2d CS FOR HOUSE BILL NO. 23(RLS) "An Act creating the Knik Crossing Development Corporation as a subsidiary corporation of the Alaska Housing Finance Corporation and relating to bonds of the Knik Crossing Development Corporation." 2:21:07 PM Vice-Chair Fairclough noted that there were varying opinions on the audit that was before the committee. She stated that the Division of Legislative Audit (DLA) had full support from legislative auditors and had worked within the parameters that had been requested by the legislature. She relayed that the Knik Arm Bridge and Toll Authority (KABATA) board had worked diligently to move the project forward. She offered support for the legislation and expressed an obligation to protect the audit staff that had been working on behalf of the legislature. 2:22:43 PM MICHAEL FOSTER, CHAIRMAN, KNIK ARM BRIDGE AND TOLL AUTHORITY, introduced his support staff. He recognized the work that had been done by the DLA committee and the legislature on the audit. He stated that KABATA had concerns with the models that were used in the findings to predict population and social economic and demographic numbers. 2:23:54 PM JUDY DOUGHERTY, DEPUTY EXECUTIVE DIRECTOR, KNIK ARM BRIDGE AND TOLL AUTHORITY, gave a brief overview of her credentials. She relayed that the audit had found nothing wrong with the Knik Arm Crossing project development process or governance and no problems with contracting practices. She said that a DLA auditor had testified earlier in the week that KABATA'a draft document could not be audited because they were a "moving target." She explained that in accordance with standard auditing practices a scope change was identified and KABATA was informed. She asserted that a balanced accounting of the general risk/reward calculus of and availability P3 agreement could and should have been included in the report. She addressed the issue of reasonableness. She offered that reasonableness was what had blown the audit out of proportion and damaged the progress of the project. She opined that the auditors contended that the assumptions made for the project model were not supported by independent sources. 2:25:45 PM Ms. Dougherty asserted that 6 different traffic demand models had been completed since 2005 that predicted traffic on the Knik Arm Crossing. She referred to "Knik Arm Crossing, Traffic Study FAQs" (copy on file). She pointed out to the committee that Page 2 of the document contained a table detailing the studies. She relayed that the studies were performed for DOT's Highway to Highway project and the AMATS Metropolitan Transportation Plan in addition to KABATA. She asserted that each study had been done with their own set of underlying assumptions, variables and limitations; each study had indicated that 4 lanes would likely be necessary on the crossing on later than 2035. She said that each study had study boundaries that included the crossing location and assumed economic growth in the lower Mat-Su borough as a result of economic "spill-over" from Anchorage once the crossing was constructed. She shared that 3 of the studies could have been used as a basis for comparison analysis by DLA or a qualified consultant. She felt that the auditors had dismissed the studies and had based their conclusions on a traffic model prepared for a DOT project located near Wasilla; more than 30 miles from the crossing location, and the study boundaries did not include the crossing location. She said that the population and variables used in DLA's selected model were based on the assumption that there would be no change to the traditional population and economic growth in the lower Mat-Su borough as a result of the bridge opening. She furthered that DLA's assumption made no consideration for a change in job growth or population growth, and had used a model that predicted that there would be 30 percent fewer jobs in Port Mackenzie than ISER had predicted would be generated by providing ferry service alone at the crossing site. She contended that the audit findings did not sound reasonable. She said that the crossing project had had traffic studies performed by 2 separate consultants who had arrived at similar traffic volumes on the bridge, but that the information had been dismissed by DLA as not being independent. She thought that varying definitions between auditing standards and professional standards among engineers of how "independent information" was defined could have catered to the problem. She stressed that the professional engineering firms that performed the studies were independent and had no reason to stake their professional integrity for the benefit of KABATA. She said that the concerns of the DLA auditor had been addressed in one-on-one correspondence with KABATA's traffic and revenue consultant who provided insight to local conditions of the project site and variances in population projections. 2:31:05 PM Ms. Dougherty cited Page 257 of the "Legislative Budget and Audit Committee Report of the Department of Transportation and Public Facilities Knik Arm Bridge and Toll Authority Knik Arm Crossing Project" (copy on file): Since both the transportation model and the financial model are computer based, performing "what if" changes in underlying assumptions and data, and evaluating their effect on outcomes should not be overly burdensome. Ms. Dougherty relayed that KABATA agreed with the statement. She said that over 2,000 simulations of key traffic control revenue variables had been performed in 5 year increments and used as input to the financial risk analysis previously presented by David Livingstone of CITI Bank. She furthered that. She opined that the auditors failed to recognize that the traffic volumes projected by DLA's "what if" scenario had been accounted for in the range of risk analysis when the risk analysis was evaluated. She asserted that KABATA's consultants represented the industry's "who's who" in transportation engineering, financing, traffic and toll revenue forecasting and contract development legal support and had been involved in nearly every successfully delivered toll road financing P3 project in the country. 2:33:39 PM Vice-Chair Fairclough remarked that she was Chair of the Legislative Budget and Audit (LB&A) Committee. She informed the committee that the audit had been requested by the previous LB&A chair. 2:34:30 PM Co-Chair Meyer wondered when the auditors had contacted KABATA for information about the project. Ms. Dougherty replied that she was not sure. She stated that management letter number 1 had been received on February 1, 2013. She said that the strong language used in the response to the report was due to the fact that KABATA had been rushed in their response; they had been given ten days to respond and the legislative session was already underway. She felt that there was a lack of understanding between KABATA and DLA. 2:35:39 PM Vice-Chair Fairclough felt that the lack of understanding stemmed from a different understanding of the P3 agreement. Ms. Dougherty thought that there was a concern regarding "toll friction." She said that toll friction could reduce the traffic count on a bridge because people had to be willing to pay the toll. She stated that a community was going to develop in the Mat-Su quickly and that the borough had establish several pound sites in anticipation. 2:36:59 PM Vice-Chair Fairclough wondered if the auditors had access to the P3 agreement. She understood that it had not been finalized yet and imagined that it would be difficult for an auditor to audit something that was not complete. She wondered what additional information would have been found by the auditor had the P3 agreement been complete. 2:37:35 PM Mr. Foster responded that KABATA had provided the draft RFP and draft PPA to the auditor. He relayed that both documents had yet to go through final review. He shared that the governor had legal consultants reviewing the document. He said that he told auditors that the document was confidential because KABATA was engaged in ongoing procurement. 2:39:02 PM Co-Chair Meyer handed the gavel to Vice-Chair Fairclough. Vice-Chair Fairclough noted that the draft was confidential. She was unsure whether the contractor would have been provided anything in the P3 agreement that they could consider as they moved forward with the audit. She said that the auditors had returned to the committee and amended the framework of how they would go forward with the audit. Mr. Foster deferred legal questions to the Department of Law. 2:40:18 PM Ms. Dougherty added that there were a number of benefits and risks associated with the general structure of a P3 agreement that had not been reflected in the report. 2:40:43 PM Senator Olson noted several projects that had been invested with millions of dollars and then had been abandoned. He wondered how the crossing project differed. He expressed concern that if the numbers were wrong that the State of Alaska would be left footing the bill. Mr. Foster responded that there was a need for infrastructure in the area. He stated that the Point Mackenzie area was looking to incorporate and would be the 4th largest city in the state. He said that the increase in traffic in the area reflected the real need for increased infrastructure in the area. He warned that not building the bridge could result in an estimated $3 billion plus in Glen Highway improvements. He stressed that all the areas in the Mat-Su were expected to grow in population in the future and that the crossing would be the best plan to accommodate the increase. 2:47:38 PM Senator Olson remarked that the money for the bridge could be going towards education. He argued that people who were independent of the audit and the legislature were coming up with numbers that were one-third of what KABATA had presented. He noted that on April 2, 2013, Mr. Foster had testified that the Highland Area in 1985 was 33,000; in 2010 the number increased to 53,000. He pointed out to the committee that that was not a doubling of the numbers, but was 63 percent more. He furthered that the numbers offered by KABATA for 2035 showed the area at 110,000, which was more than double the current number. He felt that KABATA's projections presented serious problems. He said that the people contracted by KABATA to come up with the numbers had a reputation of being overly optimistic in their estimates. Mr. Foster rebutted that he did not believe that that was true. 2:49:49 PM Senator Dunleavy believed that this was one of the few projects that he could guarantee, with 100 percent certainty, that once completed would be used. He said that the use would be continual and growing. He quoted Page 1 of the audit: The risks and rewards in totality as outlined in the P3 agreement could not be evaluated because the agreement has not been finalized and is subject to further changes. Senator Dunleavy relayed that he did not fault the auditors for their methodology. He did not believe that the project should be likened to the failed projects mentioned by Senator Olson. He wondered what could be otherwise done to serve the growing area; would it be more cost effective to build more lanes instead. He did not believe that there was any question about whether there would be traffic on the bridge. 2:52:53 PM Senator Hoffman directed attention to Page 19: In August 2012, KABATA management submitted a TIFIA loan request for $500 million at a 49 percent participation rate in eligible costs. In a letter to KABATA, dated September 25, 2012, the Federal Highway Administration (FHWA) pended reviewing the request stating that: compelling justification" for providing assistance above a 33 percent participation level. Senator Hoffman continued to Page 27, "Findings and Recommendations." He felt that the legislature should address the findings. He wondered whether KABATA would address the findings as the project moved forward. He noted that there was one recommendation: Recommendation No. 1 Knik Arm Bridge and Toll Authority (KABATA) management should revise traffic and toll revenue projections to address deficiencies. The audit of key assumptions and inputs used in KABATA's transportation modeling process identified several deficiencies regarding the validity of assumptions and inputs used as a basis for projecting toll revenues. Deficiencies are as follows. projected for 2035 were overly optimistic when compared to the household growth rates and levels projected by University of Alaska's Institute of Social and Economic Research and the State's Department of Labor and Workforce Development. The discrepancy stems from KABATA's economic growth rate projections in the Point MacKenzie region, specifically in the Port MacKenzie (Port) area. percent is significantly higher than the actual growth rate of 2.5 percent based on the Department of Transportation and Public Facilities' traffic counts. The differences are partially caused by the anticipated growth in population and employment in the Point MacKenzie area. traffic is unsupported. commercial vehicle traffic for the KAC is high compared to actual traffic count data for the Glenn Highway which indicates a split of 4.9 to 6.6 percent. KABATA's 12 percent split is based on DOTPF's 2003 through 2006 traffic data. Since then, DOTPF has improved its traffic data collection methodology and now reports much lower traffic count splits that better reflect the actual count between personal and commercial vehicles. employment level of 14,337 is significantly higher than the level noted in the Matanuska- Susitna Borough plan of 4,515. A majority of KABATA's employment (13,828) is based on projected Port economic development which is inconsistent with the Port's master plan and regulations. All of the above concerns have the effect of overstating traffic volume. Overstated traffic volume in KABATA's modeling process has the effect of overstating projected toll revenues. Senator Hoffman highlighted: The Federal Highway Administration's (FHWA) guidelines for P3s20 state: Inaccurate or overly optimistic traffic projections and underestimated project costs can lead to the development of pro forma financials that appear to justify the investment decision, but that do not reflect the project's actual ability to repay debt or to meet equity investor's return requirements. Under KABATA's planned P3 arrangement, lower than expected toll revenues would necessitate the need for additional funding as availability payments must be paid to the private partner regardless of how much the bridge is used. In recognition of the risk that overstated toll revenues pose to the State, we recommend KABATA management revise the traffic and toll revenue projections to address noted concerns. Senator Hoffman stated that as a legislator he could not ignore the recommendations of DLA. He queried the timeframe for the KABATA board to address the deficiencies as pointed out by the audit. Ms. Dougherty responded that the bullet points had been addressed in the KABATA response to the preliminary audit report. She noted that three of the bullets specifically referenced the Point Mackenzie area she did not believe that the model used by the auditor addressed the influx of traffic and economic growth that would be generated by the project. 2:57:46 PM Mr. Foster furthered that KABATA's response to the preliminary report could be found on Page 211 of the audit. 2:58:28 PM Senator Bishop echoed the comments made by Senator Hoffman. He believed that all involved parties needed to agree on the cost scheduling numbers in order for the project to move forward. 2:59:18 PM Senator Olson remarked that the proposed area for the project had a history of expensive and unused projects. He noted that the audit had highlighted that if the toll revenues were lower than expected, the state would be required to make payments to the private partners regardless of how much the bridge was used. Mr. Foster replied in the affirmative. Senator Olson contended that there was no reason to support a project that was driven by suspect numbers. He asked Mr. Foster if the speculation concerning the numbers was reasonable. Mr. Foster agreed that the residents of Alaska should evaluate every proposed project. He denied any ulterior motive on behalf of KABATA to move the project forward. He offered that the decision about whether the project would move forward should be made by the state. He explained that KABATA's job was to provide information to the legislature. 3:02:10 PM Mr. Foster referred to Page 37 of the audit report, which contained a table that compared the LB&A numbers to the KABATA population/traffic financial model. He asserted that the auditor's model did not consider the impacts of the crossing. 3:04:28 PM Senator Olson stated the state did not have the population to generate the tolls that would pay for the project. He understood that KABATA had been turned down 4 times for low-interest federal loans. Mr. Foster replied that letters of interest had been submitted 4 times. He said that at the time of application the project had not been a mature as it was currently. He stated that there were now more federal dollars available and the chances of some of them reaching the project were improved. 3:06:58 PM Senator Dunleavy commented that approximately 360,000 people were using the one major road in the area of the proposed project. He reiterated that the bridge would be used immediately upon completion. He stated that having a large project that paid for itself was a worthwhile concept to explore. He suggested that all of the major projects executed by the state should pay for themselves. 3:08:46 PM Senator Olson reiterated that if there were lower than expected toll revenues then the state would have to make the inevitability payments to private partners, leaving the state on the hook for billions of dollars. Mr. Foster replied that there were sideboards on the project which would keep the cost to the state down. 3:10:48 PM Vice-Chair Fairclough quoted Pages 19 - 20 of the audit: justification" for providing assistance above a 33 percent participation level $150 million reserve fund is appropriated by the State or it becomes clear that the funding is "reasonably likely" to be appropriated. She noted that the auditors had attempted to provided checks and balances to guide the project forward. She queried the consequence of not acting on the project during the current legislative session. Mr. Foster responded that KABATA would still move forward with the RFP process and the PPA agreement. He added that there were permits that were being finalized. He shared that if the legislation did not pass the project would fall further down the Transportation Infrastructure Finance and Innovation Act (TIFIA) list. He thought that the project could be viable for the federal funds in a year, but that would be dependent on how much of the money was allocated within the next year. He said that there was no guarantee that the legislation would put us in the TIFIA pot, but that it could move the state closer. He noted that the state had been invited to submit the application which meant that Alaska was in line for the federal funding. 3:14:41 PM Mr. Foster shared that if the legislation was not passed KABATA would continue to move forward. 3:16:35 PM Senator Dunleavy wondered about plans to upgrade the Glenn Highway. Mr. Foster replied that there was three mile expansion currently occurring, funded by a general obligation bond. 3:16:59 PM Senator Dunleavy asked if a toll was being charged for the Glenn Highway expansion. Mr. Foster replied that a toll could not be required because the road was built using federal highway money. He said that the Glenn Highway could be tolled but it would require a dedicated lane; the commuter must have an option if the road is constructed with federal dollars. Vice-Chair Fairclough returned the gavel to Co-Chair Meyer. 3:17:37 PM SB 13 was HEARD and HELD in committee for further consideration. 2d CS HB 23 (RLS) was HEARD and HELD in committee for further consideration. 3:19:00 PM AT EASE 3:30:15 PM RECONVENED