Legislature(2001 - 2002)
02/05/2002 09:40 AM Senate FIN
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MINUTES
SENATE FINANCE COMMITTEE
February 05, 2002
9:40 AM
TAPES
SFC-02 # 5, Side A
CALL TO ORDER
Co-Chair Pete Kelly convened the meeting at approximately 9:40 AM.
PRESENT
Senator Dave Donley, Co-Chair
Senator Pete Kelly, Co-Chair
Senator Loren Leman
Senator Lyda Green
Senator Gary Wilken
Senator Alan Austerman
Senator Lyman Hoffman
Senator Donald Olson
Also Attending: ANNALEE MCCONNELL, Director, Office of Management
and Budget; DEVEN MITCHELL, Debt Manager, Treasure Division,
Department of Revenue
SUMMARY INFORMATION
SB 247-REAPPROPRIATIONS & CAPITAL APPROPRIATIONS
The Committee heard an overview from the Office of Management and
Budget and the Department of Revenue. The bill was held.
SENATE BILL NO. 247
"An Act making capital appropriations and reappropriations,
and capitalizing funds; making appropriations under art. IX,
sec. 17(c), Constitution of the State of Alaska, from the
constitutional budget reserve fund; and providing for an
effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Kelly noted the purpose of this meeting is to hear an
overview of the FY 03 capital budget as proposed by Governor Tony
Knowles. He stated that the Committee would have an opportunity to
hear presentations on specific projects from department
representatives in future hearings.
ANNALEE MCCONNELL, Director, Office of Management and Budget,
shared that the Department has "a tremendous amount of information"
about the FY 03 proposed capital budget available on the Internet
via the Office of Management and Budget website at
www.gov.state.ak.us/omb.
Ms. McConnell stated that 65 percent, the largest share of the
funding is allocated to transportation projects. She noted this is
consistent with previous years. She pointed out the next largest
increment of 17 percent is for health and safety projects. She
referenced a handout: Governor Knowles' Proposed FY 2003 Capital
Budget Overview [copy on file.], which lists the projects by major
categories.
Ms. McConnell stressed the proposed budget leverages the maximum
amount of federal funds possible. She stated that 73 percent of the
total budget proposal is federal funds. She noted the general fund
source comprises 12 percent of the budget and represents the same
dollar amount of $114 million, as the current budget.
Ms. McConnell then spoke of dividend funding sources included in
the proposed capital budget: the Alaska Housing Finance Corporation
(AHFC) dividend, the Alaska Industrial Development and Export
Authority (AIDEA) dividend and the Postsecondary Education
Commission dividend. She commented that a "positive trend in recent
years" has been to include AHFC and AIDEA dividends in the capital
budget rather then the operating budget. This budget, she said,
proposes to transfer the Postsecondary Education Commission
dividend as well.
Ms. McConnell stated this budget reflects "some pretty significant
increases" in the amount of general funds necessary to secure
federal funds. For example, she said approximately $20 million
additional general funds are needed for transportation projects and
$4.7 million for water and sewer projects.
Ms. McConnell informed the amount of federal funds available is
less then in the FY 02 budget, which had included $93 million for
"earmarked" specific projects and $33 million for Alaska Marine
Highway System projects. She assured there "is still a lot of
unknown territory in the federal budget for this year" and that
funding has been allocated later in the year than normal. The
delays, she attributed to the increased attention devoted to
homeland security. As a result of the delays, she shared that
amendments would continually be submitted to this budget to reflect
upcoming federal appropriations.
Ms. McConnell remarked other state matching fund appropriations are
included in this budget that are not for identified priority
projects, but rather are necessary to meet new federal requirements
relating to child protection and health insurance. She explained
that recently adopted federal laws provide that the state must make
"substantial changes" to the management information system. She
said these appropriations are included in the Department of Health
and Social Services portion of the budget and utilize federal funds
and matching general funds.
Ms. McConnell commented the "general fund/match" category has
historically been used in project proposals to indicate that state
general funds are necessary to garner federal funding. However, she
said a similar category does not exist in the detailing for those
projects utilizing AHFC dividends and other non-general funds as
the required matching funds. She gave sewer and water projects as
an example. As a result of this discrepancy, she said the actual
amount of state funds necessary to garner federal funding is
understated. She suggested creating a designation for the non-
general funds used as matching funds.
Ms. McConnell next addressed bond proposals, which although not
included as part of the proposed capital budget, "could play a very
large role in our capital infrastructure proposals for the public
this year." She stated that two bond proposals exist for the
current fiscal year and in addition, the Governor recently
submitted two new bond proposals to the Legislature.
Ms. McConnell spoke to the recent proposals, one of which requests
$212 million for school construction and major maintenance. She
told of the decision to include these projects in a general
obligation bond package rather then as a part of the regular
capital budget. She surmised that if bond proposals receive voter
approval in the next three general elections, the entire backlog of
school construction and major repair projects would be addressed.
At this point, she continued, it would be possible to have an
annual capital budget of between $80 and $100 million specific to
schools that would be paid with "cash" or bond revenues. She
concluded this method would address rural and urban needs
throughout the state.
Ms. McConnell listed the deferred maintenance bond proposal for
$136 million as the second proposal submitted this session. She
spoke to the efforts of the legislative Deferred Maintenance Task
Force in identifying the needs.
Ms. McConnell remarked the reason for recommending the four bond
proposals at this time is the "particularly good environment right
now for bonding." She explained that interest rates are currently
low, which could be advantageous. She relayed that Government
Finance Associates, the state's bond advisors, were consulted and
subsequently advised, "The long-term tax-exempt interest rates have
been at their present low levels only about ten percent of the time
since 1983." In addition, she said, the advisors instructed that
changes to federal tax regulations relating to the comparative
rating currently under consideration could make the bond market
less desirable in the future.
Ms. McConnell shared that Administration had considered whether to
include all of the requested deferred maintenance projects in the
bond package or to include some in the FY 03 capital budget
proposal. The decision was made, she said, to list some of the
projects in the capital budget in order to maintain the "basic
level" of funding for deferred maintenance projects in the capital
budget. She gave as one reason the assumption that even with a bond
package, basic repair needs to ensure the life of a facility, such
as roof repairs, would remain. She also noted the difficulty in
"restoring" these expenditures in a budget once they have been paid
with other one-time funds.
Ms. McConnell next advised there would be no debt service incurred
on these bonds in FY 03 due to the timeline involved and when the
bonds would be sold. She stated that the total maximum debt service
for the four bond packages would be approximately $39 million, and
would be approximately $29 million in FY 04.
Ms. McConnell noted that the intent of the proposed bond package
for harbor projects is to continue the process of previous AHFC and
tobacco settlement funded bonds, "to bring harbors up to basic
level of good repair" then transfer ownership to local governments.
She listed the benefits to local communities as economic
development potential and the elimination of dependency on the
state government to perform maintenance and repair. She noted the
current bond package addresses the remaining harbor projects in
communities that are "willing and able" to take ownership.
Co-Chair Kelly asked if every project included in the current
harbors bond package has the purpose of conducting repairs and
improvements to allow transfer of ownership.
Ms. McConnell responded that only one project is not connected to
an ownership transfer. She detailed the U.S. Corps of Engineers
project in Wrangell and explained it is included in the package to
coincide with several other Wrangell harbor projects that are tied
to ownership transfers, which would allow all Wrangell projects to
be undertaken simultaneously.
Ms. McConnell stated that amendments to the current harbor bond
package would be submitted to add several projects located in
communities that were unable to assume ownership when the original
package was compiled. She noted that 31 harbors would be
transferred from state to local ownership, many in the same
communities. She listed the total package amount as $39 million in
revenue bonds, which would be repaid with proceeds from the
existing marine fuel tax.
Co-Chair Kelly then asked about the Certificate of Participation
(COP) process and how it is applied to deferred maintenance
projects.
Ms. McConnell replied that rather then issuing a lease for every
facility that has a deferred maintenance project; four or five
select facilities would "stand in" for the whole package.
DEVEN MITCHELL, Debt Manager, Treasury Division, Department of
Revenue, testified the COP structure has been used in the past for
stand-alone facilities, such as the recent Department of Health and
Social Services laboratory in Anchorage, the Fairbanks Courthouse,
Kenai Courthouse, and the Spring Creek Correctional Facility in
Seward. He explained the method of granting a title interest to a
trustee bank, after which the Department of Administration enters
into a lease with that trustee bank for the amount of the debt
service on bonds that would then be sold. He said this lease is the
"revenue stream" that provides the security to bond holders, thus
the name: certificate of participation, since the bondholders are
participating in the lease through the certificates they purchase.
At the term of the lease, he continued, ownership, or lien interest
held by the trustee bank, is relinquished and the free and clear
title is returned to the State of Alaska.
Mr. Mitchell next spoke of the differences in how this process
would be applied to a multitude of smaller deferred maintenance
projects. He anticipated that a few of the highest value facilities
would be selected and that leases for these facilities would be
offered. He expanded saying, a limited number of leases would
represent value to bondholders in an amount that could leverage a
revenue stream through those leases to pay debt service on the
bonds.
Co-Chair Kelly requested further explanation. He understood that a
specific amount of funds are needed to undertake the dozens of
deferred maintenance projects and that a trustee bank "holds the
paper" for these funds, but he questioned why there is no actual
property involved as there is in a lease. He asked what is purpose
of selecting a limited number of high value facilities.
Mr. Mitchell responded the reason for having a limited number of
facilities is ease of transaction. He stated that issuing over 200
title interests, one for each facility with a proposed deferred
maintenance project, would not be practical.
Co-Chair Kelly clarified that the title of a facility in a stand-
alone project is given to a trustee bank in the amount of the
estimated cost of the proposed project. He asked if in this
deferred maintenance situation, titles for a few facilities would
be issued with liens in the amount estimated to complete the
projects for all the facilities. He likened this method to using
the value of a few facilities as collateral.
Mr. Mitchell affirmed and added that the trustee bank and the
bondholders are not interested in ownership of the facilities in
the same manner a mortgage holder is not interested in owning a
borrower's house. He noted the State of Alaska makes a "pledge" to
provide an annual appropriation to cover debt service, which he
said is the "strength behind" the COP.
Senator Hoffman asked if the trustee bank purchases insurance to
protect against the possibility of future legislatures failing to
make debt service appropriations.
Mr. Mitchell replied that there are not specific insurance
requirements. He qualified that the state is required to insure the
facility offered for lease in the same manner it must insure any
state-owned facility. He pointed out however, there is "a means of
adding value to the transaction" through bond insurance. He
elaborated that the deferred maintenance bond package would be
considered a typical state-supported debt and would receive a
rating of "A" compared to the "AA" rating the state receives for
its general obligation bonds. He said the lower rating is because
of the "lesser pledge" involved. He continued that bond insurance
could be purchased for an "up front fee", which correlates to an
interest rate increase, and would increase the rating from "A" to
"AAA". He said the increased rating provides additional security to
bondholders; in the event the state failed to pay, the claim would
be honored through this insurance. In this instance, he remarked,
the insurance company would then pursue the state directly for
repayment.
Senator Hoffman referenced other pending legislation sponsored by
Senator Green relating to a COP for construction of correctional
facilities throughout the state. He asked if the process would be
the same for correctional facility projects as the witness
described regarding deferred maintenance projects.
Mr. Mitchell responded the process would be "similar but
different". He explained Senator Green's legislation provides for
the state to enter into leases with the communities in which the
facilities would be located. The communities, he continued, would
issue lease revenue bonds to provide improvements to the facilities
then assume joint ownership of the facilities. He said this would
be similar to the situation involving the Anchorage Fourth Avenue
Jail since the state's revenue stream would provide security to
bondholders.
Senator Hoffman next addressed the proposed $212 million bond
package for school construction and major maintenance projects. He
asked for confirmation that construction of the included projects
would occur over a two-year period, and it would be hoped that
future legislatures and administrations would address the remaining
identified projects. He asked why all the identified projects are
not included in one bond package as opposed to the current plan to
divide the projects into three bond proposals to be presented to
voters in consecutive general elections. He stated that under the
current plan voters would have to be educated on the matter
repeatedly and convinced more than once to vote for a bonding
measure. He suggested concentrating the efforts into "one sales
pitch."
Senator Hoffman commented that because Alaska has not undertaken a
major school construction effort for several years, only three new
schools were built the previous year and "very few" were
constructed in rural areas in prior years.
Ms. McConnell responded the matter could be addressed using either
method. She said the current plan divides the number of projects
into three portions of approximately $200 million each; however, if
combined into one bond package, it could be clarified that actual
construction would occur over a period of several years.
Ms. McConnell added the school bond package gives "significant
advantage" to communities. She explained that most urban school
construction projects have been funded through school debt
reimbursement programs with state reimbursement of 70 percent,
which requires the community to bond for 100 percent of the project
cost using their own debt capacity. In contrast, she said this bond
package would provide the state's 70 percent share to the community
in the form of a grant. This method, she continues, also provides
assurance to local governments that the state would contribute its
full debt payment. She noted there had only been one instance where
the legislature failed to appropriate the full reimbursement, but
it is still a concern. She added that this method is more cost
effective as well, because the state's bond rating is higher then
municipalities and lower interest rates could be secured. She
remarked school superintendents have supported this method for the
aforementioned reasons.
Senator Leman then spoke to the harbor transfers effort, which he
worked on as a member of the legislative Deferred Maintenance Task
Force. He relayed that the task force oversaw several repair
projects with subsequent ownership transfers. He asked if this bond
proposal includes assurances that once the repair and maintenance
projects are completed the transfers would actually occur.
Ms. McConnell replied the bond package is structured to stipulate
that before the maintenance and repair projects are started, an
agreement is entered into with the community. She noted the first
ownership transfers were voluntary and the repair and maintenance
projects were funded with AHFC bonds, which do not require
ownership transfer. She recommended ownership transfer requirements
for the proposed bond package projects.
Senator Leman supported transferring ownership of harbor
facilities. He pointed out the witness' earlier testimony stated
the projects consist of basic maintenance and repair items. He
considered these as operating expenses, although he understood some
maintenance and repair expenses are "over and beyond" basic on-
going needs. He asked for clarification that the proposed projects
were not for basic needs.
Ms. McConnell agreed that on-going maintenance could be addressed
in the operating budget. However, she attested the proposed
projects in this bond package are "gray area," because the needs
have accumulated to the point that they could be considered as
capital expenditures.
Ms. McConnell qualified the proposed deferred maintenance bond
package includes some expansion or replacement projects. She
explained these are instances where it has been determined that it
is not feasible to repair the existing facility, such as the
Ketchikan Public Safety Building. She suggested that to attempt to
upgrade the existing facility would only "pour good money after
bad".
Ms. McConnell continued the proposed deferred maintenance bond
package also includes $4 million for projects relating to veteran's
housing. She stated these funds would match $6 million federal
funds for the purpose of addressing housing needs for veterans who
are ineligible for the Pioneers' Homes, due to age restrictions,
but still require assisted living.
Ms. McConnell recommended the deferred maintenance bond package
contain a "specific appropriate an amount per department" as is
practiced currently with deferred maintenance appropriations in the
capital budget.
Ms. McConnell also noted the package contains separate categories
for Americans With Disabilities Act (ADA) projects at the
University of Alaska and other government facilities. She pointed
out that several large ADA upgrade projects are on the statewide
priority list and would require more funds then are normally
appropriated in the regular capital budget for facility upgrades.
Ms. McConnell informed that detailed information is available on
the Internet about the estimated cost of each project. She
cautioned that not all expenses could be anticipated. As an
example, she gave a scenario of a roof repair project with
additional structural damage discovered once the old roof is
removed. However, she said, cost overruns would be absorbed within
the bond allocation of the affected department rather then
reallocated from a different department.
Senator Austerman assumed some of the figures listed in the handout
are estimates because they do not equal the total amounts shown in
the summary. He asked the simplest manner for him to locate and
review the other fund sources involved.
Ms. McConnell referred to page 42 of the bill, which lists the
appropriation amount proposed for each department. Page 46, she
continued, has the aggregate total of every funding source for all
departments. In addition, she noted the capital project summary
lists the amount of each funding source for every project.
Senator Wilken noted past conversations about Grant Anticipation,
Revenue Vehicles (GARV) bonds. He surmised this might be the year
decide whether to take action. He suggested a Committee meeting to
focus solely on GARV bonds to address concerns raised and gather
information necessary to make educated decisions on the matter. He
informed he has five specific questions. He also recommended
notifying municipality representatives of this meeting and
encouraging them to observe for education purposes as well. He
predicted this would foster discussions that could be based on an
equal level of understanding.
Co-Chair Kelly agreed this was a good idea and assured such a
meeting would be scheduled.
Ms. McConnell offered to address Senator Wilken's five questions
beforehand, which she surmised might raise additional questions.
Ms. McConnell suggested it could helpful to look at debt service in
the same matter. She shared that it has been debated whether to
include debt service payments in the capital budget rather then the
operating budget to more accurately reflect capital expenditures.
Ms. McConnell elaborated on her earlier statements about the
advantages of addressing capital infrastructure at this time. She
said that in addition to the cost advantages of taking action now,
other "large capital intensive efforts…are on the horizon,"
including a natural gas pipeline and military expansion. She opined
the current "bidding atmosphere" is more advantageous then it would
be with other large projects underway. She also stressed the need
ensure the level of construction activity is within the instate
capacity to undertake these projects. Otherwise, she cautioned,
out-of-state contractors would be needed, which would not benefit
Alaskan workers.
AT EASE 10:22 AM / 10:22 AM
ADJOURNMENT
Co-Chair Pete Kelly adjourned the meeting at 10:23 AM.
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