Legislature(2021 - 2022)ADAMS 519
04/21/2021 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB41 | |
| HB47 | |
| HB127 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 69 | TELECONFERENCED | |
| += | HB 71 | TELECONFERENCED | |
| + | HB 41 | TELECONFERENCED | |
| + | HB 47 | TELECONFERENCED | |
| + | HB 127 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 127
"An Act relating to the Alaska Municipal Bond Bank
Authority."
2:33:07 PM
REPRESENTATIVE BART LEBON, SPONSOR, noted that the bill was
heard in committee the prior year. He provided a brief
summary. This bill expanded the authority of the Alaska
Municipal Bond Bank Authority regarding bonding capacity to
regional health organizations at up to 100 percent of the
project cost. He expounded that currently project and
funding limitations were in place. The bill also gave the
University of Alaska (UA) access to refinance debt or take
on additional debt through the bond bank.
2:35:09 PM
AIMEE BUSHNELL, STAFF, REPRESENTATIVE BART LEBON, reviewed
the sectional analysis:
Section 1. AS 44.85.010:
Removes the project scope limitation of only heating
or energy projects for the University of Alaska
Fairbanks
Section 2. AS 44.85.090:
Removes the 49 percent 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
Section 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
2:36:39 PM
DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL BOND
BANK AUTHORITY, DEPARTMENT OF REVENUE (via teleconference),
relayed the support of the bond band for the HB 127. He
conveyed that the purpose of the bill was not to increase
the use of debt but to make debt that was set to be issued
more affordable, which was the essence of the bond bank
program. He reported that the bond bank had an outstanding
balance of $1.1 billion. The amount issued for regional
health organizations was roughly $144 million, which saved
the Alaskans it served $65.3 million in debt service.
2:39:05 PM
Representative Josephson thought the bill would allow for
additional bonded debt. He asked Mr. Mitchell to comment.
Mr. Mitchell clarified that his statement meant that the
debt would be issued under any circumstance. He elucidated
that if a project was vetted and in the financing phase of
development the project would be financed with or without
participation of the bond bank. The bond bank participation
was an alternative to other financial mechanisms that
reduced costs of debt for Alaskans. Representative
Josephson inquired whether the bill crowded out or vied
with other opportunities for bonded indebtedness. Mr.
Mitchell replied that the support that the state provided
the bond bank was utilized to reduce the cost of borrowing
and never used to pay the debt service of the bonds. He
indicated that the underlining borrowers had repaid all
debt service since the programs inception in 1975. Rating
analysts were aware that the state provided support for the
program, but they do not count it against the capacity of
the state to issue debt for other needed capital projects.
Representative Josephson noted that Mr. Mitchell described
45 years of outstanding repayment history for the bond
bank. He wondered what accounted for that. Mr. Mitchell
answered that a rigorous review process was required at the
projects inception and again when seeking financing through
the bond bank. He exemplified a proposed bonded community
project, that would be vetted by local elected officials
and brought to a vote of the community to affirm community
support and issuance of the debt. He delineated that entity
would then apply with the bond bank for a loan, which would
initially receive vetting by a third party financial
advisor contracted by the bond bank. The advisor would
provide analysis and make a recommendation to the bond
banks board of directors who also had to approve the loan.
The processs scrutiny would not allow a speculative or
questionable loan to proceed through the bond bank.
2:43:49 PM
Representative Edgmon determined that the bill supported
two entities. He asked if HB 127 was a clean-up bill
because the two entities fit under the same subject matter.
Mr. Mitchell replied in the affirmative. He explained that
at the inception of the regional health organizations
bonding authority in 2015, there was concern over the new
line of lending regarding the financial strength of the
organizations. Due to the uniqueness of the loans and the
lack of knowledge regarding regional health organizations
there were limitations put into statute that became
inefficient. Based on the learned experience and financial
strength of the organizations the bond bank wanted to
address the inefficiencies. He furthered that in the recent
past UA received substantial credit rating downgrades due
to budget reductions. The university had bonding authority
specific to a power generating and heating facility at the
UA Fairbanks campus. The board felt that broadening the
bond bank authority would allow UA to leverage the bond
ratings of the bond bank authority, if advantageous for
other projects. He summarized that the legislation allowed
both entities the opportunity to utilize the bond bank for
sound projects if they desired.
2:46:51 PM
Representative Edgmon commented that the bill also spoke to
the economic power of the Alaska Native and the regional
health organizations strength. He recounted that UAs bond
debt service was roughly $28 million per year. He
considered the amount reasonable compared to their overall
budget.
2:47:27 PM
Representative Wool cited the bill and remembered the issue
of a $500 million cap for the university. He asked what its
total debt was and how was the $500 million figure derived.
Mr. Mitchell responded that the number was intended to be a
"not to exceed amount" that could provide for any potential
existing or future need. He reminded members that any UA
bond issue needed legislative approval. The university also
had its own checks and balances in place that limited the
ability of UA to acquire new indebtedness. Representative
Wool recalled that a portion of the power plant was bonded,
and another portion was paid by the state. He read the
following from the sponsor statement:
This additional financing tool is not intended to be a
substitute for capital appropriations through the
legislature.
Representative Wool asked the bills sponsor if he could
assure that the legislature would still provide capital
appropriations to the university knowing it had access to a
large amount of bonding authority.
2:50:39 PM
Representative LeBon replied that the University would seek
the best financing rate it could find for projects. He
added that UA would happily accept capital funding if the
legislature wanted to appropriate money through the capital
budget. He viewed the provisions in HB 127 as offering UA
an additional financing option.
Representative Carpenter asked what the alternatives were
if the borrower did not go to the bond bank.
2:51:52 PM
Representative LeBon replied that the options were limited.
He offered that it would be highly unusual for a
traditional bank to loan money on a university property.
The bank was obligated to seek collateral and pledging a
building on a university campus was problematic. In his 42
years of banking, he never lent money to a public education
institute. Alternatively, a regional health organization
could secure a loan through a traditional bank. He deemed
that the bank would likely finance such a facility with
government agencies like the Bureau of Indian Affairs or
United States Department of Agriculture (USDA)
participation.
2:53:11 PM
Representative Carpenter wondered why UAs bonding
authority was limited to heating and energy projects.
Representative LeBon deferred to a representative from UA
to answer the question.
2:53:39 PM
MYRON DOSCH, CHIEF FINANCIAL OFFICER, UNIVERSITY OF ALASKA,
FAIRBANKS (via teleconference), voiced that the university
supported the legislation. He reiterated that the original
authority was limited to the heating and power plant
project. He conveyed that at its conception the bonding
authority was related to accomplishing the specific
project. The university supported HB 127 because it
provided an opportunity for bottom line savings by
securing a better interest rate on debt than it might
receive on its own. He added that UA had its own
authorization to issue debt and considered it very
seriously irrespective of HB 127. A project evaluation went
through a rigorous process prior to issuing debt.
Representative Carpenter asked about Mr. Dosch's comments
about better interest rates through the market and he
wondered what the market he referred to was. Mr. Dosch
replied that the difference in interest he referred to was
the credit rating of the bond bank versus the credit rating
of the university. He explained that to the extent that the
bond banks credit rating was better than UAs, meant the
margin would provide a better interest rate. In terms of
Representative Carpenter's question about a market, he was
speaking of the general bond market or capital market where
bonds were bought through an underwriter in a negotiated
deal.
2:58:00 PM
Representative Josephson asked if the legislature had to
sign off on the portion of the bill that had to do with the
University of Alaska but not regional health organizations.
Mr. Mitchell responded that the regional health
organizations did not have to go through a state process to
issue bond debt. He added that neither did any other
entities using the bond bank: municipalities, joint action
agencies, and joint insurance associations.
2:59:11 PM
Representative Josephson asked whether there was a
requirement that a UA bond debt increase over $2.5 million
needed legislative approval. Mr. Mitchell answered that it
was a requirement unique to the University System. He
explained that the bond bank entered into loan agreements
with borrowers to purchase the loan on a private placement
basis; the bond bank was the only purchaser. The bond bank
issued bonds in $5 thousand blocks to the market that were
purchased by investors. A requirement of legislative
approval would be part of the process of the underlying
borrower and not the bond bank. Representative Josephson
could not find the $2.5 million limit in the current bill.
Mr. Mitchell responded that the requirement was already in
statute.
Co-Chair Merrick asked Mr. Mitchell to review the published
Department of Revenue fiscal note [FN 1 REV] appropriated
to the Alaska Municipal Bond Bank.
3:01:37 PM
Mr. Mitchell articulated that the fiscal note assumed that
there would be a series of issuances by regional health
organizations or UA totaling $100 million over a number of
years. Therefore, there would be estimated costs of about
$360 million per year for services associated with the bond
issues. The costs would be paid by the receipts of the bond
bank. He explained that typically when bonds were sold a
cost of issuance account was created that was used to pay
for costs related to issuing the bonds and were paid from
the proceeds of the bond issue and were incorporated into
the interest rate the borrower received.
Representative Edgmon relayed that fiscal notes typically
did not include cost savings. He reminded the committee
that the borrowers would realize cost savings.
Mr. Mitchell thought Representative Edgmon's point was
excellent and reiterated that the entire purpose of the
bond bank was to save money. Entities would save money by
going to the bond bank by attaining lower interest rates
despite the costs related for the issuance of the bonds.
Co-Chair Merrick invited Mr. Dosch to make further
comments.
Mr. Dosch did not have any additional comments. He
reiterated that the University supported the bill, and he
was available for questions.
Representative Carpenter thought it sounded good if the
state could save money. He referred to the second paragraph
of the fiscal note analysis related to default and the
moral obligation of the state for bond repayment. He noted
the paragraph the Bond Bank would request funding from the
Legislature and Governor to pay their debt service. He was
curious if the full faith in credit included the Permanent
Fund. He wondered if the Permanent Fund was obligated as
well.
3:06:40 PM
LUKE WELLES, CHAIRMAN, ALASKA MUNICIPAL BOND BANK (via
teleconference), noted that he also worked for the Alaska
Native Tribal Health Consortium.
Representative LeBon asked if Mr. Wells could review the
payment source and how the bond sales were underwritten and
how the regional health organizations stood by the debt.
Mr. Wells relayed that the most recent bonded facility was
a new hospital in Bethel through the Yukon Kuskokwim
Healthcare Corporation. He explained that the corporation
entered into a joint venture agreement with the Indian
Health Service where the healthcare corporation was
responsible for building the facility. The cost of the
building was borne in half by a federal entity and the
other half by the bond bank. Once the facility was built,
the regional health organization received a staffing
package from the Indian Health Service that paid for
staffing needs in perpetuity and for contract support costs
that will pay for the bonds. He also indicated that
whenever a tribal member received care at a regional health
organization, the state was reimbursed at 100 percent
Federal Medical Assistance Percentage (FMAP) if the member
was also on Medicaid, versus 50 percent if care was
administered outside of the tribal health system. He
concluded that it was in the state's best interest to
ensure that all tribal members received care at regional
health facilities throughout the state.
3:09:33 PM
Representative Carpenter surmised that the risk of default
was low. He still wondered whether the state would be
responsible if there was a default in payments. He asked
for further detail. He wondered if the Permanent Fund would
be used for repayment. Mr. Mitchell responded in the
negative and stressed that the Permanent Fund was not
obligated in any way to debt repayment. He explained that
the moral obligation meant a statutory framework that
required a reserve fund to secure the bonds along with
annual reporting requirements on the status of the reserves
to the legislature. If the reserves were deficient, the
issuer would request a replenishment of the reserves. There
would be potential ramifications if the legislature chose
not to fund the reserves, but it was not required.
Co-Chair Merrick thanked Representative LeBon for
presenting the bill. She would set the bill aside
HB 127 was HEARD and HELD in committee for further
consideration.
Co-Chair Merrick reviewed the agenda for the following
meeting.