Legislature(1999 - 2000)
04/18/2000 02:45 PM House FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 281
An Act providing for the issuance of general obligation
bonds in the amount of $665,000,000 for the purposes of
paying the cost of design, construction, and renovation
of public elementary and secondary schools, renovation
of state buildings, capital improvements at the
University of Alaska, and capital improvements to state
harbors; and providing for an effective date.
Co-Chair Mulder observed that there have been a number of
legal questions regarding if this fund would be dedicated.
He provided members with a legal opinion from James L.
Baldwin, Assistant Attorney General, Department of Law,
dated 4/15/00. [Copy on File].
DEVON MITCHELL, DEBT MANAGER, DEPARTMENT OF REVENUE,
provided information on the legislation. He explained that
he has had limited conversations with the State's Bond
Counsel. The issuing entity, an arm of Alaska Housing
Finance Corporation (AHFC), would be responsible for the
issuance.
Mr. Mitchell explained that the Commissioner of Department
of Revenue would negotiate a sale of the revenue stream to
the subsidiary of AHFC. The securitization of the revenue
stream would be set up with a 40-year nominal debt service
schedule. This is the minimal amount that is required to be
paid over a 40-year life, being the worst case scenario. The
amortization would be flexible. If revenues are above that
level, which is the expectation, all of the revenues, less
$1.4 million dollars, would be applied to debt service. The
average life would be reduced to 10 years.
In response to a question by Co-Chair Mulder, Mr. Mitchell
explained that the $269 million dollar target was based on
market conditions, the expectation that investment grade
bonds would be issued, and the cash flow that is expected
from the Tobacco settlement. The requirement of security
which would be required from the cash flow, limits how far a
revenue stream can be stretched when it is being
securitized. Investors are willing to take risks within an
investment grade scale. If the amount were increased there
would be a higher interest cost. He noted that more would
be paid for the capital if the revenue stream were spread
because it would be a higher risk for the investor.
Co-Chair Mulder questioned what would happen if $269 million
dollars was not derived from the sale. Mr. Mitchell did not
know. He observed that the legislation authorizes the
commissioner to sell the revenue stream to reach the target.
He clarified that the State's hand would not be tipped by
stating the amount desired and that the State bond counsel
would not have a role in the issuance.
In response to a question by Representative Williams, Mr.
Mitchell explained that the revenue stream is complex.
There is a base amount in the settlement that is on going.
There is an initial payment amount and there are strategic
contribution payments that come in from 2007 to 2018. The
on-going payment and the strategic contributions are
adjusted for inflation and volume. Inflation pushes the
number up and volume adjustment pushes the number down.
There are a variety of opinions on how the adjustments would
impact the revenue stream over time. In order to obtain
something close to a single A rate bond issuance, there has
to be an assumption of a 2.5 percent decline overtime. A
requirement exists to be within an annual debt service
amount that would allow volume adjustments to be made.
Speculations on increased smokers would be penalized in the
bond issuance.
Mr. Mitchell provided the analogy of a person with a known
salary, attempting to get a bank loan. The bank allows a
home payment of 20 percent of their income, which is based
on the opinion of how much of disposable income could be
used on the home.
Vice Chair Bunde noted that Section 5 was dropped out of the
bill, the School Major Maintenance Grant Fund.
EDDIE JEANS, DEPUTY COMMISSIONER, DEPARTMENT OF EDUCATION
AND EARLY DEVELOPMENT, provided information on the HB 281.
He thought that section had been inadvertently included in
the legislation.
Co-Chair Mulder asked if Section 5 would inadvertently
suspend the local match. Mr. Jeans noted that Section 5
suspended the evaluation process of the Capital Improvement
Projects (CIP) list. The projects that are in the bill are
the ones in which the State share and the local match has
been applied.
Co-Chair Therriault questioned how the State guaranteed that
70 percent would be covered. He asked what would happen if
the project came under budget. Mr. Jeans noted that grant
agreements are issued on every project. If the cost were
under the local match, it would be adjusted to assure that
the local match is 30 percent. That authority is under AS
14.11.088. He noted that when local communities go out for
bonds, they are reimbursed on a bond schedule. Projects in
the bill are grants and can be adjusted by the authority
listed in AS 14.11.088.
Co-Chair Mulder questioned if AS 14.11.088 should be
included. Mr. Jeans did not think it was necessary. The
local match requirement for school construction grants is
established.
Co-Chair Therriault referred to Page 3, Line 12. He noted
that AHFC "shall" make the proceeds of the bonds issued
under that section available to the Department. On Page 3,
Line 22, the legislation states that the provision is
subject to an appropriation. He noted that the legislation
is not an appropriation bill. Mr. Jeans explained that the
dollar amounts would have to be listed in a capital budget
bill.
Co-Chair Therriault questioned if the dedicated fund
argument was based on the use of "shall" and if replacing it
with "may" would alleviate the problems.
Representative J. Davies noted that Line 11 indicates that
the pledge would be subject to agreements and appropriation.
Co-Chair Mulder stated that there have been discussions
regarding inclusion in the capital bill. The decision would
be to add an introduction to an appropriation bill to
accompany the HB 281.
Co-Chair Therriault questioned if the projects would need to
be listed in the accompanying capital bill. Mr. Jeans
stated that inclusion of a list would tie the projects
between the two bills. Co-Chair Mulder agreed.
ANNALEE MCCONNELL, DIRECTOR, OFFICE OF MANAGEMENT AND
BUDGET, OFFICE OF THE GOVERNOR, spoke in support of the
discussion. She agreed that the projects would not be
needed, but that they could add convenience. The
administration supports the use of Tobacco Funds
securitization. She emphasized that the securitization
approach assists in shifting risk about the future of the
tobacco companies to the bondholders and would allow
projects to be done now. There is a timing issue which must
be addressed. She observed that other states are attempting
to securitize against the risk. There is $10 - $15 billion
dollars of investment opportunities nationwide. She
estimated that the capacity could be tapped before another
legislative session. Ms. McConnell provided members with a
letter indicating states aligning themselves to securitize
their tobacco revenues. [Copy on File]. Co-Chair Mulder
acknowledged that other states are attempting to securitize
those revenues.
Co-Chair Mulder questioned what would happen if the capacity
were met before the State's issuance. Ms. McConnell
responded that then there would not be a very good market
for the bonds. She stressed that the State is well
positioned to move quickly. She clarified that after the
bonds are paid the revenue of the Tobacco Settlement would
go into the general fund.
Co-Chair Mulder noted that "annually" should be inserted on
Page 2, Line 7 and Line 24 after "$1,400,000".
Ms. McConnell stressed that K-12 and university education
makes sense as part of the tobacco securitization plan. She
maintained that the amount for K-12 funding should be
increased. She observed that there are other vehicles to
handle transportation projects and added that it is
important to go through the priority list. She recognized
the need for balance between the districts that can do their
own bonding and those that can't. She recommended a
combination of school debt reimbursement going further down
the list for major maintenance and school construction. Ms.
McConnell believed that it would be possible to do all of
the major maintenance. She concluded that HB 281 is the
right vehicle.
JOHN BITNEY, LEGISLATIVE LIAISON, ALASKA HOUSING FINANCE
CORPORATION, DEPARTMENT OF REVENUE, provided information on
the legislation. He pointed out that there are two timing
issues:
? The purchase of the assets; and
? The issuance.
Mr. Bitney clarified that these could happen at the same
time depending on the cash flow. He stated that AHFC would
try to complete the transactions by the upcoming fall. He
agreed that actions of other states are an issue.
In response to a question by Co-Chair Mulder, Mr. Bitney
responded that the goal would be set up as an agreement that
would not require the districts to concern themselves with
the issuance of the bonds.
Co-Chair Mulder asked if the issue of risk in relationship
to the funds as a dedicated revenue stream has been
discussed with bond counsel. Mr. Bitney stated that there
had been some discussion with their bond counsel and that
they have been requested to look at the concern. The AHFC
bond counsel did not indicate that it was a problem in
earlier conversations. He observed that the concern is that
there is a pledge of the revenue stream for debt service
payments. He pointed out that the State was reimbursed up
front for the right to purchase the revenue stream. He
noted that it has been viewed by AHFC as a purchase and that
dedication is a non-issue.
Ms. McConnell clarified that even if the money was
available, communities would have to go through a bidding
process and that construction would probably not happen this
year.
Co-Chair Mulder pointed out that Mr. Baldwin's letter had
omitted "not" on Page 2.
JAMES BALDWIN, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF
LAW, provided information on the legislation. He agreed
that his letter should have stated that "this transaction
does not violate the dedicated fund prohibition." He
explained that under Alaska law, the term "property" is
defined to include what is known as a chosen action; the
right to receive something pursuant to a court type
proceeding. That is a recognized type of property in Alaska
and other jurisdictions. Since, it is property, it can be
sold or conveyed by a State agency, given proper authority
by the Legislature. The legislation grants the proper
authority.
(TAPE CHANGE, HFC 00 - 126, Side 2)
Mr. Baldwin explained that it would pick out a period of
time, stream of revenue, would reserve certain amounts for
tobacco programs and to convey this property right to AHFC
in the form of a true sale. There have been other ways that
these transactions have been done in the State by
contributing the property to another entity. He added that
because of the dedicated fund prohibition, it would be a
cleaner transaction and would support the validity better if
it were a clean sale. The Department proposed that the
bonds are issued for the projects, and in the capital bill,
it would be appropriated proceeds for those projects, which
would cover any indicated fund addressed. The Legislature
would retain its ability to appropriate the proceeds.
Co-Chair Mulder asked about the protection of a separate
bill. Mr. Baldwin explained the Governor's approach, which
would have a bond authorization and actual appropriations
would be somewhere else in an appropriation bill.
Co-Chair Therriault referenced the Four Dam Pool process.
He asked the amount in the Governor's bill for the
appropriations. Mr. Baldwin replied that their numbers were
in the Capital Bill as amendments. He noted that a similar
approach was taken with the approval of the rural
development loans in the AIDEA bill. There is a well
established precedence treating these as property rights
that can be sold.
Co-Chair Therriault noted that there is a prohibition
against substantive legislation and appropriations in the
same bill. Mr. Baldwin encouraged the Committee to take the
appropriation step. He noted that sometimes in a bonding
context, the bonding bill itself could be viewed as proper
authorization. In the proposed situation, it would be
better to have a separate appropriation.
Co-Chair Mulder asked if the revenue stream was expected to
flow between two points without an appropriation. That
arrangement could be vulnerable under Article 9, Section 13
of the State Constitution. By selling the State assets and
then appropriating them money back to those entities could
conflict with Article 9. Mr. Baldwin interjected that there
would not be a problem and that it would be a sensible
transaction. It would address the problem that the
dedicated fund was attempting to remedy, that being, taking
a revenue source and removing it completely from the
Legislature's discretion and appropriating it for any
purpose it wants.
Co-Chair Therriault noted that clearly, AHFC does not own
the revenue stream. He asked if the Legislature would have
to consider a two step process to transfer that revenue
stream over to that ownership. Mr. Baldwin noted that the
Governor proposed that authority could be given to
Department of Revenue to convey it. Then the conveyance was
made to AHFC, and they would be given value for that. Then
the Legislature would appropriate the value which was
received back. He suggested an additional step would be to
appropriate the revenue. Describing it could get "messy".
The easiest approach would be to authorize revenue to convey
it in such a way that satisfies bondholders.
Co-Chair Mulder referenced Section 3, "the sale of right to
receive anticipated special revenue..". He asked if that
language would satisfy what Mr. Baldwin was referencing.
Mr. Baldwin stated it would. The next step would be to
separate appropriations of that money. Later in the bill
would be the authorization of specific capital projects, and
their needs as a step to appropriation, beyond that.
Ms. McConnell added that there was another aspect in the
process. The point is to protect the State from the risk
that the ultimate amount of payment would be less than
anticipated. It is important to insure that the State's
full faith and credit is not involved. There are aspects of
the proposed transaction that do not have to do with the
mechanics of the sale, but to insure that the bond holders
do not become limited. She acknowledged that would add to
the complexity of the issue, at the same time, providing for
greater safety.
Co-Chair Therriault asked about the revenue stream for the
capital projects. Mr. Baldwin replied that the fund source
would be corporate receipts. Co-Chair Therriault asked if
the projects would be pro-rated. Mr. Baldwin replied that
current language of the bill states that the fees would be
allocated. Mr. Baldwin added that the projects are
allocations and if you run short in one project, you could
reallocate to another. That is how a shortage would be
addressed. There would be an issuance for a set principle
amount. It is an allocated process and can reallocate to
another project. Co-Chair Therriault asked if that would
address the issue should a project come in over budget. Mr.
Baldwin explained that in the Legislative Drafting Manual, a
General Obligation (GO) bond issue would take the allocation
approach. AHFC would be managing the funds.
Co-Chair Therriault did not like the idea of AHFC deciding,
when short of capital, which areas would be cut. He
suggested that it is important to determine if the money
would flow out of Department of Education and Early
Development.
Co-Chair Mulder suggested that it would be an interesting
"turf war". He asked if AFHC would be at risk with that
structure. Mr. Baldwin replied that would be determined in
how the structure plan was determined. Ms. McConnell
interjected, that aspect had not yet been covered. She
noted that once it was in the market, would be the time to
determine much more. She noted that they would come back to
the Legislature to determine how to move forward.
Representative J. Davies recommended cleaning up language on
Page 2, Line 27, and Page 6, Line 26. He noted that there
needs to be a method to reconcile that language. He pointed
out that how to deal with the shortfall is included in the
appropriation language contained in the second vehicle. Co-
Chair Mulder agreed that reconciliation would be a way to
address that concern.
Co-Chair Therriault asked to clarify the mechanism. He did
not think that AHFC would be "fronting" the State money and
then going out and recouping the transfer. Mr. Baldwin
understood that AHFC would hold the funds for a certain
amount of time and then the Department of Education and
Early Development would make the request, and then the funds
would be transferred. AHFC would be holding the funds as
long as they can. Co-Chair Therriault pointed out that
would occur after the sale.
Representative J. Davies commented that normally when
something like this is established, there is a fund to which
the money can be transferred. He asked if there was a
school construction fund.
Mr. Bitney noted that in 1998, when SB 360 passed, it was
the last $200 million dollars of AHFC general obligation
bonds. In that session, the appropriation fund source was
created called AHFC Bond Proceeds. All the appropriations
for each project in the capital budget were given its own
fund source.
Mr. Jeans indicated that the Department did not perceive
that to be a problem.
Vice Chair Bunde asked what would happen if there was too
much money. Ms. McConnell explained that the way it was
structured, it is not just a 40-year bond plan. The idea
was to pay it back more quickly. She noted that $1.4 would
be reserved before AHFC was to receive any of the revenue
stream.
Representative J. Davies commented that if there were excess
funds, they would presumably reside at AHFC. If they were
in an account called AHFC proceeds, then the Legislature
would know where they were and how to find them.
Co-Chair Mulder asked if the Department had anticipated
preparing an amendment to address what would happen in the
case of a shortfall. He noted that there is an
appropriation bill in Committee, the Governor's Capitol
budget. He advised that there is a committee substitute
being prepared that would marry the two recommendations.
Co-Chair Therriault referenced Page 5, the University
deferred maintenance project and asked if it was essential
to "lock" the University into those different categories.
He pointed out that in the past, they had been linked
together to give the University flexibility. He recommended
in the new committee substitute to have the language
structured to indicate deferred maintenance/renewal/code of
compliance.
Co-Chair Mulder questioned if the Bond Council would care
where the money was spent as long as there was revenue
coming in. Mr. Bitney replied that this would need to be
done for public purposes. The only instance where that
could be a problem would be in situations where grants were
provided to non profit agencies.
Co-Chair Mulder agreed that the new committee substitute
should reflect as an allocation toward the University for
deferred maintenance/code compliance/renewal replacement.
Representative Williams asked where the numbers came from.
Co-Chair Mulder replied that the numbers came from the
University.
Co-Chair Mulder replied that the list came from the actual
University list and in consultation with the specific
campuses. Representative Williams noted that he was
concerned with moving the money around. Ms. McConnell noted
that the Administration recommended clustering the deferred
maintenance projects to avoid extra accounting. That would
be consistent with how other deferred maintenance projects
have been addressed.
Representative J. Davies advised that each item was an
estimate. The language would provide the University more
flexibility.
WENDY REDMAN, VICE PRESIDENT, STATEWIDE SERVICES, UNIVERSITY
OF ALASKA, FAIRBANKS, noted that the money is allocated to
the individual campuses. There is a detailed list of the
deferred maintenance and code compliance projects. The list
contains the top priority projects from each campus. The
money would not move from campus to campus. There are many
points of accountability on how the money is spent.
Representative Austerman observed that renewal and
replacement could be listed as deferred maintenance. Ms.
Redman reiterated that the deferred maintenance was the
University's highest priority. The deferred maintenance is
the renewal and replacement that did not get done last year.
In fact it has not been done for many years. She noted that
with the AHFC bond with $35 million dollars in deferred
maintenance, this was the wording used and that it provided
flexibility to address some of the unexpected thing that may
come up.
Representative J. Davies pointed out that the Board of
Regents has to approve each project and each expenditure.
Co-Chair Mulder advised that there would be a new committee
substitute drafted which would consolidate all the concerns
which had been voiced.
Representative Grussendorf asked what happened to the
original premise of HB 281. He spoke about transferring
harbors to the local municipalities. Co-Chair Mulder
clarified that it was still the intent that harbors be
transferred to the local communities. He noted that the
Department of Transportation and Public Facilities would be
addressing that concern. With regard to the Sitka project,
unfortunately, there was only one harbor not placed into HB
269. Representative Grussendorf emphasized that the
communities that he represents are coastal communities and
that they could take over these operations and turn them
into an enterprise. Representative Phillips pointed out
that every community on the list had made the agreement that
they would take it over. Representative Grussendorf advised
that there had been some added that were not on the original
list.
Representative J. Davies asked if all the projects were in
fact "ready to go" in the next year or so. Representative
Phillips assured members that her district was ready.
Representative Grussendorf noted that in the original HB
281, there was a three-year period in which there would be
$10 million dollars available. This is no longer the
approach. Co-Chair Mulder commented that they would
continue to work on the language so to expand that concept.
HB 281 was HELD in Committee for further consideration.
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