Legislature(2001 - 2002)
04/11/2002 09:19 AM Senate FIN
| 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
MINUTES
SENATE FINANCE COMMITTEE
April 11, 2002
9:19 AM
TAPES
SFC-02 # 53, Side A
SFC 02 # 53, Side B
SFC 02 # 54, Side A
CALL TO ORDER
Co-Chair Pete Kelly convened the meeting at approximately 9:19 AM.
PRESENT
Senator Pete Kelly, Co-Chair
Senator Dave Donley, Co-Chair
Senator Jerry Ward, Vice Chair
Senator Lyda Green
Senator Gary Wilken
Senator Alan Austerman
Senator Loren Leman
Senator Donny Olson
Senator Lyman Hoffman
Also Attending: REPRESENTATIVE ELDON MULDER; JOE PERKINS,
Commissioner, Department of Transportation and Public Facilities;
JENNIFER MAYER, Innovative Finance Specialist, Federal Highway
Administration; LOREN GERHART, Director, Southeast Conference
Attending via Teleconference: From Offnet Sites: PETE RAHN,
Executive Director, New Mexico Department of Transportation and
Public Facilities; TOM NORTON, Executive Director, Colorado
Department of Transportation and Public Facilities; ERIC WOHLFORTH,
Wohlforth, Vasser, Johnson, and Brecht Law Firm; TIM RATTIGAN,
Investment Banker, Salomon Smith Barney; RON MORINO, Transportation
Analyst, Salomon Smith Barney; From Petersburg: DAVE KENSINGER,
Representative, Southeast Conference; LEO LUCZAK, Director of
Community Development, City of Petersburg; From Mat-Su: GEORGE
STROTHER, Engineering Manager, Matanuska Susitna Borough; ROBERT
HAKENSON; From Anchorage: TIM ROGERS, Legislative Program
Coordinator, Municipality of Anchorage and Chair, Public Works and
Infrastructure Subcommittee; FRANK DILLON, Executive Vice
President, Alaska Trucking Association; DICK CATTANAGH, Executive
Director, Associated General Contractors
SUMMARY INFORMATION
HB 191-FINANCING FOR TRANSPORTATION PROJECTS
The Committee heard testimony from the Department of Transportation
and Public Facilities and took public testimony. No action was
taken on the bill, and the bill was held in Committee.
CS FOR HOUSE BILL NO. 191(FIN) am
"An Act authorizing financing for certain public
transportation projects; giving notice of and approving the
entry into, and the issuance of revenue obligations that
provide participation in, lease-financing agreements for those
transportation projects; and providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Kelly stated that the Committee would entertain testimony
regarding the use of GARVEE Bonds as a means of addressing the
transportation needs of the State.
REPRESENTATIVE ELDON MULDER informed the Committee that the House
of Representatives supports the merits of this legislation as, he
contended, the proposal "is a very creative and innovative way to
try to deal with some of the more pressing transportation needs
that we have in the State, without endangering any of the future."
Representative Mulder continued that the legislation would provide
the State with a funding mechanism to implement needed
transportation projects in the near-term rather than the long-term;
thereby saving inflationary costs. He stressed "that when you bond
or securitize the revenue stream" from the federal government "and
get the cash up front, the interest off of that money that you
receive from that securitization actually helps make your federal"
match. He elaborated that using the interest gain in "this very
creative way," assists in offsetting the interest payments and, he
attested, is one of the "more logical ways of dealing with it that
we have ever come up with."
Representative Mulder reiterated that while there are very few
downsides to this proposal, it could be argued that identifying
road construction projects for the upcoming decade could be
considered a negative because it sacrifices the flexibility to
change those decisions over time. However, he contented, this
concern is "overshadowed by the fact that" needed projects would be
realized.
Representative Mulder asserted that "a new road has not been built
in this State in a long time nor have we upgraded" roads that are
in "critical need" resulting from such things as traffic
congestion. He argued that the ability to address urgent road needs
outweighs "the loss of flexibility in the future."
Representative Mulder voiced surprise that the Associated General
Contractors (AGC) oppose the proposal to establish a GARVEE Bond
funding mechanism to address the State's transportation needs. He
stated that the points of the AGC opposition are based on the
GARVEE Bond experiences of New Mexico and Colorado; specifically
that New Mexico's program utilized one third of their federal match
funding and only built one project while, it is argued, they
jeopardized that state's ability to build roads in the future.
Representative Mulder attested that, in reality, New Mexico did not
spend one third, but rather ten or eleven percent of the available
funds. However, he continued, it is correct that the State only
built one road which prompted frustration by New Mexico AGC members
as with "only one road and one big project, you have winners and
losers and those who don't get the project" would be frustrated. He
voiced understanding of the situation, and he assured the Committee
that multiple projects would occur in Alaska.
Representative Mulder continued that ACG contends that Colorado's
negative experience resulted from an over-extension of resources;
however, he asserted, this is not the case. He stated that
forthcoming testimony would correct this misinformation, and he
informed the Committee, that Colorado's GARVEE Bond program is
similar to the approach being proposed by the State of Alaska.
Representative Mulder communicated that additional arguments
suggest that the State's GARVEE Bond proposal would result in an
eleven percent level of debt service while others voice concern
over the future level and availability of unknown federal revenue
funding streams.
Representative Mulder assured the Committee that discussions with
Alaska's United States Senator Ted Stevens and Representative Don
Young indicate that in the near- and long-term, federal DOT funding
for Alaska's roads and bridges would not be reduced this year,
contrary to "rumors" circulating. Beyond that he asserted, the
federal Transportation Equity Act for the Twenty-First Century
(TEA-21) program is scheduled for re-authorization and would be
titled NEXT-TEA. He continued that, with Congressman Young being
the Chairman and highest-ranking member of the Transportation
Committee, indications are that Alaska would hold or gain in its
position in the next authorization.
Representative Mulder voiced confidence that Alaska would fare well
in its federal funding levels; however, he noted that if the
Committee were concerned that the State might be overextending
itself or determines that an obligation of ten or eleven percent
might be too much of the federal authorization to commit to the
GARVEE Bond program, he recommended that consideration be given to
scaling the level back to eight or nine percent.
JOE PERKINS, Commissioner, Department of Transportation and Public
Facilities, commented that the Department's testimony would be
supplemented by testimony from individuals with expertise on the
subject.
PETE RAHN, Executive Director, New Mexico Department of
Transportation and Public Facilities, testified from an offnet site
to inform the Committee about New Mexico's experience with GARVEE
Bonds. He characterized the testimony of the Alaska and New Mexico
AGCs as "misrepresentative of the situation in New Mexico." He
asserted that contrary to the AGC testimony, the New Mexico project
is "exactly where we anticipated being seven years ago when we
undertook a bonding program." He stated that the "GARVEE bonds were
one portion of a larger bonding program that totaled $1.2 billion."
Mr. Rahn exclaimed that the $1.2 billion project has been an
"excellent investment," and he asserted that the total cost of
borrowing $1 billion to date, is "at an all-inclusive cost of 4.69
percent." He elaborated that according to the Federal Highway
Administration (FHWA), construction inflation costs over the past
ten years have averaged 4.5 percent, which he asserted is
significantly higher than the nation's overall general economy
inflation rate. He qualified that "the 4.69 percent interest rate
is offset by an inflation cost of 4.5 percent, meaning that the net
cost of this one billion dollars is .19 percent," and he continued
that, "this is offset further by the efficiencies that we have
gained from being able to undertake entire projects at one time,
the economies of scale, the economic opportunities that have been
provided to regions of our large and sparely populated state." He
stressed that, "the economic benefits of having these projects in
place today for a net cost of .19 percent is a heck of a deal."
Mr. Rahn communicated that the state's lone project identified for
GARVEE Bond funding involved 118 miles of a 570 total mile project
to construct four-lane highways to link communities in the state to
the interstate and regional transportation systems. He expressed
that these projects provided economic stimulus to regions of the
state that had not previously been considered for business
expansion due to a lack of in-place infrastructure.
Mr. Rahn continued that this funding also provided for "a much
safer" highway system, and he shared that statistics indicate that
the state has experienced a 40-percent serious accident reduction
after converting two-lane roads to four-lane roads. He reiterated
that this has been a "phenomenal investment" as, he stated, all
these things are in place today, at a cost of .19 percent interest.
Mr. Rahn stressed that contrary to the AGCs' position, "the facts
clearly indicate that New Mexico has made an excellent investment
in infrastructure" and that "the returns are significant."
Mr. Rahn voiced that the only factor that he understands to be a
downside "is that contractors do not like to have to deal with
fluctuating demands for their services" that require them "to size
up and size down." He qualified that while he understood that a
businessperson would prefer to deal with a constant workflow rather
than a workflow with fluctuating demands for services, he asserted
that this concern could be addressed. However, he stressed that his
job "is to provide services to taxpayers and the travelers of the
state roads" rather than to "look after contractors."
Mr. Rahn referred to the handout titled "Innovative Financing and
the Major Investment Program in New Mexico" [copy on file] which
specifies that the use of bond funding for road construction has
reduced urban congestion for the 74 percent of New Mexico's
residents living in urban areas; has freed up other funds to
provide for improved road maintenance; and, he revealed, that upon
completion of the project, 96 percent of the state's citizens
living in municipalities would be connected with four-lane
highways. Mr. Rahn stressed that other benefits of using these
bonds for construction are that state's roads are safer and state
road maintenance funds are more readily available. He shared that
because of the resulting availability of state funds, the state
currently reports 3,500 "deficient road miles" which, he attested
is in "sharp contrast" to the twenty-three years of annual
increases which climaxed in 1997 with a peak of 6,000 deficient
road miles.
Mr. Rahn stated that the state's GARVEE Bond funding currently
accounts for four percent of the federal commitment to New Mexico's
road construction program; however, he reported that the innovative
design of the 118-mile GARVEE Bond project provided an economic
stimulus to the state.
Mr. Rahn disclosed that the state also initiated a twenty-year road
performance guarantee program that, he declared, would save the
state $89 million in future road maintenance costs during the
twenty-year period.
Mr. Rahn exclaimed, "the AGC absolutely bristles when you talk
about warranties." However, he contended, "it is an excellent
investment" for the state. He addressed the concern about whether
the level of future federal dollar receipts would be sufficient to
make the payments on these bonds as "really a question that the
rating industries had to address back in 1997" when the state of
New Mexico was "the first to propose a GARVEE Bond issuance with no
state guarantee whatsoever. He continued that the bonds are purely
at the risk of future federal funding," and he continued, "to
answer to the question of how the marketplace" anticipates future
federal funding availability "was answered" when the State' GARVEE
Bonds were rated, with no state guarantee or backup of state credit
or state financing, at an 'A1' level.
Mr. Rahn informed the Committee that other states are now financing
road construction projects with GARVEE Bond programs similar to New
Mexico's, and he asserted, the New York City bond rating firms "are
now very comfortable with the risk of future federal funding." He
elaborated that bond rating firms have determined "that the true
risk to these bonds is not default because of the federal
governments program going away," because the federal funding, which
has been in place since 1916, has increased "nearly every single
re-authorization" since its inception. He explained that the rating
companies have determined that the only risk to the bonds might be
a delay in the reauthorization process; therefore, he explained,
that to avoid that risk, the bond rating firms require the state to
establish a six-month's worth of payments escrow account at the
time the bond is issued.
Mr. Rahn stated that the state's GARVEE Bond project, referred to
as New Mexico 44, and another $289 million bond project in the
state involving an interchange project for Interstates 40 and 25,
attest to the fact "that bonding is good business." He furthered
that the economic benefits are tremendous, especially at a cost of
.19 percent more than the State proceeding on "a pay as you go
basis." He stressed that major road "projects are way too expensive
to undertake piecemeal," and he declared that the efficiencies of
bonding the project and building a "project under one continuous
motion" has lowered the cost of construction significantly". He
specified that "by being able to take an entire project and deal
with it in one continuous motion" has reduced the state's the road
construction costs from "1.3 million dollars a mile to convert a
two lane to a four lane road to $700,000 per mile."
Mr. Rahn relayed that local contractors have voiced concerns
regarding loss of business to large out-of-state contractors as
well as concerns about "gearing up and then gearing down" at the
end of the projects; however, he stressed that the benefit to the
taxpayer is "so great". He continued that, during the past five
years, it has been found in New Mexico that contractors "who did
not get to be the general contractor have made significant money in
the role of a sub-contractor on those projects that they felt were
too big to take on themselves." He summarized that the state of New
Mexico "has seen a huge benefit as the result of bonding," and he
reiterated that the status of the project is on target.
Senator Hoffman asked whether the 118 miles of roads funded by the
GARVEE Bonds involved new road construction.
Mr. Rahn responded that the project consisted of the total
reconstruction of converting an existing two-lane highway to a
four-lane highway.
Senator Hoffman asked whether the State constructed any "brand new
roads" with the GARVEE bond funding.
Mr. Rahn responded that the GARVEE funding was limited to the
widening of the New Mexico 44's specified 118-miles of road. He
detailed other new road miles that the state undertook.
Senator Austerman asked the details of the 20-year warranty;
specifically whether it pertained to road design or actual
construction.
Mr. Rahn responded that the twenty-year warranty cost $62 million;
however, he attested that the State has determined that maintenance
expenses would have amounted to $151 million during those twenty
years. He explained that, "the warranty is for the performance of
the pavement itself for a twenty year period" based on a state
determined road surface performance standard involving a "no-excuse
warranty," with a company who was required to post a $114 million
bond to secure the warranty and additionally provide inflation
proof measures.
Senator Olson asked the nature of the New Mexico AGC's concerns
regarding the hiring of outside contractors, and the "overheating"
of the economy.
Mr. Rahn replied that New Mexico "has reduced the costs of projects
through increased competition, and that competition has come from
adjoining states." He stated that the AGC presented its issues to
the New Mexico legislature, the Highway Commission, and the
Governor; however, "in all instances," after consideration, it was
independently determined that the benefits to the taxpayers
outweighed the AGC "possible downside" concern. He reiterated that
during the past five years of these projects being undertaken, "New
Mexico contractors have had more work, "even given the competition
that has come from adjoining states," than they have ever had
"within their lifetimes." He contended that the state has
maintained "very good relations with most of the contractors within
the state," and he declared, the majority of New Mexico
contractors, with the exception of a few "vocal" contractors, would
support what the state has done and would have to say that the
state "has a successful program."
Senator Ward asked for details regarding the warranty program on
New Mexico 44; specifically whether it was the result of a long-
term maintenance contract or an upgraded paving material.
Mr. Rahn responded that the project designer, Hope Industries,
"brought a new design for pavement to New Mexico" which involved
the use of a better road base and harder aggregates. He stated that
"the significant amount of return" projected by the state depends
on this design, and in addition, he furthered, the company "is
required to perform whatever maintenance is necessary to produce"
the required performance level. He communicated that "if the road
requires more than one overlay" during the twenty-year period, the
state projects "that Hope Industries would lose money." He stated
this roadway must perform at a higher level than what the
Department would typically require.
Senator Ward asked the amount spent by the contractor on this road
compared to regular road construction.
Mr. Rahn stated that the cost of the 118 miles of road, including
the warranty payment, was $310 million.
Senator Ward asked the cost of the road if built to the original
state standards.
Mr. Rahn responded that the state's estimate to build two adjacent
lanes adhering to "typical state standards" beside the existing
two-lane roadway would have been $214 million. He furthered that
for an additional $100 million, the state received "a complete
reconstruction of the roadway and a twenty-year warranty."
Senator Ward asked how much this project would have cost with a
"lower quality of paving."
Mr. Rahn clarified that the state's estimate of $214 million did
not provide for any improvements to the original two-lane road;
however he calculated that by subtracting the warranty cost of $62
million from the final cost of $310 million would result in an
expense of $248 million. He concluded therefore that the State paid
an additional $30 million to receive four new lanes rather than
two.
Senator Ward explained that he is trying to determine the cost of
the constructing this road using standard road building costs
rather than the more sophisticated road.
Mr. Rahn apologized that he does not have that information;
however, he noted that it is available.
Senator Ward responded that he would follow-up with Commissioner
Perkins to obtain this information.
Senator Leman asked whether the state of New Mexico allows studded
snow tires on this roadway: specifically whether their use would
void the warranty.
Mr. Rahn responded that studded snow tires are not permitted in New
Mexico.
TOM NORTON, Executive Director, Colorado Department of
Transportation and Public Facilities testified via teleconference
from an offnet site. He noted that GARVEE Bonds fund $1.3 billion
of a total $10 billion ten-year bond program in the state of
Colorado. He continued that the state has worked closely with
investment bankers and the FHWA to develop a unique program that
allows the state to collect funds and make bond payments and pay
contractors. He stated that the state of Colorado would be willing
to share with Alaska its information regarding the establishment of
payment plans and other cost-saving programs.
Mr. Norton stressed that a key to the success of the Colorado
program is that it is strongly supported by Colorado's governor who
professes, along with the state's Department of Transportation and
Public Facilities, that this bonding program "is the most
conservative financial approach," because, "through the difference
in cost of inflation and the cost of interest," the state believes
that the program, over the ten-year period, is saving the state
approximately $500 million that could be reinvested into the
state's transportation program.
Mr. Norton avowed that the department has "demonstrated" that the
bonding program, established during a time when the State was in an
economic downturn with no funds available to support a broad
program, allows the State to manage the state transportation
construction program more effectively "because we don't have some
of the ups and downs that are created" when a state is "highly
dependent on economic conditions." He continued that had the state
not been able to bond, the state would have had to severely curtail
the program. However, he attested, that because of previous bonding
endeavors, the state has been able to maintain a relative level of
construction that has been very beneficial to the AGC and the
state's local construction industry.
Mr. Norton noted that the AGC and others involved in the
construction industry "worry about the consistency of the program"
or a decrease in the level of activity; however, he continued, the
state made a commitment that implementation of the bonding program
would not result in a reduction of the "base programs" for the
smaller to medium contractors. He asserted that the state has the
records to substantiate that this commitment is being upheld, and
he stressed that, when talking with the AGC, this is an important
factor.
Mr. Norton explained that the state's program includes 28 corridors
containing hundreds of projects that are included in one
comprehensive program to ensure that the state is not required to
separately seek bonding for each component.
Mr. Norton suggested that rather than the Alaska proposal
identifying each project and its specified funding amount, that the
State consider the list carefully and provide for management
flexibility to allow for an overall bonding program with those
projects identified without a corresponding funding amount "because
in the design and construction business there is a lot of
variables." He urged the Committee "to put their trust and faith"
in the Department's managers to afford them the flexibility to
manage the projects in the most economic manner.
Mr. Norton continued that the Colorado program included one "mega-
program" wherein $1.7 billion, or ten percent of the program, was
allotted to fund an interstate/rail expansion project. He stated
that the AGC complaint about outside contractors being awarded
projects "is a distinct possibility and a probability" as there
might not be sufficient in-state resources to handle a large
project; however, he continued there is as much work for all of the
local contractors to handle as before and, in addition, the local
contractors could be simultaneously be working as sub-contractors
on large projects. He stressed that maintaining communications and
relationships with the Colorado Contractors Association (CCA),
which is the Colorado affiliate of the AGC, is important. He noted
that while there are differences between the state and the CCA;
meetings are held on an on-going basis to discuss and resolve
problems.
Mr. Norton urged the State of Alaska to use bonding "as a financial
and management tool to make your program move in a better, more
efficient, more effective way so that you can get use of the
roadways at a time while you are paying for them, rather than
waiting until you've got capacity problems and you can't get caught
up."
Mr. Norton summarized that the state of Colorado's bonding package
was a statewide program that benefited all regions of the state. He
noted that the state's "AA" bond rating resulted from the state's
willingness to provide a few state guarantees. He stated that the
program is extremely successful and beneficial and has been
appreciated by citizens.
SFC 02 # 53, Side B 10:06 AM
Commissioner Perkins informed the Committee that the establishment
of a GARVEE Bond program would provide the State of Alaska with the
"ability to use interest earnings on the bonds."
JENNIFER MAYER, Innovative Finance Specialist, Western Resource
Center, Federal Highway Administration, emphasized that the concern
about using investment earnings as State matching funds has been
addressed at the federal level, and she confirmed that the FHWA has
"no philosophical problem" with this approach. She exampled that in
as much as the federal government would not be responsible for any
investment losses, the same concept would apply to investment
earnings; therefore, she continued the earnings would be considered
as state funds. She stated that it is "just a matter of getting
that approval formalized."
Ms. Mayer noted that GARVEE Bond usage by other states has resulted
in the procedure of examining a state's overall program to
determine whether the bond package would adequately address the
size of the program and "ensure that there is not a large balloon
of projects followed by a dearth of projects in the future." She
shared that most of the states that have been involved in the
GARVEE Bond program have investigated this situation very
carefully. She noted that this is important to rating companies as
well, and the result has been that the program activity actually
"levels out" without "peaks and valleys." She noted that this is
contrary to some other state programs where a "large project is
conducted on a pay as you go basis that can squeeze out smaller
projects." She noted that programs vary in each state due to such
controlling factors as weather conditions.
Ms. Mayer stressed to the Committee that this funding stream of
borrowing against the state's future federal aid funding and the
ability "to be reimbursed for the interest and issuance costs" was
not a legal alternative until after the establishment of the 1995
National Highway System Designation Act as well as several NHWA
administrative changes. She stated that currently numerous states
have entered into these transactions; however, she noted that the
learning process involves integrating these borrowings with the
state's current program. She stressed that this funding approach
has proven to be "very successful in some states."
Ms. Mayer detailed some of the issues investigated including:
matching the GARVEE bond payment with the useful life of the asset
which "is a commonly accepted way to finance a project;" producing
economic benefits and addressing safety and environmental concerns
sooner rather than later; achieving costly economy to scale by
completing large projects in a timely manner rather than "piece-
mealing" the project; avoidance of construction inflation;
identifying "whether the issuance and interest costs that they have
to pay on the GARVEEs are going to outweigh the inflation savings;"
determining whether the additional monies would result in projects
being undertaken sooner, as the issue in some states is not the
need for additional money but rather addressing delays resulting
administrative issues, environmental regulations, etc.; and
determining whether "the accelerated program would cause
construction inflation."
Senator Hoffman inquired whether there might be a similar
innovative funding mechanism for airports.
Commissioner Perkins responded that airports report to the Federal
Aviation Agency (FAA), which has different regulations and rules
and does not have a similar program. He stated that the GARVEE Bond
program is limited to the FHWA and the Federal Transit Authority
(FTA).
Senator Hoffman furthered the hope that a relationship could be
developed with the FAA to develop such a program since Alaska's air
transportation needs are, unlike most other states, just as
critical as its surface transportation needs. He suggested that
Alaska could lead this endeavor.
Commissioner Perkins stated that because Alaska is one of only a
few states that owns its airports rather than ownership held by
port authorities, there is not much wide-scale support for this
type of endeavor "in the FAA's scheme of things." He agreed;
however, to continue to address this with the FAA.
Commissioner Perkins noted that one barometer of the GARVEE Bond
concept is "the ultimate test" of how these bonds are perceived by
the financial market.
TIM RATTIGAN, Investment Banker, Salomon Smith Barney, testified
via teleconference from an offnet site to notify the Committee that
Salomon Smith Barney has provided the members with a "Municipal
Bond Market Perspective on GARVEE Bonds" handout dated April 10,
2002 [copy on file].
RON MORINO, Transportation Analyst, Salomon Smith Barney, testified
via teleconference from an offnet site to report "that the use of
leveraging federal funds is a very positive additional option
utilized" by Alabama, Arizona, Colorado, New Mexico, Georgia,
California and numerous other states during the past four years. He
announced that several states have recently authorized the program.
Mr. Morino assured the Committee that "due to the underlying credit
and security of this type of revenue stream, most of programs have
enjoyed high ratings in the tax exempt municipal market." He
disclosed that the ratings have ranged from an "A" to an "AA" and
"the rating really relates to the legal and financial structure of
each program whether it is solely backed by federal funds or with
the addition of a second source that a state might utilize," and is
established upon a "financial structuring dealing with the amount
of debt service coverage, the amount of debt and the amount of
revenue that is available and other types of tests that are
integrated to the bond resolution."
Mr. Morino referred the Committee to the last page of the
aforementioned Salomon Smith Barney handout which identifies state
programs' legal and structuring factors and their corresponding
assigned ratings.
Mr. Morino asserted "that for a state such as Alaska, this is a
very positive option," as it would allow the Department of
Transportation and Public Facilities to utilize federal dollars
that are garnered from federal taxes "to accelerate a program" by
using federal funding at an earlier period of time thereby
offsetting the inflation factor and "buying a higher amount of
construction activity," as well as avoiding the placement of "liens
on other State funds that might be utilized for other purposes." He
continued that due to the vast geographic nature of the State and
its relatively small population, the cost of roads on a per capita
basis is very high. He stated that, "this option allows the State
to utilize your federal dollars that you are getting the best
payback on with federal funds that you've generated through the
federal taxes on gasoline, tires, and trucks."
Mr. Morino furthered that, in addition to the nine states that are
currently utilizing this funding mechanism, other states would be
using it in the near future. He stated that with the downturn in
revenue that most states are experiencing, this option would become
more valuable as large and comprehensive projects and programs are
undertaken.
Mr. Morino informed the Committee that Salomon Smith Barney has
been involved as senior manager on eight GARVEE bond transactions
and been the co-signer on seven others; therefore he attested the
company has a good working knowledge on the issue. He urged the
Committee to utilize this revenue source "because it is a
conservative, well-thought out, and reasonable option that has
limited risk" and offers an important contribution to the on-going
construction program; specifically the acceleration of the
completion of the project as well as being an economic development
factor.
Commissioner Perkins thanked the testifiers for their input. He
acknowledged Carla Perez of J.P. Morgan for her assistance to the
Department in structuring the programs.
Commissioner Perkins noted that the Committee members have a copy
of a letter addressed to Representative Bill Williams, Co-Chair of
the House of Representatives Finance Committee, from Bruce Botehlo,
Alaska's Attorney General, dated March 22, 2001 [copy on file]
"that confirms that the bonding mechanism used in HB 191 is a legal
method for financing transportation projects."
ERIC WOHLFORTH, Wohlforth, Vassar, Johnson, and Brecht Law Firm
testified from an offnet site to address the legality and
constitutionally of the proposed legislation. He informed the
Committee that his law firm as participated as legal council to the
State for cases involving issues pertaining to the constitutionally
of public financing, including the Carrs-Gottstein Properties v.
State, 899 P.2d 136 (Alaska 1995) case referred to in the Attorney
General's letter which established the basis for this legislation
not being in violation of the State's Constitutional limitation
requiring a vote on indebtness. He explained that in the Carr-
Gottstein case, "there was a unanimous Supreme Court opinion that
where the obligation of the State to pay was subject to
appropriation, as is the case here, there is no impingement or
violation of the requirement to vote State debt."
Senator Olson asked for clarification as to whether a GARVEE Bond
issuance of this size would require a vote of the people of Alaska.
Mr. Wolforth responded that this legislation "legally does not
require a vote of the people."
Commissioner Perkins informed the Committee that the Alaska GARVEE
Bond proposal is a "modest proposal" in comparison to the larger
New Mexico and Colorado programs. He detailed that the debt service
on the State's proposed bond package is approximately ten percent
of the State's current federal aid program, and the proposed bond
package would result in approximately "$220 million to $230 million
in actual highway construction costs that would be spread over five
years." He opined that this program would not "overheat" the
economy and he professed that more projects could be undertaken. He
stated that the FHWA and other states' testimony attest to the
success of the GARVEE Bond program.
Commissioner Perkins announced that Alaska is credited "with
developing the concept for using the interest money to pay state
matches."
Commissioner Perkins summarized that testimony from the legal and
bonding communities support the argument that GARVEE bonds are
legal and well received in the financial arena. He furthered that
the market is currently receptive to the sale of bonds.
Commissioner Perkins reassured the Committee that there would not
be a significant decrease in federal funding in Alaska's future. He
acknowledged that while the State's Congressional Delegation has
"brought many projects home," "these projects are earmarked"
projects and as such fall "outside of the Department's formula." He
specified that the Department of Transportation and Public
Facilities receives those funds in addition to the regular federal
formula, which is reauthorized approximately every five years. He
stated that historically the State has received approximately one
percent of the national program funds. He opined that this formula
percentage would continue to be constant, as the State "is not a
big player nationwide," although the State does receive "more back
than we pay in." However, he contended, other states do not make an
issue about this.
Commissioner Perkins explained that the size of the national
program from which the State receives one percent is funded by the
18-cent federal gas tax that consumers pay. He predicted that
consumers would not reduce their levels of usage and, consequently,
this funding source would continue to be available at or above
current levels.
Commissioner Perkins expressed that the true test of the program is
whether there is a market for the bonds. He stated that the bond
buyers are "looking at the future of federal receipts to the State
of Alaska and saying, yes, we believe that they are going to be in
sufficient quantities to pay the bonds off."
Commissioner Perkins informed the Committee that the bond projects
included in the legislation were identified after close cooperation
with communities in the State. He stated that all the identified
projects are included in a handout titled "Alaska GARVEEs: Grant
Anticipation Revenue Vehicles" [copy on file] that was provided to
the members. He stated that the Department has received numerous
letters of support from community governments.
Commissioner Perkins urged the Committee to support the
legislation.
Senator Ward asked whether the projects in this bill could be
omitted and the funding entirely identified to fund the extension
of the Alaska Railroad to Canada.
Commissioner Perkins responded that this is not an option because
the funding is designated as federal highway money, which cannot be
used for rail projects at this time.
Senator Ward voiced that the railroad situation would be similar to
the airport regulations referred to earlier in the meeting.
Commissioner Perkins concurred.
Senator Wilken asked the Commissioner to review the funding levels
proposed.
Commissioner Perkins responded that the actual amount spent on
highway construction would be approximately $220 million over a
five year period, and the amount specified in the bill includes the
entire project development with such things as design and right-of-
way purchases.
Senator Ward asked the number of new miles included in the project.
Commissioner Perkins responded that few new road miles are
included.
Senator Ward commented that he could only locate two new road miles
in the project.
Committee members briefly discussed the locations of the two or
three new road miles.
Commissioner Perkins stated that the Department would clarify the
locations of the proposed new roads and supply that information to
the Committee.
Co-Chair Donley asked whether a representative is present from the
Office of the Attorney General. None were forthcoming; therefore,
Co-Chair Donley, noting that the aforementioned letter from the
Office of the Attorney General was signed by the Assistant Attorney
General in lieu of the Attorney General Bruce Botelho, requested
Commissioner Perkins to provide the Committee with a memorandum
signed by the Attorney General himself.
Commissioner Perkins agreed.
Senator Hoffman, referencing the New Mexico 20-year highway
warranty, asked whether the State is pursuing a similar warranty,
as, he observed, Alaska's highways "do not even last ten years."
Commissioner Perkins replied that a warranty has been considered.
He informed the Committee that New Mexico is the first state to
institute a warranty of this type, and he attested that the issue
is "highly debated" in the industry. He stressed that the main
components of the warranty is the pavement and that New Mexico does
not allow studded snow tires, which he professed are the primary
element reducing the life of a road in Alaska. He opined that if a
warranty were pursued by the State, provisions would require three
or perhaps four over-layments due to studded snow tire usage over
the twenty-year timeframe. He concluded that a warranty of this
sort would be very expensive and that an acceptable warranty
program would not be possible until the State outlaws studded snow
tires. He furthered that the State's general fund rather than
federal funding would be required to pay for the State's warranty
program due to the warranty being a maintenance issue.
Co-Chair Kelly interjected that the warranty program is not germane
to the GARVEE bond program, and that, due to time constraints; the
Committee should concentrate on the GARVEE Bond program.
DAVE KENSINGER, Representative, Southeast Conference, testified via
teleconference from Petersburg to comment that people in the State
are concerned about the level of general fund dollars spent on road
maintenance. He furthered that authorizing this legislation would
save general fund dollars in the long run, and he urged the
Committee to consider the legislation due to the general fund
savings that would result.
GEORGE STROTHER, Engineering Manager, Matanuska Susitna Borough,
testified via teleconference from Mat Su to voice that the Borough
strongly supports this legislation and has passed resolutions in
support of GARVEE Bond funding. He stated that major State projects
could be fully funded simultaneously so they could be undertaken
and would not have to wait for phased funding for such things as
design and right-of-way acquisition funding on a year-to-year basis
but could instead be approached comprehensively, without delays. He
noted that several Borough road projects are included on the
legislation's construction list; however, the Borough does have
alternate suggestions. He stressed that road upgrades are needed to
address the demand placed on them due to the increased population
growth of the region.
ROBERT HAKENSON, 27-year resident of the Palmer/Mat-Su Valley area,
testified via teleconference from Mat Su in support of the GARVEE
Bond funding. He thanked the Department of Transportation and
Public Facilities, the sponsor and other legislators for the good
job that has been done in developing the legislation. He stated
that although Alaska has received its share of federal funding,
roads such as the Old Glenn Highway need funding to be upgraded to
offset the growth demands of the area. He shared that currently the
Old Glenn Highway is dangerous and its condition is "deplorable".
He sensed that there is support for using the GARVEE Bonds to
support the State's road infrastructure, and he urged the Committee
"to take care of this."
LEO LUCZAK, Director, Community Development, City of Petersburg,
testified via teleconference from Petersburg and noted that several
Petersburg projects are on the bill's proposed project list. He
stressed that the Petersburg roads "are in serious need of
resurfacing" as they are deteriorating, incurring increasing
maintenance expenses, and presenting safety concerns. He noted the
legislation has strong community support, and he urged the
Committee to support the legislation.
TIM ROGERS, Legislative Program Coordinator, Municipality of
Anchorage and Chair, Public Works and Infrastructure Subcommittee,
Alaska Municipal League, testified via teleconference from
Anchorage that the City has identified this legislation as a
priority, and the Municipal League supports increased
transportation funding. He stated that bonding, whether it is
GARVEE, General Obligation Bonding or a combination of both, "would
be the most effective way to improve" the State's road system. He
voiced support for the bill's accompanying list of projects. He
proclaimed that leveraging GARVEE Bond funds is a valid option;
and, he attested that while there are risks involved, they are
manageable. He stressed that any potential drawbacks are outweighed
by the benefits of using GARVEE Bond funding.
LOREN GERHART, Director, Southeast Conference, noted that the
Southeast Conference's primary interest in the bill concerns the
funding identified for the shuttle ferries. He stated that the
implementation of the Southeast Alaska Transportation Plan is
behind schedule and that "the fix" must be in place prior to major
capital needs of the mainline ferries being addressed. He urged the
Committee to add back in the second shuttle ferry that was included
in the original bill, but is absent from the currant committee
substitute. He furthered that completion of the Southeast Alaska
Transportation Plan requires the addition of an additional two
shuttle ferries for a total of four. He voiced concern as to the
funding mechanism of the shuttle ferries; however, he stressed that
the Southeast Conference is confident that the addition of the four
shuttle ferries is critical to the long-term operation of the
Alaska Marine Highway System.
FRANK DILLON, Executive Vice President, Alaska Trucking
Association, testified via teleconference from Anchorage to voice
"support of the GARVEE Bond concept with some caveats concerning"
the committee substitute. He noted that a number of the projects
included in the project list "would be better funded by general
obligation bonds or other funding mechanisms rather than rolling
them into the GARVEE Bonds themselves." He informed the Committee
that the State, "did in fact, lose federal highway funding this
year that we should have received under the formula that was
adopted by Congress." He noted that when $9.6 billion was removed
from the Highway Trust Fund, the level of funding awarded to the
State would have been less than previous years; however, he
asserted, with "extensive effort on the part" of United States
Representative Don Young, transportation industry representatives,
and a coalition of road builders, $4.5 billion was added back to
the Highway Fund which resulted in Alaska's "status quo" funding
level. He contended that the level of funding that Alaska received
was lower than the formula would normally have provided, as funds
from the Highway Trust Fund were allocated to provide for national
security, which is considered a higher priority.
Mr. Dillon informed the Committee that the trucking industry
supplies approximately 40 percent of the total revenues used in the
federal highway trust fund; therefore, he avowed, the trucking
industry holds a vested interest in how those funds are allocated.
He voiced that the Alaska trucking industry is concerned about
funds being allocated to construct fast or shuttle ferries in
Southeast Alaska as those ferries are not designed to accommodate
commercial usage, which is a consideration of the national highway
system. He summarized that rather than determining whether the
GARVEE bond program is a good idea, the question should be why
there is a need to establish GARVEE Bonds. He contended that in the
upcoming session of Congress, the existing "lousy highway bill"
should be rewritten to address the nation's highway needs so that
funding mechanisms such as the GARVEE Bonds would not be required.
DICK CATTANAGH, Executive Director, Associated General Contractors,
testified via teleconference from Anchorage and confirmed that the
concerns raised in opposition to this legislation in the AGC paper
[copy on file] are valid. He expressed that the fact that AGC, the
largest entity involved in the State's road construction industry,
is opposed to this legislation should be a strong statement. He
explained that AGC is concerned about the level of Alaska's future
federal highway funding as the trend has been a reduction rather
than an increase in annual funds on a nationwide basis, and he
voiced that money would be required to be removed from other
federal programs in order to get the allocation "back on track;"
however, he announced, industry sources predict that the money
would not be restored to the program in sufficient quantities to
get the funding back on track. He argued that the Department of
Transportation and Public Facilities could not manage current
project levels as, he exampled, the FY 02 road construction budget
is a 30 percent increase over the FY 01 funding level, however, the
"project letting to date" is below where it was at this time the
previous year. He stressed "that the problem is that the projects
are not getting through DOT and on to the streets for
construction." He stressed that approval of this legislation would
not address that problem, and he voiced that this project delay
issue should be addressed.
Mr. Cattanagh asserted, "that GARVEE bonds are a zero fund gain."
He stated that all this program does is move funds forward, which
he attested is "not a bad thing" because some of the identified
projects are needed; however, he argued that the project list
should be examined to determine whether all of the identified
projects need to be accelerated. He voiced that the AGC has
"serious concerns" about this. He attested that moving projects
forward does not equate to there being an increase in projects, but
does create "an artificial peak" from which a descent would occur
although the projects "would be paid off into the future." He
estimated that this twenty-year program would result in an annual
$20 million future highway program reduction.
Mr. Cattanagh reminded the Committee that Alaska receives six times
the funding from the federal highway trust fund than what it pays
in and is the biggest benefactor in the country of this funding. He
noted that Congressman Don Young has determined that this level, or
a slightly higher level of funding would continue for the upcoming
re-authorization period; however, future funding levels are
uncertain. He asserted that AGC has committed to work with the
State to represent Alaska's interest before the Congress and other
interested parties to attempt to assure the continuance of future
funding levels in future authorizations.
Mr. Cattanagh attested that other states "are discontent" with the
fact that Alaska reaps more return on it contributes to the fund.
He noted Commissioner Perkins comment that Alaska only receives one
percent of the total program; however, the six-fold return is an
issue and might not be likely to continue.
Mr. Cattanagh furthered that contractors and others in the New
Mexico highway construction industry are not happy with the process
undertaken in New Mexico.
SFC 02 # 54, Side A 10:54 AM
Mr. Cattanagh expressed that a multitude of major highway projects
would require contractors to heavily invest in equipment to meet
the demand, and the cost of that investment is charged accordingly
in bid pricing. Therefore, he argued, the State's contention that
money would be saved by moving projects forward is "illusionary."
Mr. Cattanagh suggested that the State pursue the use of general
obligation bonds rather than GARVEE Bonds to address urgent
transportation needs. He stated that this approach would increase
the volume of projects that are deemed "urgent," and would allow
the State, using the Statewide Transportation Improvement Program
(STIP) to schedule projects in a balanced manner. He stated that
this approach would allow the citizens of the State to participate
in the development of the State's highway infrastructure.
Mr. Cattanagh voiced that the fact that highways are funded by the
federal government or by local communities rather than through a
State Highway Program should be of concern to all Alaskans. He
furthered that the State's participation is currently limited to
providing matching funds to the federal highway program. He
continued that the general obligation bond funding "would send a
message to people that we do want and need a highway program that
the State has invested in." He furthered that the State should
consider increasing gas taxes as a method to pay back the general
obligation bonds.
Commissioner Perkins characterized the differing positions between
the State and the AGC on the GARVEE Bond proposal as a
"professional disagreement." He noted that the measurement of the
State's "delivery of the program" should be that the State has not
returned any allocated federal funding back to the federal
government in the past eight years. He continued that the money is
allocated to specific projects, and that he could provide a
resolution from professional design counsel attesting that the
Department's professional engineering staff is capable of handling
the workload. He stressed that there are no problems within the
Department, and the fact that the State is anticipating the major
undertaking of a gas pipeline project attests to the capability of
the Department.
Commissioner Perkins stated that the reduction in federal money
this year was the result of a correction within the federal TEA-21
program. He stated that the federal government estimates the annual
increments of gas tax revenue that will be collected and
distributes 90 percent of the estimate to the states. He informed
the Committee that the following year, if the increment exceeds or
is less than the estimate, there is an adjustment made to correct
the actual amount collected and distributed. He furthered that for
three years, the State received additional revenue through this
adjustment process; however, the United States Treasury Department
realized an error had been made in the distribution calculation,
and requested the State to return three years of extra revenue. He
stated that this is the reason that the State reflects less federal
program funding this year.
Commissioner Perkins clarified that the appearance of less federal
funding is misleading due to this correction. He attested that the
basic formula funding is not going to change. He furthered that the
GARVEE Bond program is factored using the formula funding.
Commissioner Perkins stressed that he does not see a problem with
future funding. He stated the State differs dramatically from other
states in its need for such things as essential air service, by-
pass mail, and other factors unique to the Alaska. He projected
that this uniqueness assures that Alaska would continue to be
funded at the accustomed level of funding.
Mr. Cattanagh argued that "a reduction is a reduction and the
industry would feel the reduction this year." He attested that
moving all chess "pieces to the front" would not solve the State's
transportation problems, and that this issue should be addressed
with a statewide program involving general obligation bonds. He
assured the Committee that AGC would work with the State to develop
such a program.
Senator Wilken asked Commissioner Perkins to explain the
relationship between the Statewide Transportation Improvement STIP
program and GARVEE Bonds and any affect that the GARVEE Bonds would
have on the program.
Commissioner Perkins responded that most of the big projects
identified in this legislation are in the STIP six to ten-year
plan. He continued that were the GARVEE Bond program authorized to
fund these projects, then funding would be available to pay for
other projects, particularly smaller projects in rural areas of the
State. He detailed the funding process that would evolve with the
GARVEE program, and he stated that removal of the big projects
earmarked for Anchorage and Fairbanks as well as the shuttle
ferries from the STIP program would allow the State to make
payments over a fifteen-year period "rather than taking the hit all
at one time." He exclaimed that, "we've leveled the program out by
taking out big projects." He stressed that the improvements to the
State's roads would provide for safer roads, thereby saving lives.
Senator Wilken voiced confusion regarding the deciding factors that
determine whether a qualified project should be funded through the
use of GARVEE Bonds rather than General Obligation (GO) Bond
funding.
Mr. Cattanagh stated that funding a State's major project takes a
huge proportion of available funding and distorts the funding that
is available for other projects in the State. He voiced amazement
that the Municipality of Anchorage has a larger highway-funding
budget than the State, even without the federal dollar
contribution. He noted that the State currently addresses ten
percent of the State's highway needs annually; however, the list
continues to grow each year. He continued that the proposed GARVEE
Bond "merely changes things around in the list that we've got,"
without adding any new projects. He contended that this is the
wrong approach.
Co-Chair Kelly clarified that the question is why does the AGC
support the use of general obligation (GO) bonds rather than the
use of GARVEE Bonds.
Mr. Cattanagh responded that GO Bonds are preferred because the
funding would address new projects. He contended that the
Department needs assistance in getting projects online, and the
fact that projects are not expediently addressed is of concern to
the AGC. He reiterated that the "biggest concern with GARVEE Bonds
is that it would provide only for projects that are on the list and
would move them forward, thereby "creating artificial peaks and
valleys." He stressed that when contractors are required to
purchase a million dollars worth of equipment in a single year, the
price of the project would reflect that expense.
Senator Leman asked the Commissioner to clarify conflicting cost
estimates for the improvements to the Dimond/O'Malley/"C" Street
intersection in the Anchorage area.
Commissioner Perkins stated that he had incorrectly identified the
cost of the project in a conversation with Senator Leman, and he
clarified that the amount identified in the legislation was
sufficient to complete the project.
Senator Hoffman asked the anticipated life expectancy of the
identified projects.
Commissioner Perkins responded that bridges are designed with a 75-
year life expectancy while the life expectancy of a road is
determined by ground conditions. He exampled that the "C" Street
project in Anchorage would be a 50-year road design; however, he
stressed that pavement replacement usually occurs every seven
years. He informed the Committee that pavement replacement and
other maintenance needs are not a factor in the life expectancy of
a road. He furthered that another consideration in the life of a
road is its capacity level, and he shared with the Committee that
the State designs for a 20-year traffic capacity. He stated that
capacity life is different that the design life.
Senator Hoffman stressed that road maintenance is a major concern,
and he asked whether the Department would be addressing this
concern differently in the future.
Commissioner Perkins agreed that the maintenance of a road is
important. He stressed that roads have three enemies: "water,
water, and water." He stressed that keeping water out of a road
foundation is very important, and he stated that the Department of
Transportation and Public Facilities has received federal funding
to seal cracks and chip sealing in the State's road systems. He
reiterated that this is federal funding rather than State funding,
and it has been identified to provide funds to maintain existing
roads rather than to fund new roads.
Co-Chair Kelly thanked the Commissioner and the testifiers for the
informative presentation.
Co-Chair Kelly ordered the bill HELD in Committee.
ADJOURNMENT
Co-Chair Pete Kelly adjourned the meeting at 11:14 AM.
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