Legislature(2003 - 2004)
05/08/2003 09:00 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE BILL NO. 73
"An Act relating to the authority of the Alaska Industrial
Development and Export Authority to issue bonds; and providing
for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken referenced a letter to himself dated May 1, 2003
from Mike Barry, Chairman of the Board and Ron Miller, Executive
Director of the Alaska Industrial Development and Export Authority
(AIDEA)/Alaska Energy Authority (AEA). [Copy on file.] Co-Chair
Wilken this letter provides answers to questions posed at the
previous hearing on the issue of AIDEA bonds.
Co-Chair Wilken stated that this bill "makes several changes to the
AIDEA loan participation program and secondly, authorizes the
Alaska Energy Authority to acquire the Healy Clean Coal project
from AIDEA." He reminded the Members that AIDEA brought additional
matters to his attention, which is reflected in a proposed
committee substitute.
Senator Bunde moved for adoption of CS SB 73, 23-GS1018\D, as a
working draft.
Senator Olson objected for an explanation.
Co-Chair Wilken pointed out that page 2 lines 23 through 28 of the
committee substitute contain the language of the original bill. The
remaining language, he stated, is new.
AT EASE 9:00 AM \ 9:01 AM
MIKE BARRY, Chair, Board of Directors, Alaska Industrial
Development and Export Authority, testified that this legislation
is "for the good of the State." He reported that interest rates are
lower then they have been in approximately 50 years, and because
AIDEA holds a significant portion of its assets in government
securities, as interest rates begin to increase, a "minus earnings"
could occur for a period of time. He learned that loan
participation with banks has historically provided the largest
earnings for AIDEA and also directly relates to the AIDEA mission
to diversify the State's economy and providing employment. He
remarked that the loan participation program affects every region
of the State and involves all financial institutions in the State.
As a result of this situation, he expressed intent to expand the
loan participation program and create more earning assets in the
program. To accomplish this he offered suggestions, which he cited
from the May 1, 2003 letter as follows.
The proposed changes will enhance the loan program, bring a
greater benefit to Alaskan businesses, increase AIDEA
revenues, and increase the AIDEA dividend paid to the state.
Specifically, the amendment proposes the following changes to
the program.
1. Increases the percentage in loan participants by AIDEA from
80% to 90%. This provides a greater benefit for the
borrower by allowing a larger portion of the loan to be
amortized over a longer term than provided by the banks,
thereby reducing debt service.
2. Increases the maximum dollar amount AIDEA can purchase per
loan transaction from $10 million to $20 million, allowing
AIDEA the opportunity to participate in larger financial
transactions to the benefit of Alaska banks and businesses.
3. Allows for equity extractions to finance other business
activities in Alaska that are not necessarily connected to
the financed project. Many Alaskan entrepreneurs are
involved in multiple businesses. Allowing a person to
refinance an established business and extract equity for
use in a new business will benefit the state economy
immensely.
4. In order to resolve lending limit problems of financial
institutions, the amendment allows AIDEA to purchase
participations in existing qualified loans held by
financial institutions. This change will provide an in-
state solution for Alaska banks to resolve lending limit
problems. Effectively, this frees up lending capacity so
the banks can continue to extend short-term loans and lines
of credit to their customers.
5. Allows for the establishment of a minimum interest rate
regardless of AIDEA's funding source for loan
participation, which is either bond proceeds or AIDEA
funds. Currently, the funding source dictates the method of
establishing an interest rate on the loan participation. If
bond proceeds are used the interest rate is set in statue
as AIDEA's cost to borrow plus an additional percentage to
cover the loan servicing costs. If AIDEA uses its own funds
the interest rate is determined by adopting the regulations
and may be no less than the interest rate used if AIDEA
were to issue bonds.
Mr. Barry pointed out that the provision outlined in the first
paragraph of the letter would be a reversion to the original
statutes and initial method of operation. He informed that AIDEA
performs independent underwriting investigation on all loans it
purchases in addition to the underwriting performed by the issuing
bank and therefore, AIDEA does not "simply rubber stamp" the loans.
Because of these assurances, he stated that AIDEA should acquire a
larger portion of those loans identified as "good credit", and
beneficial to the AIDEA portfolio. He qualified that banks do not
always offer a greater portion of the loans, although changes to
statute would allow borrowers to request the more favorable terms
that AIDEA is able to offer. He emphasized this would not change
the loan to value, but rather the maximum allocation between the
bank and AIDEA.
Mr. Barry stated that the $10 million limitation has been in place
for several years and he assured the increased limit would not be
"used widely". He exampled the history of the loan participation
program in which only two credits were acquired in the amount of
$10 million.
Senator Bunde asked if any pending projects would be impacted by
this change.
Mr. Barry knew of none.
Mr. Barry continued with the third item listed in the letter and
qualified that the loan extractions should be allowed so long as
the investment is made into another Alaska business. He found in
many smaller communities a "lack" on entrepreneurs and that one or
two entrepreneurs could be operating several businesses.
Senator Olson asked about any negative experiences with loan
extractions.
Mr. Barry responded that banks have informed AIDEA of "serious
problems" without the loan extraction option, in attempting to
service customers who own more than one business.
Mr. Barry explained the forth item, which proposes to allow AIDEA
to purchase loans from a financial institution in the event that
institution reaches a limit in the amount of lending it could
provide. He gave an example of a business with an existing loan
from a bank plus an application for additional financing, which
would exceed the credit amount the bank has established for each
customer. He stated that in this instance the bank could "sell" a
portion of the existing loan to either AIDEA or another lending
institution, and that this usually occurs with "the very best
customers" with good credit ratings and is called an "override".
However, he informed that AIDEA is not getting many of these
overrides to banks outside Alaska because current statute requires
the banks to rewrite the loan before it could be sold to AIDEA. He
stated that refinancing these loans is expensive for the Alaskan
business and involve payment of fees, an appraisal, title insurance
and other costs. This statutory change, he said, would allow AIDEA
to purchase existing loans in addition to new loans. He relayed
opposition to this proposal was voiced by one bank concerned that
this change would allow its smaller competitors to be more
competitive with them. He noted this is the only proposed change to
AIDEA that has received opposition from a bank and that other banks
have either abstained from commenting or fully support the changes.
Mr. Barry explained the fifth item listed in the overview relates
to changing the interest rate criteria. Currently, he stated that
AIDEA prices its loans "on a very simple basis" for either a
variable rate or a fixed rate, and the term of that fixed rate. He
proposed to allow "risk based pricing" and described that AIDEA
could charge a "slightly higher" rate for a loan offered at a 90
percent participation than a loan offered at an 80 percent
participation because AIDEA would be involved in that loan for a
longer term than the financial institution and subsequently
increase the risk to AIDEA. He stressed that this proposal is
different than the method that banks apply risk based pricing in
grading an applicant's credit against another's credit. He
predicted this would be discriminatory against residents of rural
communities.
Co-Chair Wilken pointed out the provision proposed in item two is
also contained in Section 1 of SB 112; however, that legislation
also includes language relating to the Red Dog Mine.
Senator Olson asked if the third proposal could be implemented to
subsequently allow Cominco to secure funding for some of its "less
than profitable" ventures.
Mr. Berry clarified this statutory change applies to the loan
participation program of loans originated by banks, and that the
equity would be extracted on behalf of the borrower, i.e. the
bank's customer. He stated that AIDEA has no mechanism through the
loan participation program to extract any equity from a borrower.
Co-Chair Wilken referenced a letter dated April 24, 2003 from Marc
Langland, President of Northrim Bank addressed to AIDEA [copy on
file] requesting that AIDEA increase approval authority of the in-
house credit committee from $3 million to $6 million. He asked if
this matter was considered and whether it is addressed in the
aforementioned five items.
Mr. Barry clarified this is a regulatory issue, not requiring
statutory changes, and that the board of directors would address
the matter.
Co-Chair Wilken relayed concern expressed by Wells Fargo in a
letter dated April 25, 2003 from Executive Vice President James L.
Cloud to AIDEA [copy on file] relating to item five and the need
for an understanding of the proposal's intent.
Mr. Barry reiterated that another bank opposed this proposal and
that Wells Fargo "chose to take no stand" on the matter.
Senator Olson removed his objection to the motion and the committee
substitute Version "D" was ADOPTED.
Senator Taylor requested the record reflect that he joined the
meeting at 9:04 am.
Co-Chair Wilken noted this legislation also addressed the Healy
Clean Coal project.
Mr. Barry explained the committee substitute would provide
statutory authority for the Alaska Energy Authority (AEA) to
acquire the Healy Clean Coal asset. He informed that the transfer
of AEA to AIDEA did not include authority for AEA to initiate new
projects without legislative consent. He stated that the AIDEA
Board of Directors also acts as the board of directors for AEA,
although AIEDA and AEA are separate companies with separated
accounting. He stated that AIDEA owns Healy Clean Coal, a
generating asset located along the Railbelt, and that AEA owns
another generating asset, called Bradley Lake, and a transmission
asset, called the Alaska Intertie, both also located on the
Railbelt. He expressed intent to transfer Healy Clean Coal from
AIDEA to AEA in the future so all State-owned energy assets located
along the Railbelt would be in the same company. He indicated a
potential conflict of interest of the board of directors in
addressing these assets separately and noted possible "flexibility"
in locating all the assets within one company. He assured that if
the transfer were arranged, AIDEA would present the proposal to the
Legislature for approval and that the change in this legislation
would provide advanced notice of intent.
Co-Chair Wilken asked the extent of the "distress" of the Healy
Clean Coal project in the intent to transfer the asset to AEA.
Mr. Barry replied that as a new chair of AIDEA, he would not have
perceived a conflict with the board of directors if the Healy Clean
Coal project were not in distress. He qualified that no conflict
has been identified to date; however, precautions should be taken
against future conflict.
Co-Chair Wilken announced intent to hold the bill in Committee at
this hearing.
SARA FISHER-GOAD, AIDEA, testified that Brenda Applegate,
Controller, AIDEA and Sue Weimer of the AIDEA Credit Department
were available on teleconference to answer questions.
Senator Olson asked if any implications resulted from the transfer
of AEA to AIDEA. He recalled a letter of intent drafted by parties
involved in the Healy Clean Coal Project [copy not provided].
Mr. Barry stressed that some "serous issues" must be resolved
before a transfer of the Clean Coal project could occur. He listed
permits issued to AIDEA for operation of the project that may or
may not be transferable, and an outstanding agreement with Golden
Valley Electric Association. He remarked that no transfer would be
attempted without input from the Association and noted a meeting
was planned between the boards of both organizations.
Senator Olson asked the relationship between Golden Valley Electric
Association and the Healy Clean Coal project.
Mr. Barry told of a power sales agreement reached in 1991, which
was terminated in April 2003 by the Golden Valley Electric
Association; however, a settlement agreement resulting from
litigation filed in 1999 is still valid. He assured that neither
AIDEA nor the Golden Valley Electric Association is attempting to
avoid their obligations.
Senator Hoffman commented that the language of Section 2 appears
"broad and open ended" and asserted he would not support this
provision unless he knew specifically if a purchase or lease were
under consideration and the conditions of that proposal. The
language of Section 2 reads as follows.
Sec. 2. AS 44.83.080 is amended by adding a new paragraph to
read:
(16) to acquire, by purchase or lease, a coal-fired
electric generation project owned by the Alaska Industrial
Development and Export Authority that qualified for federal
financial participation under P.L. 99-190, as amended.
Senator Hoffman understood that the Healy Clean Coal project was
not earning a profit, in part because of high operating costs. He
expressed the need to know of the conditions of an AIDEA purchase
to identify the State's obligation and whether further debt would
be incurred. He wanted to know if AIDEA would "cut it's losses" if
the project were unprofitable and subsequently write down those
losses. He also informed that federal legislation related to the
project is unresolved.
Mr. Barry responded that the provision in Section 2 does not
actually request the transfer, but rather notifying "the world"
that such an acquisition could occur. He assured that legislative
authority would be required for such a purchase. He furthered that
feasibility studies to determine such matters as whether the
permits could be transferred, have not been conducted to date.
Mr. Barry asserted that the fact that the Healy coal project is not
a profitable operation is not in dispute. During the previous year
and in 1999, he stated that AIDEA "took a very significant write
down on impairment of assets" to account for the losses. He
emphasized the board of directors' intent to make every effort to
determine whether this resource generating capability could be
utilized for the benefit of the State of Alaska.
Senator Hoffman asked the amounts of the two write-downs.
Mr. Barry replied that he joined the Board in January and was not
familiar with the details. He estimated the first write down was
$131 million and the second was approximately $66 million.
Senator Hoffman opined that a decision must be made quickly and
that conducting studies would be "prolonging the agony". He
stressed the need for AIDEA and the Legislature to act as "prudent
business people", noting that Golden Valley Electric Association is
"already cutting their losses" and that the State should do the
same.
Co-Chair Wilken announced intent to hold this bill in Committee.
Amendment #1: This amendment inserts "and to a municipal tax
exemption for certain assets and projects of the Alaska Industrial
Development and Export Authority" to the title of the bill. The
amended language reads as follows.
"An Act relating to powers of the Alaska Energy Authority to
acquire a coal-fired electric generation project from the
Alaska Industrial Development and Export Authority, to
exemption from the State Procurement Code for contracts
related to a coal-fired electric generation project that the
Alaska Energy Authority acquires from the Alaska Industrial
Development and Export Authority, to regulations of the Alaska
Industrial Development and Export Authority, to the authority
of the Alaska Industrial Development and Export Authority to
issue bonds, and to a municipal tax exemption for certain
assets and projects of the Alaska Industrial Development and
Export Authority; and providing for an effective date."
This amendment also inserts a new bill section on page 6, line 5 to
read as follows.
Sec. 11. Section 19, ch. 117 SLA 2000, is amended to read:
Section 19. Section 3 of this act takes effect July 1,
2012 [2004].
New Text Underlined [DELETED TEXT BRACKETED]
Senator B. Stevens moved for adoption.
Co-Chair Wilken objected for clarification.
Senator B. Stevens explained this amendment relates to changes made
to the companion bill, HB 112, which imposed a repeal of the sunset
date. He stated this amendment represents a compromise in that it
would not repeal the exemption of the DeLong Mountain
transportation system, but rather extend the exemption to the year
2012. He noted this date also marks the end of the pilot agreement
between the Northwest Arctic Borough and Cominco in which payments
are made to the Borough in lieu of taxes. He expressed that he
disagrees with the State tax assessor's position that the
transportation system is not a State-owned asset, held by AIDEA.
Co-Chair Wilken objected to this amendment on the grounds that it
"brings before this Committee, some significant policy calls and we
can deal with those in House Bill 112. If we bring it into this
bill, it adds nothing to the bill; in fact detracts from the bill
and detracts from the discussion and the benefit that this bill
provides." He assured he was committed to addressing HB 112.
Senator Taylor thanked the sponsor of the amendment, expressing
that he shares the concerns. He recalled the Legislature reaching
the initial agreement and remarked that a "deal was a deal,"
whether or not he supported it at the time.
Senator Hoffman supported the amendment as well. He shared that
AIDEA reports the single largest revenue producer of this project
is Cominco Alaska Red Dog Mine and that Cominco has a nonexclusive
priority right to use the DeLong Mountain transportation system. He
commented that the Legislature must consider how its actions affect
the corporation and the bond ratings.
A roll call was taken on the motion.
IN FAVOR: Senator Olson, Senator B. Stevens, Senator Taylor, and
Senator Hoffman
OPPOSED: Senator Bunde, Co-Chair Green, and Co-Chair Wilken
The motion PASSED (4-3)
The amendment was ADOPTED.
Senator Taylor stated that the extension of the exemption date
reflects only one portion of the provisions in HB 112. The
definition of a roadway and the purposes of a transportation
corridor, he noted are not addressed in the committee substitute to
SB 73.
Co-Chair Wilken announced the matter would be addressed at a later
date.
Co-Chair Wilken ordered the bill HELD in Committee.
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