Legislature(2021 - 2022)BARNES 124
04/08/2021 08:00 AM House COMMUNITY & REGIONAL AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| HB127 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 127 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 127-MUNI BOND BANK: UA, LOAN AND BOND LIMITS
8:03:26 AM
CO-CHAIR SCHRAGE announced that the only order of business would
be HOUSE BILL NO. 127, "An Act relating to the Alaska Municipal
Bond Bank Authority."
8:03:54 AM
REPRESENTATIVE BART LEBON, Alaska State Legislature, as prime
sponsor, introduced HB 127. He paraphrased the sponsor
statement, which read as follows [original punctuation
provided]:
This bill expands the authority of the Alaska
Municipal Bond Bank Authority regarding bonding
capacity to the University of Alaska and regional
health organizations.
Regarding the University of Alaska (UA), the bill
proposes two changes:
? Removes the project scope limiting Alaska
Municipal Bond Bank Authority participation to only
heating or energy projects
? Raises the UA project participation cap from
$87,500,000 to $500,000,000
Previously the University used Municipal Bond Bank
participation for funding of the combined heat and
power plant at the University of Alaska Fairbanks.
This change is intended to provide the University with
expanded tools for financing or refinancing, allowing
the University to leverage the bond ratings of the
Alaska Municipal Bond Bank Authority if advantageous.
This additional financing tool is not intended to be a
substitute for capital appropriations through the
legislature.
Regarding regional health organizations, the bill
proposes these changes:
? Removes the 49% Alaska Municipal Bond Bank
Authority single-project participation cap
? Raises the cap for all regional health
organization projects from $205,000,000 to
$500,000,000
This change is intended to expand opportunities for
regional health organizations to use the Alaska
Municipal Bond Bank Authority. In accordance with
existing statute AS 44.85.010, the Bond Bank provides
capital funds through loans to regional health
organizations "when the commissioner of health and
human services anticipates a state financial benefit
and an increase in regional quality of care." The
financial benefit is realized by the state by
capturing additional Federal Medicaid reimbursement,
assisting the State in reducing Medicaid expenditures.
I would appreciate your support in expanding
opportunities for the University of Alaska and
Alaska's regional health organizations to utilize the
Alaska Municipal Bond Bank Authority.
8:06:23 AM
AIMEE BUSHNELL, Staff, Representative Bart LeBon, Alaska State
Legislature, offered a sectional analysis for HB 127 on behalf
of Representative LeBon, prime sponsor. The sectional analysis
read as follows [original punctuation provided, with some
formatting changes]:
Sec. 1. AS 44.85.010
Removes the project scope limitation of only heating
or energy projects for the University of Alaska
Fairbanks
Sec. 2. AS 44.85.090
Removes the 49% project participation on the Alaska
Municipal Bond Bank for regional health organization
projects Raises the $102,500,000 project limit for a
single regional health organization project to
$250,000,000
Sec. 3. AS 44.85.180
Raises the $87,500,000 cap for University of Alaska
projects to $500,000,000 Raises the $205,000,000 cap
for regional health organization projects to
$500,000,000
8:07:49 AM
DEVEN MITCHELL, Executive Director, Alaska Municipal Bond Bank
Authority, Department of Revenue, explained the necessity for HB
127. Currently, he said, there is a limitation on financing
participation for the Alaska Municipal Bond Bank, on a regional
health organization project, of 49 percent of the project. This
means a regional health organization considering financing a
project would have to use not only the Alaska Municipal Bond
Bank, but also have another significant lender, which results in
pressure not to use the Alaska Municipal Bond Bank, even if the
alternatives are slightly more costly. He said the Alaska
Municipal Bond Bank has done a couple projects for regional
health organizations: a refinancing of the Tanana Chief
Conference's (TCC's) health clinic in Fairbanks and the Yukon-
Kuskokwim Health Corporation's (YKHC's) new hospital project in
Bethel. He said TCC had borrowed money prior to using the
Alaska Municipal Bond Bank to refinance its bonds and was "not
able to achieve an investment grid credit rating on those
bonds," but the Alaska Municipal Bond Bank helped them to
"structure their transaction in a way that the municipal market
expects to see" thus getting "an investment credit rating
similar ... to the bond bank's rating." He called this "the
meat and potatoes of what the bond bank's all about," which is
to provide opportunities to people "to access markets so that
they can gain experience and then be able to access markets
independent of the bond bank."
MR. MITCHELL said in the 1970s, Alaska was "kind of like a
different country almost" compared to the financial markets in
New York. The Alaska Municipal Bond Bank could lend credit
support to smaller communities, to the extent that the state was
able to provide it, and reduce costs for capital projects,
thereby helping communities to gain experience so that they
could potentially issue bonds without the Alaska Municipal Bond
Bank, if it was advantageous for them to do so.
8:11:21 AM
MR. MITCHELL talked about the proposed increase in the cap for
the University of Alaska (UA). He indicated that because of
UA's financial stress of the last several years, it had "a
fairly draconian negative credit action against them." He said
the Alaska Municipal Bond Bank has worked with University of
Alaska Fairbanks (UAF) on a specific project on campus. He
added, "It made sense to provide greater opportunities or
alternatives for the university to use the bond bank for either
refinancing other outstanding loans or any new money projects
that might come down the road here in the future." Mr. Mitchell
offered to answer questions from the committee.
8:12:55 AM
MYRON DOSCH, Chief Finance Officer, University of Alaska, stated
the university's support for HB 127. He said the proposed
legislation would provide the opportunity for UA to obtain a
loan through the Alaska Municipal Bond Bank at a potentially
lower rate than it could obtain on its own. He explained that
is because the Alaska Municipal Bond Bank has a higher credit
rating than UA does, which means UA can save on financing costs
on refinancing or borrowing for new capital projects in the
future.
8:14:07 AM
REPRESENTATIVE HANNAN asked Mr. Mitchell for an overview of what
a municipal Alaska Municipal Bond Bank is structured to do.
8:15:26 AM
MR. MITCHELL responded that the Alaska Municipal Bond Bank
program was created as a public corporation of the State of
Alaska in 1975. The purpose of the corporation has been to lend
support to credit-worthy municipalities that would otherwise pay
higher interest rates. He said the process for considering
loans involves a five-member board that considers a credit
report from the Alaska Municipal Bond Bank, which issues bonds
that carry a moral obligation pledge of the State of Alaska. He
explained that moral obligation is a term of art "where the
enacting statutes of a program require, upon issuance of bonds,
you fund a reserve that's in place to secure the bonds in the
event of a payment failure, and that, in addition to funding
that reserve, you have an annual reporting requirement to the
legislature and governor to notify them of the sufficiency of
that reserve." If the reserve were insufficient, then the
governing body would appropriate to replenish it. He said that
structure "gets you a rating based on, in this case, the State
of Alaska." He added, "So, we wind up with a credit rating
that's one notch off the State of Alaska." Mr. Mitchell noted
that the bonds are all self-paying; there has not been a draw on
that reserve, and "there has been no funding to pay for a
delinquent borrower in the 45-year history of the bonding
program." He said, "This isn't counted against the debt
capacity of the State of Alaska." He said it is a standalone
program similar to that used by other state agencies, such as
the Alaska Housing Finance Corporation.
8:19:55 AM
MR. MITCHELL discussed the $87.5 million cap. He advised it was
a creative solution to the difficulty in funding a large capital
project on the UAF campus: the coal fire power and heat plant.
The cost of the plant exceeded what the state could fund on a
cash basis and what the university was able to fund through its
historical revenue bond program. The Alaska Municipal Bond Bank
was introduced as an alternative. He said UA still issued
bonds, but they were "privately placed with the bond bank,"
which in turn issued its bonds in the public market and passed
those rates on to the university. The cap was anticipated as
the amount needed as the last piece of the funding of that
particular project. He said increasing that cap [under HB 127]
and "eliminating the restriction on just power and heat
projects" will provide an alternative for the university to
consider in the future to ensure it gets the lowest rates
available.
8:21:39 AM
REPRESENTATIVE HANNAN asked whether there are other
restrictions.
MR. MITCHELL answered there are more restrictions on the
regional health organization program than any other category of
lending the Alaska Municipal Bond Bank has. He said there are
caps for every one of the Alaska Municipal Bond Bank's
categories for lending: $1.5 billion for municipalities, joint
action agencies, and joint insurance associations; $205 million
for regional health organizations; and $87.5 million for the
university. The current total lending capacity, he said, is
$1.792 billion. He reported that as of September 2020, the
Alaska Municipal Bond Bank had outstanding loans of $987 million
to municipalities, joint action agencies, and the university and
just over $100 million to regional health organizations. In
response to a follow-up question, he said the $1.792 billion is
"the summation of the other authorizations," and that amount
would increase if other authorizations were increased. He said
that during his tenure, the amount for municipalities, joint
action agencies, and joint insurance associations has increased
five times. He said when he first started working with the
Alaska Municipal Bond Bank, the authority was $125 million;
there has been significant growth within the program in the last
20 years, resulting in an increase to the cap. He said it is
not unusual to come before the legislature to request a cap
increase. He explained one reason the Alaska Municipal Bond
Bank has not asked for a larger increase is that these are moral
obligation bonds of the State of Alaska, and it wants to be
fiscally prudent. He said, "It provides comfort to me to have
more contact with the legislature as a program grows, rather
than have growth that's less restrictive and has more of an
opportunity to deviate from what the leadership might think that
it should be." He said if there are large growth projects that
come through the Alaska Municipal Bond Bank, if HB 127 were
passed, then he is comfortable in coming back to the legislature
to provide more information and letting its members know how the
program might be developing.
8:26:21 AM
REPRESENTATIVE PRAX asked for confirmation that from the
perspective of the entities, they get a better credit rating
because of the state's backing of a project.
MR. MITCHELL confirmed that is correct.
REPRESENTATIVE PRAX asked whether citizens are depending on the
expertise and integrity of board members and Mr. Mitchell, in
terms of managing risk.
MR. MITCHELL answered that is true, but noted that the projects
also go through a local process, as well as annual reporting,
auditing, and public credit ratings.
REPRESENTATIVE PRAX asked if there are established industry
fiduciary guidelines for the Alaska Municipal Bond Bank.
MR. MITCHELL answered that there are, in the sense that the
Alaska Municipal Bond Bank is issuing public debt with a credit
rating attached. That process has a wide array of fiduciary
standards associated with it. He said he doesn't know what
benefit would come from deviating from the standards.
REPRESENTATIVE PRAX noted that school bonds had been promoted on
the assumption that "the state legislature was going to pay a
good part of the debt version." He indicated that [the public]
did not read the fine print that specified the funds would be
subject to appropriation. Now municipalities are concerned that
"they are asked to make good on their obligation." He
questioned whether this program could run into a similar
situation.
MR. MITCHELL responded that "the loans that are made to these
entities are structured to either conform to a general
obligation bond structure or a revenue bond structure or, in
some very limited instances, a lease revenue bond structure, and
so there are ... commitments that are made at the borrower level
that provide a pathway for ensuring that any corrective action
that's needed is taken in the event of stress that might come
down the road." He continued:
... At the local level, it would be the same if they
issued these bonds independent of the bond bank.
Because in ... almost all instances - there are some
limited instances where it would be difficult to find
alternative financing - they could do the same thing
that they're doing through the bond bank - they would
just pay more.
MR. MITCHELL said when the Alaska Municipal Bond Bank issues new
money bonds for communities, it asks its financial advisor to
calculate the savings as a result of using the Alaska Municipal
Bond Bank relative to what the community might have paid in
interest expenses if it had gone outside the Alaska Municipal
Bond Bank. He said over the last five years, savings approached
$100 million. Mr. Mitchell shared that the Alaska Municipal
Bond Bank spends only full budget authorization if it is very
busy issuing a lot of bonds and spends less when issuing fewer
bonds; in that way it is an efficient program that uses only
what it needs. He indicated that savings goes directly into
Alaskans' pockets, either from decreased taxes or decreased user
fees.
8:34:30 AM
REPRESENTATIVE PRAX expressed concern that "this situation
creates an incentive for the borrower to borrow more than they
otherwise would have borrowed, because it gives the impression
that somebody else is securing the loan."
MR. MITCHELL responded that he understands the concern. He
reminded Representative Prax that the Alaska Municipal Bond Bank
is not and could not pay anyone's debt service. He said [bonds]
are an alternative means of funding a project at less cost and
burden. He said he understands the angst caused by the unfunded
school bond program; however, he speculated that when asked,
people experiencing that issue would not say the Alaska
Municipal Bond Bank falls into that same category.
8:36:29 AM
REPRESENTATIVE MCCARTY said he shares concerns similar to that
of Representative Prax. He mentioned the fiduciary
responsibility and credit rating of the Alaska Municipal Bond
Bank and necessity to ensure the entity asking for the bond to
be issued is credit worthy.
MR. MITCHELL confirmed that the ability to issue bonds doesn't
guarantee that a loan will be made; fiduciary responsibility of
the seeker of the loan must be determined. Bonds are loans paid
100 percent of the time and on time.
8:39:22 AM
CO-CHAIR HOPKINS asked if it was [an accurate assessment] to say
that Mr. Mitchell is there to facilitate lending but has a
responsibility to protect the state by ensuring those applying
for bonds have the ability to pay.
MR. MITCHELL answered yes.
CO-CHAIR HOPKINS asked the bill sponsor if there is a difference
in HB 127 and the legislation that had been before the previous
legislature.
8:39:47 AM
REPRESENTATIVE LEBON answered no. He added that the bonding and
banking worlds are similar. In his past banking career, he
shared, he participated on loans through the Alaska Industrial
Development and Export Authority (AIDEA), where the bank could
finance from 10 percent to 50 percent, and AIDEA had the ability
to go to the Alaska Municipal Bond Bank to raise its share of
the funding. He said banks look for "safety and soundness" when
making loans and often seek partners to share the risk. He said
there are different entities that could participate in loans;
the Alaska Municipal Bond Bank is "just another tool in the
toolbox" for both UA and regional health organizations.
8:41:44 AM
REPRESENTATIVE DRUMMOND asked Mr. Mitchell to speak more about
the ceiling on the bond capacity.
8:42:06 AM
MR. MITCHELL responded that current statutes allow a ceiling for
authorizing bonds without a third-party authorization. He
reiterated the various ceilings that exist.
REPRESENTATIVE DRUMMOND asked if the Alaska Municipal Bond Bank
was close to its ceiling or was issuing "as many bonds as
possible" in order to achieve its authority.
MR. MITCHELL reemphasized that the Alaska Municipal Bond Bank
does not seek to issue bonds; it tries "to fund good projects as
they come along."
8:43:56 AM
REPRESENTATIVE PATKOTAK asked about the UA process in public
engagement in approving a bond package.
MR. MITCHELL deferred to Mr. Dosch, but said UA has higher
standards and must obtain legislative approval for larger
issuances.
8:44:54 AM
MR. DOSCH added that UA goes through a due diligence process and
assesses new projects based on mission and need and capacity.
Although UA does not have the same public obligation, under
statute, it must seek legislative approval for any bond that
exceeds $2.5 million. He said the Board of Regents would
approve, under UA's policy, any new debt issuances and
refinancing debt; there is debt ratio that is monitored.
REPRESENTATIVE PATKOTAK asked Mr. Mitchell about the history of
debt paid.
MR. MITCHELL replied that the regional health organization
authorization of the Alaska Municipal Bond Bank is relatively
new. He said these organizations are defined under statute, are
typically nonprofits, and are associated with tribal entities.
They cover 3,000 square miles of a region, providing health
care. There are 12-13 of these regional health organizations in
Alaska. They receive funding through compact agreements, which
have been challenged historically. The organizations sued for
the payments they were eligible to receive, and those lawsuits
went all the way to the [U.S.] Supreme Court. The regional
health organizations prevailed, and their funding is automatic
at this point, Mr. Mitchell said; therefore, it is not something
that has any risk factors attached to it. The type of funding
is significant and in excess of a billion dollars a year. He
said, "In some ways, they increased that funding by entering
into further agreements for funding of facilities as they're
required." He offered an example. He said there is significant
credit strength through the regional health organization sector
of the Alaska Municipal Bond Bank program, but it has existed
only since legislation was passed in 2015 authorizing the Alaska
Municipal Bond Bank to lend to regional health organizations.
He said, "I believe the newness of it is, in part, why there are
some of the restrictions that we're asking the legislature to
remove at this point." He said the Alaska Municipal Bond Bank
has made two loans to the regional health organization program,
one to YKHC and one to TCC; the former paid on time and the
latter paid off its loan early. He noted that TCC could not get
an investment grade rating prior to the Alaska Municipal Bond
Bank working with TCC to get them to restructure how funds flow
through the organization. He explained that there are different
requirements in the municipal market than in other areas,
because "we're not looking for a title interest on a piece of
property, we're looking at a commitment of a revenue stream,
which ... takes a different thought process." He said UA has
just the one project, with a parity revenue bond, and there have
been no issues.
8:51:21 AM
REPRESENTATIVE PATKOTAK asked the amount of TCC's debt paid in
full, as well as an understanding of current caps.
MR. MITCHELL recollected that TCC had borrowed approximately $50
million to refinance the existing loan. Prior to that, TCC had
been paying almost 8 percent on the loan, and that rate dropped
to 3.5 percent, which he said equated to "$40 million, in
today's dollars, in savings." He said the current total
outstanding for the regional health organizations is $1.7
million, so there is "capacity of around $104 million or $103
million." He said YKHC got a USDA loan for $170 million, but
USDA wanted the project done before it would lend the money;
therefore, the Alaska Municipal Bond Bank "coming in with $102
million of bond proceeds" allowed YKHC to stage the project in
two components "and still get the USDA money at a below-market
rate."
MR. MITCHELL said the restriction related to regional health
organizations to fund only 49 percent of the project creates an
inefficiency, because it requires financing from the Alaska
Municipal Bond Bank and a third party. He explained this
creates a reluctance to use the Alaska Municipal Bond Bank even
though it might be more advantageous to do so. He characterized
the regional health organization facilities in Bethel and
Utqiagvik as "world-class," and he said that is one reason why
the Alaska Municipal Bond Bank is asking for the increase in the
cap, the individual loan, and the project participation
percentage. He noted that the commissioner of the Department of
Health and Social Services has to determine that the project
will increase the quality of health care in the region, as well
as save the State of Alaska revenue; this is an additional
factor required before the Alaska Municipal Bond Bank can
participate in a regional health organization loan.
8:57:22 AM
REPRESENTATIVE PATKOTAK asked Mr. Mitchell to elaborate on UA's
revenue stream guarantee that ties into loans pursued.
MR. MITCHELL replied that the Alaska Municipal Bond Bank wants a
"revenue pledge" wherein the organization legally binds itself
to "having revenue flow through their organization in a certain
way so that it can be pledged to the bond issue." He described
a "waterfall of revenue" first paying for operation and
maintenance, then debt service. He said, "Typically we'll
require a rate covenant on a revenue pledge," which means there
must be net revenues that exceed the debt service due by a
certain amount. This ensures revenues available in the instance
of a "negative event." Mr. Mitchell said there are reserve
funds put in place to secure bonds, typically one year's-worth
of debt service set aside in an account irrevocably pledged to
the bonds. He offered further details. Furthermore, there is
an additional bonds test to ensure the underlying entity has
sufficient coverage.
MR. MITCHELL said the Alaska Municipal Bond Bank has a parity
pledge with UA, which includes all of the legal commitments the
university has with all other outstanding bonds. He said, "It's
viewed as a credit strength, because you share your common
interest in ensuring that the university does what it's supposed
to do with an array of bond holders."
9:02:54 AM
REPRESENTATIVE PATKOTAK mentioned the fiscal note and asked Mr.
Mitchell to talk about management costs related to bond
packages.
MR. MITCHELL said there are costs associated with bonds being
issued, including credit ratings, bond councils, a law firm that
ensures the bonds are legally binding, and a financial advisor.
The cost is rolled into the transaction and is paid by the
borrower.
9:05:40 AM
CO-CHAIR HANNAN asked about the origin of the 49 percent and
total cost restrictions.
MR. MITCHELL answered that the original bill did not have the 49
percent limit. He said he thinks the $102.5 [million] limit per
project was a fairness issue. He offered his understanding that
there had been concern by the Senate Finance Committee regarding
the evolution of the Alaska Municipal Bond Bank to lend money to
a regional health organization, and he said there was a learning
curve regarding how regional health organizations would perform
in obtaining and committing money. The bill was modified [to
address these concerns], which he related was acceptable to
everyone at the time. He said TCC and YKHC were able to make
things work out within those restrictions. He proffered that
with experience comes the ability to improve structures, which
is where things stand now with the proposed legislation.
9:09:39 AM
REPRESENTATIVE PATKOTAK asked for UA's existing debt to cap
ratio.
MR. MITCHELL responded that he did not think he had the answer,
but he said UA did not use the entire $87.5 million. He
estimated that "it would be in the $60-$70 million range that
would outstanding under that cap," but "it's been rolled into
the total rather than separately identified."
9:10:46 AM
REPRESENTATIVE LEBON recommended asking Mr. Dosch for that
amount.
9:10:55 AM
MR. DOSCH responded that he did not have that number but
estimated it to be in the $70 million range. He said UA has
paid down principle over the last five years.
9:11:20 AM
REPRESENTATIVE PATKOTAK asked about the history of UA's debt
program.
MR. MITCHELL said he could not recall but noted that Senator
Meyer had been on the Senate Finance Committee.
9:12:36 AM
CO-CHAIR SCHRAGE opened public testimony on HB 127. After
ascertaining that there was no one who wished to testify, he
closed public testimony.
[HB 127 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 127 Sponsor Statement version A 3.16.2021.pdf |
HCRA 4/8/2021 8:00:00 AM SCRA 1/27/2022 3:30:00 PM |
HB 127 |
| HB 127 version A.PDF |
HCRA 4/8/2021 8:00:00 AM SCRA 1/27/2022 3:30:00 PM |
HB 127 |
| HB 127 Sectional Analysis version A 3.16.2021.pdf |
HCRA 4/8/2021 8:00:00 AM SCRA 1/27/2022 3:30:00 PM |
HB 127 |
| HB 127 DOR Fiscal Note.pdf |
HCRA 4/8/2021 8:00:00 AM |
HB 127 |
| HB 127 Support Letter University of Alaska 3.9.2021.pdf |
HCRA 4/8/2021 8:00:00 AM |
HB 127 |
| HB 127 Letter of Support Maniilaq 3.15.2021.pdf |
HCRA 4/8/2021 8:00:00 AM |
HB 127 |