Legislature(1995 - 1996)
02/20/1996 01:13 PM House CRA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 401 - REVENUE BONDS: WATER & WASTE PROJECTS Number 0059 CO-CHAIR IVAN noted that committee packets for HB 401 contained copies of the bill, a bill summary, a sectional analysis, zero fiscal notes from the Department of Environmental Conservation and the Department of Revenue and back-up material. Number 0140 KEITH KELTON, Director, Division of Facility Construction and Operation, Department of Environmental Conservation (DEC), presented HB 401 on behalf of the Administration, saying he was explaining both HB 401 and its companion bill, SB 207. He offered some background. In 1987, when the Clean Water Act was reauthorized, it was mandated to drop the construction grants program and shift it into a low-interest loan program for the construction of wastewater facilities. It also could apply to solid waste facilities where ground water contaminants were being treated, dealing with estuary contamination and controlling nonpoint source pollution. Number 0213 MR. KELTON explained that since 1989, DEC had administered the Alaska Clean Water Fund, a program set up to make those low- interest loans. The loans, which had fluctuating interest rates tied to the municipal bond index, were available to incorporated communities having a dedicated revenue stream to repay the loans. Typically, the loans were for twenty years, with interest rates of 4 - 5 percent; currently, they were at 3.75 percent. The loans were, therefore, a fairly attractive financing alternative as general fund grants diminished. To date, the fund had received approximately $80 million, a combination of state and federal dollars. Until the last two years, the demand for those funds had been less than the availability. However, that trend was reversing. Number 0305 MR. KELTON expressed that at the current rate of obligation, the fund would be used up in two years, except for the revolving portion that would come back. Twenty-one other states administered this "leveraged program," using the corpus of the fund as collateral and selling revenue bonds to leverage the account into more dollars. Mr. Kelton said DEC had worked with the Department of Law, bond counsel and the Department of Revenue to come up with a process that fit Alaska's needs. Number 0373 MR. KELTON referred to the top half of a wall chart and said, "This describes the program that we currently have in place, the Alaska Clean Water Fund, which is capitalized 80 percent by federal dollars, 20 percent by state." He referred to the blue center portion, representing current funds, and said, "Of that $80 million, approximately $50 million has been loaned to 24 recipients. In your packets, you will find a list of the communities that currently have received loans." He added that the only requirements were being incorporated and having a dedicated revenue stream. After the fund loaned money to municipal projects, the repayment stream recycled back into the program. That was what was in place right now, he said. The $30 million that was left would be gone in two years unless something was done to "leverage" that money, he added. Number 0463 MR. KELTON indicated that HB 401 set up a bond redemption fund, which would then pay the bond issuance costs to the state bond committee. That committee would issue bonds for purchase by investors with the proceeds returning to a bigger Alaska Clean Water Fund. Those funds would recycle back through projects with the repayment stream returning to the bond redemption fund to pay off the bonds, and so forth. There was the possibility of making that $30 million into a much larger number and funding more projects statewide. Although the program was not restricted to any community, by virtue of the fact that it required a dedicated payment stream, it primarily benefited larger, incorporated communities. Mr. Kelton indicated there was a list of participating communities in the bill packet. Number 0570 CO-CHAIR AUSTERMAN referred to the $50 million in loans already made and asked, "When does that cycle back in, so that there's not a need to go out and buy more bonds?" MR. KELTON replied that the whole repayment stream, as well as additional federal capitalization, was dedicated to paying off the bonds. The $50 million already out there was a big incentive to the bond-buying market, he said, since that repayment stream was already dedicated. That, in addition to the $30 million currently unobligated, would provide the corpus to the fund. Number 0615 CO-CHAIR AUSTERMAN asked if Mr. Kelton was saying the total $80 million of the original fund was going to be the corpus. MR. KELTON clarified that the $30 million "just sitting there" would be the main collateral. However, there was money coming back from the original $50 million already loaned to communities; that repayment stream, with interest, returned to the fund and provided assurance to the bond purchasers that the state had the ability to repay those bonds. Number 0675 CO-CHAIR AUSTERMAN asked how big the bonds under discussion were. Specifically, he was curious where the $50 million would go after it was paid back. MR. KELTON replied it would go to new projects. It would continue to recycle. This was one of the questions the Senate committee had as well, he said, explaining, "We're working on two amendments right now in their Senate CRA committee that will provide the cap that you're talking about. The language has not been approved yet in the Senate CRA committee, but we're expecting it to be heard tomorrow, and one of the proposals is that they would establish a $15 million-per-year cap on the amount of revenue bonds that could be sold, up to $100 million total. This would allow a finite maximum the state would be able to go in debt on, even though this particular proposal does not require the full faith and credit of the state. They're revenue bonds and, basically, the communities are the ones who are establishing their full faith and credit." Number 0753 REPRESENTATIVE PETE KOTT asked Mr. Kelton to explain the process as it existed today, without the new legislation. MR. KELTON expressed that the program currently provided low- interest loans from the $80 million combination of state and federal dollars. As those funds came back as principal and interest, they were again available for loans. All HB 401 did was to establish a larger pot of money through the sale of revenue bonds. The administration of the program would proceed exactly as before. Number 0828 REPRESENTATIVE KOTT asked whether, as the fund was depleted, money would come back to municipalities, keeping that pool of money at the present level, at least. MR. KELTON replied, "We definitely expect it will revolve. The level will be somewhat dependent on how many bonds are sold." He said they expected it to stabilize and be a revolving loan fund, providing a fund in the neighborhood of $10 million to $15 million per year. Number 0872 REPRESENTATIVE KIM ELTON stated that his understanding was, "At the present time, we have a loan fund that's capitalized with about $80 million. $50 million of that is already out in loans to municipalities, leaving $30 million yet to be allocated. Under this bonding proposal, and if we accept the caps that are being discussed on the other side, you would have the authority, over a period of time, to build up your loan fund from the $80 million that you have now to $180 million at some point in the future, assuming that the caps that are being discussed on the other side are imposed." Number 0872 MR. KELTON said that was correct. REPRESENTATIVE ELTON continued, saying, "So that you'd have a revolving loan fund that was partially capitalized with federal dollars/state dollars/bond dollars, and the pool was $180 million instead of $80 million." MR. KELTON indicated that was also correct. He added, "We do expect that the reauthorization of the Clean Water Act, which is up again, will include additional federal appropriations into this, so with a state match, it could ultimately grow above that level." Number 0950 CO-CHAIR AUSTERMAN asked Mr. Kelton what he saw as the dollar need. He said, "If, in the last few years, you've been able to keep the $30 million in there and not have to spend it, but now you say that there's becoming more of a demand, at some point in time, the revolving aspect of this thing, where the $50 million comes back in and is reloaned, is an ongoing process." He asked if more than $80 million was needed if it was on a revolving loan basis. Number 0981 MR. KELTON replied that additional loans would be limited to the repayment stream "once the first amount is out there." With repayment on a 20-year cycle, only 1/20th of that would come back in any given year. After the money was cycled once, there would no longer be $80 million until it started coming back. Number 1018 CO-CHAIR AUSTERMAN said that got back to his original question about how long the cycle time was. MR. KELTON responded that they were 20-year loans. He pointed out that the committee packets contained, in addition to the list of projects where money had been loaned, a list of communities that had expressed interest in receiving loans. Currently, that list involved approximately $78 million. He added, "There is no certainty or an obligation on their part that they would ever need to apply for those loans, but that's an expression of interest at this date. We do this on an annual basis. Some of these projects will get grants; some of them will fall by the wayside for other reasons. But at the current rate, which is $13 million a year, we will be out of that corpus of $30 million within a two-year period. We're trying to expand our capability of providing loan funds to communities while we still have this corpus available. Once this corpus is loaned, we no longer have the collateral available to sell these revenue bonds. Passage of this legislation this year will enhance the ability of this legislation to be effective, because the smaller that gets, the less leveraging we'll have available." Number 1126 CO-CHAIR IVAN said he understood there were two situations. Currently, the Village Safe Water Program made grants to rural water and sewer projects. In contrast, this program was geared towards those built-up communities like Anchorage that had the necessary payback capability, through property taxes or other revenue streams. Co-Chair Ivan asked if this would free up funds for water and sewer projects, especially the Village Safe Water Program, which funded rural areas lacking payback capability. Number 1180 MR. KELTON replied he would not presume how money might be appropriated by the legislature. However, the legislature certainly had the potential, if part of the capital budget demand were assumed by the loan program, of making additional limited dollars in the capital budget available to other communities. Number 1215 CO-CHAIR IVAN referred to the 50/50 municipal matching grant and asked if this program would free up funds from the municipal matching grants as they were today. For example, he believed the average provided was $25,000 per community for use as a matching grant towards community projects. Number 1255 MR. KELTON asked if Co-Chair Ivan was talking about the Governor's matching grants program or DEC's. CO-CHAIR IVAN replied, "the current capital matching grant program." MR. KELTON thought it best to use the two programs in conjunction with each other. This would provide the ability to increase the amount of dollars available to local projects. If a community was short of money after receiving a matching grant, it would certainly be eligible to borrow the balance from the loan program, he said. He thought the main place it saved was in the capital budget that was approved, outside of the matching grants program. Number 1298 CO-CHAIR IVAN referred to Mr. Kelton's mention of estuary conservation. MR. KELTON clarified that was estuary pollution control or correction. Although it was eligible, they had never received an application for estuary enhancement. However, it was written into the federal law, which the state was mandated to repeat in statute. Number 1335 CO-CHAIR IVAN asked if state agencies were authorized to apply for loans. MR. KELTON replied that federal language authorized state agencies to be eligible for loans. He noted that was an item that the Senate CRA committee had also questioned. As a result of that committee's work, he said, there was an amendment that would be prepared and heard the next day which redefined that to eliminate state agencies. Number 1368 CO-CHAIR IVAN referred to the term "liberally construed" and asked for a definition. MARIE SANSONE, Assistant Attorney General, Natural Resources Section, Civil Division (Juneau), Department of Law, explained that in terms of statutory construction, the term "liberal construction" meant that this statute should be broadly construed to give effect to its beneficial purposes of providing money for the public wastewater projects and other pollution projects. The term was fairly standard in statutes, Ms. Sansone said. In contrast, "strict construction" or "narrow construction" would indicate a much more restrictive view of the words of the statute. Number 1477 REPRESENTATIVE KOTT asked if underground storage tanks would fall within the scope of HB 401. MR. KELTON indicated that would have happened only if they were going to make loans to state agencies. Some states had dedicated this program to that purpose, he added. He emphasized the fund primarily would be for new construction. Number 1534 REPRESENTATIVE KOTT asked for an explanation of "state aid intercept." MR. KELTON responded that the packet contained a more complete discussion of that issue. In a nutshell, the bond counsel had informed them that having the "state aid intercept" language in there meant the difference between selling the bonds at a "AA" rating versus an "A" rating. "It's assurance to the buyers of the bonds that there's less chance of default," he said. If there was a default by a borrower, the state agency or agencies with control of the funds could intercept undesignated funds to repay the defaulted loan. It would apply to specifically appropriated funds, Mr. Kelton said. He referred to an example in the packet and added that in the nationwide history of the loan program over the past seven years, there had been no defaults. In Alaska's history, there had not been a single late payment. They did not view this as a significant problem, he emphasized. Any community that defaulted would ruin its own credit rating. Number 1651 BERDA WILLSON, Assistant Manager, Nome Joint Utilities, City of Nome, testified via teleconference in favor of HB 401. She asked that the funds be provided only to communities in need and not to state agencies. Number 1738 DIANA BENNETT, Finance Manager, Anchorage Water and Wastewater Utility (AWWU), Municipality of Anchorage, testified via teleconference in favor of HB 401 and SB 207, its companion bill. She read from a prepared statement: "Although AWWU shares a common work force and management team, it is actually two separate utilities for regulatory purposes, establishing separate rates for service and incurring separate debt for capital projects. The wastewater utility relies substantially, in fact, almost entirely, on the Alaska Clean Water loan fund to finance its comprehensive capital improvement plan. We anticipate borrowing $4-6 million annually from the loan program. I hope the funds will be available to do so. "The low-interest loan program has been extremely popular and well received throughout the country. The Anchorage Wastewater Utility has borrowed $8.8 million from this low-interest loan program, at rates substantially lower than would be possible in the regular bond market. We estimate this has saved the ratepayers at least $400,000 over the past four years, in addition to the flexibility the program affords us. In the years this Alaskan program has been in existence, ADEC has made loans totaling $53 million. There is still a tremendous need for low-cost funding throughout the state. ADEC received requests for $13 million in loans for the current fiscal year. "The bill now under discussion will allow what many other states have done and leverage this initial capitalization money from the federal government. Increasing the amount of funds available allows projects to be completed sooner than if we have to wait for our projects to move above the `cut line.' This is a good way to increase the pool of money available for necessary water quality projects, without putting any other programs at risk. The burden for repayment remains with the communities requiring the funds and there is a strong incentive for them, or for us, to continue to make our repayments. "Without increasing the availability of funds, at the current request level of $13 million a year, the state is going to run out of money to loan in only two years. The loans are being repaid, but the repayment stream has not reached equilibrium yet, and when it does, it will still only be, I believe, $4-5 million, which is well below the projected need. The communities around the state need this source of low-interest money to help finance sorely needed water quality improvements. "The revenue bonds will be backed, not by the full faith and credit of the state, but by the revenue coming from repayment of the loans. As you've heard, in the history of the low-interest loan program, there has never been a default -- not in the entire United States. In fact, in Alaska, there has never even been a late payment. These bonds will be extremely safe. The state will not be required to `bail out' any agency over this. "You may have seen a Municipality of Anchorage memo listing some recommended changes in this bill. The Utility is substantially in favor of the bill as was originally written; however, we were asked to comment on the bill, with an eye to any proposed changes. This Utility works closely with ADEC and we have agreed among our two groups that this bill, with or without any or all of the suggested revisions, is extremely workable and will benefit the whole state of Alaska. I urge you to pass this bill. Thank you for your time." Number 1930 LEE SHARP, Attorney at Law, Preston, Gates & Ellis, testified via teleconference that his firm had been acting as bond counsel to the state, assisting ADEC with some of the language in HB 401. He expressed that he was available for questions with respect to the peculiarities of bonding. Number 1954 CO-CHAIR AUSTERMAN asked Mr. Kelton how long ago the loan program had begun. MR. KELTON replied the program had been in place about six years. CO-CHAIR AUSTERMAN referred to the $15 million per year of maximum bonding, with $50 million being repaid over 20 years. He suggested there was a time frame for looking at getting that $15 million stream coming back, so that bonding would no longer be needed. Number 1969 MR. KELTON said it depended on the lengths of the loans. Although most were 20-year loans, some were less. To come up with a firm figure was difficult. For example, if all $80 million were already loaned for 20-years, the maximum principal repaid per year would be $5 million. There may be interest, as well. That was a long ways from the demand of $15 million, even if all the money were out there and repayments coming back. CO-CHAIR IVAN asked if others wished to testify; there were none. Number 2062 REPRESENTATIVE ELTON noted that HB 401 had several other committee referrals. In light of that, he moved that HB 401 move from the committee with individual recommendations and attached zero fiscal notes. There being no objection, it was so ordered.
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