Legislature(2005 - 2006)SENATE FINANCE 532
04/12/2006 08:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB243 | |
| SB231 | |
| SB235 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 305 | TELECONFERENCED | |
| += | SB 243 | TELECONFERENCED | |
| *+ | SB 231 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| = | SB 235 | ||
MINUTES
SENATE FINANCE COMMITTEE
April 12, 2006
8:05 a.m.
CALL TO ORDER
Co-Chair Lyda Green convened the meeting at approximately
8:05:10 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice Chair
Senator Fred Dyson
Senator Bert Stedman
Senator Lyman Hoffman
Senator Donny Olson
Also Attending: DALE ANDERSON, citigroup/ Smith Barney; TIM
RATTIGAN, Regional Banker for Northwest and Alaska, citigroup;
JIM HADDON, Managing Director of Tobacco Securitization,
citigroup; CHERYL FRASCA, Director, Office of Management and
Budget, Office of the Governor; KEVIN BROOKS, Deputy
Commissioner, Department of Administration; MIKE CALLAHAN,
Director, Enterprise Technology Services, Department of
Administration; NICO BUS, Acting Director, Division of Support
Services, Department of Natural Resources;
Attending via Teleconference:
SUMMARY INFORMATION
SB 243-TOBACCO REV. FOR UNIV. & CORR. FACILITIES
The Committee heard a presentation by bond raters. The bill was
held in Committee.
SB 231-BUDGET: CAPITAL & OTHER APPROPRIATIONS
The Committee heard presentations on the Alaska Land Mobile
Radio project, statewide information technology requests, and
Governor Murkowski's priority project requests. The bill was
held in Committee.
SB 235-SCHOOL PERFORMANCE BONUSES
The Committee considered and adopted an amendment. The bill was
reported from Committee.
8:05:47 AM
SENATE BILL NO. 243
"An Act relating to the financing of construction, major
maintenance, and renovation of facilities for the
University of Alaska; relating to the financing of
construction of a correctional facility; authorizing the
commissioner of revenue to sell the right to receive a
portion of the anticipated revenue from a tobacco
litigation settlement to the Northern Tobacco
Securitization Corporation, with the proceeds of that sale
to finance construction, major maintenance, and renovation
of facilities for the University of Alaska and to finance
the construction of a correctional facility; providing for
the establishment of funds for deposit of those proceeds;
authorizing the issuance of bonds by the Northern Tobacco
Securitization Corporation for the purpose of acquiring the
right to receive a portion of anticipated revenue from a
tobacco litigation settlement; and providing for an
effective date."
8:05:51 AM
This was the second hearing for this bill in the Senate Finance
Committee.
Presentation by citigroup
on
Tobacco Bond Issuance
DALE ANDERSON, citigroup/ Smith Barney, introduced the
presenters. Citigroup is the leader in tobacco settlement
securitization and has been involved since 1999.
8:07:53 AM
TIM RATTIGAN, Regional Banker for Northwest and Alaska,
citigroup, introduced Mr. Haddon.
8:09:18 AM
JIM HADDON, Managing Director of Tobacco Securitization,
citigroup, gave a presentation utilizing a packet titled,
"Presentation to: The State of Alaska, Tobacco Settlement
Revenue Securitization Update, April 12, 2006" [copy on file].
References are not all made in sequential order.
8:09:28 AM
Page 4
Completed Tobacco Securitizations
71 completed issues totaling over $34 billion in par amount
since 1999.
[US map highlighting the dates, amounts and percentages of
Securitizations Completed, Securitization Pending, and
Legislation Introduced status of states, US territories,
counties and cities.
Notations indicate that a percentage of the Tobacco
Settlement Receipts (TSR) generated by the states of
California and New York are allocated to counties and
certain cities. Amounts or percentages of TSR are pledged
for the states of Alabama, Arkansas and North Dakota.
States not a party to the Master Settlement Agreement (MSA)
are identified.]
Mr. Haddon outlined the information on this map.
8:10:11 AM
Page 5
Secondary Market Trading (2003 - 2006)
[Line graph showing Secondary Market Trading and Yield (%)
of the 5.5 percent Northern Tobacco Securitization
Corporation Series 2001 Maturing 2029, and the 30-Year MMD
"AAA", for selected months from March 2003 to March 2006.
Pertaining legal actions are noted on the timeline, as well
as the dates bond raters downgraded unenhanced tobacco
securitization bonds. A notation reads, "Yields calculated
as volume-weighted averages based on MSRB daily trading
data."]
Mr. Haddon stated this graph is indicative of the status of the
yield in the current market of the Alaskan bonds issued in 2001
and maturing in 2029.
Mr. Haddon pointed out the 200 basis point change in tobacco
rate yield variations from 8.5 percent to 5.5 percent between
March 2003 and March 2006. This is a "very event risk" market
that is subject to media reports of consumption, significant
"factor determination concerning nonparticipating manufacturer
adjustment", and litigation against the industry. These
occurrences cause the market to fluctuate as the market
evaluates the security.
Mr. Haddon noted the 30-year AAA MMD provides a baseline market
analysis. "Rates have drifted down in tobacco" and therefore now
is an opportune time to consider a tobacco securitization.
8:11:52 AM
Senator Dyson requested the witness explain acronyms as they are
used in the presentation.
8:12:12 AM
Mr. Haddon defined "triple A" as the highest credit rating
possible, 30-year as the term of maturity, and MMD as Municipal
Market Data. Secondary market trading reflects the buying and
selling of the Alaska Northern Tobacco Securitization Corp bond
issued in the year 2001.
8:12:45 AM
Mr. Rattigan furthered the amount the State pays for the
securitization on the bonds is not impacted. That rate was set
at the date of issuance in 2001. This information reflects
activity in the secondary market as buyers and traders are
selling and buying the bonds after the initial offering.
8:13:12 AM
Page 6
2005 Tobacco Market Overview
· In 2005, the market for tobacco securitization bonds
continued to be shaped by three primary factors:
o Large cash positions of high-yield / tobacco
investors
o Market supply of various types of high-yield
bonds
o Investor perception of tobacco industry
creditworthiness, litigation risk, and
consumption risk
· In early 2005 (after a year with no tobacco
securitization issuance), large cash positions of
tobacco investors (specifically, municipal high yield
funds) and an improving litigation environment
provided a favorable backdrop for new tobacco
securitization issuance
· At the end of 2005, we witnessed a softening secondary
market, with decreased tobacco trading volume
occurring
o Less hype over potential tobacco refundings
o Investors somewhat more credit cautious given the
developments in the Grand River case
Thirteen tobacco securitizations were completed in
2005 for a total of $6.1 billion in par amount.
· $4.5 billion refunding
· $1.6 billion new money
And
Page 7
2006 Tobacco Market Outlook
· New tobacco securitization issuance has continued in
2006, and there is a building forward calendar
· Cash positions in high yield funds remain robust, and
we believe demand continues to exceed new supply. This
was witnessed in the successful sale of $1.75 billion
of tobacco securitization bonds during the week of
January 30 alone, and an additional $530 million
brought to market year-to-date
· Institutions who have approved the tobacco credit
continue to be buyers, and favorable yields and market
outlook continue to attract new investors
· Despite recent developments regarding the Brattle
Group's determination in the NPM Adjustment process,
investors appear relatively comfortable in the current
market environment, and market volatility has been
minimal
· Tobacco market conditions and investor demand remain
favorable
Over $2.2 billion of unenhanced tobacco securitization
bonds have been issued year-to-date.
· $1.6 billion refunding
· $600 million new money
Currently, litigation and NPM (Non-Participating
Manufacturer) Adjustment risk are the most significant
credit concerns in the tobacco securitization market.
Mr. Haddon stated that no tobacco securitizations were completed
in 2004 due to significant litigation underway involving the
State of Illinois and Phillip Morris, Inc. A $13 million
judgment was assessed against Phillip Morris in this case. As a
result the company threatened to file bankruptcy proceedings,
which caused volatility in the market. The market improved in
2005 and rates dropped. Several deals were made in 2005, as
buyers became more interested in tobacco securitization bonds.
The improvements continued in 2006.
8:14:35 AM
Page 8
Recent Secondary Market Trading (February - April 2006)
[Line graph showing Yield (%) of 5.5% Northern Tobacco
Securitization Corporation Series 2001 Maturing 2029,
Recent "BBB" Rated Tax-Exempt Capital Appreciation Bond
Pricing, and 30-Year MMD "AAA", for various dates between
February 1, 2006 and April 5, 2006. Pertinent events are
indicated. A notation reads, "Yields calculated as volume-
weighted weekly averages based on MSRB daily trading data.]
Mr. Haddon noted the minimal volatility of the market in 2006
not withstanding issues involving a potential Non-Participating
Manufacturers (NPM) Adjustment. He explained this pertains to
whether the Master Settlement Agreement (MSA) was a significant
factor in the market share loss of the Participating
Manufacturers (PMs). The Brattle Group, an econometric firm, has
been examining this matter and released a preliminary report on
March 2 opining that the MSA was a significant factor. On March
27 the final report was issued. Despite this, the market
conditions are favorable for issuers.
8:15:56 AM
Page 19
NPM Adjustment: Overview
· The Non-Participating Manufacturer (NPM) Adjustment,
measured by domestic sales of cigarettes by NPMs,
operates to reduce the payments of the Participating
Manufacturers ("PMs") under the Master Settlement
Agreement ("MSA") in the event that the PMs incur
losses in market share to NPMs during a calendar year
as a result of the MSA
· Three conditions must be met in order to trigger an
NPM Adjustment for one or more Settling States:
o (1) the aggregate market share of the PMs in any
year must fall more than 2% below the aggregate
market share held by those same PMs in 1997 (a
condition that has existed for every year since
2000)
o (2) a nationally recognized firm of economic
consultants must determine that the disadvantages
experienced as a result of the previsions of the
MSA were a significant factor contributing to the
market share loss for the year in question, and
o (3) the Settling States in question must be
proven to not have diligently enforced their
Model Statutes
· The NPM Adjustment is applied to the subsequent year's
Annual Payment and Strategic Contribution Payment and
the decrease in total funds available as a result of
the NPM Adjustment is then allocated on a Pro Rata
basis among those Settling States that have been
found:
o (i) to have not diligently enforced their Model
Statutes, or
o (ii) to have enacted a Model Statute or
Qualifying Statute that is declared invalid or
unenforceable by a court of competent
jurisdiction
· The MSA provides that the amount of an NPM Adjustment
applied to any Settling State in any given year cannot
exceed the amount of Annual and Strategic Contribution
Payments to be received by such Settling State in such
year.
The market for tobacco securitization bonds may be
affected in upcoming months by recent developments
relating to the "NPM Adjustment".
Mr. Haddon informed that the NPM Adjustment could potentially
impact Alaska on two levels: the amount received in the payment
due April 17, 2006, and the condition of the bonds already
issued as well as the 20 percent of the settlement not
securitized.
Mr. Haddon explained the NPM Adjustment. A tobacco manufacturer
has two options: join the MSA, or be a NPM and submit an escrow
payment to the State based on the amount of cigarettes sales
made in the state. He outlined the conditions in which a NPM
Adjustment could be made, which could decrease the amount of the
payments the PMs must remit.
Mr. Haddon informed that the PMs have begun a procedure to
achieve a NPM Adjustment. A greater than two percent market
share loss since 1997 has occurred and subsequently, PMs could
withhold a portion of their payments due in April or make the
full payment and seek a NPM Adjustment for future payments.
Mr. Haddon also noted the determination must be made as to
whether the State diligently enforced the MSA. A standard of
diligent enforcement has yet to be established and would require
either a court decision or binding arbitration. The PMs favor
binding arbitration, while the Settling States prefer court
involvement. Meanwhile, the manufacturers must decide whether to
withhold partial payment.
Mr. Haddon reported that the market was "very concerned about
this", although the market has not shown significant volatility
as a consequence of these possible occurrences.
8:19:44 AM
Page 21
NPM Adjustment: Recent Developments
· In May 2004, the Settling States and the PMs selected
The Brattle Group as the firm of economic consultants
responsible for making the "significant factor"
determination regarding the Market Share Loss of the
PMs for calendar year 2003
· On March 2, 2006, the Brattle Group issued its
preliminary finding that the MSA was a significant
factor contributing to the Market Share Loss of the
PMs for calendar year 2003 (the preliminary
determination was challenged by the Settling States
and additional arguments/information were submitted
to The Brattle Group for consideration in connection
with its final decision)
· On March 27, 2006, The Brattle Group announced its
final determination that the MSA was a significant
factor contributing to the Market Share Loss of the
PMs for calendar year 2003
· If the Original Participating Manufacturers ("OPMs")
claim an NPM Adjustment for 2003 in April 2006, such
OPMs may either make an appropriate deposit into the
Disputed Payments Account or withhold payment
reflecting the claimed NPM Adjustment, which could
have a materially adverse impact on the available
amount of tobacco settlement revenues ("TSRs")
flowing to Settling States
· The Settling States have reserved the right to
commence an enforcement action for compliance with
the MSA. It has been reported that a majority of the
Settling States have sent a notice to the PMs of
their intent to commence such an action, including an
action seeking a declaratory order that regardless of
the "significant factor" determination, the PMs are
not entitled to an NPM Adjustment because those
Settling States have been diligently enforcing their
Qualifying Statutes
There can be no assurance as to the amount of any NPM
Adjustment or the corresponding reduction in TSRs
payable to the Settling States.
Mr. Haddon shared that Phillip Morris submitted its payment in
advance of the April deadline. That manufacture occupies over 50
percent of the marketplace. RJR has submitted a partial payment
and whether final payment would be withheld is unknown.
8:20:24 AM
Page 22
NPM Adjustment: April 2006 Payment
· Assuming no NPM adjustment, the April 2006 payment due
has been reported to be approximately $6.5 billion
· The OPMs have requested the Independent Auditor for
the MSA to reduce its calculation of the expected 2006
payment by $1.14 billion plus interest (approximately
$1.2 billion total) to account for the NPM Adjustment
for 2003
o Assuming a $1.2 billion NPM Adjustment, the
impact to TSRs flowing to the State would be as
follows:
Assumed NPM Adjustment: $1.2 billion
State Allocation Percentage: 0.3414187%
Decrease in Total TSRs Flowing to the State:
100.000%: $4,097,024
Decrease in Amounts Available for Series
2000 Bonds: 40.000%: $1,638,810
Decrease in Amounts Available for Series
2001 Bonds: 40.000%: $1,638,810
Decrease in Non-Securitized TSRs:
20.000%: $819,405
· On March 31, Philip Morris reportedly made a full
payment; RJR made a partial payment
o Assuming Philip Morris' share was approximately
50%, this would suggest an NPM Adjustment of up
to $600 million; in this case, the impact to TSRs
flowing to the State would be as follows:
Assumed NPM Adjustment: $1.2 billion
State Allocation Percentage: 0.3414187%
Decrease in Total TSRs Flowing to the State:
100.000%: $4,097,024
Decrease in Amounts Available for Series
2000 Bonds: 40.000%: $1,638,810
Decrease in Amounts Available for Series
2001 Bonds: 40.000%: $1,638,810
Decrease in Non-Securitized TSRs:
20.000%: $819,405
There can be no assurance as to the amount of any
NPM Adjustment or the corresponding reduction in
TSRs payable to the Settling States.
Mr. Haddon indicated the information on this page explains the
potential impact of a NPM Adjustment.
8:20:35 AM
Page 15
Preliminary Financing Results
· Scenarios 1 and 3 of the following page assume a full
refunding of State's Series 2000 and Series 2001
Tobacco Settlement Asset-Backed Bonds, respectively
o Scenario 1 allows State to achieve $114.5 million
in upfront new money net proceeds
o Scenario 3 allows State to achieve $106.5 million
in upfront new money net proceeds
· Scenarios 2 and 4 assume the Series 2000 and 2001
Bonds remain outstanding. The Series 2006 Bonds are
structured on a subordinate basis to the Series 2000
and 2001 Bonds, respectively. In the respective
scenarios, no revenues will be available for debt
service on the Series 2006 Bonds until the currently
outstanding bonds are fully repaid
o Scenario 2 allows State to achieve $90 million in
upfront net proceeds
o Scenario 4 allows State to achieve $87.8 million
in upfront net proceeds
· Though the bonds in each scenario have a stated
maturity of 2060, with their turbo amortization
structure they are projected to be fully repaid by
2041 in Scenarios 1 an d3, and 2040 in Scenarios 2 and
4
o Shortening the final planned amortization date of
the refunding scenarios to that of the Series
2000 and 2001 Bonds (2015) allows the State to
achieve approximately $20 million from a
refunding of the Series 2000 Bonds, and
approximately $12 million from a refunding of the
Series 2001 Bonds
Mr. Haddon noted this explains the opportunities for the State
to generate additional revenue in 2006.
8:20:53 AM
Page 16
Preliminary Financing Results
State of Alaska Tobacco Settlement Asset-Backed Bonds,
Series 2006, Scenario Summary as of 4/10/2006
[Spreadsheet listing Delivery Date and % of TSRs Pledged;
then calculating Initial Par, less (OID)/Premium, equaling
Gross Proceeds; less COI and Underwriter's Discount, Debt
Service Reserve, Capitalized Interest, Escrow Cost net of
Debt Service Fund, and Operating Expenses, plus Release
from Series 2000 and 2001 SDR, totaling Net Proceeds to the
State; Final Maturity and Final Planned Amortization dates
are listed, as well as Cost of Capital and Yield on Final
Maturity percentages for Scenario 1: New Money and
Refunding of Series 2000 Bonds; Scenario 2: New Money Only:
CABs Subordinate to Series 2000; Scenario 3: New Money and
Refunding of Series 2001 Bonds; and Scenario 4: New Money
Only: CABs Subordinate to Series 2001.]
Mr. Haddon outlined the four scenarios. The first would generate
the most money possible, over $14 million. Scenario 3 employs
the same structure.
8:22:04 AM
Mr. Haddon clarified he considered Scenarios 1 and 3 to involve
restructuring rather than refunding, because the bonds would not
be refunded "purely for economical savings" but would instead
extend debt.
Mr. Haddon hypothesized leaving the Series 2000 and 2001 bonds
outstanding and "only try to wrap new money around" those bonds,
saying the new bonds must be "subordinate" to the existing
bonds. A zero coupon structure would be required because no
revenues would be received until the payment of the Series 2000
and 2001 bonds were fully paid off. No interest payments would
be made during that period.
Mr. Haddon stated that if a zero coupon structure were used, the
State could generate $90 million subordinate to the Series 2000
bonds, and $87 million subordinate to the Series 2001 bonds, to
total approximately $180 million. These would be "leveraged out
to the maximum amount" the bonds could be sold in the
marketplace.
8:23:39 AM
Senator Bunde asked the earnings of the Series 2000 bonds
without the "wrapping of new money".
8:24:16 AM
Mr. Haddon replied that the State has already issued the bonds
and received payment so the State would generate no additional
funds. The projected payoff of those bonds is 2015.
8:24:38 AM
Senator Bunde surmised the proposal is to refinance these bonds.
He asked if the same bonds could be sold twice.
8:24:50 AM
Mr. Haddon clarified that a new set of bonds would be issued
with a portion of the proceeds deposited into an escrow account
to service the debt of the Series 2000 bonds. Technically, the
first bonds would no longer have claim to the TSRs and the TSR
funds would then be "freed up" and available for debt service on
the new bonds.
Mr. Haddon pointed out the spreadsheet details that the Escrow
Cost net of Debt Service Fund would be deducted from the gross
proceeds.
8:26:12 AM
Senator Bunde commented that each time citigroup becomes
involved in the sale or refinance of these bonds, the State
incurs a cost. He therefore questioned how the State would
generate additional income from the scenarios posed.
8:26:41 AM
Mr. Haddon responded that rates are lower, and the time is
opportune to participate in the marketplace. The State would
generate $114 million net of all fees on the refunding of Series
2000 bonds. This is a market opportunity and is not required.
Currently, the State would resume retention of TSR funds when
the current bonds mature.
8:27:38 AM
Co-Chair Green understood the current timing is optimal due to
activity in the market.
8:27:48 AM
Mr. Haddon affirmed. He informed that this market has
volatility, evidenced in 2004 when the market "shut down". The
market is "open now". He could not guarantee whether the market
would close again in the future, whether significant litigation
would be decided against the tobacco industry or against the
Settling States of the MSA. The State "did the right thing" in
selling off the TSR risk in 2000 and 2001. If the State were to
decide to repeat the action, this would be an ideal time.
8:28:44 AM
Senator Bunde estimated the cost of undertaking the action posed
in Scenarios 1 or 3 would be approximately $100,000,000. He
based this on the Gross Proceeds amount of almost $212 million,
less the multiple deductions, totaling approximately $114.5
million Net Proceeds to the State.
8:29:08 AM
Mr. Haddon clarified that $90 million of the Gross Proceeds must
be provided as escrow for the original bond issuances. A debt
service reserve must also be provided. These are not costs to
the State, but rather necessary to refund the 2000 and 2001
Series bonds.
Mr. Rattigan pointed out that once the Series 2000 and 2001
bonds were refunded, the TSR would no longer need to be
dedicated to their repayment and would be "freed" to pay the
debt service on the new bonds.
8:29:57 AM
Mr. Haddon when refund 00 bonds, not longer using tobacco
revenues.
8:30:12 AM
Senator Bunde asked the cost to the State of Scenario 1.
8:30:24 AM
Mr. Haddon listed transactions costs of approximately $2 million
[actual amount shown on spreadsheet is $2,800,831].
8:30:56 AM
Senator Hoffman understood the Series 2000 bonds are currently
scheduled to be paid off in 2015 and if no changes were made,
the State would have the ability to appropriate the TSR funds
after that date.
8:31:13 AM
Mr. Haddon responded that 2015 is a target date but is not
certain. The target date would be achieved if tobacco revenues
"come in" as projected. At the full amortization of the Series
2000 bonds, the 40 percent of TSR pledged to the repayment of
those bonds would revert to the State.
8:31:38 AM
Senator Hoffman asked the amount anticipated annually and the
total amount over time.
8:32:04 AM
Mr. Haddon indicated he would calculate the amounts. He noted
the State would resume retention of the TSR funds.
8:32:24 AM
Senator Hoffman ascertained the issue as deciding whether the
State needs revenues from the TSR immediately with no further
TSR revenues until 2060; or to receive no revenue until 2015,
but resume collection of TSR at that time. The question is
whether receipt of $114 million this year would be more
advantageous.
8:33:03 AM
Mr. Haddon affirmed Senator Hoffman's assessment.
Mr. Haddon informed that bonds secured with TSRs have an
expected payment date and a stated payment date. The Series 2000
bonds are targeted to pay off in 2015 with a stated maturity of
2031. The proposed bonds of Scenario 1 have stated payment date
of 2060 and an expected payment date of 2041. He would therefore
compare the 2015 payoff date of the Series 2000 bonds with the
proposed expected payoff date of 2041 of Scenario 1 bonds. He
agreed that the refunding of the original bonds and issuance of
new bonds would extend the debt a number of years.
Mr. Haddon explained that by issuing new bonds, the State would
receive a present value payment of future TSRs. If no changes
were made and the original bonds paid out in 2015, the State
would begin collecting revenue from the TSR although not in a
"lump sum". If the Series 2000 bonds do no pay out in 2015, the
State would not receive TSR revenue until the bonds were fully
paid.
Mr. Haddon identified the policy question as whether to receive
the funding "up front" based on projections that could be sold
in the current marketplace; or to accept annual payments in the
amount based on annual consumption once the original bonds are
repaid. That amount could be significantly lower than current
projections.
8:34:59 AM
Senator Hoffman countered that the amount could also be
considerably higher.
8:35:01 AM
Mr. Haddon agreed this was possible. If so and new bonds were
issued, those bonds would be paid off sooner.
8:35:23 AM
Senator Stedman commented to the question of whether the State
should capitalize on the TSR at a time of surplus, or wait until
oil prices are down and revenue is needed. A proposal that is
"attractive today" could also be worth consideration several
years in the future. This, plus how the revenues would be
expended, are the policy discussions.
8:36:30 AM
Senator Bunde identified a third topic for policy discussion as
the worth of the "price of doing business". The State would
"give up a lot" by having use of the revenues immediately rather
than allowing the settlement to "play out".
8:37:00 AM
Co-Chair Green asked the benefits of refunding and reissuing
stocks at this time, and the benefits of making no changes.
8:37:08 AM
Mr. Haddon gave the favorable market as the reason for
undertaking this now. Interest rates are relatively low compared
to previous years and the market is "willing to accept" these
bonds, meaning the bonds would be saleable. In 2004, the market
was not favorable and similar bonds could not be sold. The
question is whether the market would be favorable in the future
for later bond issuances. Tobacco settlement-secured bonds
represent a small portion of the bond market.
Mr. Haddon continued that the State could make no changes at
this time if officials predicted that tobacco consumption would
continue at the current level, the funds were not needed at this
time, and receipt of future annual payments in unknown amounts
was deemed acceptable.
8:39:05 AM
Senator Hoffman asked the amount the Series 2000 and 2001 bonds
were sold.
8:39:16 AM
Mr. Haddon replied that he would provide this information,
surmising the amount of the proposed sales would not be
substantially different. Current rates are less than one percent
or 100 basis points lower than they had been at the time of the
original offerings. Refunding the existing bonds would not
result in a significant savings. Therefore, he considered the
proposals to be more of a restructuring.
8:40:25 AM
Senator Hoffman calculated that the State would generate $114
million on the Series 2000 bonds by extending the potential
earnings from 2015 to 2060.
8:40:48 AM
Mr. Haddon affirmed; clarifying the target payoff date of the
Scenario 1 bonds is 2041.
8:41:02 AM
Senator Hoffman asked if the returns would not be a result of
previous interest rates of 8.5 percent compared to the current
rate of 5.5 percent as reflected on the graph on Page 5.
8:41:13 AM
Mr. Haddon noted the Series 2000 bonds were not sold at a rate
of 8.5 percent. The graph instead demonstrated the rates in
which the secondary bond market, i.e. tobacco settlement-secured
bonds, has traded over time.
Mr. Haddon stated that if the maturity of the Series 2000 bonds
was held at the 2015 target date and new bonds were sold "doing
a straight refunding", the State would net $20 million after
escrow costs to restore the original bonds were paid. This
amount is significantly less than the amount projected for
Scenario 1 and demonstrates that approximately $80 million of
the $114 million would be generated as a result of extending the
debt.
Mr. Haddon qualified that if the situation involved general
obligation bonds rather than TSR secured bonds, and the State
could save $20 million, or ten-percent, through a refunding
process, the State would likely undertake the process. Receiving
an upfront payment of debt service cost of ten percent is "above
the normal threshold that states look to do refundings for."
8:43:14 AM
Mr. Rattigan addressed refunding versus "new money". "Freeing
up" the tobacco revenues currently dedicated to the Series 2000
and 2001 bonds would allow for issuance of bonds that would be
"more desirable by the market." These are current interest bonds
that "pay regular interest" and "come at a much lower interest
rate" than the zero coupon bond structure that would be required
if the refunding was not done.
Mr. Rattigan suggested that if a "new money target project list
of a certain dollar amount" was agreed upon, the refunding of
the existing bonds could allow for the issuance of new bonds at
a lower interest rate. Significantly less zero coupon bonds,
which are more expensive and generate lower proceeds, would be
necessary.
AT EASE 8:44:14 AM / 8:44:33 AM
Senator Hoffman understood that $20 million would be derived
from the release of the Series 2000 and 2001 bonds if the State
restructured the bonds.
8:45:00 AM
Mr. Haddon corrected that the State would receive $20 million
under a straight refunding scenario with a targeted maturity of
2015. The existing bonds have an $11 million debt service
reserve account and the new bond scenario would require a $14
million debt service reserve. The $3 million difference would be
utilized to pay off the bonds at their maturity.
8:45:42 AM
Mr. Rattigan noted that the handout referenced for this
presentation does not include a straight refunding scenario.
This presentation is based on the assumption that the State
would intend to generate more than $20 million.
8:46:24 AM
Senator Stedman referenced conversations about the benefits of
shifting risks given the uncertainty of future TSR payments and
the potential that tobacco manufacturing corporations could
dissolve. He requested financial information on these
corporations, including international activities, Standard and
Poor ratings and the bond and stock ratings of other firms, to
help determine possible insolvency.
8:47:37 AM
Mr. Haddon replied that rating agencies carry ratings on all the
major tobacco companies. However, those companies do not
comprise the full component of the TSR. Small tobacco
manufacturers also contribute. Philip Morris, Inc. represents
approximately 50 percent of the marketplace and has been awarded
a weak BBB rating by Standard and Poor.
Mr. Haddon also pointed out that the payments per the Master
Settlement Agreement are based on domestically shipped
cigarettes and do not involve the international markets. In
evaluating the security of Philip Morris, only the domestic
subsidiary of the company could be considered. RJR, Inc.,
formally Reynolds Tobacco, is rated below investment grade by
the major rating services. The third largest tobacco company,
Loews, is a larger conglomerate involving more than tobacco
manufacturing. It is therefore difficult to isolate the rating
of just its tobacco operations.
Mr. Haddon stated that the highest rating TSR secured bonds
could receive is BBB. By considering the solvency of all
participating manufacturers, the rating agencies consider the
revenue stream for these bonds slightly stronger than the
individual companies.
8:49:52 AM
Senator Stedman surmised that the market place already factors
the current financial scenario of the settlement agreements.
Therefore, an imminent demise of the corporations would be
reflected in current ratings.
8:50:24 AM
Page 18
Tobacco Securitization Credit Risks
[Flow Chart showing the interrelationship between Tobacco
Securitization Credit and Non-Participating Manufacturer
(NPM) Adjustment Risk; Decreased Market Share of
Participating Manufacturers; Litigation Against
Participating Manufacturers; Legal Risks to Master
Settlement Agreement; Bankruptcy of Participating
Manufacturers; and Uncertainty of Future Consumption.]
Mr. Haddon directed attention to this page to demonstrate the
risks.
8:51:00 AM
Page 24
Market Share of PMs and NPMs
[Spreadsheet listing Historical Market Shares as follows:
OPMs
1998 - 96.5%
1999 - 92.3%
2000 - 91.4%
2001 - 89.4%
2002 - 86.1%
2003 - 84.5%
2004 - 83.75%
SPMs
1998 - 3%
1999 - 3.9%
2000 - 5.2%
2001 - 6.2%
2002 - 7.2%
2003 - 7.4%
2004 - 7.5%
NPMs
1998 - 0.5%
1999 - 3.7%
2000 - 3.5%
2001 - 4.4%
2002 - 6.7%
2003 - 8.2%
2004 - 8.75%
Source: "Opinion And Order Partially Denying
Preliminary Injunction" in 02 Civ. 2939 (AKH),
September 14, 2004, Alvin K. Hellerstein, U.S.
District Judge, United States District Court for the
Southern District of New York.]
· NPMs pay into an escrow and do not contribute to the
payments flowing to Settling States
· Increasing NPM market share means less money flowing
to Settling States
Mr. Haddon stated this page demonstrates how market shares have
changed with an increasing market share going to the
nonparticipating manufacturers. An increase in NPM decreases the
amount of revenue generated from the MSA because NPM do not make
payments into the MSA. This is a risk of holding the TSR.
8:51:40 AM
Mr. Haddon returned to the flow chart on Page 18 to speak to the
significant litigation against tobacco manufactures. Individual
suits are filed, with occasional large judgments made against
the manufacturers. Class action suits have also resulted in
large judgments against the industry. Such continued losses
could result in financial duress to manufacturers.
Mr. Haddon furthered that the Master Settlement Agreement itself
is being challenged on "two major fronts." Small manufactures
are challenging the MSA arguing it is an anti-trust agreement
resulting in restraint of trade. If one of these challenges
prevailed, the MSA could be "disrupted" and the requirement that
the PMs make payments could be "decoupled".
Mr. Haddon explained the other challenge is "consumption risk
going forward."
8:53:22 AM
Senator Stedman remarked that these bonds are not insured
against default for the purchaser. The purchaser would have at
least as much information about the MSA as the State does.
Therefore, he surmised the purchaser would adjust the purchase
price to reflect the perceived risk levels.
8:53:57 AM
Mr. Haddon affirmed, replying this is the reason the interest
rates are higher yielding than general obligation bonds. There
is no insurance on tobacco bonds and the purchaser requires
higher payment for assuming the risk.
8:54:20 AM
Mr. Rattigan added that volatility of the secondary market
trading is not only interest rate movement, but also includes
"tobacco event occurrence" that caused the risk to be perceived
as higher. The market evaluates events that could affect the
securitization stream and adjusts accordingly either in the
secondary market or in the primary market, which issued no
tobacco securitization bonds in 2004 because the risk was deemed
too high to be compensated by higher interest rates.
8:55:05 AM
Senator Stedman understood that the higher the risk level, the
larger the discount the State must concede to attract
purchasers. The larger discount would result in less income to
the State in the future. He concluded, "It's not a zero sum
gain."
8:55:45 AM
Mr. Haddon agreed.
8:55:50 AM
Mr. Haddon referenced the line graph on Page 5 to point out that
the variance between the "general municipal market" and the
secondary tobacco securitization market is currently minimal,
indicating the market is favorable for selling new TSR bonds.
The interest rate is determinative of the discount paid "to
present value these payment streams". The higher the interest
rate, the bigger the discount factor, but would impact the
amount of revenue received "up front" for the State.
Mr. Haddon characterized this as a situation in which the State
could make no changes and receive the TSR funds once the
existing bonds have matured in an amount higher or lower than
current payments. The State could instead, refinance the bonds
and receive the funds immediately.
Mr. Haddon concluded that if new bonds were sold and the State
received the revenue "up front" and if the long-term TSR
revenues were lower than projected, the State would have "got a
good deal". If the TSR revenues were higher than projected, the
bonds would be paid off sooner and the State would resume
collecting the revenues earlier, albeit later than the repayment
date of the existing bonds.
8:58:16 AM
Mr. Rattigan commented that in securitizing the TSRs and
receiving money up front, the bondholder is assuming the risk.
8:59:49 AM
Senator Olson asked the impact on the State's bond rating in the
event of a "catastrophic event" involving the MSA.
9:00:05 AM
Mr. Rattigan replied that such an event should have not affect
on Alaska's credit ratings. Bond raters recognize the TSR bonds
are no reflection of the State's solvency.
9:00:33 AM
Senator Olson asked what actions other states were taking in
this regard.
9:00:44 AM
Mr. Haddon referred back to Page 4 and the US map listing the
completed and pending tobacco securitizations of all states and
some counties and cities. Other states are considering
restructuring existing bonds and issuing new bonds.
9:01:52 AM
Mr. Rattigan noted that approximately three-quarters of the
"deals" done in 2005 and 2006 have been refundings of earlier
offerings.
9:02:40 AM
Mr. Haddon asserted that the market is favorable for such
activities. Alaska would not be required to do refunding of its
existing bond offerings. New bonds could be sold, although this
would require additional legal restructuring. These are policy
issues the legislature must decide to determine the length of
extension.
Mr. Haddon stated he would provide additional information to
address questions raised during this presentation.
9:03:30 AM
Senator Dyson asked the amount that citigroup would earn if the
State undertook the refinancing of existing bonds and issuance
of new bonds. He also asked the net return that the holders of
the existing bonds would realize.
9:04:12 AM
Mr. Haddon responded that if the Series 2000 bonds were
restructured, the bondholders would receive payment from the
escrow account. The "security character" of those bonds would be
changed, as the TSR revenues would no longer be the guarantee.
These bonds would have higher value.
Mr. Haddon continued that the bondholders would have the option
to redeploy "that money" into the new bonds. As an underwriter,
citigroup would attempt to have the Series 2000 bondholders to
purchase the new bonds at a higher interest rate. However, the
bondholders would not be required to do so.
9:05:38 AM
Senator Dyson again asked the rates and the net return the
bondholders would receive.
9:05:53 AM
Mr. Haddon stated that citigroup could sell new bonds at lower
rates, with the bondholders obtaining bonds with a lower yield.
The escrow guarantee on the existing bonds would provide
incentive to purchase the new bonds.
9:06:35 AM
Mr. Rattigan furthered that the holder of Series 2000 bonds, if
purchased at the initial offering would receive a return rate of
approximately six percent. If the initial bonds were sold at
present in the current market, a higher gain of "a few
percentage points" would be realized based on the value of the
bonds at the time of sale. The bondholders would not be required
to sell the bonds.
Mr. Rattigan continued that the return on the new bonds would
not be set until they were sold and would be determined by the
market. The new bonds would likely have a lower rate of return
than the existing bonds. A regular market exists for tobacco
bonds, those issued by all participating states and local
governments. The return on the original Alaska bonds that had
been traded would be dictated by the market rate at the time
they were traded.
9:08:47 AM
Senator Dyson expressed that the witnesses did not answer any of
his questions. He again asked how much the company would earn
from these transactions.
9:09:06 AM
Mr. Haddon told of an underwriting discount, spread, or fee paid
on tobacco bonds. The underwriting fee on bonds sold for $216
million would be approximately $1.2 million. If citigroup were
the lead underwriter, it would expect to receive fifty percent
of the fee, or $600,000.
9:09:49 AM
Senator Dyson reposed his second question asking the amount the
bondholders could potentially realize if the State were to
refund existing bonds and issue new bonds. He asked if the
amount would be $5 million, $10 million or another amount.
9:10:14 AM
Mr. Haddon responded that the value of the bonds is determined
by interest rates. The value of the Series 2000 bonds at the
time of initial purchase was low because the interest rates were
high. As interest rates decreased, the value of the bonds
increased. The increased value of the bonds would only be
realized if the bonds were sold when the interest rates were
lower.
Mr. Haddon continued that Series 2000 bonds would actually trade
at an amount higher than 100 cents on the dollar if the State
restructured because the original bonds would have a higher
security. However, the bonds would generate a lower interest
rate and those bondholders could chose to redeploy their
investment into the new bonds, which would pay a higher interest
rate.
9:12:16 AM
Senator Stedman stated that the $2.8 million "COI and
Underwriter's Discount" deduction from "Gross Proceeds" in
Scenario 1 shown on Page 16 is "the cost of doing the deal". He
asked how the amount designated for the escrow account is
determined, and whether the amount is an estimate or a firm
figure.
9:13:22 AM
Mr. Haddon answered that the escrow amount is not an estimate.
It is calculated, for Scenario 1, from the debt service owed on
the Series 2000 bond deal for the "call date". The call date is
the date when the bonds could be retired. The escrow account is
established to make the interest payments to the call date and
provide principle to retire the bonds. The original terms of the
Series 2000 bonds provided that the bonds could be "called in"
on "certain terms" and therefore the call date would be defined
by those requirements as well as the debt service requirements
on those bonds. An independent accountant does this calculation
to ensure accuracy. This is a legal requirement and the amount
must be calculated to the "penny".
9:14:34 AM
Senator Stedman asked if no reinvestment risk would be incurred.
9:14:42 AM
Mr. Rattigan responded that no reinvestment risk would exist for
the escrow, due to the requirement that the account have
sufficient funds. Tobacco securitization contains many "nuance
and complications". The escrow and refunding components are no
different than any refundings the State has done in the past. He
gave airport bonds as an example in which older bonds were
refunded to achieve a savings. Those older airport bonds are now
guaranteed by an escrow account and no longer have any claim to
airport revenues. At the time of pricing, a deposit is required
in an amount verified by an independent accounting firm to be
sufficient.
9:15:46 AM
Senator Stedman asked if escrow funds would be set aside and
would collect interest.
Mr. Haddon affirmed.
Senator Stedman asked how all interest rate exposure would be
removed. The escrow account would be held for years if not
decades.
9:16:17 AM
Mr. Haddon replied that the escrow funds would be utilized to
purchase federal government securities guaranteed by the U.S.
Treasury Department or other federal agencies. The interest rate
of those securities would be fixed and the income generated
would be calculated to determine the amount of securities
necessary to pay the principle and interest payments on the
original bonds. The escrow account is required before the TSRs
could be pledged for new bonds.
9:17:33 AM
Senator Stedman understood the issue of buying zero coupons or
government backed bonds. He asked about the imbedded costs of
establishing and administering the escrow account.
9:18:05 AM
Mr. Haddon answered that the escrow account would have no
embedded cost. The securities "will cost what they cost based on
the current market". The $88 million cited for Scenario 1 could
change with interest rates over next couple weeks. This is the
risk of delaying the transaction.
9:18:39 AM
Mr. Rattigan told of the requirement that the securities
purchased to fund the escrow "are bid out to the market" to
ensure that the State has achieved the "best possible price."
Bond council would also provide a "defeasance opinion" avowing
that the Series 2000 bonds were officially defeased and no
longer have the right to receive TSR payments they were
originally secured by.
9:19:23 AM
Co-Chair Green suggested the witnesses meet with interested
Committee members individually to address concerns and respond
to questions.
9:19:39 AM
The bill was HELD in Committee.
9:20:11 AM
SENATE BILL NO. 231
"An Act making appropriations, including capital
appropriations and appropriations to capitalize funds; and
providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
9:20:27 AM
CHERYL FRASCA, Director, Office of Management and Budget, Office
of the Governor, gave a presentation utilizing a handout titled,
"Governor's Capital Budget Proposals, Senate Finance Committee,
Cheryl Frasca, Director, Office of Management and Budget" [copy
on file].
9:21:10 AM
Page 2
Capital Budgets by Fund Source FY 98 - FY 07
[Bar graph showing amount in million of dollars of federal
funds, general funds and other funds for each of the fiscal
years indicated.]
Ms. Frasca pointed out the proposed FY 07 capital budget would
appropriate approximately $125 million more general funds than
the previous year. The graph shows the funding sources in
context over time.
9:21:57 AM
Page 3
FY 07 Capital Budget by Program Category
General Funds & Other Funds
[Pie chart demonstrating the following:
Transportation 55%
Development 6%
Natural Resources 2%
Education 5%
University 15%
General Government <1%
Health & Human Services 8%
Housing/Social Services 5%
Public Protection 3%
Law & Justice 1%]
Ms. Frasca explained this chart does not delineate by
department, but rather program category, and includes both
general fund and other fund sources. Capital budgets of the
1970s and 1980s were categorized in this manner. She pointed out
that Law and Justice activities involve more agencies than the
Department of Corrections and the Department of Public Safety.
It also encompasses the Office of Public Advocacy, the Public
Defenders Agency, the Alaska Court System and other State
agencies.
Ms. Frasca stated that approximately $350 million was proposed
for the Transportation category and $98 million for the
University of Alaska. The funding source for the University
projects would be proceeds from tobacco securitization bonds.
Health and Human Services projects would receive $52 million and
Housing and Social Services would receive $32 million.
9:24:11 AM
Page 4
FY 07 Capital Budget by Fund Source
[Pie chart demonstrating the following:
Federal Funds $1,268.8m 66%
General Funds 465.2m 24%
Tobacco Refinance 89,2m 5%
Other Funds 65.9m 3%
AHFC Dividend 31.2m 2%]
Ms. Frasca overviewed this page.
9:24:46 AM
Page 5
Investment of FY 06 Additional Revenue
December 15, 2005 Proposal
[Pie chart demonstrating the following:
Advance Fund K-12 Education $565 million
Deferred Maintenance 43 million
Save for Gas Pipeline Ownership 400 million
Road Projects 86 million]
Ms. Frasca informed that Governor Frank Murkowski proposed to
invest a portion of the surplus revenue generated in FY 06 into
capital projects. This is a notable event, although not much
different than the legislator's decision to appropriate excess
earnings of FY 05 for FY 06 capital projects.
Ms. Frasca listed examples of the intended transportation,
including $86 million for repaving the Richardson Highway, $12
million for improvements to the Palmer/Wasilla Highway, and $30
million for projects to alleviate congestion in Anchorage.
Ms. Frasca also told of $700 million in identified deferred
maintenance needs, of which the University submitted requests
for approximately $428 million. The Office of Management and
Budget selected projects totaling $43 million to be addressed in
FY 07. Almost $9 million of the amended amount would be
appropriated for transportation projects, $10 million for the
University, and $1.6 million for parks.
9:27:09 AM
Page 6
Investment Priority: K-12 Education
· Alternatives to help more Alaskans succeed
o Galena, Nenana boarding schools
o Military Youth Academy expansion
o Mt. Edgecumbe maintenance, repairs
· School maintenance, construction
o 78% FY 06 grants unexpended to date
o School debt reimbursement
ƒ$134 million (19%) from 2002 approved by
voters but unsold
ƒ$185 million (97%) from 2005 not yet
approved by voters
Ms. Frasca acknowledged that increased funding is requested in
the FY 07 operating budget for K-12 education; however, capital
investments are necessary for some alternative education
programs. The Mt. Edgecumbe facility was constructed during the
1940s.
Ms. Frasca explained the reason that a significant percentage of
grants approved for FY 06 had not yet been expended because the
funds became available in July 2006 after the onset of the
construction season. Most of these funds would be expended in
the upcoming 2007 summer construction season.
Ms. Frasca stated that some projects identified for the grants
approved by the legislature in 2002 had yet to be presented for
voter approval, thus explaining the unexpended balance of that
appropriation.
9:30:05 AM
Senator Dyson requested affirmation that all the projects
outstanding for which grants were approved in 2002 had not yet
been subject to voter approval.
9:30:25 AM
Ms. Frasca corrected that some of the projects had been placed
on the ballot but were rejected by voters.
9:30:37 AM
Page 7
Investment Priority: University of Alaska
· Maintain existing facilities, equipment
o $35 million of $98 million requested
· New facilities, other projects
o $55 million of $152 million requested
ƒFunds first priority: Integrated Science
Building
Ms. Frasca noted the board of Regents requested $98 million for
deferred maintenance projects. The Integrated Science Building
is located on the University of Alaska, Anchorage campus.
9:31:27 AM
Page 8
Investment Priority: Job Training
· Preparing Alaskans for the future's opportunities
o Fairbanks Pipeline Training Center
o AVTEC
ƒDistance training videoconferencing
ƒDormitory remodel
ƒFacility replacement
Ms. Frasca spoke to the job training needs, especially in
preparation of a natural gas pipeline. The Governor proposes a
$3 million grant to fund the Fairbanks Pipeline Training Center.
The Committee supported this effort the previous legislative
session.
Ms. Frasca informed of the intent to provide distance-training
programs through the Alaska Vocational Technical Center (AVTEC)
to rural areas. Additionally, the dormitories at the campus are
30 years old, pose life safety issues and must be upgraded to
comply with safety codes. An appropriation of $2 million is
requested to replace a facility on the campus. The current
facility was constructed ten years ago with the intent it would
be temporary.
9:32:55 AM
Page 9
Investment Priority: Resource Development
· Oil and gas development
o Unified Permitting Process
o Frontier Basis Geologic Assessment
o Bristol Bay Energy Development
o Geologic Data for new North Slope Exploration
o Pipeline Corridor Geologic Hazards
o Shallow Coring Program
Ms. Frasca stated the funding requested for the Unified
Permitting Process would be utilized for the third phase of a
multi-year project to modernize the system. The Frontier Basis
Geologic Assessment would allow for oil and gas development. The
Bristol Bay Energy Development project pertains to a new lease
and would provide an understanding of resources. The Geological
Data project would provide the State with information to obtain
maximum investment with private industry. The proposed natural
gas pipeline could go through Delta Junction to the Canadian
border, so the geologic hazards of that area must be studied.
The Shallow Coring Program would generate data on potential
resources around the state.
9:34:51 AM
Page 10
Investment Priority: Public Safety
· Tools to respond effectively
o APSIN re-design
o Online fire, life safety plan review system
o Crime lab design
· Emergency preparedness
o ALMR, satellite phones
o Alert warning system
· Correctional system upkeep
Ms. Frasca told of the Alaska Public Safety Information Network
(ASPIN) that would enable data sharing with all law enforcement
agencies operating in the state. The FY 07 proposed capital
budget includes $3 million State funds and $1 million federal
funds for this project.
Ms. Frasca stated that the on-line fire, life safety plan review
system would make the processes more efficient.
Ms. Frasca requested $4.8 million to design a new crime
laboratory. Yesterday a connection was made in the DNA evidence
of a murder that occurred in 1991. The existing laboratory is
undersized.
Ms. Frasca deferred to the Department of Administration and the
Department of Natural Resources to detail the Alaska Land Mobile
Radio (ALMAR) project.
Ms. Frasca informed that funding is necessary to make the Alert
Warning System compliant with federal standards.
Ms. Frasca described the planned correctional system upkeep
projects as typical maintenance and repair items and completion
of the installation of a closed circuit monitoring system.
9:37:17 AM
Page 11
Investment Priority: Public's Health
· Safe water, sewer
o VSW and community projects
· Immunization, Disease Registry
· Safe community housing
o Bring the Kids Home
o Pioneer Homes code compliance
o AHFC programs
Ms. Frasca noted the request of approximately $29 million
general funds to match $74 million federal funds for the Village
Safe Water (VSW) program. Other community projects include one
located in Sawmill Cove at Sitka, the landfill at Unalaska, and
the water line at Ketchikan.
Ms. Frasca told of the requested immunization and disease
registry tracking system and database for the Department of
Health and Social Services that would provide "real time"
information. The current system is not as updated as those in
other states and is necessary to address certain events such as
Hurricane Katrina.
Ms. Frasca stated that planning, design and construction of
facilities is necessary to implement the Bring the Kids Home
plan. Planned Alaska Housing Finance Corporation (AHFC) projects
include creating housing for teachers and public safety
officials. Eighteen communities have applied for grants to fund
these projects, which has assisted villages with teacher
retention.
9:39:52 AM
Page 12
Investment Priority: Transportation
· $481 million of overall capital budget
· State match of $90 million for $405 million
o Aviation $16 million
o Highways: $74 million
· State harbors, docks, AMHS - $41 million
· Community priorities
o Pt. Mackenzie Road
o Port of Anchorage
o Seward Dock
o Whittier boat harbor
Ms. Frasca informed that transportation projects comprise the
largest amount of general fund and other State funding
appropriations in the FY 07 proposed capital budget. Eight
projects at State-owned harbors have been identified for
upgrades and eventual transfer to local government ownership.
The Governor is requesting $14 million for the Point Mackenzie
Road project. The Port of Anchorage serves statewide purposes
and the Seward Dock has been identified as a local priority. The
Whittier boat harbor project would expand the existing
facilities and allow for additional waterfront development.
9:42:01 AM
Page 13
Governor's Transportation Initiative:
· Prepare Alaska's infrastructure for tomorrow's
opportunities
o Alaska Railroad extension
o Juneau Access
o Roads to Resources
o Parks Highway
o Dalton Highway
Ms. Frasca noted that funding for these projects would be
entirely State general funds.
Ms. Frasca spoke to the extension of the Alaska Railroad to the
Canadian border. A feasibility study was underway in cooperation
with the Yukon Territory and British Columbia and Canadian First
Nations to determine potential routes and the economic benefit
to Alaska. If the study, to be completed in July 2006, finds the
plan feasible, the $50 million of this request would be utilized
for the next step of the project. If the study determines the
plan to not be feasible, the funding would not be expended and
would lapse to the general fund available for legislative
appropriation the next session.
Ms. Frasca noted the $45 million requested for the Juneau Access
project would be expended to include the road, terminals and
ferries related to the project.
Ms. Frasca explained the Roads to Resources program relates to
industrial roads and that the funding would be utilized to
further projects including access to Point Thompson, a Foothills
West road, Lucky Shot line and timber access roads in Southeast.
The program is intended to address opportunities as they arise.
Ms. Frasca informed that funds were needed to address load
capacity on the Parks Highway. Currently load limits must be
imposed for approximately six months each year. This results in
higher costs, as goods must be transported in smaller loads.
Ms. Frasca stressed the importance of maintaining the Dalton
Highway, which serves as a link to oil and gas development sites
on the North Slope. The requested funding would allow for
continued maintenance. Co-Chair Wilken wrote a letter in support
of such activities.
9:46:30 AM
Page 14
Investment Priority: Economic Development
· Tourism destination promotion, development
o Morris Thompson Cultural, Visitor Center
o Tongass Coast Aquarium
o Anchorage Museum
o Alaska Native Heritage Center
· Maintain parks, campgrounds
Ms. Frasca emphasized the need to make Alaska more attractive to
tourists. Funding from other sources has been secured for each
of the aforementioned projects; the requested general funds
would provide the State's contribution. The Alaska Tourism
Association provides marketing for businesses located along the
road system aimed at independent and international travelers.
Ms. Frasca expressed appreciation for the Committee's
appropriation for State park operations. Additional capital
funds are requested to ensure the parks are well maintained.
9:48:09 AM
Senator Stedman pointed out that the proposed Gravina Island
bridge project in Ketchikan was not included in the community
transportation priorities listed on page 12.
9:48:37 AM
Ms. Frasca responded that this listing did not focus on federal
projects. The Governor's proposed budget contains an
appropriation to provide State matching funds for the project.
9:49:24 AM
Senator Stedman, referencing page 2, questioned the comparisons
to budgets of previous years.
9:50:10 AM
Ms. Frasca explained that the graph is intended to demonstrate a
pattern over a period of time. She admitted some appropriations
made in one year were not expended until the following year. She
would provide detailed information.
9:51:23 AM
Senator Stedman asked how receipt authority for funds never
actually received is reflected in this presentation.
9:51:42 AM
Ms. Frasca acknowledged that "budgeting versus spending" is not
delineated. She gave FY 05 as an example as including federal
receipt authority for the Gravina Island and Knik Arm Crossing
projects, although the funds were not received in that year.
9:52:30 AM
Senator Stedman commented that at times, authority is granted
but the funds are not received.
9:52:43 AM
Co-Chair Wilken appreciated the emphasis on the Dalton Highway.
He traveled this road during the 1980s and again last year. The
road condition was worse on his second trip and he was surprised
at the amount of traffic activity. Some areas were dangerous.
Upgrades are needed given the increased natural resource
exploration occurring on the North Slope.
9:53:56 AM
Co-Chair Wilken understood that discussions had occurred with
the Governor's staff regarding funding a science facility at the
University of Alaska, Fairbanks campus utilizing tobacco
settlement receipts. However, the project is not included in
this Governor's proposed budget, although funding for the
integrated science facility at the Anchorage campus is included.
He requested to be kept better apprised of these discussions and
decisions.
9:54:25 AM
Senator Olson asked about improvements to the Dalton Highway.
9:54:58 AM
Ms. Frasca responded that the Department of Transportation and
Public Facilities has a five-year proposal for upgrading and
improving the Dalton Highway.
9:55:40 AM
Senator Dyson asked if the project to extend lighting along the
Glenn Highway between Anchorage and the Parks Highway is
included in the Governor's request.
Ms. Frasca would provide information on this.
9:56:20 AM
Senator Dyson understood that a certain percentage of spending
be allocated for capital projects. He asked the specifics of
this guideline.
9:56:50 AM
Ms. Frasca surmised that Senator Dyson was speaking to the
constitutional spending limit instituted under the governorship
of Jay Hammond, which directed that one-third of spending be
allocated for capital improvements. This provision has never
been implemented because revenues were inadequate to "support
the level of spending" allowed under that limit. Otherwise, she
was unaware of no requirements for distribution of
appropriations for capital projects.
9:58:12 AM
Presentation by Department of Administration
on the
Alaska Land Mobile Radio Project
AT EASE 9:58:18 AM
10:01:18 AM
KEVIN BROOKS, Deputy Commissioner, Department of Administration,
introduced Mr. Callahan who recently transferred to the
Department from the Department of Military and Veterans Affairs
where he was head of the Alaska Land Mobile Radio Project
(ALMR).
MIKE CALLAHAN, Director, Enterprise Technology Services,
Department of Administration, gave a presentation titled,
"Alaska Land Mobile Radio Project, ALMAR, Presented by: The
Department of Administration" [copy on file].
10:01:57 AM
Page 2
What is the ALMR project?
· The first step in statewide interoperable
communications for the State of Alaska
o Ability to communicate on demand in real time
· First responders first
· ALMR was created in 1995 as a broad governmental
partnership
· Executive Council representatives
o Department of Defense
o State of Alaska
o Alaska Municipal League
o Federal (Non-DoD) agencies
Mr. Callahan outlined this information. He gave examples of
first responders as those who would fight fires and respond to
crimes.
10:03:27 AM
Page 3
LMR Now A National Issue
Compatible radio systems would cost billions
By Paul Davidson, USA TODAY
As chaos engulfed New Orleans after Hurricane Katrina
struck, emergency responders traded urgent information in a
way that was hardly a model of 21st century high
technology.
With the floodwaters surging, they scurried on foot to
ferry messages among city police, state troopers and the
National Guard.
It's not that the agencies' radio systems didn't work. They
just didn't work with each other.
The breakdown in New Orleans was the latest proof of a
troubling quandary: Many of the USA's 50,000 public-safety
agencies still can't talk to each other in a crisis. The
problem has plagued emergency responders in every big
disaster in recent memory - from the Oklahoma City bombing
to 9/11 to Katrina.
The main culprit? Incompatible radio equipment.
"We didn't learn our lesson after the '93 World Trade
Center bombing; we didn't learn our lesson after Sept. 11,"
Senate Commerce Committee hearing on Katrina. "We don't
need anymore failures."
H. Darr Beiser, USA TODAY
Mr. Callahan pointed out the issue is not unique to Alaska and
would not "go away" unaddressed. In this state, events such as
the Millers Reach wildfire, emergency calls to 911 and others
raised questions as to why emergency workers were unable to
communicate with each other.
10:03:52 AM
Page 4
Project objectives:
· Replace aging LMR infrastructure
· Enhance personnel safety and operational capabilities
· Phased implementation
o Highway system
o Southeast Alaska and Kodiak
o Rural areas where cost effective
· Cost share infrastructure cost among the federal,
state and local governments
Mr. Callahan informed that both systems currently in operation
have reached the end of their period of usability and that
replacement parts could no longer be obtained. Rather than just
purchasing new radios, the system would be upgraded and
replaced.
Mr. Callahan reported that the highway system portion of the
project was completed the previous year and includes the road
systems from Valdez to Fairbanks to Anchorage and Kenai. System
replacement for Southeast Alaska would be undertaken in the
upcoming year.
Mr. Callahan stated that because this project involves the US
Department of Defense, a significant amount of federal funding
is appropriated.
10:05:19 AM
Page 5
Current Phase Build out
[Map depicting Alaska, with the exception of the northern-
most area, with multiple sites marked as ALMAR locations.]
Mr. Callahan stressed the importance of the site located on St.
Paul Island.
10:05:43 AM
Page 6
End of 2004 Status
[Map depicting and area spanning from the Canadian Border
to the east, the Kenai Peninsula to the south, Mount
Susitna to the north and Money Knob (north of Fairbanks) to
the north. Areas including Valdez, Anchorage, the Alaska
Highway between Ester and Delta and an area east of
Fairbanks are highlighted.]
Mr. Callahan compared the progress of this year to that of the
following year.
10:05:51 AM
Page 7
[Map depicting and area spanning from the Canadian Border
to the east, the Kenai Peninsula to the south, Mount
Susitna to the north and Money Knob (north of Fairbanks) to
the north. Most areas along the major road systems between
Valdez and Fairbanks, Delta and Tok, Ester and Whittier and
Seward, and Glennallen and Anchorage are highlighted.]
Mr. Callahan spoke to the "immense amount of work" accomplished
during this period. Although not officially completed, the
system is operational in the highlighted areas.
10:06:17 AM
Co-Chair Wilken asked when the sites of Gerstle River, Byers
Creek, and Honolulu would be addressed. These areas on the
Alaska Highway and the Parks Highway are not highlighted as
completed on the aforementioned map.
10:06:31 AM
Mr. Callahan replied that these sites are scheduled for
completion in the current year. These areas present unique
challenges. Permit issues in the Honolulu locations had to be
resolved. Other sites require significant expense to deliver
power to the facilities.
10:07:26 AM
Co-Chair Wilken clarified that power delivery is the reason the
three sites were not completed with the majority of the project
in this region.
10:07:33 AM
Mr. Callahan affirmed, noting that the problem is likely solved
for two of those sites.
10:07:43 AM
Page 8
How does this benefit Alaska?
· 1st responders can now communicate with each other on
a single radio platform.
· ALMR will serve 87 sites along the highway and
railbelt from Anchorage to Fairbanks and down to
Kodiak, at the completion of this phase of the
buildout.
· Sites connected via SOA microwave system (SATS)
o Fully meets congressional mandates for a
"private, government owned and operated LMR
network for first responders"
o Enhanced survivability compared to fiber optics
· Establishes infrastructure for future mobile data
projects and remote data reporting
Mr. Callahan defined the "private, government owned and operated
LMR network" as being limited to first response use. This would
avoid an incident in which a first responder was unable to
access the network due to a high volume of other users, such as
what occurs in Anchorage during rush hour commutes.
10:08:27 AM
Senator Hoffman asked if first responders include health care
workers.
10:08:31 AM
Mr. Callahan affirmed, adding that security personnel for the
TransAlaska Pipeline System would also be connected to the
system.
Mr. Callahan cited the most significant danger to the existing
system would be earthquake damage to fiber optic cables.
Mr. Callahan listed future uses of the ALMAR system. The
Department of Transportation and Public Facilities is
considering installing cameras at weather stations to provide
information on road conditions. Also, "wire connection" could be
established for "road workers".
10:10:37 AM
Page 9
2005 Key Accomplishments:
· Implemented 41 sites, covering the bulk of the road
system between Anchorage and Fairbanks
· The Users Council is operational
· Completed St. Paul Island technology demonstration
· Two Transportable Sites
o Quickly add coverage
o Augment existing coverage
[Photograph of a facility titled, "R1 North" including a
two-story building, radio towers and satellite disks.]
Mr. Callahan noted that as of 1995, the system could not work
over satellite. Vendors changed technology and tests of the new
systems were successful. The system could be utilized in rural
areas.
Mr. Callahan explained the advantages of the transportable sites
in the event of a large disaster in which the basic system were
overloaded.
10:12:28 AM
Page 10
Direct Benefits:
· December 2005 - for the first time ever, DOT snow
removal crews can communicate with each other via 2-
way radio in Thompson Pass.
· Alaska Shield/Northern Edge '05 Homeland Security
Exercise
o One of three "national level of interest"
exercises for the year
o ALMR was the successful technology demonstration
project for the exercise
Mr. Callahan stressed the importance of communication between
snow removal crews, as they routinely plow in white-out
conditions. If a vehicle went off the road, assistance could be
given immediately thus reducing life-threatening situations.
Mr. Callahan reported that the security exercises determined the
ALMR technology to be sufficient.
10:13:57 AM
Page 11
Financial Status Report
[Spreadsheet showing the following:
Funded to Date
Department of Defense $65,300,000
State of Alaska 17,977,000
Federal Grants 13,827,442
Project Total $97,104,442
Funding to Finish
State of Alaska 2,500,000
Federal Grants 7,500,000
*Note: $5 million additional SATS infrastructure money
included in FY 07 request.]
Mr. Callahan qualified that the Governor's proposed FY 07 budget
includes additional funding requests. Half of the requests
relate to the ALMR project with the remaining relating to other
maintenance requirements.
10:15:15 AM
Page 12
How we service these sites:
[Three photographs showing sites in remote locations with
helicopters flying overhead, towing a large container and
landed.
Mr. Callahan commented to the difficult accessibility to some
locations, noting one site was "blown off the top of the
mountain."
10:15:36 AM
Page 13
Winter Challenges
[Two photographs of the Mt. Bede site in winter conditions
with blown snowpack covering the building and tower. A
person wearing a survival suit is shown at the site.]
Mr. Callahan told the Committee that crews used chainsaws to
penetrate the snow pack.
10:15:55 AM
Page 14
Pillsbury Mountain Site
[Two photographs of a worker at this location showing the
small building, transmission tower, a solar panel and other
equipment on a clear day with a few inches of snow-
covering.]
Page 15
Saddle Mountain (Juneau) site
[Photograph of building, towers, solar panel and
miscellaneous gear on the snow-free mountaintop site next
to an alpine lake overlooking Gastineau Channel.]
Mr. Callahan noted that some maintenance work is conducted
during summer months.
10:16:17 AM
Page 16
Frequently Asked Questions
Mr. Callahan indicated the following pages address these
questions.
10:16:24 AM
Page 17
Is the existing ALMR system compatible with the planned
Municipality of Anchorage system?
· Yes. The Muni system will use 700 MHz frequencies
instead of VHF, but the three system controllers will
interconnect the users
· If Muni assets/subscribers travel outside the
Anchorage bowl they will use their deployable VHF
radios, with they are buying with the system
Mr. Callahan outlined this information.
10:17:11 AM
Page 18
Is ALMR Outdated Technology?
· No
· The ALMR System fully meets congressional mandates for
a "private, government owned and operated LMR network
for first responders"
Mr. Callahan informed that one additional upgrade would be
installed in the fall, after which, no mandatory upgrades would
be required for 14 years.
10:18:09 AM
Page 19
How many Radios are on the system?
· Current: 9,894
· Projected by end of CY 2007: 14,900
Mr. Callahan reiterated that the system is operational despite
not being officially completed.
10:18:21 AM
Page 20
Are all costs included in these budget numbers?
· All infrastructure costs are covered.
· Subscriber units are the responsibility of the
individual agencies. Almost all non-state agencies buy
their subscriber units using federal grant funds.
Mr. Callahan explained that participating municipalities are
applying for federal funds for their portions of this program.
10:18:45 AM
Page 21
What is the Cost per unit for radios?
[Spreadsheet listing the following:
Portable (Handheld)
Motorola $4771
EF Johnson 2324
Mobile (Installed in Vehicle)
Motorola $5514
EF Johnson 3442]
Mr. Callahan noted that some first responder participants would
be unable to secure total funding for the purchase of these
units and that the State is "trying to help them". He exampled
that the Ester Volunteer Fire Department could not hold enough
pancake breakfasts necessary to raise enough funding to buy the
five radios it needs.
10:19:06 AM
Page 22
Projected FY 08 Budget impacts/requirements
· Capital funds: Motobridge Interconnect Requirements
$2.764M
o Originally Department of Defense funded - lost
funds
o Intent to fund through federal grant/s
o Uncertainty due to changes in earmark
capabilities
· O&M funds: Chargebacks & options
o Model not defined and agreed
o Proposals range from "you play, you pay - by
radio" to State of Alaska and Department of
Defense split the cost
Mr. Callahan informed that the State "lost" federal funds to
competing grants.
Mr. Callahan cautioned that "earmark" rule changes could affect
the amount of federal funding received. However, he was "highly
confident" the State would receive the full amount of these
funds because the ALMR project matches the federal government's
plan for homeland security.
Mr. Callahan stated that information regarding the operation and
maintenance funds would be available by August 2006.
10:20:38 AM
Senator Olson, referencing the locations of ALMR sites on a map
of Alaska, noted the "line of sight" between most locations. He
asked why a facility was constructed on St. Paul Island, which
does not appear to be in the line of sight of the other
locations.
10:21:02 AM
Mr. Callahan told of the test project conducted in conjunction
with the US Institute of Justice to demonstrate the system could
operate over satellite link. Such a link was not technologically
supportable until a year ago.
10:21:30 AM
Senator Olson asked the plan for distribution of the ALMR to the
remainder of the state.
10:21:38 AM
Mr. Callahan responded that a plan had yet to be determined.
With satellite capacity, more areas could be addressed. Sites in
regional hubs would likely be chosen rather locating the system
in every village. A more cost effective method would need to be
identified.
10:22:16 AM
Senator Hoffman asked the cost of the Pribilof site.
10:22:25 AM
Mr. Callahan replied the cost was "slightly" over $300,000.
Infrastructure was already available on St. Paul Island,
including a power supply and radio tower.
10:22:55 AM
Senator Hoffman asked if existing infrastructure in other rural
sites, such as Dillingham and Bethel, was sufficient to
accommodate an ALMR site.
10:23:12 AM
Mr. Callahan answered that generally these communities did not
have the necessary infrastructure. Although a mixed frequency
repeater exists in Bethel, it would require significant upgrades
to integrate with the ALMR system.
10:23:40 AM
Co-Chair Wilken asked the amount of power required to operate
sites such as the Pillsbury Mountain site.
10:23:58 AM
Mr. Callahan responded that the amount of power necessary to
operate a site varies on the number of channels utilized. Peak
power is 18.5 kilowatts.
10:24:26 AM
Senator Olson acknowledged this is a significant amount of
power.
10:24:31 AM
Mr. Callahan stated this explains the problems encountered when
a site could not be linked to an existing power grid.
10:24:53 AM
KEVIN BROOKS, Deputy Commissioner, Department of Administration,
furthered Ms. Frasca comments on proposed capital information
technology projects utilizing a spreadsheet titled," Capital IT
Projects" [copy on file]. The spreadsheets list over 35 projects
totaling $64 million of which approximately $13 million is
general funds. These projects involve 11 State departments.
Mr. Brooks outlined the process undertaken to identify and
review these projects and select only those that are
technologically supportable, meet the business needs of the
affected department, and would provide a service to the public.
10:26:47 AM
Mr. Brooks informed that during the summer of 2003 the state
began a process to develop a statewide information technology
plan. Before then, State agencies were "working hard doing some
really great things with computers" to implement permitting
processes and providing public access. However, this was done
without an enterprise approach. Instead, each agency addressed
only their own business needs and not attention was given to the
interaction of State agencies. As a result, some redundancies
occurred. Three years ago, department representatives agreed to
the need to "work better and smarter".
Mr. Brooks stated the plan adopted in 2003 has been updated
annually, with the third revision completed in preparation for
the FY 07 Capital budget.
Mr. Brooks told of the establishment of the five-member
Enterprise Investment Board that meets twice a year to ensure
the overall policy direction and investment level was
appropriate as it relates to the remainder of the budget. The
commissioner of the Department of Administration, the director
of the Office of Management and Budget, the chief of staff to
the governor, a director of a State Division of Administrative
Services, and the director of the Enterprise Technology
Services, comprise the membership.
10:29:16 AM
Mr. Brooks explained the precluding level of review consists of
the directors of administrative services divisions of all 15
State departments. This IT workgroup meets regularly to address
matters of common concern.
10:29:44 AM
Mr. Brooks informed that each department now employs an
Information Technology (IT) Manager. Previously, many
departments did not have a centralized "voice" to address
information technology. Six of these managers serve on a
Technology Management Council. This council establishes
standards and guidelines to ensure that agencies are working in
collaboration.
Mr. Brooks noted that the IT managers of the Department of
Health and Social Services and the Department of Transportation
and Public Facilities each hold a seat on the Council. The
Department of Environmental Conservation, the Department of Fish
and Game and the Department of Natural Resources has one
aggregate "voice" on the council to represent natural resources
interests. The IT managers of these three departments
collaborate on certain functions, such as mapping.
Many methods exist to accomplish a function, the council
attempts to establish a standard method.
10:31:10 AM
Mr. Brooks explained the intent to group collaborators at
appropriate levels. Subject matter experts are also included to
advise on e-mail, etc.
10:31:43 AM
Mr. Brooks reported this system has worked well. Projects agreed
upon through this process could then be included in preparation
of the budget.
10:32:06 AM
Mr. Brooks explained that the agencies submit proposed projects
for review by the three aforementioned entities. Proposed
projects are reviewed for technical merit, then to ensure they
would meet the State's business needs. A policy decision is then
made as to whether the State should undertake a project. Those
proposed projects that successfully complete this review process
are forwarded for possible inclusion in the governor's capital
budget request. The spreadsheet contains projects that completed
the review process and have been deemed to be the most critical
and time sensitive. Some of the projects are necessary to meet
deadlines imposed by the federal government.
Mr. Brooks told of the more than 80 standards adopted, including
types of computers and software to be utilized by the agencies.
Certain aspects of the information technology infrastructure
should be centralized. However, other functions should be
overseen within agencies because they are the experts in
identifying their customers and understanding how to deliver
their services. Specialized functions would still comply with
certain standards.
Mr. Brooks remarked that standardization would reduce the need
for training State employees who transfer between agencies.
10:35:20 AM
Mr. Brooks furthered that working as a single enterprise the
State could achieve significant savings on purchases. Under
consideration, is a conversion of all systems to a single
Microsoft application. Currently five different e-mail systems
are utilized and although they interact without difficulty, the
State could incur savings through licensing costs, training and
maintenance if one system were in place.
10:36:30 AM
Senator Stedman directed attention to the Statewide Digital
Mapping project on the spreadsheet. The Department of Natural
Resources already has a "powerful" system. He asked if the
proposed project would enhance the existing system and allow
public access to digital mapping.
10:37:19 AM
Mr. Brooks deferred to Department of Natural Resources staff.
10:37:42 AM
Senator Stedman remarked on the benefits of providing access to
detailed mapping information of Alaska.
10:37:54 AM
Mr. Brooks reported that efforts had been made so mapping
activities of the Department of Natural Resources, the
Department of Fish and Game and other agencies would be
interactive.
10:38:12 AM
Co-Chair Wilken understood that the mapping project would
include enhancement of aviation navigation to allow real time
navigation of certain mountain passes.
10:38:37 AM
NICO BUS, Acting Director, Division of Support Services,
Department of Natural Resources, testified to the intent to
obtain additional elevation mapping. A Memorandum of
Understanding has been signed with the Department, the
Department of Military and Veterans Affairs and the University
of Alaska to ensure all data would be available to the public.
The investment must provide the broadest application for the
public, private entities and the State.
10:39:49 AM
Senator Olson asked if the mapping activities were undertaken by
the private sector.
10:40:14 AM
Mr. Bus stated this project would be funded with over $8 million
in federal funds and $2 million in general funds and would be
utilized to purchase information from the private sector.
10:40:52 AM
Senator Olson surmised that the affected industries approve of
this project.
10:41:00 AM
This bill was HELD in Committee.
10:41:22 AM
SENATE BILL NO. 235
"An Act relating to a public school performance incentive
program; and providing for an effective date."
This was the second hearing for this bill in the Senate Finance
Committee.
Co-Chair Green noted interest expressed by the Committee to
discuss certain aspects of this legislation.
10:41:58 AM
Amendment #1: This amendment inserts language to Sec. 14.03.123.
Public school performance incentive program., added by Section 2
of the bill on page 3, following line 3 to read as follows.
(d) Notwithstanding (a) of this section, the
department may not distribute a school performance
incentive payment to more than 850 certified employees
annually. The limitation of this subsection does not affect
the number of noncertified employees and central office
personnel to whom the department distributes a school
performance incentive payment under (a) and (b) of this
section. The department's regulations adopted under this
section shall implement the requirements of this
subsection.
(e) The public school performance incentive program
described in this section expires June 30, 2009. The
program may be continued or reestablished by the
legislature. The Legislative Budget and Audit Committee
shall review the program not later than December 31, 2008,
and may submit its recommendations to the respective houses
of the legislature in the form of a bill that, if enacted
into law, would continue or reestablish the program on or
before July 1, 2009.
Senator Bunde moved for adoption.
Senator Bunde explained he supported the basic concept of the
legislation. Co-Chair Wilken had made a compelling argument on
the benefits of providing incentives to reward good performance
of employees in private enterprises.
Senator Bunde, however, had concerns about the considerable
expense of the proposed program. He therefore suggested
establishing it as a pilot program, and one that school
districts could choose to participate in rather than providing
another State mandate. These changes would reduce the fiscal
note cost from $15 million to $5.8 million.
10:43:49 AM
Senator Bunde detailed that the pilot program would operate
through the year 2008, at which time the Legislative Budget and
Audit Committee would submit a recommendation to the legislature
to expand or eliminate the program. This would provide an
acceptable compromise.
Senator Bunde commented that the argument could be made that the
funding for this proposed program should instead be appropriated
to the education foundation funding formula. However,
improvements in education are necessary and this program is a
method that could assist in achieving improvements.
10:44:51 AM
Senator Hoffman asked how the participating schools would be
selected.
10:45:14 AM
Senator Bunde responded that the program would be available on a
"first come first served" basis in which schools would be
accepted in the order their applications were received.
10:45:25 AM
There was no objection and the amendment was ADOPTED.
10:45:32 AM
Senator Bunde offered a motion to report the bill, as amended,
from Committee with individual recommendations and new fiscal
note.
Without objection, CS SB 235(FIN) was MOVED from Committee with
a new fiscal note dated 2/23/06 from the Department of Education
and Early Development in the amount of $5,800,000.
10:46:00 AM
Co-Chair Green noted the representatives from citigroup would be
available to meet with Members individually to provide
additional information on the proposal to reissue tobacco
settlement revenue bonds.
ADJOURNMENT
Co-Chair Lyda Green adjourned the meeting at 10:46:21 AM
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