Legislature(2017 - 2018)SENATE FINANCE 532

02/12/2018 09:00 AM FINANCE

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Audio Topic
09:02:36 AM Start
09:03:09 AM Presentation: Credit Rating and Debt Analysis
10:12:36 AM SB125
10:46:17 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentation: Credit Rating and Debt Analysis TELECONFERENCED
Deven Mitchell
+ SB 125 EXTEND BOND AUTH FOR INTERIOR ENERGY PROJ TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                     February 12, 2018                                                                                          
                         9:02 a.m.                                                                                              
                                                                                                                                
9:02:36 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  MacKinnon  called  the  Senate  Finance  Committee                                                                    
meeting to order at 9:02 a.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Anna MacKinnon, Co-Chair                                                                                                
Senator Click Bishop, Vice-Chair                                                                                                
Senator Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
Senator Gary Stevens                                                                                                            
Senator Natasha von Imhof                                                                                                       
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Deven  Mitchell, Executive  Director, Alaska  Municipal Bond                                                                    
Bank Authority,  Department of Revenue; Senator  Pete Kelly,                                                                    
Sponsor;  Joe   Burns,  Staff,  Senator  Pete   Kelly;  Gene                                                                    
Therriault,   Deputy  Director,   Statewide  Energy   Policy                                                                    
Development,   Alaska   Energy  Authority,   Department   of                                                                    
Commerce, Community and Economic Development.                                                                                   
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Jomo Stewart,  Interior Gas Utility,  Fairbanks; Jim Dodson,                                                                    
President, Fairbanks  Economic Development  Corporation, San                                                                    
Diego; Jim Matherly,     Mayor of Fairbanks, Fairbanks;  Jon                                                                    
Cook,  Chief Financial  Officer, Airport  Equipment Rentals,                                                                    
Fairbanks.                                                                                                                      
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
SB 125    EXTEND BOND AUTH FOR INTERIOR ENERGY PROJ                                                                             
                                                                                                                                
          SB 125 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
^PRESENTATION: CREDIT RATING and DEBT ANALYSIS                                                                                
                                                                                                                                
9:03:09 AM                                                                                                                    
                                                                                                                                
DEVEN  MITCHELL, EXECUTIVE  DIRECTOR, ALASKA  MUNICIPAL BOND                                                                    
BANK AUTHORITY, DEPARTMENT OF  REVENUE, continued to discuss                                                                    
the  presentation,  "2018  Credit   Review  and  State  Debt                                                                    
Summary"  (copy  on  file) from  the  committee  meeting  on                                                                    
February 7, 2018.                                                                                                               
                                                                                                                                
Mr. Mitchell read slide 13, "State Debt Rating Overview."                                                                       
                                                                                                                                
Mr.  Mitchell  reviewed slide  14,  "Evolution  of State  of                                                                    
Alaska Credit Story":                                                                                                           
                                                                                                                                
      FY 2010-2014 high levels of unrestricted general                                                                       
        fund revenue greatly exceed budgetary needs, growing                                                                    
        reserve  positions,  pre-funding  of  budget  items,                                                                    
        large capital budgets,  highest credit  ratings with                                                                    
        stable outlook.                                                                                                         
                                                                                                                                
      FY 2015-2017 significantly diminished unrestricted                                                                     
        general fund, use of  pre-fundings, Statutory Budget                                                                    
        Reserve and Constitutional Budget Reserve to balance                                                                    
        budget, reductions to capital and operating budgets,                                                                    
        discontinuation of  following statutory  formula for                                                                    
        determining Permanent Fund  Dividends, consideration                                                                    
        of various  tax proposals,  consideration of  use of                                                                    
        earnings  of   the  Permanent   Fund   to  pay   for                                                                    
        government, State downgraded four  times followed by                                                                    
        three additional downgrades in FY 2018.                                                                                 
                                                                                                                                
      FY 2018 advocating shifting the state's credit                                                                         
        analysis towards an endowment model  rather than the                                                                    
        state models that rely almost  exclusively on annual                                                                    
        tax and fee collection.                                                                                                 
                                                                                                                                
9:07:36 AM                                                                                                                    
                                                                                                                                
Senator  von Imhof  recalled a  question regarding  the bond                                                                    
debt analysis, and whether it  took into account a potential                                                                    
Percent of Market Value (POMV)  from the Permanent Fund that                                                                    
would raise  the state's bond  capacity. The reply  was that                                                                    
the POMV was  not factored into the  bond capacity analysis.                                                                    
She stated that there was  an indication that passing a POMV                                                                    
would  change the  calculation and  open opportunities.  She                                                                    
stated that the conversation occurred six months prior.                                                                         
                                                                                                                                
Mr.  Mitchell agreed  with his  previous remarks.  He stated                                                                    
that the  rating and strength  of credit would  be affected.                                                                    
There was an  active push to have a shift  in how the rating                                                                    
agency would examine the state.                                                                                                 
                                                                                                                                
Senator von Imhof asked about  bond capacity, and thought it                                                                    
had not been incorporated yet.                                                                                                  
                                                                                                                                
Mr. Mitchell answered in the affirmative.                                                                                       
                                                                                                                                
Senator  Stevens referred  to Mr.  Mitchell's comparison  of                                                                    
the  state  to a  large  endowed  university in  the  United                                                                    
States. He wondered whether there  should be a worry in that                                                                    
respect.                                                                                                                        
                                                                                                                                
Mr.  Mitchell replied  that the  changes  that would  impact                                                                    
universities  than  those  that  would impact  a  state.  He                                                                    
remarked that tax  changes that would affect  the tax status                                                                    
of the Permanent Fund should  be concerned, because it was a                                                                    
tax exempt investor.                                                                                                            
                                                                                                                                
9:12:37 AM                                                                                                                    
                                                                                                                                
Mr. Mitchell  turned to  slide 15, "Good  News and  Bad News                                                                    
Rating Agency Views State of Alaska":                                                                                           
                                                                                                                                
     Moody's     Aa3 (Stable)                                                                                                   
     Standard and Poor's Rating Services     AA (Negative)                                                                      
     Fitch Ratings       AA (Stable)                                                                                            
                                                                                                                                
     POSITIVES                                                                                                                  
     ?Recognition  of the  efforts  of  the Legislature  and                                                                    
     Governor to diminish spending                                                                                              
       ecognition of  the new  revenue options  available to                                                                    
     fund  government   expenditures  (Permanent   Fund  and                                                                    
     untapped taxes)                                                                                                            
     ?Recognition that  from a credit perspective  Alaska is                                                                    
     more like  an endowed university  than it is  like most                                                                    
     other states.                                                                                                              
     ?November 2, 2017 Fitch  Ratings "upgrades" the state's                                                                    
     outlook from negative to stable                                                                                            
     ?December 1,  2017 Moody's Investor  Service "upgrades"                                                                    
     the state's outlook from negative to stable                                                                                
                                                                                                                                
     Negatives                                                                                                                  
     ?Downgraded by Moody's on July 13,  2017, by S and P on                                                                    
     July  18, 2017,  and  Fitch on  November  1, 2017  (7th                                                                    
     downgrade since AAA in 2015)                                                                                               
     ?Historic concerns  related to  narrow economy  that is                                                                    
     in recession, actuarially  assumed pension liabilities,                                                                    
     and over reliance on oil production.                                                                                       
                                                                                                                                
Senator Micciche wondered how important of a POMV would be                                                                      
to a rating agency.                                                                                                             
                                                                                                                                
Mr. Mitchell thought  passage of a POMV  would constitute an                                                                    
important  shift. He  thought progress  had  been made,  but                                                                    
considered that there had not  been a lot of positive fiscal                                                                    
news of the state.                                                                                                              
                                                                                                                                
Mr. Mitchell read slide 16, "Excerpts from Last Rating                                                                          
Agency Presentation."                                                                                                           
                                                                                                                                
9:17:58 AM                                                                                                                    
                                                                                                                                
Mr. Mitchell displayed slide 17, " Executive Summary":                                                                          
                                                                                                                                
    The State has been migrating towards a fiscal plan                                                                          
                                                                                                                                
     Budget Reductions                                                                                                          
      FY  2018   Budget  passed   with  $145.6   million  of                                                                    
     additional reductions in operating appropriation                                                                           
      Unrestricted    General    Fund   operating    expense                                                                    
     reductions from FY 2015: $1.3 billion                                                                                      
                                                                                                                                
     Permanent  Fund  Dividend:   50  percent  of  statutory                                                                    
     formula -$760  million (down from $1,373  million in FY                                                                    
     2015)                                                                                                                      
                                                                                                                                
     Cut 50  percent by Veto  in FY 2017 and  no legislative                                                                    
     over ride                                                                                                                  
                                                                                                                                
     Cut 50 percent  by Legislature in FY  2018 with support                                                                    
     of Governor                                                                                                                
                                                                                                                                
     No appropriation from Earnings  Reserve to Principal in                                                                    
     2017  or   2018  as  required  by   State  statute  for                                                                    
     inflation proofing                                                                                                         
                                                                                                                                
     Substantial Existing  Revenues and Evolving  but Stable                                                                    
     Reserve Position                                                                                                           
                                                                                                                                
     ?Significant  liquidity in  the  General  Fund with  an                                                                    
     asset value as of August 31, 20171of $3.6 billion                                                                          
     ?State  has   maintained  the  practice   of  labelling                                                                    
     available  current  year  revenues  as  restricted  for                                                                    
     savings                                                                                                                    
     ?Includes Permanent Fund and CBRF revenues                                                                                 
     ?Oil,  gas and  resource-based  industries continue  to                                                                    
     provide  substantial  revenue  that  is  available  for                                                                    
     appropriation                                                                                                              
     ?Currently no broad based tax on Alaska's economy                                                                          
     ?Governor  has called  for a  special session  starting                                                                    
     Oct. 23 to discuss wage tax and crime bill                                                                                 
     ?Stable available  reserves projected at  $17.6 billion                                                                    
   for 6/30/20172compared to $17.3 billion at 6/30/2015                                                                         
     ?Permanent   Fund  Earnings   Reserve  increased   $4.2                                                                    
     billion from FY 2016 to FY 2017                                                                                            
                                                                                                                                
     Progressively Closer to Long Term Solution                                                                                 
                                                                                                                                
       FY 2015 Initial budget reductions                                                                                        
                                                                                                                                
       FY 2016 Significant budget reductions                                                                                    
                                                                                                                                
        FY 2017   Additional  budget reductions,  diminished                                                                    
     PFD by Governor's veto                                                                                                     
                                                                                                                                
        FY 2018   Additional  budget reductions,  diminished                                                                    
     PFD by legislative action with Governor's support                                                                          
                                                                                                                                
     Both  House and  Senate passed  versions of  the budget                                                                    
     using PF Earnings Reserve                                                                                                  
                                                                                                                                
     2.  Reserve balances  shown here  include the  CBRF and                                                                    
     the  PFER.  FY2017  CBRF balance  subject  to  year-end                                                                    
     closeout, audit  adjustments, and finalized  results of                                                                    
     the FY2017 CAFR, and uses  a projection for FY2017 with                                                                    
     best available information at this  time. PFER based on                                                                    
     APFC's  June 30,  2017 fund  financial history  monthly                                                                    
     report                                                                                                                     
                                                                                                                                
9:22:31 AM                                                                                                                    
                                                                                                                                
Mr.  Mitchell  spoke  to slide  18,  "Revenue  Forecast  and                                                                    
Budget   Outlook,"   which    showed   a   table   entitled,                                                                    
'Compilation  of  Available  Revenue  and  Recent  Budgeting                                                                    
Practice  Shows Surplus  and Reserve  Growth.' He  clarified                                                                    
that  the  slide  represented  a point  in  time  with  some                                                                    
assumptions  that   could  be   viewed  as   pessimistic  or                                                                    
optimistic, depending upon one's point  of view. There was a                                                                    
projected $2.5 billion  deficit for FY 18. He  looked at the                                                                    
CBRF investment  earnings projection,  the CBRF oil  and gas                                                                    
dispute resolutions.  the optimistic GF expense  line, which                                                                    
had held static at $4.3  billion. He acknowledged that there                                                                    
was older  revenue source information that  needed updating.                                                                    
Additionally, the  table did not  reflect potential  draw on                                                                    
the Permanent Fund.                                                                                                             
                                                                                                                                
9:26:55 AM                                                                                                                    
                                                                                                                                
Senator Micciche thought  slide 18 was helpful.  He asked if                                                                    
it would be a great amount  of work to update the slide with                                                                    
the new forecast.                                                                                                               
                                                                                                                                
Mr.  Mitchell clarified  that the  table did  not depict  an                                                                    
official  forecast.  He specified  that  the  slide did  not                                                                    
reflect a plan.                                                                                                                 
                                                                                                                                
Co-Chair MacKinnon  wondered if the slide  was an optimistic                                                                    
view of the state's finances.                                                                                                   
                                                                                                                                
Senator  Micciche thought  it would  be helpful  to see  the                                                                    
slide updated with Fall Revenue Forecast numbers.                                                                               
                                                                                                                                
Co-Chair MacKinnon thought Mr.  Mitchell had fairly reported                                                                    
to credit rating agencies.                                                                                                      
                                                                                                                                
9:31:00 AM                                                                                                                    
                                                                                                                                
Senator Micciche pointed  out that the numbers  on the slide                                                                    
did include projections  for oil price, and  thought that it                                                                    
might not be optimistic.                                                                                                        
                                                                                                                                
Co-Chair MacKinnon  thought it was difficult  for the public                                                                    
to follow  along when the  committee put out  different sets                                                                    
of  bottom  line numbers.  She  explained  that members  saw                                                                    
numbers differently. She thought  the committee's job was to                                                                    
come together to consider one  set of numbers. She hoped the                                                                    
media understood  that the  fiscal numbers.  The legislature                                                                    
was working hard to find a common set of data points.                                                                           
                                                                                                                                
Co-Chair  Hoffman looked  at FY  19 on  slide 18;  and noted                                                                    
that  the legislature  had not  agreed  upon a  split for  a                                                                    
POMV.                                                                                                                           
                                                                                                                                
9:35:44 AM                                                                                                                    
                                                                                                                                
Mr.  Mitchell  reviewed  slide  19,  "Revenue  Forecast  and                                                                    
Budget Outlook":                                                                                                                
                                                                                                                                
     Unlike  other State's,  the State  of Alaska's  Revenue                                                                    
     Generation is Not Limited to Alaska's Economy                                                                              
                                                                                                                                
     The Alaska Permanent  Fund Provides Alaska Unparalleled                                                                    
     Revenue Source Diversification                                                                                             
                                                                                                                                
     As  of   August  31,   2017  Alaska's   Permanent  Fund                                                                    
     endowment had an unaudited total  fund balance of $61.5                                                                    
     billion.                                                                                                                   
                                                                                                                                
     o The State's Permanent  Fund Revenue is generated from                                                                    
     the national and world economies                                                                                           
     o The Permanent Fund does  not rely on Alaska's economy                                                                    
     for revenue generation prohibited investment                                                                               
     o The APFC Board  independently directs investments and                                                                    
     has established  a 10-year  total return  projection of                                                                    
     6.50 percent                                                                                                               
     o The  Permanent Fund  owns shares  in more  than 3,000                                                                    
     corporations around the world                                                                                              
     o   Fixed  Income   holdings   include   both  US   and                                                                    
     International securities                                                                                                   
     o  The   Real  Estate  allocation   provides  inflation                                                                    
     protection and enhanced diversification worldwide                                                                          
                                                                                                                                
     Investment income  has tended to be  countercyclical to                                                                    
     oil, the  source of the  State's other  largest revenue                                                                    
     stream                                                                                                                     
                                                                                                                                
Mr. Mitchell looked at slide  20, "Alaska's Economy Has Been                                                                    
More Stable than U.S.," which  showed four graphs. qualified                                                                    
that  he was  not  an economist,  but  acknowledged that  he                                                                    
looked at the work of economists.                                                                                               
                                                                                                                                
9:40:17 AM                                                                                                                    
                                                                                                                                
Vice-Chair Bishop thought the  slide was helpful, and showed                                                                    
that Alaska  was a  resource state. He  felt that  the chart                                                                    
would  be different  and show  diversity, if  the chart  had                                                                    
been outlined based on the rest of the U.S.                                                                                     
                                                                                                                                
Co-Chair  MacKinnon pointed  out the  graph of  unemployment                                                                    
rates in  the state as  compared to  the rate in  the entire                                                                    
U.S                                                                                                                             
                                                                                                                                
Senator  Micciche   had  recently  looked  at   a  chart  of                                                                    
unemployment rate over a 30-year timeline.                                                                                      
                                                                                                                                
Mr. Mitchell  read slide 21, "Alaska  Tax Credit Certificate                                                                    
Bond Corporation."                                                                                                              
                                                                                                                                
Mr.  Mitchell   displayed  slide  22,  "Alaska   Tax  Credit                                                                    
Purchase Proposal                                                                                                               
                                                                                                                                
     Existing    liability   included    in   the    State's                                                                    
     Comprehensive Annual Financial Report                                                                                      
                                                                                                                                
     Payable through an offset to  state tax liability or by                                                                    
     appropriation                                                                                                              
                                                                                                                                
     Historical  practice  of   annually  appropriating  all                                                                    
     accrued credits until FY 2016                                                                                              
                                                                                                                                
     Appropriation  of  annual  payment based  on  formulaic                                                                    
     statutory framework                                                                                                        
                                                                                                                                
     Governor has proposed paying  for accrued credits based                                                                    
     on  discounted  value  from the  statutory  framework's                                                                    
     payment projection                                                                                                         
                                                                                                                                
     Payment  would   be  provided   by  issuing   bonds  to                                                                    
     refinance the existing liability                                                                                           
                                                                                                                                
     The combination  of discounting and borrowing  at lower                                                                    
     rates  than   existing  fund   balance  will   earn  is                                                                    
     anticipated  to result  in a  financial benefit  to the                                                                    
     State                                                                                                                      
                                                                                                                                
9:46:19 AM                                                                                                                    
                                                                                                                                
Mr. Mitchell spoke to slide  23, "Alaska Tax Credit Purchase                                                                    
Proposal,"  which  showed four  graphs.  He  noted that  the                                                                    
purple  on  the  graphs   represented  the  current  payment                                                                    
schedule. The purple cash flow  could be refinanced, but the                                                                    
initial  benefit  was how  the  proposal  differed from  the                                                                    
pension obligation  bond. He noted  that the  various shades                                                                    
of  blue and  green represented  the replacement  cash flows                                                                    
that would  occur in the  place of  the purple cash  flow as                                                                    
expenditures were being deferred for a number of years.                                                                         
                                                                                                                                
9:50:12 AM                                                                                                                    
                                                                                                                                
Senator von  Imhof thought  slide 23  was very  helpful, and                                                                    
helped to illustrate  the scale and timing  of the payments.                                                                    
She  understood that  the  state  would initially  negotiate                                                                    
with the receivers  of the tax credits for either  a 5 or 10                                                                    
percent  discount rate,  and the  state would  fix into  the                                                                    
rate.  She noted  the rising  inflationary environment.  She                                                                    
wondered whether the state had  the capacity without a POMV.                                                                    
She furthered queried whether there  would be an impact on a                                                                    
rate, with the passage of a POMV.                                                                                               
                                                                                                                                
Mr.  Mitchell replied  that the  there was  nuance regarding                                                                    
whether the  state could participate with  debt. He remarked                                                                    
that  it was  an existing  liability. He  recalled that  the                                                                    
state had previously desired a  pension obligation bond, and                                                                    
that transaction had been properly structured.                                                                                  
                                                                                                                                
Mr. Mitchell  replied that  one rating  agency would  have a                                                                    
one-notch downgrade; the  other two would recognize  it as a                                                                    
refinancing of  an existing liability.  He remarked  that he                                                                    
said that there  was potential to impact  the debt capacity,                                                                    
but it was not a one-for-one basis.                                                                                             
                                                                                                                                
9:54:47 AM                                                                                                                    
                                                                                                                                
Mr. Mitchell referred  back to slide 23,  and qualified that                                                                    
the  chart  was very  generalist.  The  legislation did  not                                                                    
allow  for  the  state  to borrow  for  the  current  year's                                                                    
payment.                                                                                                                        
                                                                                                                                
Co-Chair  MacKinnon  referred  to  a policy  from  the  debt                                                                    
affordability  analysis. She  wondered  whether the  state's                                                                    
debt was still between 5 and 8 percent.                                                                                         
                                                                                                                                
Mr. Mitchell answered in the affirmative.                                                                                       
                                                                                                                                
Co-Chair  MacKinnon remarked  that  the determinations  were                                                                    
subjective. She stressed that there  should be a policy, and                                                                    
target  to  stay  within those  parameters.  She  wanted  to                                                                    
reassure Alaskans that the state was within that realm.                                                                         
                                                                                                                                
Mr. Mitchell replied  that the state was  above the metrics.                                                                    
He stated that the projections  were that the state would be                                                                    
within the metrics  in two years on debt into  the 5 percent                                                                    
level.                                                                                                                          
                                                                                                                                
Co-Chair MacKinnon asked if  the projection included current                                                                    
projections for revenue.                                                                                                        
                                                                                                                                
Mr. Mitchell answered in the affirmative.                                                                                       
                                                                                                                                
9:58:16 AM                                                                                                                    
                                                                                                                                
Senator Micciche remarked  that the cash flow  would help to                                                                    
reduce UGF. He stated that  the revenue would match the call                                                                    
for the extended  cash payments out when  the state expected                                                                    
to be  at a better  financial position. He  wondered whether                                                                    
the credit  rating determination  examined at that  level of                                                                    
detail.  He  wondered  whether  it  would  be  considered  a                                                                    
positive  step, stable,  or negative  impact on  the state's                                                                    
rating.                                                                                                                         
                                                                                                                                
Mr.  Mitchell  replied that  there  was  a discussion  about                                                                    
pension  obligation  bonds  about  a  "soft  liability."  He                                                                    
stated  that making  the actuarily  determined contributions                                                                    
to  pension trusts  was an  annual appropriation  that could                                                                    
occur  or  not  occur.  He  remarked that  there  may  be  a                                                                    
constitutional protection  for those benefits to  be paid to                                                                    
the  beneficiaries,  but the  actual  funding  of the  trust                                                                    
could  occur or  not occur.  He stressed  that one  debt was                                                                    
issued,  it  became a  hard  liability.  The hard  liability                                                                    
concept was that there was a  bond that must be paid on, and                                                                    
choosing not  to pay would  result in a credit  default with                                                                    
all the negative ramifications.                                                                                                 
                                                                                                                                
Senator Micciche wondered whether  it balanced to a positive                                                                    
or not.                                                                                                                         
                                                                                                                                
Mr. Mitchell thought it was  a difficult question to answer,                                                                    
since  there was  positive and  negative aspects.  He stated                                                                    
that oil and gas credits were  not used on the credit rating                                                                    
scorecards, as most states did not have them.                                                                                   
                                                                                                                                
10:02:32 AM                                                                                                                   
                                                                                                                                
Vice-Chair  Bishop  thought  the  conversation  was  largely                                                                    
hypothetical.                                                                                                                   
                                                                                                                                
Co-Chair  MacKinnon  thought  Vice-Chair  Bishop's  comments                                                                    
were related to the discount proposed by the governor.                                                                          
                                                                                                                                
Senator  von Imhof  looked at  the graphs  on slide  23, and                                                                    
asked if the figures represented real or nominal dollars.                                                                       
                                                                                                                                
Mr. Mitchell confirmed that the figures were accurate.                                                                          
                                                                                                                                
Mr.  Mitchell addressed  Vice-Chair  Bishop's comments.  The                                                                    
firms had considered  that any proposal was  better than the                                                                    
status quo.                                                                                                                     
                                                                                                                                
Co-Chair  MacKinnon   asked  if  the  slide   was  available                                                                    
electronically, so  it could be reproduced.  She stated that                                                                    
the  governor's  proposed  budget contained  no  tax  credit                                                                    
payments. She  thought it was disheartening  that the budget                                                                    
did  not  have  the  statutorily  required  minimum  payment                                                                    
included.                                                                                                                       
                                                                                                                                
10:07:02 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:12:29 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
SENATE BILL NO. 125                                                                                                           
                                                                                                                                
     "An  Act  relating to  the  financing  and issuance  of                                                                    
     bonds  for a  liquefied natural  gas production  system                                                                    
     and natural gas distribution  system; and providing for                                                                    
     an effective date."                                                                                                        
                                                                                                                                
10:12:36 AM                                                                                                                   
                                                                                                                                
SENATOR PETE KELLY, SPONSOR, discussed  SB 125. He read from                                                                    
a prepared statement:                                                                                                           
                                                                                                                                
     For the  record, I  am Senator  Pete Kelly,  district A                                                                    
    covering the City of Fairbanks and Fort Wainwright.                                                                         
     Madam Chair,  members of the Senate  Finance Committee,                                                                    
     thank you for hearing SB 125.                                                                                              
                                                                                                                                
     Senate Bill  125 extends  the time  for AIDEA  to issue                                                                    
     bonds  for the  Interior Energy  Project (IEP)  by five                                                                    
     years to June 30, 2023.                                                                                                    
                                                                                                                                
     The  Interior suffers  from  the  most volatile  energy                                                                    
     costs of any community on the Railbelt.                                                                                    
                                                                                                                                
     As  a  result  of  the cold  winters  and  high  prices                                                                    
     residents   also  burn   a  lot   of  wood   and  coal,                                                                    
     exacerbating the high prices with air quality issues.                                                                      
                                                                                                                                
     It is due to these issues:                                                                                                 
     We,  Governor Sean  Parnell and  the legislature  put a                                                                    
     package  together in  the form  of SB  23 creating  the                                                                    
     Interior  Energy  Project.  SB 23  was  a  funded(ING?)                                                                    
     package                                                                                                                    
                                                                                                                                
     The funding package for the IEP included:                                                                                  
     1. $57.5  million dollars  in a  capital grant,  all of                                                                    
     which has been spent or                                                                                                    
     obligated                                                                                                                  
     2.   $125  million   dollars   in  Sustainable   Energy                                                                    
     Transition  and  Supply  (SETS) Loans  of  which  $52.8                                                                    
     million dollars  has been spent  and $45.5  million had                                                                    
     been obligated                                                                                                             
     3.   And  $150   million  dollars   in  AIDEA   Bonding                                                                    
     Authority, the subject of the  bill before you, none of                                                                    
     which has been used to date                                                                                                
                                                                                                                                
     The  distribution  system  we  have  in  place  due  to                                                                    
     limited  liquefaction and  storage infrastructure,  has                                                                    
     never exceeded 70 miles of pipe.                                                                                           
                                                                                                                                
     With I think no more than about 1200 customers,                                                                            
                                                                                                                                
     Many  of  the  current   customers  are  commercial  in                                                                    
     nature,  and many  of them  have interruptible  service                                                                    
     due to the lack of  sufficient local backup LNG storage                                                                    
     capacity.                                                                                                                  
                                                                                                                                
     This  structure  made  it   challenging  to  create  an                                                                    
     expanded  distribution   network  for   other  interior                                                                    
     residents and businesses.                                                                                                  
                                                                                                                                
     For  a  community  that  supports  two  major  military                                                                    
     installations   and  many   commercial  entities,   the                                                                    
     volatility   of   energy   prices   has   presented   a                                                                    
     significant economic impediment.                                                                                           
                                                                                                                                
     Madame  Chair, the  AIDEA team  overseeing the  IEP has                                                                    
     been advancing the original financing package,                                                                             
                                                                                                                                
     But  just  as  they  were  ready  to  deploy  the  $150                                                                    
     million-dollar bond component,  we have essentially run                                                                    
     out of time on the legislative authorization.                                                                              
                                                                                                                                
     This bonding  is absolutely  necessary for  the project                                                                    
     as it will be used  to Increase the production capacity                                                                    
     of the  LNG plant  at Point  MacKenzie and  further the                                                                    
     expansion of the distribution network.                                                                                     
                                                                                                                                
     I  want to  emphasize that  this bonding  authorization                                                                    
     can  only be  used  for the  purposes  of the  Interior                                                                    
     Energy  Project  due  to amendments  to  the  financing                                                                    
     package created in 2015 through the passage of HB 105.                                                                     
                                                                                                                                
     The  bonding   can  also  only   be  used   to  finance                                                                    
     investment-grade  grade utility  infrastructure due  to                                                                    
     covenants  included in  the  agreements signed  between                                                                    
     AIDEA and the IGU.                                                                                                         
                                                                                                                                
     TO DATE:                                                                                                                   
     1.  The  2014  and  2015 build-out  of  a  natural  gas                                                                    
     distribution  system covering  nearly all  of Fairbanks                                                                    
     and core-North Pole                                                                                                        
     2.  The  2015  AIDEA  purchase  of  the  Pentex  assets                                                                    
     including   the  LNG   production  facilities   at  Pt.                                                                    
     MacKenzie,   LNG  trailers,   and  local   distribution                                                                    
     infrastructure                                                                                                             
     3.  The  passage last  spring  of  PACE legislation  to                                                                    
     assist in commercial conversions to natural gas                                                                            
     4.  Last   September,  AIDEA   secured  a   gas  supply                                                                    
     agreement with Hilcorp.                                                                                                    
     5. This was  followed in December, with  the signing of                                                                    
     agreements  to consolidate  the  Fairbanks Natural  Gas                                                                    
     (FNG) and  the Interior Gas Utility  (IGU) systems into                                                                    
     a  single,  investment-grade  gas utility  through  the                                                                    
     sale of the Pentex assets to IGU.                                                                                          
                                                                                                                                
     6. And, this  month, construction is now  underway on a                                                                    
     large-scale 5.2 million gallon  LNG storage facility in                                                                    
     south Fairbanks  that will support the  future customer                                                                    
     growth of the combined utility system.                                                                                     
                                                                                                                                
     Even with the  recent fall in the price  of heating oil                                                                    
     in  the  past few  years,  the  need for  a  long-term,                                                                    
     clean,  and  affordable   energy  alternative  for  the                                                                    
     Interior remains a                                                                                                         
     high priority.                                                                                                             
                                                                                                                                
     On   its   present   schedule,   first   expanded   gas                                                                    
     availability with  the potential to  move interruptible                                                                    
     customers to full service is  expected in the winter of                                                                    
     2019.                                                                                                                      
                                                                                                                                
     And ... 2020  will see the first full  scale efforts to                                                                    
     convert   properties  with   access  to   the  existing                                                                    
     distribution system to gas.                                                                                                
     Madame Chair, Extending the  sunset for AIDEA's bonding                                                                    
     authority  for  this   project  will  ensure  continued                                                                    
     success of the  IEP and will help  the interior realize                                                                    
     the vision of  clean and affordable natural  gas in the                                                                    
     Fairbanks/North Pole area.                                                                                                 
                                                                                                                                
Vice-Chair  Bishop   commented  that   the  fuel   that  was                                                                    
delivered to  his Fairbanks  home the  week prior  was $2.86                                                                    
per gallon. He felt that the prices were increasing.                                                                            
                                                                                                                                
Senator  von Imhof  wondered whether  there was  a long-term                                                                    
contract with the gas supplier in Southcentral Alaska.                                                                          
                                                                                                                                
Senator Kelly deferred to Mr. Therriault.                                                                                       
                                                                                                                                
10:19:57 AM                                                                                                                   
                                                                                                                                
JOE BURNS, STAFF,  SENATOR PETE KELLY, noted  that there was                                                                    
the most  recent bill  version in  the members'  packets. He                                                                    
stated that the only change  from the original version was a                                                                    
title  change,  which  cleared  up  some  ambiguity  in  the                                                                    
original title.                                                                                                                 
                                                                                                                                
Co-Chair MacKinnon remarked that she  may have had an impact                                                                    
on  that  change,  because she  wondered  which  entity  was                                                                    
financing the bonds.                                                                                                            
                                                                                                                                
Co-Chair MacKinnon OPENED public testimony.                                                                                     
                                                                                                                                
10:21:07 AM                                                                                                                   
                                                                                                                                
GENE  THERRIAULT, DEPUTY  DIRECTOR, STATEWIDE  ENERGY POLICY                                                                    
DEVELOPMENT,   ALASKA   ENERGY  AUTHORITY,   DEPARTMENT   OF                                                                    
COMMERCE,  COMMUNITY  AND ECONOMIC  DEVELOPMENT,  referenced                                                                    
Senator  von Imhof's  question. He  stated that  the current                                                                    
gas supply  that was secured  from Hilcorp was for  a three-                                                                    
year period  of time. He  remarked that there was  offered a                                                                    
longer  term contract,  but the  entity that  was purchasing                                                                    
and  consolidating the  utilities  asked not  to  lock in  a                                                                    
longer  period  of time.  He  stated  that the  AIDEA  board                                                                    
decided  that three  years, with  potential extensions,  was                                                                    
acceptable. He  shared that  it allowed  for the  ability to                                                                    
look for other potential sources  outside of Cook Inlet that                                                                    
may lower  the price of  gas. He  remarked that in  2015, HB
2015  was  passed,  and  the legislature  put  a  number  of                                                                    
requirements  on the  AIDEA  board. He  stated  that one  of                                                                    
those requirements that the board  needed to see a supply of                                                                    
gas, understand  all the  components of  the infrastructure,                                                                    
and have  an estimation of  the delivered price.  She stated                                                                    
that  the  supply  contract  allowed  for  no  take  or  pay                                                                    
obligation  to accommodate  the anticipated  growth, because                                                                    
Hilcorp had provided flexibility to the enterprise.                                                                             
                                                                                                                                
Senator  von  Imhof  wondered   when  the  current  contract                                                                    
expired. She asked  whether the terms would  remain the same                                                                    
or  require re-negotiation  if there  was a  renewal in  the                                                                    
contract.                                                                                                                       
                                                                                                                                
Mr. Therriault  replied that the  old contract  was supposed                                                                    
to end  at the  end of  march. The  new contract  started at                                                                    
that  time,  but there  was  an  avoidance  of a  3  percent                                                                    
increase in  the old contract  on January 1. He  stated that                                                                    
it was three years from the  end of March. He furthered that                                                                    
in order  to get  increased capacity,  the producer  must be                                                                    
given  18 months  advance  notice. He  stated  that for  the                                                                    
five-year extensions,  the terms  could be  renegotiated. He                                                                    
noted that  there was no current  discussion about reopening                                                                    
those terms, but he believed  the producer would be amenable                                                                    
to consider a possible request.                                                                                                 
                                                                                                                                
Senator von  Imhof observed that the  current contract would                                                                    
expire  in  2021. She  surmised  that,  at that  time,  both                                                                    
parties would meet to discuss, terms, and other topics.                                                                         
                                                                                                                                
Mr.  Therriault replied  in  the  affirmative. He  furthered                                                                    
that, with  existing customers, the  utility must  start the                                                                    
discussions well before the end  of the contract in order to                                                                    
show the Regulatory Commission of Alaska.                                                                                       
                                                                                                                                
Co-Chair  MacKinnon  wondered  whether  Mr.  Therriault  had                                                                    
prepared testimony to provide to the committee.                                                                                 
                                                                                                                                
Mr. Therriault  replied that he  was available  to primarily                                                                    
answer questions.                                                                                                               
                                                                                                                                
10:25:21 AM                                                                                                                   
                                                                                                                                
Senator Stevens  wondered whether the bill  provided for all                                                                    
of the energy needs of the  two bases. He felt that it would                                                                    
be crucial to the security of the bases.                                                                                        
                                                                                                                                
Mr.  Therriault   replied  that   there  was   currently  no                                                                    
anticipated use on the bases.  He shared that Ft. Wainwright                                                                    
had some  of the  facility across the  river, which  was not                                                                    
heated,  but had  a distributed  heat loop  off their  power                                                                    
plant. That  power plant ran  on coal, and remarked  that it                                                                    
was difficult to compete with  the price of oil. He remarked                                                                    
that there  was some infrastructure that  could avail itself                                                                    
of  a   pipe  distribution.  He  stated   that  Eielson  was                                                                    
approximately 7  miles from North  Pole, and there  was some                                                                    
estimation  of  the cost  of  what  it  would take  to  pipe                                                                    
energy.  He  stated that  most  facilities  on Eielson  were                                                                    
heated with a distributed heat  loop. He remarked that until                                                                    
they decided  to use  a different  source of  generation for                                                                    
the bases,  there was no  anticipated use. He hoped  to pick                                                                    
up some  use for  some of the  facilities. He  remarked that                                                                    
there had  been responses to  a request from  the Department                                                                    
of Energy  to examine  the interest  of changing  the energy                                                                    
source for  Fort Greely. He  remarked that there was  an RFP                                                                    
to examine who may have  that capability. He understood that                                                                    
there  would  be  no  capability of  pushing  gas  via  pipe                                                                    
distribution, the Fort  Greely area could source  LNG out of                                                                    
the plant  expansion. He remarked  that it was all  a volume                                                                    
enterprise: the  higher the volume,  the lower the  per unit                                                                    
cost.                                                                                                                           
                                                                                                                                
Co-Chair MacKinnon  remarked that  she had asked  in another                                                                    
committee whether there were any  anchor tenants. She shared                                                                    
that there  were people who  were interested in gas,  but no                                                                    
anchor tenants  like the ones  thought of for  industry. She                                                                    
wondered  whether  that  had changed  since  that  committee                                                                    
question. She  shared that  there was  a possibility  that a                                                                    
retailer  or  small box  store  may  be interested,  but  no                                                                    
anchor tenants like the mine or military bases.                                                                                 
                                                                                                                                
Mr.  Therriault replied  that there  were no  current anchor                                                                    
tenants.  He shared  that mining  operations  up the  Dalton                                                                    
Highway had been  watching the program to  see the delivered                                                                    
price  in the  community at  bulk LNG.  He stated  that once                                                                    
that  price  was  seen,  those   operations  could  run  the                                                                    
economics  for continuing  to drive  a further  distance for                                                                    
delivery.                                                                                                                       
                                                                                                                                
10:28:40 AM                                                                                                                   
                                                                                                                                
Co-Chair   MacKinnon  queried   the   anticipated  cost   to                                                                    
consumers.                                                                                                                      
                                                                                                                                
Mr.  Therriault  replied  that there  was  a  document  that                                                                    
showed  that the  delivered price  was over  $20 per  NCF of                                                                    
gas, which  was equivalent  to $2.77  fuel oil.  He believed                                                                    
that   once   there   was   service   to   residential   and                                                                    
uninterrupted customers,  the price would reduce  in 2020 to                                                                    
$17.31 per  NCF of gas. He  stated that it would  be down to                                                                    
$15.48 in 2022,  which would be approximately  $2.00 in fuel                                                                    
oil.                                                                                                                            
                                                                                                                                
Senator von  Imhof felt that the  transportation costs could                                                                    
increase  the costs,  because of  liability, insurance,  and                                                                    
labor  costs.  She wondered  whether  there  was ability  to                                                                    
revisit  a fixed  pipeline,  which was  a  fixed asset  that                                                                    
could depreciate over time.                                                                                                     
                                                                                                                                
Mr.  Therriault  stated  that   AIDEA  was  focused  on  LNG                                                                    
delivery. Part of  the difficulty was the  seasonal swing in                                                                    
energy demand  in Fairbanks. It  was necessary to  have pipe                                                                    
capacity for triple the volume in winter.                                                                                       
                                                                                                                                
10:33:12 AM                                                                                                                   
                                                                                                                                
JOMO STEWART,  INTERIOR   GAS    UTILITY,   FAIRBANKS   (via                                                                    
teleconference), testified in support of the bill.                                                                              
                                                                                                                                
10:33:48 AM                                                                                                                   
                                                                                                                                
JIM  DODSON,   PRESIDENT,  FAIRBANKS   ECONOMIC  DEVELOPMENT                                                                    
CORPORTATION,  SAN  DIEGO  (via  teleconference),  spoke  in                                                                    
support of the bill.                                                                                                            
                                                                                                                                
10:34:30 AM                                                                                                                   
                                                                                                                                
JIM MATHERLY,  MAYOR,   FAIRBANKS    (via   teleconference),                                                                    
testified in support of the bill.                                                                                               
                                                                                                                                
10:35:16 AM                                                                                                                   
                                                                                                                                
JON  COOK,   CHIEF  FINANCIAL  OFFICER,   AIRPORT  EQUIPMENT                                                                    
RENTALS,  FAIRBANKS (via  teleconference), spoke  in support                                                                    
of  the  bill. He  thought  the  bill  was critical  to  his                                                                    
company.                                                                                                                        
                                                                                                                                
Co-Chair MacKinnon CLOSED public testimony.                                                                                     
                                                                                                                                
Vice-Chair Bishop discussed the fiscal note.                                                                                    
                                                                                                                                
Co-Chair  MacKinnon noted  on  page 2  of  the fiscal  note,                                                                    
which  said   that  the  principal   amount  of   the  bonds                                                                    
authorized  may not  exceed $150  million plus  the cost  of                                                                    
capitalized  interest,  bond  counsel  fees,  trustee  fees,                                                                    
rating fees,  financial investor fees, and  other costs that                                                                    
the authority considered reasonable and appropriate.                                                                            
                                                                                                                                
Senator Olson asked if there were private investors.                                                                            
                                                                                                                                
Mr.  Therriault  stated  there were  not  private  investors                                                                    
involved. He detailed  that AIDEA had put out  an RFP, There                                                                    
was  a  request  for  the  company to  step  away  from  the                                                                    
project, and it had agreed.                                                                                                     
                                                                                                                                
Senator Olson  considered the price  of oil hovering  for an                                                                    
extended length  of time, and  wondered whether there  was a                                                                    
concern that the  economy of Fairbanks would  take stress to                                                                    
payback the bonds.                                                                                                              
                                                                                                                                
Mr.  Therriault replied  that  the numbers  in  HB 105  were                                                                    
based  on only  50 percent  of the  potential customers.  He                                                                    
furthered that  originally there  was anticipation  that the                                                                    
price of fuel presented enough of  a delta to get upwards of                                                                    
70 to 75 percent of  the customers. He remarked that because                                                                    
of  the smaller  delta, the  expectation was  reduced to  50                                                                    
percent. He felt confidant that  they could reach the target                                                                    
numbers.                                                                                                                        
                                                                                                                                
10:41:26 AM                                                                                                                   
                                                                                                                                
Senator Olson considered the purchase  in 2013 when the bill                                                                    
was passed. He wondered whether inflation was a concern.                                                                        
                                                                                                                                
Mr.  Therriault stated  that when  the consolidation  of the                                                                    
utilities was  negotiated, the  contractual documents  had a                                                                    
number of covenants.                                                                                                            
                                                                                                                                
Co-Chair MacKinnon asked Mr. Therriault  to explain how much                                                                    
money  the  state  had  invested   in  the  Interior  Energy                                                                    
Project.                                                                                                                        
                                                                                                                                
Mr. Therriault replied that the  original financing plan was                                                                    
$57.5  million of  capital grants,  with allowance  for $125                                                                    
million  of  SETS financing.  He  stated  that there  was  a                                                                    
specific appropriation  for the SETS fund  for that purpose.                                                                    
The potential for  the $150 million of bonds,  but the bonds                                                                    
had  not  yet  been  accessed.  He  stated  that  under  the                                                                    
contractual  agreements  from  December  2017,  all  of  the                                                                    
capital money would  have been deployed with  $70 million to                                                                    
$80 million of the SETS funds.                                                                                                  
                                                                                                                                
Co-Chair  MacKinnon  recalled  that  the  total  was  $337.5                                                                    
million of  state support for  the project. She  queried the                                                                    
state's investment for storage.                                                                                                 
                                                                                                                                
Mr. Therriault  replied that  storage was  the "bottleneck."                                                                    
He  stated that  more  customers could  be  served with  the                                                                    
current  small  plant in  MatSu,  except  that there  was  a                                                                    
requirement for  five days  of product  in the  community in                                                                    
order to serve customers in case of an interruption.                                                                            
                                                                                                                                
10:45:28 AM                                                                                                                   
                                                                                                                                
Co-Chair MacKinnon asked if the  state had granted bonds for                                                                    
support of storage facilities in the Interior.                                                                                  
                                                                                                                                
Mr.  Therriault stated  that the  financing for  the storage                                                                    
was utilization of some of the SETS authorization.                                                                              
                                                                                                                                
SB  125  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
10:46:17 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:46 a.m.                                                                                         

Document Name Date/Time Subjects
SB125 Supporting Document - House Bill 105 Plan Memorandum - Copy.pdf SFIN 2/12/2018 9:00:00 AM
SB 125
SB125 Letters of Support (January 30, 2018) - Copy.pdf SFIN 2/12/2018 9:00:00 AM
SB 125
SB125 Supporting Document - AIDEA IEP Quarterly Report January 2018 - Copy.pdf SFIN 2/12/2018 9:00:00 AM
SB 125
SB125 Sponsor Statement ver. U.pdf SFIN 2/12/2018 9:00:00 AM
SB 125
SB125 Summary of Changes Versions A to U - Copy.pdf SFIN 2/12/2018 9:00:00 AM
SB 125
SB125 Supporting Documents - News Articles.pdf SFIN 2/12/2018 9:00:00 AM
SB 125
SB 125 Support Letter.pdf SFIN 2/12/2018 9:00:00 AM
SB 125
SB 125 Support Resolution.pdf SFIN 2/12/2018 9:00:00 AM
SB 125