 10:07 AM House STA

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled

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HOUSE STATE AFFAIRS STANDING COMMITTEE February 7, 1998 10:07 a.m. MEMBERS PRESENT Representative Jeannette James, Chair Representative Ivan Ivan, Vice Chairman Representative Ethan Berkowitz Representative Fred Dyson Representative Kim Elton Representative Al Vezey MEMBERS ABSENT Representative Mark Hodgins COMMITTEE CALENDAR HOUSE BILL 312 "An Act relating to the Public Facilities Financing Corporation; authorizing an advisory vote on whether the legislature should appropriate $1,500,000,000 from the constitutional budget reserve fund to capitalize the build Alaska fund; and providing for an effective date." - HEARD AND HELD * HOUSE BILL NO. 313 "An Act relating to preventive maintenance programs required for certain state grants; and providing for an effective date." - SCHEDULED BUT NOT HEARD * HOUSE BILL NO. 315 "An Act relating to operating appropriations for annual maintenance and repair and periodic renewal and replacement of public buildings and facilities; and providing for an effective date." - SCHEDULED BUT NOT HEARD (* First public hearing) PREVIOUS ACTION BILL: HB 312 SHORT TITLE: PUBLIC FACILITIES FINANCING CORP SPONSOR(S): RULES BY REQUEST OF DMT Jrn-Date Jrn-Page Action 01/12/98 2026 (H) READ THE FIRST TIME - REFERRAL(S)

01/12/98 2026 (H) STATE AFFAIRS, FINANCE 02/05/98 (H) STA AT 8:00 AM CAPITOL 102 02/07/98 (H) STA AT 10:00 AM CAPITOL 102 WITNESS REGISTER DENNIS DEWITT, Legislative Assistant to Representative Eldon Mulder Alaska State Legislature Capitol Building, Room 501 Juneau, Alaska 99801 Telephone: (907) 465-2647 POSITION STATEMENT: Provided information on HB 312. FORREST BROWNE, State Debt Manager Treasury Division Department of Revenue P.O. Box 110405 Juneau, Alaska 99811 Telephone: (907) 465-3750 POSITION STATEMENT: Provided information on HB 312. CHRIS CHRISTENSEN, General Counsel Office of the Administrative Director Alaska Court System 8204 West Fourth Avenue Anchorage, Alaska 99501 Telephone: (907) 264-9229 POSITION STATEMENT: Recommended an amendment to HB 312. MIKE MORGAN, Facilities Manager Teaching and Learning Support Department of Education 801 West Tenth Street, Suite 200 Juneau, Alaska 99801 Telephone: (907) 465-1858 POSITION STATEMENT: Provide information on HB 312. JACK KREINHEDER, Senior Policy Analyst Office of Management and Budget Office of the Governor P.O. Box 110020 Juneau, Alaska 99811 Telephone: (907) 465-4676 POSITION STATEMENT: Provided information on HB 312. ROD WILSON, Architect Engineering Division Department of Transportation and Public Facilities 3132 Channel Drive Juneau, Alaska 99801 Telephone: 465-6962 POSITION STATEMENT: Provided information on HB 312. ACTION NARRATIVE TAPE 98-12, SIDE A Number 0001 CHAIR JEANNETTE JAMES called the House State Affairs Standing Committee meeting to order at 10:06 a.m. Members present at the call to order were Representatives James, Berkowitz, Dyson, Hodgins and Vezey. Representatives Ivan and Elton arrived at 10:07 a.m. HB 312 - PUBLIC FACILITIES FINANCING CORP Number 0020 CHAIR JAMES announced the first order of business was House Bill 312, "An Act relating to the Public Facilities Financing Corporation; authorizing an advisory vote on whether the legislature should appropriate $1,500,000,000 from the constitutional budget reserve fund to capitalize the build Alaska fund; and providing for an effective date," sponsored by the Deferred Maintenance Task Force. Number 0038 DENNIS DEWITT, Legislative Assistant to Representative Mulder, Alaska State Legislature, addressed the committee on behalf of Representative Mulder, Co-Chairman of the Deferred Maintenance Task Force. Mr. DeWitt said the task force's responsibility was to establish a financing mechanism to fund deferred maintenance for public facilities. House Bill 312 establishes the Public Facilities Financing Corporation in the Department of Revenue. This corporation is authorized to sell bonds to finance projects. The legislature will annually appropriate funds to pay debt service on the bonds. Thus, the legislature maintains the control of identifying projects, amount of funding, and will also control the amount of debt service. Number 0074 MR. DEWITT stated the Public Facility Finance Corporation will function in the Department of Revenue, similar to the State Bond Committee. It will have an executive director, the remainder of the staff work will be done by hiring consultants - and including their fees in the bond package. This will minimize the need for new funding. He said he understood the Department of Revenue will name an executive director. An analyst type position would also be needed. Number 0096 MR. DEWITT pointed out the amendments in the committee substitute were recommendations by Roger Davis, Attorney, Orrick, Herrington and Sutcliffe. He concluded the corporation will allow tax-free revenue bonds which will be economical to the state. Number 0123 CHAIR JAMES did not believe the changes would alter positions on the proposed committee substitute. Number 0140 REPRESENTATIVE AL VEZEY made a motion to adopt proposed committee substitute [0-LS1243\H, Cook, 1/29/98] as a working document. There being no objection, it was so ordered. Number 0146 MR. DEWITT read the following sponsor statement: Section 1, legislative findings that there is a need for deferred maintenance to existing public facilities and that a new corporation would provide the effective means for financing those. Section 2, adds a new chapter 45 to AS 35 which creates the Public Facilities Financing Corporation. 34.45.101, establishes the Corporation. The corporation is independent but it is subject to the Executive Budget Act. 35.45.020, sets the board of directors which includes the commissioners of Revenue, Education, Transportation and Public Facilities (DOT/PF), and the executive directors of Alaska Housing Finance Corporation (AHFC) and Alaska Industrial Development and Export Authority (AIDEA). Number 0164 MR. DEWITT explained the task force made a recommendation to include the executive directors of AHFC and AIDEA since they are familiar with the bonding process and bonding markets. He said the Department of Revenue will manage the corporation, the Department of Education will have a lot of impact on schools, the Department of Transportation and Public Facilities owns most of, the rest of, the state facilities. Number 0175 MR. DEWITT continued reading the sponsor statement. 35.45.030, deals with officers and quorums. 35.45.040, sets out the powers and duties of the corporation. Number 0183 MR. DEWITT said the original draft listed only personal property, or other kinds of property, and the limitation did not make sense. Number 0188 MR. DEWITT continued. 35.45.050, allows the corporation to issue bonds for projects approved by the legislature, and payment of those bonds is made by funds appropriated from the legislature. It authorizes state departments to enter into agreements with the corporation. Agencies receiving funds from these bonds must have preventive maintenance programs in place and must be energy efficient. Bonds sold by the corporation may be "moral obligation bonds", but they are not secured by the full faith and credit of the state. Number 0203 MR. DEWITT stated subsection (a) allows the corporation to finance an entire project rather than just the state's portion of the project. He said, "What we had envisioned, and continue to envision, it that this would be a source of funding for the state to be involved in projects." It was pointed out when federal funds, or other kinds of funds, are available for paying off the bonds, this would allow the corporation in those instances, to let the full amount of a bond, and then receive payment from the legislature in terms of appropriation and other agencies that were making payment in terms of how their cash flows might operate. Number 0221 MR. DEWITT referred to section (g). He said the state will be involved in leases, the legislature will make the lease payments, the lease payments then would be the funds from which the bonds would be paid. He indicated this would be consistent with requirements of federal law. Number 0239 MR. DEWITT continued reading the sponsor statement. 35.45.060, provides the details of the bonds that may be issued by the corporation. It requires the corporation to notify the legislature prior to bond sales and inform the legislature of the amounts necessary for appropriation to maintain the reserves and to service the debt. Number 0240 MR. DEWITT said after the legislature authorizes the projects, and the amount for the projects, the corporation will begin selling bonds. Bonds may be sold in differing amounts, so funding of those bonds would not come at one time. Mr. DeWitt said, "Depending on what they need to do to move forward on the projects, they would then report back. We would have an estimate for budgeting purposes of what the needed appropriation would be - but they would come back and confirm what it would be." Number 0264 MR. DEWITT continued. 35.45.070, page 9, line 7, limits the bonding allowed to $2 billion [error in sponsor statement $2 'million']. It is unlikely that we will reach this level in the future, the proposals that the task force have certainly don't meet that, but this allows the corporation to be an ongoing activity that we can use into the future for many kinds of opportunities that may present themselves. Number 0270 MR. DEWITT indicated the task force put a $2 billion cap on this, after we got out there a ways, it would give the legislature the opportunity to say, "Where are we if we hit that number and do we want to proceed, or do we not want to proceed." Number 0282 MR. DEWITT pointed out an error on page 9, line 9. "Securities" should have been plural, not singular. Number 0285 MR. DEWITT continued. 35.45.080, line 12, limits personal liability of directors and employees. 35.45.090, line 16, exempts these bonds from state taxation. Number 0290 MR. DEWITT said should we institute taxes in the state that would be applied to these kinds of financial instruments. This would make those tax-free, not only at the federal level but would maintain them as tax-free bonds at the state level. Number 0295 MR. DEWITT continued. 35.45.100, is a pledge of the state. It states the state will not alter the terms under which the bonds are issued or impair the rights of the bond holders. This is not a guarantee or a promise of repayment or performance by the corporation, but it is a pledge that the state will not change the terms of the bonds that have been issued. 35.45.110, page 10, line 13, establishes the Build Alaska Fund. Funding and the amount is considered in HB 314 which is an appropriation bill. Number 0311 MR. DEWITT said there is a likelihood that it will be rolled back from the $1.5 billion proposal, closer to a billion dollars, until it is known how the change in oil prices is going to effect the Constitutional Budget Reserve. Number 0317 MR. DEWITT pointed out an error that the committee substitute corrected the word secure on page 10, line 19, it should have been singular. Number 0320 MR. DEWITT continued reading the sponsor statement. 35.45.120, line 28, page 10, requires an annual audit. 35.45.130, requires an annual report to the governor and legislature. 35.45.140, provides the corporation the ability to adopt regulations for operation. 35.45.900, line 10, are the various definitions for the bill. Section 3, makes the state procurement code applicable to the corporation. Section 4, makes the executive director exempt from the classified service. Section 5, makes the corporation a state board or commission for purposes of the Administration's conflict of interest statutes. Section 6, provides for an advisory vote on moving funds from the Constitutional Budget Reserve to the Build Alaska Fund. The amount is likely to be amended following Finance Committee discussion in HB 314. Likely recommendation will be less than the current number, as the anticipated draw on the CBR Fund will be greater this year than was estimated when they were drafting this proposed legislation in December 1997. Section 7, is an effective date which makes the corporation and the vote effective immediately. The advisory vote can go on the ballot in November. Number 0355 MR. DEWITT indicated the two bills [HB 313 and HB 315] can go forward with or without a vote on the ballot. He concluded the bill that names projects and the bill that moves money from the Constitutional Budget Reserve to the Build Alaska Fund will have two effective dates, one on certification of the ballot in November, if the people vote yes. If it is voted down, there will be an effective date of July 1, 1999, which will give the legislature time to decide if they want to repeal that. Number 0379 REPRESENTATIVE VEZEY asked Mr. DeWitt to explain the organizational chart of the corporation. Number 0387 MR. DEWITT replied there will be a corporation board of directors which will include the commissioners of the Departments of Transportation and Public Facilities, Revenue, and Education, including the executive directors of AIDEA and AHFC. He also indicated the board will have an executive director. Number 0386 FORREST BROWNE, State Debt Manager, Treasury Division, Department of Revenue said the Public Facilities Corporation will have no employees, even though the bill permits having one employee. He believes the Department of Revenue can staff this entity with one accountant to keep the records and assist on the bond issuance. The corporation envisions the Department of Revenue will continue to manage the funds just as we manage the Constitutional Budget Reserve. Number 0410 MR. BROWNE said, "We believe, for the sake of our fiscal note, we put a $300,000 credit to the Constitutional Budget Reserve. If this amount were transferred out, because we wouldn't be expending those management fees with outside managers, and then we picked up the same amount that would be an expense of this corporation if the Build Alaska Fund was in this corporation." Number 0419 MR. BROWNE indicated it is a very low-overhead operation, it has no organizational chart other than it being a separate legal entity that would serve as a conduit for state financing. Number 0425 REPRESENTATIVE ETHAN BERKOWITZ asked if other entities, other than Orrick, Herrington and Sutcliffe, had developed this type of bonding package and what consequence it had on their bonding. Number 0429 MR. DEWITT responded the state of Virginia has been doing something similar to this since 1981. He believed they did not have problems with their bond rating. Orrick, Herrington and Sutcliffe said this methodology would not affect Alaska's bond rating. Number 0445 REPRESENTATIVE BERKOWITZ asked if this format has been used any other time. Number 0447 MR. DEWITT did not know if this precise format had been used, but indicated other similar formats have been used, for example issuing revenue bonds. Number 0451 REPRESENTATIVE BERKOWITZ asked if the language in HB 312 has been applied in other instances. Number 0454 MR. DEWITT said HB 312 was patterned on proposals that have been in the legislature, from the state of Virginia, and advice from Orrick, Herrington and Sutcliffe. He indicated this question may be deferred to Mr. Brown. Number 0466 REPRESENTATIVE BERKOWITZ referred to page 11. He interpreted the question that is going before the voters is that the legislature is deferring the question of deferred maintenance for another year. Number 0472 MR. DEWITT said the task force's expectation is the public will support this. He indicated the implementation will be delayed from the first of July 1998 to mid-November 1998. Number 0487 REPRESENTATIVE BERKOWITZ pointed out there is an urgent need for deferred maintenance but the state is not going to attend to that in a timely manner. Number 0491 MR. DEWITT interjected it is a matter of perspective. He indicated the state has not attended to urgent needs for a number of years. The task force believes moving within the next fiscal year is not bad for a governmental process. Number 0497 REPRESENTATIVE KIM ELTON referred to page 11, line 14. He asked why is there a limitation that the Department of Revenue only deals in revenue bonds. Number 0505 MR. DEWITT said the definition of bonds means revenue bonds, notes or other obligations of the corporation issued under this chapter. He believes it is a limitation against general obligation bonds. Number 0510 REPRESENTATIVE ELTON asked if the limitation may be broader than suggested, it still would not include general obligation bonds. Number 0512 MR. DEWITT said the task force wanted to allow the kinds of debts that are allowed through the constitution and through practice of other agencies. General obligation bonds do not fall within the authority of this organization. Number 0518 REPRESENTATIVE ELTON referred to page 5, lines 8 through 18. He asked Mr. DeWitt to address the issue which suggests the revenue from the funds of the corporation will go into the general fund. He indicated what happens is $1.5 billion comes out of the Constitutional Budget Reserve, becomes the Build Alaska Fund, but the revenues generate it. The income generated from the Build Alaska Fund are spun off into the general fund that will be in the neighborhood of $115 to $120 million. Number 0538 REPRESENTATIVE ELTON said it seems like they are significantly narrowing the budget gap. He asked, "How does that affect the five-year budget plan and other things the legislature has locked itself into for the last couple years." Number 0547 MR. DEWITT replied the task force attempted to create a model that shows how the funding, and the funds off of that fund, would be needed and used to finance the projects identified through the corporation. He stressed the tax laws require co-mingling of the funds in order to avoid arbitrage problems. The process shows clearly the amount that would be similar to interest funds to be used for funding identified projects. The legislature could, once they have authorized bonds, choose not to pay those bonds. He indicated revenue bonds are a very good risk and the interest rate gained by the revenue bonds would be favorable. Number 0587 REPRESENTATIVE ELTON said the interest earned on that account may be higher than the interest on the revenue bonds. He said he expected the interest rate they would be paying would be lower. They may have created an additional $60 million in general funds that are available for use in fisheries management, the education foundation formula, or elsewhere. Number 0604 MR. DEWITT stated there is no absolute corral. He stressed that they are paying principal and interest back and the intent is not to consume the Build Alaska Fund, it is for capitol improvements. Number 0610 REPRESENTATIVE ELTON said HB 312 is creating a structure and placing a lot of temptation with the $1.5 billion. He believes the only control over that is a simple majority of the legislature. Representative Elton said you can list how you are going to spend for six years, but you can not bind the legislature on actually spending that money on those projects. There would be no guarantee that fund would be used to do deferred maintenance on an assigned project. He said the only thing that would prevent that would be a lack of majority in either branches of the legislature. Number 0635 CHAIR JAMES pointed out every decision that is financed is subject to legislative appropriation and approval and that process would not be changed. Number 0638 REPRESENTATIVE ELTON said this does not have to be the only structure or the only way in which deferred maintenance is accomplished. For example, the legislature can maintain control by leaving the money in the Constitutional Budget Reserve and annually withdrawing funds that may be needed. Or a structure can be created that allows the issuance of general obligation bonds, which puts a certain amount of pressure on the legislature or policy leaders, to make sure the projects are accomplished based on fair distribution. Number 0648 CHAIR JAMES asked if taking that route would be better than what was provided in HB 312. Number 0649 REPRESENTATIVE ELTON believed it would be better. Number 0656 CHAIR JAMES said the goal was to have an annual plan to address deferred maintenance. The plan shows how everyone [districts] would be treated, however, it is subjected to the ensuing legislators. It will be brought to the attention of the public by an advisory vote. Chair James indicated they can not give this program to a different program that does not have an organized structure. Number 0677 REPRESENTATIVE ELTON said one of the things that deserves full debate is whether or not the state wants to set up a structure in which the legislature is totally in control of $1.5 billion, or whether there is public control through general obligation bonds. He noted general obligation bonds are not allowed under this structure. Number 0689 REPRESENTATIVE VEZEY asked why would they want an annual report before March 1 of each year. Number 0691 MR. DEWITT said that would give both finance committees the option to review it and make any adjustments in the budget prior to enacting it for the next fiscal year. Number 0693 REPRESENTATIVE VEZEY asked what the fiscal year was for the corporation. Number 0694 MR. DEWITT believes it would be July 1 to June 30. Number 0695 REPRESENTATIVE VEZEY asked, "What is the point of having a date for an annual report if you do not have a fiscal year." If the fiscal year is July 1 to June 30, he believed an annual report could be completed well before March 1. Number 0701 MR. BROWNE replied it is typical in moral obligation pledges to have a requirement that the entity, that is issuing the bonds, indicate to the governor and the legislature that there is a shortfall in the reserve fund that has been set up - it backs up the moral obligation pledge. Mr. Browne said it does not have anything to do with either the fiscal year of the corporation, or its normal annual audited report. This is a separate report that has to do with what is typically required in bond documents. He believes it was put in for that purpose by bond council. Number 0709 CHAIR JAMES asked for a response to Representative Vezey's question, why does HB 312 not have a fiscal year indicated in this piece of legislation. MR. BROWNE .... [END OF TAPE]. TAPE 12, SIDE B Number 0001 CHAIR JAMES said she thought that might be appropriate. Number 0008 REPRESENTATIVE VEZEY said if we have a fiscal year that ends June 30, why do we want to wait nine months to get an annual report. Number 0013 MR. BROWNE said, " I believe we're making a distinction between the audited report, the so called annual report. And in this instance it's the annual report to the legislature that there is, or that there is not a problem on the reserve fund that backs-up the bonds. And the idea for that is, if anything happens during the previous year that the staff would know about, that we had to draw on the reserve fund to make any debt service payments. Then the bond documents would require us, as soon as the legislature met the next time, to petition the legislature for an appropriation to that reserve fund." He concluded the typical annual report should be out in two or three months after the fiscal year, and this particular report is related to the bond documents. Number 0036 REPRESENTATIVE VEZEY indicated if it was left up to management, the legislature, and the governor he would not have a problem with it. He said, "It sounds like we are going to wait until three months before the next fiscal year ends before we do a comprehensive report on the prior fiscal year." Representative Vezey indicated they would be in deep trouble, they will not have a way of digging themselves out. Number 0053 MR. DEWITT replied that was addressed on page 11, lines 1-4. Any date would probably be reasonable. Number 0064 REPRESENTATIVE VEZEY asked which annual report was he referring to. Number 0068 MR. DEWITT responded the audit report, page 10, lines 28 through 31. Number 0076 CHAIR JAMES agreed with Representative Vezey's comments. She said the date might have been an error, assuming that it was a calendar year operation. She indicated the first of March would be appropriate but the committee would have to decide if the corporation would operate on a calendar year or should they change the date of the annual report. An annual report is usually due within a couple of months after the close of the fiscal year. Number 0089 REPRESENTATIVE VEZEY referred to Representative Elton's comments on the powers of the corporation. He said the powers of the corporation do not include the powers to do deferred maintenance as he had expected. His interpretation of the powers of the corporation is simply to be an agent to get around Internal Revenue Service (IRS) tax laws. He indicated that was perfectly legal, the purpose of this corporation is to fill a loophole in IRS tax laws. Number 0104 MR. DEWITT said the corporation allows the state to work within the structure that IRS has laid down to provide tax-free revenue bonds to finance the deferred maintenance needs in Alaska. Number 0114 REPRESENTATIVE VEZEY said the corporation has the ability to issue revenue bonds. Why does it needs a $1.5 billion capitalization. Number 0125 MR. DEWITT replied the capitalization provides the flow of revenues through the receipt into the general fund as corporate receipts to offset the increased expenditures that would be required to service the bonds. Number 0140 REPRESENTATIVE BERKOWITZ said he heard the legislature is not intending to spend $1.5 billion in one year. He believes funding would be spread out over five or six years. Why are they capitalizing the entire amount at once. Number 0149 MR. DEWITT replied it was decided to create the corporation, the fund, to lay out a Six-Year Plan, and a group of actions at one time. It is the intent of the task force, and it will ultimately be the decision of the legislature, to put in place a Six-Year Plan. In order to change the plan new legislation would have to be introduced. HB 312 creates a long-term opportunity to address the issue. Number 0176 REPRESENTATIVE BERKOWITZ asked Mr. Browne if there was any difference, in terms of the impact on the state, of capitalizing $1.5 billion or doing it over six years. Number 0181 MR. BROWNE said if the bonds could be sold with a lesser capitalization he believes the answer would be yes. Would it make a difference to the state in terms of the general fund income, the answer is also yes because the proposal envisions the amount going in on day one. In either case there would be an immediate decrease in income to the Constitutional Budget Reserve Fund because it would not have the money to be investing. Mr. Browne said, "The result of income, because the Build Alaska Fund is restricted, that it must go to the general fund. It was estimated in the first full year there would be a difference of $107 million between what is now credit to the Constitutional Budget Reserve and what would then be credited to the general fund, less any debt service on bonds that were approved that first full year." Number 0205 REPRESENTATIVE ELTON addressed Mr. DeWitt. He said what you are doing is putting together a structure that will operate for six years but you are not guaranteeing that the plan is as outlined in HB 312, or that the projects are as outlined in that bill. Number 0217 MR. DEWITT stressed it was the anticipation of the Deferred Maintenance Task Force, and their staff, that the Six-Year Plan would be put on the table. There is no guarantee that a future legislature will change legislation that is enacted this year. He believes HB 312 has broad support. Number 0250 CHAIR JAMES said it was important to have long-term plans, and long-term plans need to be monitored all the way along. Number 0275 REPRESENTATIVE ELTON agreed things do change. It is not only the concept of the corporation itself but what the state is going to spend money on. He said they talk about this plan as being for deferred maintenance when, in fact, in the first year there are going to be a lot of school projects that are already completed and are not considered deferred maintenance. The legislature has $120 million for school projects, some of which have already been accomplished. Number 0288 REPRESENTATIVE ELTON asked how do we put together a corporation in which we absolutely do stick to deferred maintenance projects, and that we have a prioritization list that is based on good public policy rather than the politics of a simple majority in the legislature. Number 0294 CHAIR JAMES said it is sometimes very difficult to draw a line between what is a deferred maintenance need and what is a rebuild need. Should they focus on taking care of all the state's deferred maintenance, which will probably take close to five or six years, before they build anything new. She felt that they could not because there are other important needs, such as schools and roads that are in need of repair. Number 0313 CHAIR JAMES said, "The goal of the $1.5 billion is more than the accumulation of deferred maintenance at this time - and is intended to expand this amount of spending to include the on-going needs at the same time, as much as could be done. The issues on there were not the deferred maintenance. The other issues on those first lists was that there was an expectation from the public, when they have gone ahead to issue bonds on their own to, depending on whether or not we were going to -- and expecting us to give them some kind of a shared expense in that. That we would get that out of the way." Number 0321 CHAIR JAMES indicated they are ready to go, they do not lose money over the period of inflation, they can be done quickly. In the meantime, start on the deferred maintenance list. She said the list is in the Finance Committee. She believes everybody should be treated fairly and equitably. Number 0339 REPRESENTATIVE ELTON said he did not disagree that there is not going to be tension in developing a list. The structure does nothing to protect deferred maintenance as Representative Vezey indicated. Once in place, it gives the legislature the latitude of saying, "Okay, we know that that school project has already been accomplished, it has already been paid for, it is no longer on the deferred maintenance list, but we're going to spend money on that project any way rather than using that money to address a deferred maintenance need." Number 0353 CHAIR JAMES pointed out how the money is spent is in a different bill and that they would be discussing part of that list. Number 0358 REPRESENTATIVE BERKOWITZ referred to the fiscal note. He said the plan requires significant expenditures from the general fund. Number 0370 MR. BROWNE stated he wrote the Department of Revenue's fiscal note. The department indicated what they thought the operating expenses would be in the first section and included a modest increase in personal services, one person. The contractual services are outlined in the attached page of the narrative. Number 0384 MR. BROWNE said, "The big number starting with $14 million in the first year and then escalating up to $113 million after five or six years." He believes this was outlined on page three that has the assumption. The assumption stated that the task force's recommended expenditure pattern and debt pattern would be followed. That is subject to each legislature approving that. He indicated the Department of Revenue wanted to give the committees and themselves some indication of the possible build-up of that debt service expense if the plan was approved as proposed. Number 0391 MR. BROWNE said offsetting that would be then the revenues that would come in each year. Assumed if this went in on December 1, after voter approval, the state would have a partial-year-revenue that would come into the Build Alaska Fund, but then would immediately come out because it is required to go to the general fund. In the following years, $107 million would be so transferred from the Build Alaska Fund to the general fund. Number 0400 MR. BROWNE said, "That essentially shows that, until you got up to the full billion for outstanding of debt in the [fiscal] year 04, you would have more coming into the general fund than you would have been expanded for the debt service. On a cumulative basis it would also be more. In the [fiscal] year 04, under these assumptions, there would be a charge, if you will, to the general fund of approximately $6 million." Number 0409 MR. BROWNE cautioned the committee these are forecasts of future revenues and expenses. He indicated a $6 million swing, after six years, could just be a change in the assumption. He concluded it comes very close to covering the debt service of the plan. Mr. Browne said, "We could tweak the assumptions on the income of the fund, and so forth, to make it come out just right. I didn't do that sir." Number 0416 REPRESENTATIVE BERKOWITZ expressed another concern. He said, "If we're going to draw this money out of the general fund for debt service, either we're eliminating the gains that have been made and cutting the budget so far, or else we're going to be placing cuts above and beyond it in the future. This majority maintains control." He indicated that was problematic, given the size of the debt service. Number 0423 MR. DEWITT said the assumption that the majorities are going to walk off of their five-year plan is not well founded. He indicated the task force had to use limited resources in terms of modeling, the fiscal note shows $10 million less debt service than what the task force's projection showed. The co-chairs of the task force and the co-chairs of both finance committees have had discussions relative to the impact of the change in oil revenues, the impact on the constitutional budget reserve, and the need to readjust the proposal as it reaches the finance committee to accommodate those concerns. Number 0454 CHAIR JAMES said over the period of the majority's five-year plan, the measurement of success has been in the reduction of general fund spending. She indicated she understood Representative Berkowitz's concern, if we dump a lot more money into the general fund, that may be additional deductions that we have to do in general fund spending. The majority's five-year plan of reduction in spending was intended to close the fiscal gap in five years. This is not going to change the fiscal gap actually, because the money that is coming in is obligated to be spent. It probably will be separated in the account, just as when we had the bill last year which changed the way we identify designated receipts. Program receipts are now designated receipts and are balanced separately because using that goal of balancing only general funds that if you wanted to bring in more program receipts, and then you spent the program receipts, you upped general fund spending. So some adjustments have to be made to that. She said it appears the five-year plan is on target. Number 0484 REPRESENTATIVE BERKOWITZ said what you have to say is very encouraging to me in terms of the smart start money, that new revenue is not going to be used for cuts. But, he is still left with the problem of explaining to his constituents, "Why we're having $1.5 billion after we just saved $250 million. It's going to take some explanation." Number 0491 CHAIR JAMES asked Representative Berkowitz if his concern was they do not want to do the deferred maintenance fixing up. Number 0498 REPRESENTATIVE BERKOWITZ replied his constituents do not want deferred maintenance, they want maintenance. Number 0502 MR. BROWNE stated he would like to testify in two general areas. First, will the proposed structure work in the national bond market and is it an efficient vehicle to issue bonds. The second area, what are the mechanics, how would we propose to implement this if it were enacted into legislation. Number 0505 MR. BROWNE referred to the first area. In the work draft, from last October or November, some concerns about the arbitrage issue. Unfortunately they were raised by too many people. But, nevertheless, those structural changes have been made because the committees retain bond council in San Francisco. Mr. Browne indicated they had taken the proposed legislation to our bond council, New York financial advisor who is under contract to the Department of Revenue, and to several investment bankers. To summarize their conclusions he said we believe that the proposed financing structure will work if you wish to enact it in this manner. He indicated they are not testifying on the desirability of doing that, they are fairly neutral on that. Number 0516 MR. BROWNE believed we would obtain a single A bond rating, on the proposed bonds if they went forward on it for two reasons, because the payments are subject to annual appropriation it would be an A rating rather than a double A rating we enjoy on our general obligation bonds. Secondly because there is a state's moral obligation pledge that was referred to earlier. He said, "Will it work, our answer is yes we believe it will." Number 0522 MR. BROWNE addressed the mechanics of the operation. He said the corporation is viewed as a legal conduit for issuing state revenue debt. It is similar to the conduits that are used in issuing certificates of participation in lease financing that has been approved by this body in previous years. In this instance there is a corporation committed to that in the individual certificates of participation proposals. He said he closed one about two weeks ago, the Anchorage Public Health Lab, that bond issue was sold on the national markets at an effective 4.39 percent interest. That is a well financed structure the financial markets accept. He proposed staffing the corporation with the addition of one person and having no employees at the corporation itself. Number 0541 MR. BROWNE said in response to the question are there other states that use the similar structure, he indicated two were found. The state of Virginia has a public facilities financing corporation. It was also discovered about a week ago that the state of New Jersey has a transportation financing authority. And although it is not as broad as HB 312, because it is restricted to transportation needs in that state only, they are authorized to do $700 million of funding and they essentially have finance agreements with the state of New Jersey and this conduit to issue approximately $700 million worth of bonds each year. He said he reviewed the bond ratings on those bonds, they received a double A rating and A plus rating on their bonds. New Jersey is a somewhat stronger state than Alaska financially at least in the eyes of the bond raters. Nevertheless, that verifies the conclusion that this is an efficient vehicle if were enacted. Number 0556 MR. BROWNE responded to the question on why the income from the Build Alaska Fund must go to the general fund. He stated that is the key element that helps us resolve the arbitrage problem that was had with the earlier structure, that we need to unlink the fund and the income from the fund from the payment of the bonds. By putting that into the general fund - use the analogy of making sausage. He said, "You put in a whole lot of ingredients in, in this case to the general fund, and when it comes out later as an appropriation for debt service it can't be identified with any particular ingredient that was put into the general fund. And, so that successfully unlinks, from the IRS's standpoint the income from the debt service, it allows us to issue tax-exempt bonds." Number 0566 MR. BROWNE responded to the question why bonds were defined as revenue bonds in the definition section. It was his understanding that this entity would not be eligible to issue general obligation bonds because it would require a pledge of the Build Alaska Fund. Essentially that is the only asset in this corporation, and that is prohibited in statute. He noted the drafters of HB 312 wanted to be very sure that there was never any temptation of future legislatures or administrations to even think about general obligation bonds because that could taint then, assuming the general obligation bonds were issued by the corporation and they relied on the Build Alaska Fund - the corporates there is security to repay it that could somehow taint the tax-exempt nature of the outstanding bonds. He believed that was a deliberate decision on the part of the bond council. Number 0580 REPRESENTATIVE FRED DYSON asked where is the Administration at on this. Number 0582 MR. BROWNE responded he is not sure what the Administration's position is. Number 0586 REPRESENTATIVE ELTON referred back to the fiscal note, page 3 of 5. He said he understood that under each of the fiscal years beginning with fiscal year 2000 that the total debt service line down below is the debt service for principal and interest that the corporation would be paying for the revenue bonds. Number 0591 MR. BROWNE replied that is correct. That is footnoted, it assumes a debt service at five percent interest which he believes is the current rate with a fifteen-year term. Number 0594 REPRESENTATIVE ELTON asked is the expectation that the legislature will annually appropriate the difference between, for example on the first fiscal year 2000, it is anticipated that the legislature would reappropriate back to the corporation the difference between this debt service and what the interest earnings were. Would the legislature appropriate back to the corporation the difference between this, nearly $15 million in fiscal year 2000. Representative Elton said we would appropriate that back to the corporation for the payment of the debt service, and we would appropriate back the rest of the interest earning that have been spun off the Build Alaska Fund. Number 0604 MR. BROWNE said it was envisioned that each year the legislature would have two types of appropriation. One would be for the debt service, and that each year would be the numbers indicated here assuming that these were the amounts that were bonded and assuming that these were the interest rates, which they certainly would vary from that. In theory that would be the amount that would be appropriated from the general fund to the corporation as debt service and that would be in the front part of the budget along with the state's other debt service. Number 0608 MR. BROWNE said the second appropriation that would be required would be the ability for this corporation, once it is funded, for example, in fiscal year 2001, $250 million worth of bonds, to use those bond proceeds for this list of capital expenditures. That was their vision of how this would work. Number 0618 MR. BROWNE believed the Department of Revenue would prepare the budget for the debt service because in a way this is really state debt even though it is going through this particular entity. It is state revenue debt so it does not require voter approval, the same way certificates of participation are subject to annual appropriations and are not considered debt under the constitution. Number 0620 CHAIR JAMES asked if it would be safe to say, if the interest income, which is transferred to general fund, and then the debt service is transferred back, that would not necessarily be the same numbers. There could be more interest income than there was debt service, therefore that money would stay in the general fund. Number 0625 MR. BROWNE replied, "That is correct, in fact I would not want the legislature to appropriate back an amount any where near what was required. We have the sausage problem and we have the arbitrage problem with U.S. Treasury." Number 0628 REPRESENTATIVE ELTON said to put it in real terms, in fiscal year 2000 we transfer back nearly $15 million and we could be leaving $100 million in the general fund that would be available for any type of appropriation. Number 0632 MR. BROWNE said, "That is summarized on the first page of the fiscal note, I believe. Fiscal year 2000, in the first year it looks to us, assuming this went into play the first of December, we would be an increase of $62.6 million in the general fund. That would be the income from December 1 through June 30, the end of the fiscal year - assuming 7.1 percent income, and that's what we're currently projecting on the Constitutional Budget Reserve. So I've used the same amount. And then we would have paid out in that year $107.4 million in fiscal year 2000, and then we would pay out roughly $15 million. So the general fund, under these assumptions, is ahead by about $92 million." Number 0644 REPRESENTATIVE ELTON said, "The investment strategy of the corporation, I mean is that investment strategy going to be the same investment strategy that's applied to other corporations using general funds. What type of parameters are on the investment strategy." Number 0648 MR. BROWNE replied it has been discussed briefly within the Department of Revenue. There is currently an asset allocation in the Constitutional Budget Reserve Fund that has been approved by the legislature and implemented. It has been assumed, for these purposes, that it would be an identical asset allocation. If this were enacted, the period would be from the end of this session until next December to fine-tune that asset allocation. Mr. Browne stated it might be somewhat different. For the purposes of the fiscal note, it was assumed that the return would be the same as they are anticipating on the Constitutional Budget Reserve. Number 0664 CHRIS CHRISTENSEN, General Counsel, Office of the Administrative Director, Alaska Court System came before the House State Affairs to testify on HB 312. Mr. Christensen referred to page 4, line 4, paragraph (b), he said, "The legislation provides that the bonds or notes may be issued for a facility if the commissioner of Administration has certified that a computer maintenance management plan is in place, and if the commissioner of the Department of Transportation and Public Facilities has certified that the facility meets modern energy standards. The court system operates about 50 different court facilities around the state. The vast majority are just leaseholds, we do own about a dozen buildings. The legislature has granted the supreme court the authority to actually manage the construction and renovations of those buildings. When court construction is needed, we're the ones who hire the architects, supervise the construction, we hire the contractors, supervise that. This amendment simply says that if we are talking about court facilities it's the supreme court that will certify to the corporation, that we meet the computer and energy standards. Not the commissioners, since they really don't know what we are doing." Number 0685 MR. DEWITT stated the language referencing the supreme court is good and recommended adding, in the case of the University of Alaska, the Board of Regents. He said we do the certification. Number 0688 MR. DEWITT suggested deleting the word "are" on page 4, line 3, and inserting the word "including." The corporation is bound by statute to adhere specifically to the Department of Education's prioritization list. The intent was that it would be used as a guide but would not lock the legislature in in terms of its decision. He indicated there are changes the legislature has to accommodate, for example a roof may fall in. If you are locked into the Department of Education list only you would have problems. TAPE 98-13, SIDE A Number 0001 MIKE MORGAN, Facilities Manager, Teaching and Learning Support, Department of Education came before the committee to testify. He said the reference, as it is in the bill, does not reference the department's list but merely the approval process. It does not lock the legislature into following the prioritization but states the projects have to be approvable and have it follow the same criteria for approval. For example, if a roof fell in there is room under this for a retroactive approvability. What it does not allow are projects which would not be approvable under current criteria. The Department of Education would like to go on record as supporting the criteria as they currently exist for approvable type projects. Number 0029 CHAIR JAMES said the legislature has a system that works but we are constantly striving to improve it. Chair James believed Mr. Morgan meant he wanted to make sure the legislature preserves its system, but allow the legislature to change this list. Number 0034 MR. MORGAN replied the legislature has the purview to appropriate money to the projects it wants to fund. He pointed out there are two parts in AS 14.11. He said, "The first part of our current system is a set of statutes that sets up projects which are approvable. The second part sets up the prioritization process, and that process we do continually (indisc.) improve and make it more representative of the need that's in the state. In this particular part is just the eligibility and approvability of the projects, the types of projects which can even end up being ranked and prioritized." Number 0052 MR. MORGAN said one example which falls back on current department space guidelines is if a district says, we want a new school, and they had three schools that were one-third empty, we would say that their request for a new school is a project that is not eligible because they have sufficient space in their district. Number 0063 CHAIR JAMES said, "We have one like that." Number 0064 MR. MORGAN said this gets back to the types of projects which are approvable. He indicated the Department of Education supports that language. Number 0071 CHAIR JAMES said in order to get on this list you have to go through the normal process of making your application to the Department of Education and get approved and weighted. Number 0081 MR. MORGAN said there are other avenues for people to have emergency funding. One example would be the Municipal Grant Program. The state has insurance requirements that are supposed to take care of funding for fires. He pointed out emergency needs were needed last year in Diomede where the foundation was failing. The Department of Education was able to help them because they had some old Bureau of Indian Affairs funds which are for those types of projects. Otherwise, they would have had to go to the legislature for emergency appropriations. 0093 REPRESENTATIVE ELTON asked for clarification. He said this language does not restrict expenditure by the legislature or the corporation on a project based on where it is on the list. It just states that it has to be on the list. Number 0101 MR. MORGAN replied that is correct. He said this particular statute does not address the prioritization process, or funding, or pulling projects out of sequence, it merely says they need to be on the list. Number 0108 JACK KREINHEDER, Senior Policy Analyst, Office of Management and Budget, Office of the Governor came before the committee to testify on the requirement to meet energy performance standards. He said it suggests that this corporation could not provide funding for a deferred maintenance project for a state facility. He indicated he was not talking about the schools, but for other state facilities, unless the project would bring this facility up to the standards in AS 44.42.020. He said, "My concern is that, while I am all in favor of energy efficiency improvements, I wonder if that would prohibit a project, for example if the roof was falling in it seems like we'd want to be able to fix the roof before we fix the energy systems in the building." Number 0142 ROD WILSON, Architect, Engineering Division, Department of Transportation and Public Facilities (DOT/PF) came before the committee to testify. He said he noticed a glitch that is potentially a problem, those standards that are referenced in statute are standards that were adopted by the department in 1985 or 1986. Buildings built prior to that date very well may not meet these energy standards and a lot of the projects that you see specifically within the public facility listing in that chapter come from buildings that are considerably older than 1985. The Department of Transportation and Public Facilities average age of buildings is around 25-years-old. So most of DOT/PF's buildings are in the 1970 era, long before these energy standards were even put in place. He stressed there will be buildings out there that technically would not meet that requirement. Number 160 CHAIR JAMES said because this says upon completion of the project, that they will meet these energy performance standards. She asked Mr. Wilson if there was no way to fix them. Number 0169 MR. WILSON replied there is always a way to fix them. The deferred maintenance issues that are brought up in these lists though do not address energy situations in many cases. He said, "In some cases we might ask for a roof repair. I could certainly go in and repair that roof and bring that roof element up to that standard, but at the same time I am doing nothing to insulate the exterior envelope of that building. Nor may I be upgrading a mechanical system within that building." Number 0178 REPRESENTATIVE VEZEY indicated approximately half of the facilities in the state are not eligible for funding under this act. To bring them to this standard, it would be cheaper to bulldoze them down and start over again. Number 0190 CHAIR JAMES said sometimes it is more expensive to get rid of the building than it is to leave it. How would you suggest writing an exception that would be meaningful and not destroy the intent. Number 0196 MR. WILSON conveyed his personal opinion. He said, "First of all we talk about any improvements that are made on that project list, anything on that project list, that it says if I am going to do a roof, I'm going to do it to the fullest extent practical of bringing the roof component into standards. If I'm going to replace windows, I'm not going to replace the windows with single- pane glass, I'm going to replace those with energy efficient windows. Those individual components that we replace under these projects could easily meet that requirement. So any project that's on that list, to work within that project, should focus on energy- related elements." Number 0209 CHAIR JAMES asked Mr. Wilson to provide the committee with specific language. Number 0215 MR. WILSON said he would work on the language. In response to Representative Vezey's question Mr. Wilson said, "You're correct about a lot of buildings out there, that we are probably ahead to bulldoze down and start over from scratch. But, unfortunately, over the last 50 years we have acquired buildings that to bulldoze them down and start over from scratch you'd be looking far more than $1.5 billion. I think there was value left in those buildings and we need to try to obtain that greatest amount of that value that remains in those buildings." For example, the Griffin Building in Kodiak has a price tag of approximately three-quarters of a million dollars to do deferred maintenance to bring it up to standards. The package lists $1.3 million to bulldoze it down and start over from scratch. There comes a point in time where there is diminishing returns. Mr. Wilson said, "The university - I don't believe we have anybody from the university here, but as I recall one of the guideposts that they use is the say, if the deferred maintenance ever outweighs the value of the building by more than 50 percent bulldoze it in and start over." Number 0237 MR. WILSON said the Griffin Building for example had a backlog of $750 thousand of deferred maintenance, whereas a new facility could be replaced for $1.3 million. It makes sense to do that. Number 0246 CHAIR JAMES asked where does the health, life safety issue fall. Number 0249 MR. WILSON indicated there are a couple on the DOT/PF list, for example the Chandalar Camp on the Haul Road. They are concerned that that building is going to collapse and kill somebody. It is beyond its useful life, we shovel the roof to keep that building standing. Those kinds of buildings are obviously dangerous. Number 0258 CHAIR JAMES said the state has been foolish in the maintenance of our assets. Health wide safety issues are of great concern and this issue should to be primary in our spending. Chair James asked for language to recognize that. She indicated they may have to reconsider spending more than the $1.5 billion. Number 0274 MR. WILSON said, "I think we would be remiss to even present to you the assumption - as President of the Alaska State Facility Administrators, I assembled the listing for most of the executive branch agencies and presented it to Representative Mulder's office. I wouldn't want to even suggest to you that that is an absolute 100 percent accurate list. That was a list that was put together in a very short period of time. And while those are elements that we're absolutely aware of, I won't go on record saying you work off that list and you've got all the deferred maintenance taken care of." Number 0286 CHAIR JAMES said she had introduced legislation in the past which would have required one but it did not pass because of a large fiscal note. She concluded if it is put on a priority of health, wide safety issues are more concern to her than the cost of energy. She indicated they would have a list of facilities within two years. Number 0308 MR. KREINHEDER commented on the task force bills as a package. The Administration is pleased that the task force has addressed this issue and the concept of the Six-Year Plan. The Governor and Administration have put together a Six-Year Plan in the last couple of years, but it has not received a lot of attention by the legislature. The Administration has focused primarily on the school area in terms of deferred maintenance and new construction. He encouraged the committee members to also consider House Bill 352, "An Act relating to the state's participation in the financing of construction and major maintenance of public school facilities; giving notice of and approving the entry into, and the issuance of certificates of participation in, lease-financing agreements for public school facilities; and providing an effective date." That bill works off the established priority lists which have been developed over the last several years. Number 0330 MR. KREINHEDER said, "Clearly there are some major policy issues here, some of which had been discussed in this committee hearing. I won't get into all of them. Some of them relate to, for example, the appropriation of half of our liquid cash reserves in the Constitutional Budget Reserve to this new facilities corporation. And as this legislation moves forward, clearly there needs to be some discussions about the impact of that on the state's financing, balancing, closing the fiscal gap, and so on." Number 0341 MR. KREINHEDER pointed out the Administration has been doing a fair amount of work in the facilities area, not only on deferred maintenance but on trying to improve on-going maintenance. He believed they would all agree that it does not do much good to fix the deferred maintenance if you are continuing to fall behind in future years. Number 0350 MR. KREINHEDER said, "First they are developing a pilot rent structure project and proposal. That's something we made a presentation on to the task force and the task force has endorsed. That type of rent structure is something that's used in a number of other states and we believe would be helpful in making sure that buildings are maintained properly." Number 0355 MR. KREINHEDER said, "Another one is trying to improve the accounting and tracking of facility cost." He said, "We've had some questions about how much the state is spending on maintenance, and believe it or not, we can't really tell you in great detail. Just the way the accounting system works, for example fuel oil for buildings is co-mingled with diesel fuel for trucks, and that type of thing. So we are trying to sort that out because how can you tell you're doing a good job on maintenance if you don't know what you're spending on a building by building basis." Number 0365 MR. KREINHEDER said, "Finally, we've got another project going on in Nome that involves the coordination of maintenance staff from several departments there to try to both improve the maintenance and the project also involves expanding this computerized maintenance management system that the Department of Military and Veteran Affairs has, to DOT/PF buildings, and Department of Corrections buildings as well. So we're piloting some of these concepts with the intent of moving those forward to a statewide basis in future years. So far, it's just been going on for a few months now, but so far the results do look encouraging." Number 0383 CHAIR JAMES said she understands the difficulty in identifying these things because there are always different kinds of maintenance. What needs to be done can be done by the accounting method to specifically define what goes into this account and (indisc.) account of maintenance. She indicated she was happy to see those changes being made and with the rent concept The rent concept has been one of the things that she has suggested, there is a need to have a cost per square foot and when agencies decide how many square feet they want, they need to see whether or not they want to pay that much for it. HB 312 was heard and held. ADJOURNMENT Number 0400 CHAIR JAMES adjourned the House State Affairs Standing Committee at 12:03 p.m.

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