Legislature(1995 - 1996)
02/05/1996 01:32 PM Senate CRA
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
SENATE COMMUNITY & REGIONAL AFFAIRS COMMITTEE
February 5, 1996
1:32 p.m.
MEMBERS PRESENT
Senator John Torgerson, Chairman
Senator Randy Phillips, Vice Chairman
Senator Tim Kelly
Senator Fred Zharoff
Senator Lyman Hoffman
MEMBERS ABSENT
All members present.
COMMITTEE CALENDAR
SENATE BILL NO. 207
"An Act authorizing the issuance and sale of revenue bonds to fund
public wastewater systems, nonpoint source water pollution control
projects, including solid waste management systems, and estuary
conservation and management projects; authorizing the use of the
Alaska clean water fund to pay and secure the bonds and to pay
costs related to issuance and administration of the bonds;
authorizing certain measures to secure payment of the bonds; and
amending Alaska Rule of Civil Procedure 3."
PREVIOUS SENATE COMMITTEE ACTION
SB 207 - No previous action to record.
WITNESS REGISTER
Keith Kelton, Director
Division of Facility Construction & Operation
Department of Environmental Conservation (DEC)
410 Willoughby Avenue, Suite 105
Juneau, Alaska 99801-1795
POSITION STATEMENT: Supported SB 207.
Ross Kinney, Deputy Commissioner
Treasury Division
Department of Revenue
PO Box 110400
Juneau, Alaska 99811
POSITION STATEMENT: Discussed SB 207.
Marie Sansone, Assistant Attorney General
Civil Division
Department of Law
PO Box 110300
Juneau, Alaska 99811-0300
POSITION STATEMENT: Answered questions.
ACTION NARRATIVE
TAPE 96-3, SIDE A
Number 001
SB 207 REVENUE BONDS: WATER & WASTE PROJECTS
CHAIRMAN TORGERSON called the Senate Community & Regional Affairs
Committee meeting to order at 1:32 p.m. and introduced SB 207 as
the only order of business before the committee.
KEITH KELTON, Division Director of Facility Construction &
Operation within DEC, supported SB 207. He said that he would be
using the "Leveraging the Clean Water Fund" chart as a guide for
his overview. SB 207 modifies an existing statute in order to take
advantage of available money for capital construction. He
mentioned that 20 other states have utilized this leverage and much
has been learned from their experiences. The Alaska Clean Water
Fund (ACWF) is the statute that is being modified. ACWF is a fund
that is put in place by the federal government and matched by the
state. There will be approximately $80 million in the fund at the
end of this fiscal year.
Mr. Kelton explained that ACWF is available to fund low-interest
loans for wastewater projects, primarily collection systems and
treatment plants. The fund can be used for land fills if there is
a wastewater component to the facility. Currently, ACWF receives
money from federal capitalization grants and state appropriations
which is loaned to municipal projects with a repayment mechanism.
Of the $80 million currently available to the State, about $50
million has been loaned to existing projects. Therefore, a $30
million unobligated balance is available for new loans. Mr. Kelton
emphasized that the obligation rates on this money is increasing;
the current obligation rate is $13 million per year. The available
$30 million would be used within two to three years. He explained
that DEC wants to create a mechanism allowing DEC to leverage the
$30 million remaining. In order to achieve that goal the $30
million should be used as a corpus, revenue bonds should be sold,
and the money should be leveraged two or three times to one
according to the market.
Mr. Kelton pointed out that the statute changes can be seen on the
bottom half of the chart. A Bond Redemption Fund (BRF) is
established. The ACWF balance goes through the BRF and pays the
bond issuance costs. The bonds are then sold by the State Bond
Committee (SBC) and their Trustee who then issue and sell the bonds
to investors. When the investors buy the bonds, the proceeds
return to the ACWF in order to fund additional loans for projects
and create the repayment stream again. Then the bonds and
investors are paid. In conclusion, Mr. Kelton stated that this
bill would allow leverage of the existing dollars in order to allow
the funding of more projects. If ACWF can fund $60 million worth
of projects from the $30 million, then some of the demand on the
State's General Fund would be alleviated. He mentioned that there
is federal legislation which establishes a similar system for
drinking water which is expected to be in place within a year or
so.
Number 108
SENATOR KELLY asked if the drinking water fund would be placed in
the ACWF or a separate fund? KEITH KELTON informed the committee
that there are several different concepts, one of which would
allow, 30 percent of either fund to cross over between the two
programs. Mr. Kelton emphasized that there would be two funds, but
cross over may be allowed. Mr. Kelton explained that passing this
legislation is advantageous because most of the $30 million would
be retained for leveraging. Delays would cause a decrease in the
$30 million so that the remaining corpus would not offer a large
amount to leverage. Mr. Kelton noted that the reauthorization of
the Clean Water Act is still pending in Congress.
CHAIRMAN TORGERSON inquired as to how this would be self-limiting.
Number 138
ROSS KINNEY, Deputy Commissioner of Revenue in the Treasury
Division, felt that the limits would be determined by the
marketplace, the amount of money in the corpus fund, and the
distribution of loans. The income stream would be utilized as the
pledge for the repayment of the bonds. As the credits are reviewed
in relation to the communities, the interest rate on the bonds will
be dictated. Therefore, a limiting factor would be placed on the
amount committed. Other techniques, such as insurance of the
corpus of the fund, could be used depending on the circumstances.
Mr. Kinney emphasized that market conditions would be limiting, so
establishing limits in the bill would be meaningless.
CHAIRMAN TORGERSON said that he did not know which state agencies
would be allowed to borrow from this fund. He did not believe
there would be a limit if buying and refinancing debt occurred.
ROSS KINNEY posed the following scenario. If bonds were issued at
a rate of seven percent and the marketplace interest rates fell in
the next two or three years, those bonds could be refinanced by
issuing new bonds to retire existing bonds. Utilizing the new
bonds and the income stream from the loans would pay for the new
bonds based on the lower rate of interest. Mr. Kinney noted that
his example assumes that special provisions such as call features
would be allowed. Refinancing is dependent upon what is
outstanding and whether there is a realized savings based on
interest rates; there is a limit on that. Revenue bonds require a
dedicated revenue stream - proceeds derived from the borrowing.
Mr. Kinney pointed out that SB 207 contains some provisions that
allow for state intercept which serves as protection for the
bondholders.
CHAIRMAN TORGERSON referred to Section 8 of the bill when surmising
that any state agency or department that relied on the legislature
for appropriations would not qualify. Would they not qualify
because they do not have a dedicated source of revenue? ROSS
KINNEY said that was a legal question. In his opinion, the revenue
stream would have to be present, available and pledged. Mr. Kinney
acknowledged that there is a dedication problem in the State. Most
of the revenue bonding mechanisms that are utilized in Alaska are
lease purchase agreements with nonappropriation clauses.
Number 252
SENATOR HOFFMAN pointed out that the legislature appropriates on an
annual basis due to the Constitution. How can the constitutional
provisions regarding the dedicated fund be dealt with if the
legislature is not the one appropriating on an annual basis? ROSS
KINNEY explained that the dedicated revenue stream in this case
refers to that revenue coming from communities and municipalities.
The revenue stream based on this bond issue would come from other
places than the state budget which would be utilized to make the
payments.
SENATOR KELLY asked if this was the Municipal Bond Bank? ROSS
KINNEY said that it is different than the Municipal Bond Bank.
There are limitations within the bond bank legislation which
prevent the bond bank from assuming a program of this nature. Mr.
Kinney recalled that there had been some joint meetings in June of
1994 in order to review the option of running this program through
Alaska's Municipal Bond Bank. The statutory language of the bond
bank necessitates that the bond bank make a profit. Mr. Kinney
stated that this program is not necessarily going to generate a
profit. Therefore, statutory language changes would have been
required within the bond bank in order to implement a program that
did not generate a profit. There may be some problems with
existing loans with the bond bank when some of the same communities
may be required to generate revenue in one instance and not
another. The grants from DEC are very specific.
KEITH KELTON explained that the bond bank buys existing debt which
means the community must already have incurred a debt. The program
established in SB 207 loans money to a community without a
municipal debt being incurred first. The program in SB 207 could
save a point of interest. Currently, ACWF is the lowest interest
loan available to construct infrastructure facilities in Alaska.
Number 320
SENATOR KELLY pointed out that SB 207 seems to be expanding this
program to state agencies as stated in Section 8 of the bill. Now
the State is allowed to go into debt without passage in the
legislature; where is the balance of power? ROSS KINNEY said that
the balance of power would come from the revenue stream that DEC
could provide. SENATOR KELLY interjected that DEC cannot provide
revenue stream unless the legislature appropriates it each year.
A revenue stream cannot be guaranteed. ROSS KINNEY replied that
under a revenue bond program, there would be almost no opportunity
for the participation of those subject to annual appropriations
utilizing a pure revenue bond. SENATOR KELLY inquired as to why
this was being extended to state agencies.
CHAIRMAN TORGERSON asked Ms. Sansone to discuss why state agencies
are being added to this program.
MARIE SANSONE, Assistant Attorney General of the Civil Division of
the Department of Law, explained that the expansion to state
agencies is derived from a DEC policy decision. The Clean Water
Act does allow the use of the fund by state agencies as well as
municipalities. If the state agencies are left in SB 207, the
funding available to them would have to be received from outside of
the revenues from the bond program. The Clean Water Fund
encompasses money from federal grants, matching state
appropriations, interest, and loan repayments. Therefore, there
are types of money in the fund which could be utilized by state
agencies. Ms. Sansone noted that any concern regarding the control
of the use of the fund by state agencies could be addressed in the
appropriations process. She informed the committee that state
agencies had been added at the request of DEC.
Number 362
SENATOR KELLY inquired as to the advantage DEC saw when extending
the program to itself. KEITH KELTON stated that this issue could
be eliminated without any detriment to the program. Mr. Kelton
explained that state agencies were added because they were an
eligible requirement under federal law. There are many programs
operated by state agencies and within DEC which are eligible for
this type of funding. Mr. Kelton pointed out that the clean-up of
contaminated ground waters by petroleum tanks could be an eligible
cost. A state agency cannot pay for that cost with an
appropriation because it would not meet the revenue stream
requirements. If that money were loaned to people who dedicated
their repayment stream as with the wastewater projects, it would be
a feasible alternative. Mr. Kelton did not anticipate that the
other applications would be a major use of the fund.
SENATOR KELLY reminded everyone that the word "leverage" really
referred to debt. This would allow others to place Alaska in debt
for which the State would be responsible.
KEITH KELTON reiterated that this program has existed in 20 other
states for seven years. In response to Senator Kelly, Mr. Kelton
said that this program had been utilized in the State of
California. There has not been a default nationwide in the
program's seven years. In Alaska, there has not been a late
payment in the six years of the program's existance. He explained
that a portion of the leveraging concept would limit the sale of
bonds to an amount that could be absorbed if default occurred.
CHAIRMAN TORGERSON asked if it would be better to establish a cap;
would that hinder the program? KEITH KELTON did not believe it
would pose a hinderance, but suggested that perhaps a leveraging
amount would be more appropriate than a numerical amount. Mr.
Kelton suggested a limit of two to one and said that he could offer
specific language later.
Number 412
SENATOR ZHAROFF inquired as to how a state agency would repay money
borrowed from the ACWF. KEITH KELTON explained that the only
manner in which the money could be repaid or loaned would be if
there was a dedicated payment stream coming back to that state
agency for the project it was billed; it could not depend upon
state appropriations.
SENATOR KELLY asked if the Matanuska ferry requested money to
refurbish and rebuild its wastewater treatment plant, could they
borrow money from this fund and repay it with the revenue stream
from the Alaska Marine Highway system fund. KEITH KELTON said that
he could not answer that. Unless the agency can commit a revenue
stream without an act of the legislature over the life of the debt,
the agency cannot utilize this program.
SENATOR KELLY asked if that authority was being given in this
legislation. KEITH KELTON did not believe that one could dedicate
revenue in Alaska without an amendment to the Constitution. This
seems to be one of the problems.
SENATOR KELLY asked how that was dealt with regarding the student
loan revolving fund. KEITH KELTON pointed out that it is a
separate corporation. There was a capitalization and statutory
language allowing specific functions under certain guidelines and
restrictions. SENATOR KELLY assumed that the State could not let
the student loan program go under. The State would have to bail it
out just as with this program.
KEITH KELTON indicated that debt of any type which was issued by
the State or through one of the corporations such as Alaska Housing
and Alaska Student Loan, would have an impact on future credit or
bond rating of Alaska. He reminded everyone that SB 207 does not
refer to a full faith and credit pledge; that necessitates a higher
rate of interest, but we may be required to retain a debt service
reserve or a bond redemption reserve equal to one annual
installment of principal interest on the debt. If there is default
in various communities, the program may apply the intercept
program. There is a period of over one year in which corrective
action may be taken. For their own protection, bond holders will
require those type of mechanisms for the more risky investments.
At the same time, those mechanisms help by allowing the borrowing
of money at a cheaper rate. The SBC is reviewing the types of
plans Alaska is including since we are currently spending more than
we are receiving annually; they are concerned about Alaska's
ability to issue debt. In Mr. Kelton's opinion, Alaska is not
going to enjoy freedom with the time of maturity schedules nor will
Alaska be able to borrow without stringent controls until an
Operating Budget and Capital Budget are established.
Number 490
CHAIRMAN TORGERSON asked if the Municipal Bond Bank had an
intercept clause in their language. ROSS KINNEY replied yes. That
clause ensures the rating that the Municipal Bond Bank enjoys.
Alaska's financial advisor for the SBC strongly recommended that an
intercept clause be included in this legislation in order to ensure
as high a rating as possible as well as ensuring as low an interest
rate to the borrowing communities as possible.
SENATOR KELLY inquired as to the meaning of the section entitled
"ENFORCEMENT BY BONDOWNER"; what legal powers does that section
give the bondowner? MARIE SANSONE explained that the bonds are
normally considered to be a contract between the state or the
agency issuing the bond and the bondowner. If a bondowner felt
that the state was not living up to the obligations of the bond
resolution or the statute, the bondowner could seek to enforce the
contractual arrangement. Ms. Sansone noted that sometimes the
bondowner will challenge the legal provisions of the bond in order
to test them prior to investment. This section allows the
bondowner to proceed to State court if they feel the obligations
are not being met. The 10 percent was established in order to
eliminate frivolous suits by people not holding many bonds. Ms.
Sansone pointed out that there is also a provision requiring that
any lawsuit be heard in the First Judicial District at Juneau in
order to avoid the selection of a more favorable forum.
SENATOR KELLY asked if the sections, "STATE AID INTERCEPT", "PLEDGE
OF THE STATE" and "ENFORCEMENT BY BONDOWNER" are also in the
Municipal Bond Bank legislation. MARIE SANSONE believed that those
sections are included in the Municipal Bond Bank. SENATOR KELLY
requested that Ms. Sansone determine if these sections are in fact
in the Municipal Bond Bank legislation.
Number 543
CHAIRMAN TORGERSON asked why the language on lines 17-18, on page
10 was added. MARIE SANSONE believed that the language was added
to strengthen the value of the debt in order to support the bond.
The language was an addition by the Bond Council which reflected
the recommendations of the SBC or the financial advisor.
CHAIRMAN TORGERSON expressed concern with how that would translate
into the allocation of dollars when determining the criteria for a
project. Chairman Torgerson seemed to believe the person with the
most in their reserves would rate higher than others.
ROSS KINNEY explained that "sufficient reserves" referred to money
set aside at the time the loan is committed. Normally in a reserve
situation, the borrower would be required to set aside the reserves
by borrowing the money. That reserve would be used first to meet
a payment in the event of a default. The reserve would be based
upon the amount available to the borrower or a portion of the fund
would set these reserves aside based on a percentage of their loan.
If a community with no rating or payment history and a small source
of revenue with little possibility of intercepted money from the
State pursues a loan, their reserve requirement may be higher. The
reserve requirement offers a period of time for corrective action
in order to avoid an immediate default with no remedy.
CHAIRMAN TORGERSON assumed that reserves set aside by
municipalities for future mitigation problems with water, sewage,
and solid waste were not subject to such restrictions. ROSS KINNEY
understood Chairman Torgerson to be speaking to the fact that
Governmental Accounting Standards Board has required that a
substantial amount of financial assurances be available in the
event of ground water contamination as a result of solid waste
landfill. This would ensure that sufficient money is being
accumulated on a pay as you go basis so that there is the ability,
during the closure and post closure period, to monitor for some
years after the facility closes. That change occurred about three
years ago. He discussed Kenai's situation. Mr. Kinney emphasized
that the previously described situation is a separate issue; the
money cannot be utilized for the purposes of meeting these same
requirements.
Number 580
SENATOR KELLY indicated that the bondholder's should assume some of
the risk. ROSS KINNEY said that there is a risk factor. The risk
factor is determined by the loaner and is based on the interest
rate they demand which is determined by the project for which the
money is being loaned. Mr. Kinney acknowledged that there are
advantages to dealing with the government in this situation in that
these are tax exempt transactions. Therefore, the interest rate is
lower.
TAPE 96-3, SIDE B
SENATOR KELLY asked if SB 207 was drafted by legislative drafters
or by the Administration's attorneys. KEITH KELTON said that the
Administration's attorneys drafted the bill.
SENATOR KELLY referred to page 8, line 27 when recommending that
such language structure should be avoided.
SENATOR ZHAROFF pointed out that there is no provision for a
dedicated fund to pay back revenue bonds. There will probably not
be a repayment schedule. He noted that the departments had
testified that there would not be a problem with eliminating state
agencies from this bill. The legislature has no control over state
agencies as the bill is currently written.
KEITH KELTON suggested that an authority could be incorporated into
the bill. He explained that an authority would combine
jurisdictions of political boundaries for purposes of a certain
project. He said that a portion of the definition of a "state
agency" should remain in order to cover the "authority" situation.
SENATOR ZHAROFF expressed concern with the effect this legislation
would have on smaller communities. He asked that caution be taken
on this. Senator Zharoff did not believe that there had been a
constitutionally correct example with the dedication of fund
prohibition.
SENATOR KELLY mentioned that there is no future in cutting cash
spending today only to go into debt tomorrow.
KEITH KELTON noted that the definition of "state agency" could
apply to housing authorities. They may build projects and receive
commitments from some of the users of the facilities in order to
obligate that revenue stream to pay the debt. SENATOR ZHAROFF said
that if it's a separate legislative appropriation, then it should
be addressed.
The point that there is no cap on this entire process was
reiterated. That raised the red flags to begin with.
SENATOR KELLY asked if Alaska would be pledging its faith and
credit to repay these bonds. KEITH KELTON said that is not the
case. Mr. Kelton explained that the pledge is for a revenue stream
from the borrowers to pay this. The bill is not necessarily
pledging full faith and credits of municipalities either, but their
revenue stream is being pledged. In order to pledge the full faith
and credit of the State of Alaska, a referendum must be held. In
the cases of Airport Bonds, Alaska Housing and the Student Loan
Corporation, the revenue stream derived from an income generating
function is being pledged; no vote has to be taken. Mr. Kelton
informed the committee that normally, revenue types are done for
enterprise funds such as water, sewer, etc. The payment of the
bonds in this case are actually being given by the user of the
provided service not the general taxpayer.
SENATOR RANDY PHILLIPS posed the following scenario: Anchorage
International Airport takes a down-turn and their bonds go belly
up; what would happen? KEITH KELTON said that the Department of
Transportation could begin the liquidation of facilities and other
necessary actions. That is a state function which would be
achieved through a liquidation measure. In response to Senator
Randy Phillips, Mr. Kelton agreed that at that time the full faith
and credit of Alaska would not be involved.
SENATOR KELLY said that in the end, the State of Alaska cannot
allow any of these groups to go under and maintain credibility.
SENATOR ZHAROFF interjected that back up parallels the ACWF to the
Airport Fund although, the Airport Fund has a cap and is subject to
appropriation.
Number 505
SENATOR KELLY asked if the legislature is required to authorize
each year all the bond proceeds from the revolving Airport Fund.
CHAIRMAN TORGERSON pointed out that the bill says that the SBC must
give the Commissioner of Administration the money necessary to pay
for the bond that year.
SENATOR RANDY PHILLIPS interjected that it had to go through the
General Fund and be approved first. SENATOR KELLY agreed and said
that there is a provision in the budget dealing with that loan fund
in which those projects are authorized each year.
CHAIRMAN TORGERSON asked if the references to hazardous wastes on
page 11, lines 4 and 21 in the bill provide the authority to loan
money for hazardous waste management. Chairman Torgerson seemed to
think that was a different direction than the bill intended.
KEITH KELTON explained that this section of the bill modifies
current statute which does refer to hazardous waste. The change
deleting "facility" and adding "system", was done in order make the
language consistent between the two statutes. The reference to
solid and hazardous waste does not apply to the intention of the
bill.
CHAIRMAN TORGERSON was concerned that the issue of hazardous waste
was being incorporated into the bonding stream. KEITH KELTON
reiterated that this was existing language, but it could be
changed.
Number 470
In response to Senator Kelly, KEITH KELTON explained that a public
process is utilized in order to develop an annual intended use plan
which defines the projects that would be funded. The demand for
this money has been considerably less than the available money.
The legislature is provided with an annual report which defines all
the activities of the program in the preceding year.
SENATOR KELLY expressed concern that this could be another open
pocketbook for debt in Alaska. Municipalities can tax in order to
repay revenue bonds if the revenues do not fulfill the
expectations.
SENATOR ZHAROFF said that in various areas of Alaska there is a
serious sewer and water problem. A large revenue stream is being
taken in order to leverage more money to complete more of these
projects, however we are limiting this to areas that already have
the ability to do such projects.
CHAIRMAN TORGERSON referred to page 8, line 5 when indicating that
there had been suggestions to broaden the definition of "committee"
in the bill. KEITH KELTON informed everyone that the bond
community has a standard definition of "committee", but there is a
trustee who assists in the management recommendations.
ROSS KINNEY pointed out that the SBC is authorized by statute to
issue these types of debt within certain limitations. In regard to
these types of issues, the definition should be retained unless
language changes to other statutes dealing with authority of the
SBC were to be proposed. Mr. Kinney assured the committee that a
bond sale would not be authorized or approved without the consent
of the SBC and the opinion from the financial advisor.
CHAIRMAN TORGERSON asked if the word "may" on page 6, line 13 was
used in order to allow that the proceeds of the bond would not all
go to the functions of AS 46.03.032. ROSS KINNEY explained that an
allowable expenditure under the proceeds of a bond sale is the cost
of the sale itself. That would include the cost of the financial
advisor and the bond attorney as well as associated administrative
costs. In addition, there may be custodial bank fees which would
be an allowable expenditure. Mr. Kinney believed that "may" was
the correct word.
Number 388
A discussion ensued between Senator Randy Phillips and Keith Kelton
regarding the technologies and their applicability in rural Alaska.
In response to Senator Randy Phillips and Senator Hoffman, ROSS
KINNEY explained that one of the criteria for clean water is that
local governments have an O&M capability. Before a facility is
built a utility collection fee system, an 80 percent collection
rate, and trained operators must be in place. Those measures are
done in order to eliminate the possibility of failure.
Number 290
SENATOR ZHAROFF inquired as to the beneficiaries of SB 207. ROSS
KINNEY said that the beneficiaries would be the residents of the
larger urban communities. The communities must have a dedicated
revenue stream before the loan will be made.
CHAIRMAN TORGERSON said that when the committee receives the
discussed language changes, a CS would be written and the bill
would be heard again. There being no further business before the
committee, the meeting was adjourned at 2:50 p.m.
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