HOUSE BILL NO. 106 "An Act relating to school bond debt reimbursement." 1:57:18 PM LYNN GATTIS, STAFF, REPRESENTATIVE TAMMIE WILSON, relayed that the bill would simply extend the termination date for the school bond debt reimbursement program with an an effective date of July 1, 2025. The bill was a 5-year extension request. 1:58:27 PM HEIDI TESHNER, ADMINISTRATIVE SERVICES DIRECTOR, DEPARTMENT OF EDUCATION AND EARLY DEVELOPMENT, OFFICE OF MANAGEMENT AND BUDGET, reviewed the zero fiscal note. She referred to the OMB component number 153. She explained that the note was zero because the bill was simply extending the debt moratorium. The current costs of the program would continue and there would be no additional costs because of no new debts coming online until 2026. Co-Chair Wilson asked if the bill would affect the debt the state currently had. Ms. Teshner replied that the bill would extend the payments of the debt the state currently had. For FY 20, $100 million would be paid out. Going forward, each year the amount would decrease depending on when current projects and associated bonds in the system were closed out. Representative Josephson asked if the Regional Educational Attendance Area (REAA) programs would be impacted with a reduction in the outlay for programs they had in the que based on priority. Ms. Teshner replied that currently the REAA and Small Municipal School District Fund calculation was based on the annual debt service for the program. Representative Josephson was correct that the amount would decrease over the following 5 years, as it had over the previous 5 years, if the moratorium were to be continued. The district REAAs could still apply for the school construction and major maintenance CIP list every year. They would be competing with other projects and would be funded through the non-REA fund. Representative Josephson commented that there was another avenue for REAAs to receive state revenue that would not be impacted by the legislation. Ms. Teshner clarified that REAAs would still be able to apply for the major maintenance and school construction funds. Currently they could be funded, depending on their ranking, through the REAA fund. If they were to rank high enough and the appropriations for major maintenance or school construction projects, they could receive a direct appropriation outside of the REAA fund. Funding would be contingent on the amount of appropriations the Department of Education and Early Development (DEED) received. Vice-Chair Ortiz asked about the potential impacts of extending the sunset. He was particularly curious about the impacts to borough areas and non-REAA areas. Co-Chair Wilson answered that the Fairbanks North Star Borough had gone out for bonds. Currently, the community had paid 100 percent for the bonds. It was the same for all municipalities in the previous 5 years. Vice-Chair Ortiz wondered if any assessment had been done on whether other boroughs would be crippled in advancing other projects with an extension of the sunset. Co-Chair Wilson commented that there were several people waiting in the que to testify. She thought his questions would be answered. Co-Chair Foster commented that regarding the ordering question for the REAAs, the first school on the new school construction list was for $37 million, and the second school was for $10 million. If the state fully funded the debt reimbursement, the REAAs would receive $39 million. He asked if the second school with a cost of only $10 million would move into first place if only $20 million was available. He was trying to determine the order in which the funding was appropriated. Ms. Teshner answered that if the initial project on the list was $20 million and only $10 million was available, the division might only fund the design portion of the project saving the remainder for the following year. She thought Tim Merrick could provide further detail about how the division had applied it in the past. She noted that the division would attempt to keep the REAA Fund to fund the REAAs and not to comingle funds. 2:05:07 PM TIM MEARIG, FACILITIES MANAGER, DEPARTMENT OF EDUCATION AND EARLY DEVELOPMENT, explained there was a provision in regulation that allowed the department to fund a phase of a project (if it could be phased) if there were not sufficient funds for the entire project. Otherwise, the department was permitted to fund further down the list. Co-Chair Foster clarified that a school project could be phased or skipped. He asked at what point the state would move to the major maintenance list. Mr. Mearig replied that the language in statute for using the funding on the major maintenance list required that priority would be given to school construction projects. He surmised there was not a simple answer without looking at the detail of the scenario. The division would develop scenarios in conjunction with the districts being served at the priority points on the list and at the department's leadership. Representative Josephson mentioned he had taught in an REAA for 3 years. Shortly after he left, the George Morgan Senior High School burned to the ground and was rebuilt. In such a circumstance, he asked what priority would be given to the community. He wondered how the situation would be handled. Mr. Mearig responded that the priority list was established through a regular statutory process annually. If there were emergencies that arose, such as the earthquake for the previous year, they would likely be reflected on the list if the districts chose to submit a project for funding. He continued that a school that was completely unhoused would receive a significant amount of points in the matrix. The project would likely rise to the top of the priority list. 2:08:12 PM Co-Chair Wilson OPENED Public Testimony. 2:08:23 PM JIM ANDERSON, CHIEF FINANCE OFFICER, ANCHORAGE SCHOOL DISTRICT (via teleconference), was in support of continued school bond debt reimbursement for districts to the state. In the past, municipalities and borough incurred school bond debt in accordance with the state's contractual agreement in place at the time the bonds were approved. The agreements allowed the state to maintain education facilities across the cities, boroughs, and local communities. He spoke of the struggles of recession. He urged the committee to continue supporting bond debt reimbursement. 2:10:26 PM BRYCE WARD, MAYOR, FAIRBANKS NORTH STAR BOROUGH, FAIRBANKS (via teleconference), spoke in support of HB 106. The ramification of not funding the school bond debt reimbursement to the Fairbanks North Star Borough would equal about $9 million, roughly a 1.1 mill increase for the local tax base. He was speaking in favor of the extension of the program to pay for current debt that was approved by the borough's voting base with the assumption the state would be contributing as part of the requirement for school construction. The borough currently operated under a tax cap. However, debt was exempt from the cap and the bill would result in an increase to the tax base. The borough was proposing a tax increase in its budget in the current year. Mr. Ward continued that the ability for the state to be able to partner with communities at the local level was significant. The 30 percent match that the local level was paying contributed to the state's ability to continue to provide school services. He reiterated his support for the bill. 2:12:10 PM CHEYENNE HEINDEL, MAT-SU BOROUGH, PALMER (via teleconference), spoke in support of HB 106. She explained that without the passage of the bill the borough would have to impose an additional 2 mills on its tax payers. Also, she mentioned that the borough was in need of additional school facilities. She thanked members for their consideration. 2:12:51 PM LUCY NELSON, NORTHWEST ARCTIC BOROUGH, KOTZEBUE (via teleconference), spoke in opposition of the bill. She relayed that for FY 20 the Northwest Arctic Borough bond debt balance was $40.9 million, none of which was reimbursable by the State of Alaska if the FY 20 proposed governor's budget was approved due to the moratorium. Adding years would devastate the borough's finances. The borough would be required to supplant the funding previously committed to be paid by the state. Essential borough services that protected the life, health, and safety of its residents would have to be reduced or eliminated. The State of Alaska was responsible for funding schools having made a prior commitment to reimburse a portion of school bond debt. Local governments had relied on the state's commitment in good faith. Any change in the state's commitment on school bond debt reimbursement posed a significant financial burden on local communities. Ms. Nelson continued that the borough understood the state's fiscal shortfall and the need to balance the state budget by placing the moratorium on bond debt. However, the Northwest Arctic Borough was currently operating under a PILT [Payments in lieu of taxes] agreement. At the time the borough negotiated the PILT agreement there was no discussion on the elimination of bond debt reimbursement payments from the state. She clarified that any reduction to the bond debt payment would devastate the borough which was already suffering from high crime and the lack of basic infrastructure. Mr. Nelson reported that, unlike other rural communities, the Northwest Arctic School District was not an REAA. The borough contributed over $2 million per year towards the bond repayments. Although the payments were large, the borough was committed to education and its schools. Eliminating the state reimbursement would cost the borough $4 million in FY 20. She asked legislators to consider the bill carefully as it moved forward. The borough had no new revenue source to make up the huge reduction. The borough had $14.3 million of bond debt reimburse payments pledged by the state for its school construction projects. The amount did not include the Kivalina school bond debt which was $12.7 million. She asked the committee to pay the authorized bond debt reimbursement for the agreed upon timeline. The borough had no other choices available to absorb such a huge reduction. Co-Chair Wilson asked whether she understood that the bill had nothing to do with bond reimbursement for the borough's current bonds taken out prior to 2015. Ms. Nelson responded in the affirmative. Representative Josephson thought there was a good argument that the world continued to advance and that the district had increasing needs since 2015. His understanding was that when the moratorium began the world was on notice that they would be subject to taking care of their own bonds in full. He asked if Ms. Nelson shared the same understanding. Ms. Nelson asked Representative Josephson to restate his question. Representative Josephson thought there might be two sets of arguments. First, prior to 2015 and subject to appropriation there was an expectation that if things went well, the state would help. However, after 2015 there should not have been any expectation of help from the state. He asked if he was correct. Ms. Nelson offered that the borough felt that the state was responsible for funding schools. 2:17:31 PM AT EASE 2:18:00 PM RECONVENED Co-Chair Wilson reiterated that the bond debt reimbursement in the operating budget that was under discussion was not part of the bill. They were bonds taken out prior to 2015 and had a 70 percent state contribution and 30 percent local contribution or a 60 percent state contribution and a 40 percent local contribution. All of the bonds were contingent on an appropriation by the legislature. The bonds prior to 2013 were not a part of the bill under consideration. There had been confusion in the testimony. Co-Chair Wilson clarified the purpose of the bill. For the previous 5 years no municipality had been able to take out a bond with the understanding that the state would pay. They could put out bonds, but communities would be 100 percent responsible. The bill would extend the same moratorium for 5 years from FY 20 to FY 25. It would have no effect on the appropriation that might or might not happen with the current debt from Alaska's school districts. 2:19:15 PM DR. ANNMARIE O'BRIEN, SUPERINTENDENT, NORTHWEST ARCTIC SCHOOL DISTRICT, KOTZEBUE (via teleconference), called in opposition to the bill. She reported that the Northwest Arctic Borough was under a PILT agreement negotiated in good faith with the Red Dog Mine with an understanding that the moratorium would end in 2020. It would come in time for the borough to support the Kivalina School and to bond for the borough match for the school. She stressed that the borough had no other place to turn to raise funds. The borough felt very strongly about putting an end to the moratorium. She added that the committee should make considerations for boroughs receiving funding under PILT. The Kivalina School was part of the Moore Settlement. The borough had begun the process of working on the school access. The development of the road to the school was currently in process. The opening of the school was long- overdue and had an expected opening date of 2021. However, it was necessary to have the school bond debt reimbursement in place to move forward with the project. She urged members to reject the extension of the moratorium. 2:21:38 PM NILS ANDREASSEN, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL LEAGUE, thanked the chair for clarification on the purpose of the bill. He spoke of the importance of school bond debt reimbursement to local governments around the state. In order for the Alaska Municipal League (AML) to approach the bill effectively it was still working to determine municipal impacts. He thought agreement needed to be reached as to whether the state had an obligation to fund the construction and/or maintenance of school facilities. If the answer was yes, then the next question that needed to be answered was to what extent. The Alaska Municipal League believed that the constitution was clear that it was the state's responsibility to establish and maintain a system of public schools, which AML thought extended to the construction of schools. Once his questions were answered, better certainty for school districts and local governments could be provided. Mr. Andreassen continued that AML's fear was that extending the moratorium would result in minimal investment in major construction and maintenance as districts waited an additional 5 years before being able to address current concerns. The league was aware that deferred maintenance was currently a challenge and extending the moratorium might compound the challenge. It was not to say that some municipalities might make different decisions. Clearly, Fairbanks and others had worked to address current concerns as best as they could. It did not mean that school districts would not work with local governments to make necessary investments. However, the questions about who was responsible and to what extend needed to be answered. Mr. Andreassen continued that it would fall to local tax payers to determine whether tax increases at the local level could and should be borne or sustained and whether they could occur presently or whether local tax dollars would be better leveraged against state investment in the future. He asserted that it was clearly in the state's interest to put some stronger guidelines around the program including better control over its debt structure and to ensure that the funding of school construction or maintenance was consistent with available revenues. The Alaska Municipal League would look forward to such a conversation. He offered that where there might be changes to the program, AML would like to be involved and would like to see all parties at the table. He suggested working next on an assessment of needs that had been delayed for the previous 5 years, where there had been progress, and what the potential impact of 5 more years might mean to communities, school districts, and students. 2:25:06 PM Representative Knopp noted Mr. Andreassen's comment about the state aligning its debt with the ability to pay for it. He thought it was exactly what the state was doing by extending the moratorium. He asked Mr. Andreassen to comment. Mr. Andreassen responded that he thought 5 years was a long period without knowing what the current needs looked like at the local level in terms of school districts needing construction funding or major maintenance conducted. He suggested that it was not possible to match need to current revenue without knowing what the needs were. Additionally, he thought it would be wise to consider caps or different matching amounts to shape the requests which would better enable the state to structure the program relative to current revenues. Representative Knopp asked whether he thought it had been made clear to voters that the bond reimbursement would be subject to appropriations. Mr. Andreassen replied that for prior committed school bond debt reimbursement it varied by community in terms of the public's understanding. He believed the public made the commitments based on a 17-year history of the state reimbursing school bond debt. Co-Chair Wilson asked Mr. Andreassen's if he thought it was fairer for the legislature to allow districts to bond without looking at their ability to pay. Mr. Andreassen replied that he would be better able to evaluate the bill if a needs assessment was available showing which districts currently needed major construction or maintenance. He would then be able to evaluate it against the local tax base ability to pay for or provide match funding. He noted the Northwest Arctic Borough's PILT agreement which was very different than other boroughs. There were different tax bases and tax formats that local governments applied to their ability to bond. He believed that having a more nuanced view of what it looked like at the local level would help everyone involved in understanding what a moratorium might look like for local residents. Co-Chair Wilson thought the first question should be about a municipality's ability to pay. Mr. Andreassen responded in the affirmative. He thought it went back to the earlier confusion about whether it extended and paid the reimbursement or whether it was only focused on the moratorium. If it extended the repayment of current bond obligations, AML would support the bill. It was whether the moratorium was extended and whether the analysis was done. Co-Chair Wilson reiterated that the bill had nothing to do with paying what was currently owed. She brought the bill forward because the state was having difficulty being able to pay what the state presently owed. She opined that it would be unfair to Alaskans to issue more bonds while the state was currently not paying it. She was proud of her school district and community that stepped up to the plate. Representative Josephson was likely to support the bill. However, he was sad that there had been a lack of resolve since 2015 to put together a comprehensive fiscal plan. It was something he had fought for. He noted voting for new revenue. He thought the bill was warranted given the circumstance in context. 2:30:25 PM Co-Chair Wilson CLOSED Public Testimony. Vice-Chair Ortiz agreed with the previous speaker regarding supporting the bill. He wanted to be clear that by extending the moratorium, the legislature was not extending deferred maintenance needs or deferred construction needs. He did not think the extension would help in the state's ability to provide adequate education and facilities for Alaska's children. He wanted to hear more from Mr. Mearig about future deferred maintenance and school construction projects that might not go forward if the legislature were to extend the moratorium. Co-Chair Wilson asked Mr. Mearig to respond to Vice-Chair Ortiz's question. Mr. Mearig asked for clarification. Vice-Chair Ortiz asked Mr. Mearig if he was aware of any deferred maintenance issues or new school construction plans that might get put on hold if the state was to adopt the moratorium. Mr. Mearig reported that the state had a program for identifying and collecting school capital needs. The program was an annual opportunity for all districts to submit their requirements to the state. A list for possible FY 20 funding had been compiled and was available to the public. Based on the list, there were plenty of needs from districts around the state. There were many districts that had not participated as well as they could have. There might be other needs not expressed on the list. The only district he had had active conversations with about the reopening of debt had been the Mat-Su Borough School District. They spoke about the timeline to introduce a $20 million to $25 million bond package. His advise to them was to get on the list so that the division could see their need. If there was an opportunity for the debt to be reopened, the division would have a chance to work through the eligibility review. Representative LeBon asked whether the department had a chance to weigh in on language presented to voters on a bond issue when a community bonded for a new school building. Mr. Mearig responded that there was no longer a requirement in statute to pre-approve voter language for debt service for schools. Representative LeBon mentioned that in his days on the school board, members went to great lengths to educate voters. Although the intention was for a 70/40 split, it was not a guarantee. The board educated voters that the possibility existed that the district might not receive a 70 percent state reimbursement. There was a risk in any school bond debt program that the community might end up having to service the debt. 2:36:42 PM Vice-Chair Ortiz directed a question to Representative LeBon. He suggested that if the state appeared to be an unlikely participant in the bonding program, the bond rates offered to communities might increase. He wondered if communities would have to pay a higher rate for the bonds. Representative LeBon thought there was a chance that the rate of the bond would be slightly higher. However, they were general obligation bonds which the community had to stand behind, as the bonds carried the highest priority for repayment. Co-Chair Wilson added that when communities signed on the bottom line, it was for 100 percent of the obligation, whether or not the state contributed. Representative Carpenter was struck that the state had a $1.6 billion deficit and Alaska's economy was in recession. He thought it was obvious the state could not support its current spending level. The extension of the moratorium would require entities to look elsewhere other than the state which was not a bad thing while Alaska's economy was struggling and could not afford its current spending. HB 106 was HEARD and HELD in committee for further consideration. Co-Chair Wilson reviewed the agenda for the following day.