HB 184-DEBT AUTHORIZATION FOR UNIVERSITY 8:23:48 AM CHAIR SEATON announced that the final order of business would be HOUSE BILL NO. 184, "An Act relating to the debt authorization of the University of Alaska." 8:24:26 AM DEREK MILLER, Staff, Representative Mike Kelly, Alaska State Legislature, presented HB 184, paraphrasing from the sponsor statement, which read as follows [original punctuation provided]: HB 184 adjusts the current bond debt cap for the University of Alaska to reflect today's construction prices. Current Alaska Statute allows the University of Alaska to borrow money, issue debt, or enter into long-term obligations for the purchase of facilities, goods, or services without having to provide notice to the legislature as long as the annual debt service payment doesn't exceed $1.0 million. HB 184 bumps up the threshold to $2.5 million. The current bond debt cap limit of $1.0 million was originally issued in 1990. At that time, $1.0 million in annual debt service was the cost of financing a $15.0 million capital project. Taking into account construction inflation in Alaska, a $15.0 million capital project build in 1990 would cost about $40.0 million today. Annual debt service on $40.0 million is $2.5 million assuming a 4.5% interest rate and a 25-year straight line amortization. The University has operated a viable debt program over the last 18 years. It has issued 14 general revenue bonds plus other financing arrangements that have been critical in securing funding for capital projects. The University has never suffered a rating downgrade. In fact, in December 2007, Moody's Investor Service upgraded the University credit rating to Aa3. The University continues to monitor its debt capacity and compliance with tax exempt bond covenants. Currently, the amount of debt service outstanding is $11.2 million. This is less than half the Board of Regents' policy limit of 5% of unrestricted revenues which is $26.2 million for FY08. This equates to $127 million in outstanding debt with the ability to issue a total of $317 million in debt. By increasing the bond debt cap approval level, the administrative burden of compliance with the statute for smaller bond issues would be reduced for both the legislature and the University. At the same time, legislative oversight would be retained for larger financings. I would appreciate your support for HB 184. 8:26:48 AM REPRESENTATIVE BUCH asked if this cap would allow the university's participation at the maximum level the university is seeking. MR. MILLER explained that HB 184 merely reflects the changing construction environment. If the legislature were to authorize receipt authority for a couple of the current projects that the university is proposing, this legislation would impact that. 8:27:56 AM REPRESENTATIVE WILSON said that she would view HB 184 as problematic if it creates a tuition increase. She asked if the sponsor would object to an amendment specifying the aforementioned wouldn't happen. REPRESENTATIVE MIKE KELLY, Alaska State Legislature, clarified that the university oversight remains because no funds can be expended without receipt authority, which the legislature approves. "This [proposed legislation] merely makes the level of bonding to accomplish the same chores current," he said. He then pointed out that state funds to the university have reduced from 60 percent to 40 percent. In answer to Representative Wilson, Representative Kelly acknowledged that a project that HB 184 would support could result in an increase in tuition. For example, at the Fairbanks campus students agreed to a tuition increase in order to fund a recreation center. Representative Kelly related his opposition to an amendment that would hinder the Board of Regents' management of tuition rates as related to the proposed debt cap. The legislation wouldn't cause/trigger a tuition increase because HB 184 strictly permits the university to bond for smaller amounts. 8:31:42 AM REPRESENTATIVE WILSON inquired as to how many tuition increases the university system has experienced. MR. MILLER answered that since 2003 there has been a 10 percent increase in tuition for four years in a row. He recalled that after those four years, tuition increased by the higher tuition price index plus a bit more, but not quite 10 percent. REPRESENTATIVE WILSON expressed concern with such tuition increases. She then stressed that the university must review ways in which it can avoid tuition increases. 8:33:11 AM CHAIR SEATON asked if the Fairbanks recreation facility impacted the tuition across the university system or was it merely a surcharge at the Fairbanks campus. REPRESENTATIVE KELLY responded that it was a specific surcharge for Fairbanks students. 8:33:41 AM REPRESENTATIVE GARDNER commented that she was struck by the thinness of the committee packet for HB 184. She expressed interest in receiving backup. MR. MILLER said that although he doesn't have a letter from the university specifically, the Controller from the University of Alaska is available online. 8:34:12 AM REPRESENTATIVE MUNOZ related her understanding that the university's opportunity to issue debt is about $317 million, which won't change even with changing the cap. Therefore, she opined that changing the cap wouldn't affect tuition rates. MR. MILLER explained that the total outstanding debt the university is authorized to issue is set by the Board of Regents. Currently, that limit is set at 5 percent of unrestricted revenue. The aforementioned is separate from the university's annual debt service. He pointed out that if the university needs to bond above the specified threshold, the university will seek that funding from the legislature. In further response to Representative Munoz, Mr. Miller confirmed that changing the cap doesn't affect the university's ability to bond that $317 million. 8:35:57 AM REPRESENTATIVE BUCH inquired as to whether students have any involvement in determining tuition costs. MR. MILLER highlighted that the Board of Regents includes a voting student representative on the board, which provides input at that level. However, the decision is ultimately that of the Board of Regents. With regard to the Fairbanks Student Recreation Center, the Fairbanks students actually voted to build that facility and impose a surcharge. In further response to Representative Buch, Mr. Miller confirmed that students who may not have been part of the decision to impose the surcharge were faced with paying it. 8:38:06 AM REPRESENTATIVE WILSON inquired as to the percentage of students who pay their own tuition versus the percentage of students whose parents pay their tuition. MR. MILLER said it would be difficult to establish that number, but offered to provide it if he could. 8:39:10 AM CHAIR SEATON remarked that such information may not be available, and in fact may be confidential. 8:40:40 AM CHAIR SEATON, referring to page 1, lines 9-12 of HB 184, asked if the language means that the university doesn't have to come before the legislature unless the amount being sought is above the $2.5 million financing debt cap. 8:41:55 AM The committee took an at-ease from 8:41 a.m. to 8:43 a.m. 8:43:02 AM REPRESENTATIVE KELLY related his understanding that the bonding is separate from the approval. Therefore, the receipt authority is generated by the legislative action. The bill merely states that if the receipt authority is from bonds, the approval is not required for the act of bonding itself. The language doesn't affect the power of the legislature over projects; rather it says that once the legislature approves a project, the university has the ability to bond at a higher level than before without coming before the legislature. CHAIR SEATON pointed out that the discussion seems to be as if the legislature has to approve the projects if the university totally bonds for it and pays for it itself. However, existing language on page 1, lines 9-13, says that the legislature only has to approve the university's receipt authority if the amount is more than the service debt of $2.5 million. Therefore, he requested the sponsor have Legislative Legal and Research Services check the meaning of this language. REPRESENTATIVE KELLY agreed to do so. 8:46:31 AM MYRON DOSCH, CPA, Controller, University of Alaska, offered to answer any questions. 8:47:02 AM CHAIR SEATON asked if the university has to obtain legislative approval for bonded projects that are below the existing limit of $1 million or the proposed $2.5 million limit. MR. DOSCH answered that the university can issue debt if it's below the specified limit. The legislature approves those projects through the receipt authority. 8:48:10 AM CHAIR SEATON posed an example in which the university decides to issue debt for a project rather than go through a capital project request. He asked if the university can do so if the anticipated debt service would be less than $2.5 million. MR. DOSCH replied yes. 8:49:01 AM REPRESENTATIVE WILSON asked if the university could decide to bond a project the legislature denied. MR. DOSCH replied no, and explained that the university would still need the receipt authority to issue debt if it's a capital project. 8:49:43 AM MR. DOSCH, in response to Chair Seaton, confirmed the university's support for HB 184. 8:50:31 AM REPRESENTATIVE KELLY offered to obtain a position statement from the university. 8:51:00 AM REPRESENTATIVE MUNOZ suggested that including clarifying language referring to "projects greater than $2.5 million" on page 1, lines 9-11, would be helpful. REPRESENTATIVE KELLY related his agreement that HB 184 may create an inconsistency with existing law. He pledged to have the legislation scrutinized on the points the committee has addressed. The intent, he said, is not to place unforeseeable restrictions on the university. CHAIR SEATON pointed out that the portion of HB 184 referring to the $2.5 million limit is addressing an annual payment not the cost of the project. 8:54:27 AM CHAIR SEATON, upon determining no one else wished to testify, closed the public hearing on HB 184. He announced that HB 184 would be held over.