HOUSE BILL NO. 161 "An Act relating to the Alaska Mental Health Trust Authority Subport Office Building; authorizing the issuance of certificates of participation for construction of the building and authorizing the use of up to $25,000,000 from the mental health trust fund for construction of the building; approving leases of all or part of the building by the Department of Administration; and providing for an effective date." 3:14:22 PM Representative Foster spoke in support of the bill. REPRESENTATIVE CATHY MUNOZ, SPONSOR, addressed specific questions that had been asked previously by committee members. She referred to additional materials covering cost comparison data, due diligence information, and a construction analysis. Representative Munoz addressed concerns that the proposed building was considered Class A space. She detailed that the proposed construction cost was $315 per square foot, which is considered Class B space when compared to office space around the state. New office space ranges from $200 to $500 dollars per square foot. Representative Munoz turned to the question of square footage price and reported that a ceiling had been established at $3.50 per square foot; the intent was to negotiate down from the ceiling. She pointed to extensive data regarding cost comparisons for Anchorage and Juneau. She reminded the committee that the square footage costs do not include investments that the state makes on lease space to make the space meet information technology (IT), lighting, and other requirements. For example, the Frontier Building in Anchorage is leased at $3.00 per square foot, but recently required over $1 million in upgrades to make the space adequate. Representative Munoz discussed concerns raised about the owner of the Department of Labor and Workforce Development (DLWD) building. She noted that the state is not interested in renegotiating a lease contract at the site because of environmental and repair issues. Representative Munoz emphasized that the proposed project provided great opportunity for the state of Alaska and for the Mental Health Trust; the state would save $13 million and the trust would be able to develop a key asset. Representative Munoz mentioned a proposed amendment that would allow the Alaska Housing Finance Corporation (AHFC) to purchase an administrative building in Anchorage using AHFC funds. 3:19:54 PM Vice-Chair Thomas puzzled over the location of the building and questioned the price that would be paid. He thought for the price the building should be where the subport building used to be. Representative Munoz responded that the project architects could speak specifically to site issues; she was presenting the mental health trust's proposal. Co-Chair Stoltze noted that the bill would be heard again the next day. Representative Kelly commented that his previous questions had been answered completely. 3:23:15 PM Co-Chair Hawker stated some of his concerns for the record. He had questions regarding cost, value, quality issues, financing alternatives, and the structure of the bill. Representative Crawford requested a short explanation as to why it would be to the state's advantage to have someone else build, own, and operate the building instead of owning the building itself. He understood that the deal would be increasingly good for the mental health trust over time and wondered how the state would benefit. Representative Munoz emphasized that the mental health trust and the state should be regarded as partners. The state works very closely with the trust and encourages it to develop its assets. She thought the project provided the trust with an opportunity to develop their portfolio and provide a revenue stream to beneficiaries over the course of the project. The state would benefit as a funding partner with the trust. REPRESENTATIVE BETH KERTTULA, SPONSOR, added that another advantage to the state would be saving $13.5 million. 3:25:59 PM Representative Crawford did not understand how the state would save $13.5 million. He thought the trust could gain by selling the land and investing the earnings. He had been told that the state had paid over $50 million in rent for the DLWD building. He asked why the state should rent rather than buy and why the state should not appropriate money directly to the trust instead of give it money through rent. Representative Munoz responded that the proposal involves three different sites. The Department of Public Safety (DPS) building on Whittier Street, was built in 1970 to last ten years, but has been occupied by the state for nearly 40 years. Renovation of the DPS building and the second building, the Department of Fish and Game (DFG) building in Douglas, would cost much more than $8.5 million. She added that the $13 million savings does not include replacement costs that the state foresees for both the DPS and DFG buildings. 3:28:25 PM Vice-Chair Thomas queried whether the buildings would have 60-foot atriums and whether they would meet the new state energy efficiency codes being proposed because of the stimulus funds. Co-Chair Stoltze thought the architect could address the question. Co-Chair Stoltze MOVED Amendment 1, 26-LS0605\W.1, Cook, 4/2/09 (copy on file): Page 1, lines 2-3: Delete "the Alaska Mental Health Trust Authority" Insert "a separate trust land development account" Page 1, line 6, following "Administration;": Insert "authorizing the Alaska Housing Finance Corporation to acquire the building that it occurpies for an amound that does not exceed $14,500,000;" Page 5, following line 20: Insert a new bill section to read: "*Sec.8. The uncodified law of the State of Alaska is amended by adding a new section to read: AUTHORIZING THE ALASKA HOUSING FINANCE CORPORATION TP ACQUIRE A BUILDING. The Alaska Housing Finance Corporation is authorized to acquire the building in Anchorage it occupies on the effective date of this Act for an amount that does not exceed $14,500,000. This section constitutes the approval required by AS 18.55.100(d) and AS 18.56.090(d) for that acquisition." Renumber the following bill sections accordingly. Co-Chair Hawker OBJECTED for DISCUSSION. JOHN BITNEY, STAFF, REPRESENTATIVE JOHN HARRIS, SPONSOR and CHAIRMAN, LEGISLATIVE COUNCIL, reported that the intent of the amendment was to bring forth a proposal. He explained that the Anchorage Legislative Information Office (LIO) is on a year-to-year lease and needs office space. Conversations with AHFC about space and financing options led to a cost-savings idea. The corporation has needed space as well and had calculated costs for a mortgage that could result in savings of several million dollars. 3:34:04 PM DAN FAUSKE, CEO/EXECUTIVE DIRECTOR, ALASKA HOUSING FINANCE CORPORATION, DEPARTMENT OF REVENUE, provided a memo regarding the proposal (copy on file). He provided history, explaining that AHFC has owned 4.3 acres in midtown Anchorage since 1995; the corporation had planned to build office space but the contract was cancelled. In 1997, AHFC entered into an agreement to lease office space. In 1999, AHFC unsuccessfully sought legislative approval to acquire the property. Tatitlek Corporation bought the building for $6 million and has been open to sell the property to AHFC. The native corporation wants the 4.3 acres that AHFC owns and AHFC wants the building they are currently leasing from Tatitlek. Mr. Fauske continued that there have been negotiations to trade assets. Appraisals on the building show that it is worth about $14.5 million. No cash will be required from the legislature, lease payments will be reduced, and AHFC will acquire an asset. In addition, the increased net income will increase the dividend available to the state. Mr. Fauske added that the governor's office had not objected to the idea of AHFC purchasing the building. He referred to a spread sheet with detailed descriptions and figures related to the properties (copy on file). 3:39:59 PM JOE DOOGLER, CHIEF FINANCIAL OFFICER, ALASKA HOUSING FINANCE CORPORATION, DEPARTMENT OF REVENUE, summarized that the net present value savings [of the trade] would be approximately $7.5 million, and possibly $12 million. He continued that the purchase price includes $2 million for needed upgrades. Representative Foster cited experience with city taxes, and reported that most of a city can be tax-exempt. He asked how the proposal would affect tax income for Anchorage. Mr. Fauske responded that the building would be tax exempt as AHFC would own it as a state entity. He referred to similar discussion regarding other property. Co-Chair Stoltze asked if the taxable and tax-exempt aspects would cancel each other out. Mr. Fauske replied that it was possible. 3:43:54 PM Representative Gara asked whether the building was currently not taxed because it was owned by Tatitlek Corporation. Mr. Fauske thought it was being taxed. Representative Gara wondered how much property tax revenue the municipality would lose. Mr. Fauske responded that he did not know but would find out. Representative Gara asked if Anchorage would end up collecting less money. Mr. Fauske replied that the city would collect less money. He defended AHFC regarding taxes because the corporation brings a lot of assets to Anchorage. He thought the issue was more a state issue. He referred to past debates with the legislature regarding taxes. 3:45:31 PM Representative Gara wanted to know the position of the municipality. Mr. Fauske did not know. Co-Chair Stoltze noted that the municipality is not asked in other similar situations. Representative Fairclough spoke on the taxing issue. In her experience, taxes do not go up but are spread across the entire body. There are many components: property values might go up or down, the mill rate goes up or down, depending on Anchorage's budget; but government spending is not cut back when less tax income is available. Representative Gara asked for clarification. Representative Fairclough responded that state government has a bill for various items; if revenue declines, people who have the ability pay in. She pointed to other variables, such as a mini-permanent fund that draws interest. Representative Gara asked whether AHFC's fund and ability to further its mission would be impacted if AHFC purchased the building. 3:48:17 PM Mr. Fauske responded that there would only be a cash displacement and other programs would not in any way be affected. Representative Fairclough asked whether there would be a small increase in income to the state. Mr. Fauske replied that there would be a positive increment because AHFC would be spending less in operating expenses and 75 percent of the corporation's net income is available for appropriation by the state. Vice-Chair Thomas asked for clarification about the trade. Mr. Fauske responded that the amount of the land value, estimated at between $4.5 million and $5 million, would be deducted from the $14.5 million and AHFC would owe the difference. The additional revenue from the second piece of land would also be deducted. Vice-Chair Thomas asked whether the amendment would give legislative authority to release the assets. Mr. Fauske explained that AHFC needs authority to purchase a building. He stressed that in the present proposal AHFC would be exchanging and not disposing an asset. Mr. Doogler interjected that AHFC would be disposing an asset as well. He added that AHFC also has the statutory authority to dispose of assets. Mr. Fauske clarified that AHFC cannot sell assets as a private entity would; there is a public process. Mr. Doogler pointed out that Anchorage would get more taxes from the land when it is developed, which would replace taxes lost by AHFC acquiring the building. 3:51:54 PM Co-Chair Hawker asked about the quality and desirability of the exchanged land in the Anchorage market. Mr. Fauske th responded that land on 34 street was appraised in 2008 at $4,168,000; current market value would put it closer to between $4.7 million and $5.1 million. As of February 2008 the 1.4 acres at Boniface and DeBarr was appraised at $511,000; current market value could be slightly higher. Co-Chair Hawker queried the probability of the property being developed. Mr. Fauske responded that there was a very high probability that Tatitlek Corporation would develop the site. Co-Chair Hawker confirmed that the property would be developed for taxable commercial purposes. Co-Chair Hawker asked whether AHFC would be the only occupant of the building acquired. Mr. Fauske replied that one tenant, the Alaska Public Safety Employees Union, occupies a small space. Co-Chair Hawker confirmed that there was no commercial plaza involved. Mr. Fauske stated that AHFC needs to own a building. He did not want higher leases and thought the opportunity was good as the location is centrally located and the property will only increase in value. He did not feel the amendment would harm HB 161. 3:55:59 PM Co-Chair Hawker noted that questions he had had regarding deferred maintenance and other issues had been answered. He hoped negotiations would continue in such a way that the state would receive the best value possible. Mr. Fauske agreed. Co-Chair Stoltze spoke to personal experience with an AHFC purchase and appreciated the open process. Representative Gara stated his support but wanted to hear from the municipality. Mr. Fauske replied that he would get the information. 3:59:04 PM Representative Salmon asked which native corporation owned the building. Mr. Fauske responded Tatitlek Corporation, a subsidiary of Chugach Alaska Corporation. Representative Kelly asked if there would be further issues. Mr. Bitney stated that "this is it." Mr. Fauske explained that the purchase of the building was originally going to be a stand-alone bill. Co-Chair Hawker WITHDREW his OBJECTION. There being no further objection, Amendment 1 was ADOPTED. HB 161 was HEARD and HELD in Committee for further consideration. 4:02:30 PM AT EASE 4:06:22 PM RECONVENED