Legislature(2007 - 2008)HOUSE FINANCE 519
03/28/2007 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB 137 WAS SCHEDULED BUT NOT HEARD. | |
| HB168 | |
| HB218 | |
| HB72 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 72 | TELECONFERENCED | |
| *+ | HB 218 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 137 | TELECONFERENCED | |
| += | HB 168 | TELECONFERENCED | |
HOUSE BILL NO. 218
An Act relating to the payment of dividends by the
Alaska Aerospace Development Corporation to the state,
and to appropriation of the dividend for fiscal year
2008.
REPRESENTATIVE MIKE KELLY, SPONSOR, addressed the intent of
HB 218 & how it addresses the deficit concerns. In 1991,
the Legislature created the Alaska Aerospace Development
Corporation (AADC). The mission of the Corporation is to
create a new high-technology industry for the State's space
launch service. Since 1991, the State has appropriated over
$15 million dollars to the corporation and received no
payment in return. It is in the State's best interest to
look for new revenue from diversified sources. HB 218 would
accomplish that by having AADC pay an annual dividend.
HB 218 would add language to the AADC statute to provide an
annual dividend, not less than 25%, nor more than 50% of new
income, in a given fiscal year. The bill also stipulates
that a dividend may not exceed the total unrestricted net
income for AADC in that year. If there was no unrestricted
net income, they would not pay the State a dividend.
Representative Kelly noted that HB 218 was a revenue
generating bill and urged the Committee's support.
1:55:48 PM
DEREK MILLER, STAFF, REPRESENTATIVE MIKE KELLY, provided a
sectional summary of the bill and noted it should not be
considered as an authoritative interpretation. The bill
carries the best statement of contents.
· Section 1 adds language requiring the Alaska
Aerospace Development Corporation to adopt a policy
that pays out a dividend to the State each fiscal
year. It also establishes methods for calculating
that dividend and defines the terms.
· Section 2 permits the FY08 Aerospace dividend to be
appropriated to the Teachers Retirement System (TRS)
Fund or for any other public purpose.
Vice Chair Stoltze remembered past conversations he had with
Mr. Pat Ladner, President and CEO, Alaska Aerospace
Development Corporation, regarding forthcoming dividends.
He applauded the work accomplished by the Corporation to
date; yet, shared Representative Kelly's concerns.
1:59:14 PM
PAT LADNER, PRESIDENT AND CEO, ALASKA AEROSPACE DEVELOPMENT
CORPORATION, reiterated that Alaska Aerospace Development
Corporation was legislated into existence in 1991. The goal
of Corporation is economic diversification. He provided a
handout & power point presentation highlighting their
marketing strategy. The original $15 million dollar
appropriation has created a $100 million dollar operation.
He pointed out over 10 launches in the past 10 years.
VIDEO PRESENTATION:
2006 Highlights:
· LAUNCH SERVICES: The tenth launch from the Kodiak
st
Launch Complex (KLC) on September 1 was a
significant milestone for Alaska Aerospace
Development Corporation (AADC). It demonstrated
AADC's ability to deliver launch services
consistently, professionally and cost-effectively as
a commercial facility.
· TELECOMMUNICATION LEADER: The new fiber optic cable
project spearheaded by AADC and the Kodiak Kenai
Cable Company will bring high speed
telecommunications technology to Kodiak Island and
the Kenai Peninsula for the first time. That major
economic infrastructure development will bring the
KLC online with secure, fast data transmission
capabilities and provide high-speed access to
residents and businesses of Kodiak and the Kenai
Peninsula.
· SUPPORT FOR EDUCATION: AADC broadened its support
of education in 2006 with an increase in
contributions to the AADC Scholarship Program and a
continued commitment to the Space Explorers Program
for grades K-12. AADC is also the major sponsor for
a fundraising event to benefit the Challenger
Learning Center of Alaska (CLCA).
· INFRASTRUCTURE DEVELOPMENTS: AADC completed the
construction and installation of a permanent
telemetry site in Cordova for the second unit of the
Range Safety and Telemetry System. The dual
systems, one at Cordova and one at the KLC, have
also been expanded to provide data receiving and
processing capabilities.
The Year in Review:
· Launch Success - Tenth Launch for KLC, which is a
milestone for the mature AADC
· Kodiak Island - High speed telecommunications come
to Kodiak Island & Kenai Peninsula
· Economic Impact - KLC operations impact Kodiak
economy
· Infrastructure - KLC facilities upgrades and
increases capabilities
2:10:18 PM
Mr. Ladner addressed the Board's intent. Funding is based
on the number of launches and is received through contracts.
The Board places dollars into future years even when there
are no launches so that expertise is not lost. He commented
on costs associated with keeping the launch center in great
order. There are many expenses. He agreed that a dividend
is in order, however, premature at this time. He requested
that the Alaska Aerospace Development Corporation business
accountant and auditor testify.
2:13:15 PM
SHARON ANDERSON, (TESTIFIED VIA TELECONFERENCE), ALASKA
AEROSPACE DEVELOPMENT CORPORATION (AADC) BOARD OF DIRECTORS,
ANCHORAGE, stated that she was a resident of Anchorage and
was representing the Board of Directors for the Alaska
Aerospace Development Corporation (AADC), which owns and
operates the Kodiak Launch Complex (KLC). The 11 member
board is a diverse representation of the aerospace and
defense industries, University of Alaska and the Geophysical
Institute, the State of Alaska Administration and private
industry. She spoke in opposition to HB 218, while stating
that it was the unanimous position of last years Board of
Directors to provide the State of Alaska with an annual
dividend, it is financially wise at this time.
Ms. Anderson thanked the State of Alaska for vision,
support, and the initial seed investment of $10 million from
the Alaska Science & Technology Foundation. Within AADC's
first decade of operations, they have conducted ten
successful launches in support of science and national
defense missions. It was AADC President Pat Ladner that
recognized Kodiak Island's latitude and unobstructed flight
paths away from populated areas, making it an ideal site for
launching satellites into polar orbits and sub-orbital
payloads. It has been and will remain a wise investment for
the State of Alaska as AADC continues to expand revenue and
customer base.
2:17:00 PM
Ms. Anderson pointed out that during the last two years,
AADC has completed two projects that expanded into a $100
million facility with the capabilities to perform an
essential supportive role to National Defense and growing
commercial aerospace, high-technology industries in Alaska.
The high speed communications via a new fiber optic project,
between Kodiak Island and the Kenai Peninsula, expands the
capabilities for the University of Alaska, Telemedicine and
Homeland Security, as well as KLC current and future
customers. The construction and installation of the Range
Safety and Telemetry System has been completed, which allows
the KLC to perform on the same or higher level of rocket
data gathering capabilities.
Since the initial investment, AADC has been totally self-
supporting, primarily through launch contracts. Doing
business in the aerospace and defense industries brings
challenges. Although working within a very capital
intensive industry, AADC provides its own payroll,
retirement, employee benefits, as well as a very costly
annual maintenance of the sophisticated and highly
technological equipment required to support launch
infrastructure. The financial impact on Kodiak has been
significant as well as support to the University of Alaska
and Fairbanks with development of earth stations and Poker
Flat research projects. The Board did establish a
scholarship program in partnership with the University of
Alaska Foundation to enable high school seniors seeking a
Bachelor's degree in math, physics, engineering, business or
a technical field such as computer science, the opportunity
to apply for scholarships.
AADC also supports the Challenger Learning Center and
nationally recognized Space Explorers Program bringing
interactive science materials for students from K-12. The
Board views all of these as vital dividends to Alaska
residents.
2:19:00 PM
Ms. Anderson reviewed AADC financials, which is where the
basic business model differences began between AADC and
other independent State corporations. AADC does not provide
long-term loans or rents that secure revenue over long
periods of time that can be used to cover expenditures of
the organization and enable them to provide a stable
dividend to the State. In early years, AADC conducted
commercial launches, but currently has only one customer,
the Missile Defense Agency (MDA) in support of the Ground-
based Midcourse Defense program. The problem with relying
on revenues from launches is that scheduling is totally
unpredictable and not guaranteed creating a challenge in
predicting year to year revenues.
She pointed out that AADC has very strict demands to
maintain a high level of readiness both from the
intellectual and personnel skill base but also with the
complicated electronic hardware and software, fiber
communications, vehicles, large metal buildings with
integral cranes, a high tech clean room for satellite
processing, and multiple HVAC systems. Due to these
expensive preventative maintenance costs, which vary from
year to year, daily operating cash amounts must be
maintained at a higher level than most organizations.
Ms. Anderson added that revenues must also be reinvested for
future capital expenditures. To expand and diversify AADC's
customer and revenue base, a third launch sub-orbital launch
pad is necessary. Continuous funding for various quantities
of launch support equipment is required, as they are
reaching the 10 year mark, others require repair or
replacement. The current draft KLC Improvement
Modernization Plan totals over $16 million.
Ms. Anderson stated that the AADC Board of Directors has
every intention of providing the State a dividend as soon as
it is financially practical. However, to provide a dividend
using the proposed HB 218 model without having the ability
to set aside appropriate funding for capital repair,
replacement, and expansion, would not be financially wise
and would have serious negative affects on the ability to
sustain the KLC. The Corporation is working to improve the
infrastructure and capabilities.
2:23:24 PM
Representative Hawker asked when the State could anticipate
a dividend. Ms. Anderson replied that when the third launch
pad is in place and there is an account large enough to
maintain and sustain maintenance, then AADC will be ready.
Representative Hawker commented that it was "troublesome"
that a corporation that has been in existence for sixteen
years can not yet pay back. He wanted to see a business
plan, noting that the only client AADC has at this time is
the federal government. Ms. Anderson recognized that AADC
only has one customer; however, pointed out that ADDC has
brought science, modern technology and high paying jobs to
the State. Representative Hawker was disappointed that the
presentation did not include all information. Mr. Ladner
interjected it was included in each member's packet.
Representative Hawker stood corrected.
2:26:25 PM
Co-Chair Meyer inquired if AADC receives State dollars. Mr.
Ladner replied that they do not receive any General Fund
dollars, only funds from customers. He added that there is
a marketing plan in place and that all their insurance and
Public Employees Retirement System (PERS) costs are paid in
house. He guaranteed that the company is not standing
still.
Co-Chair Meyer asked about the State owned road going out to
the launch site. Mr. Ladner commented that there is a road,
which also continues to the bay where there are homes and
cabins. He pointed out that when a launch is happening,
approximately 150 people visit the area for an extended
period of time.
Co-Chair Meyer asked about the length of the road. Mr.
Ladner replied that from the airport, the road extends forty
one miles. Co-Chair Meyer maintained that there had been
State assistance in building and maintaining the road. Mr.
Ladner pointed out that the Larand Coast Guard station also
exists on that road.
2:29:58 PM
Representative Gara inquired how a dividend could work as he
knew it could not be removed from a federal grant. He asked
about the general breakdown for funds received.
Mr. Ladner offered to provide a written outline of all
contracts and the amount associated with each. Each launch
is a separate task order and depending on the contract, AADC
receives 8% if it is less risk up to 11% if it is a high
risk venture, which is how the income is derived.
Ms. Anderson commented that in 2006, launches totaled $16.8
million dollars; operating expenses totaled $20.2 million
dollars with a net operating loss of $3.3 million dollars.
Fees are limited by federal regulation & capital
contributions and grants through the National Guard totaled
$15.8 million dollars.
Representative Gara asked for a launch fee breakdown. Ms.
Anderson responded that there was only one entity using the
service at this time, the Missile Defense Agency (MDA).
2:34:13 PM
Representative Hawker stated that a complete financial
annual report should include an audited financial statement.
He worried about audit assurances. Mr. Ladner noted that
they could provide the audit reports to the Committee.
2:35:37 PM
Vice Chair Stoltze stated that the statute was specific and
lengthy with regard to the reserve fund and asked how it had
been incorporated into the AADC financial report. Mr.
Ladner explained that they had never used the reserve fund.
He added that their annual report is distributed and
expenses are reviewed.
Vice Chair Stoltze asked about the video. Mr. Ladner
explained that the video explains the difference between
Kodiak and distances all the way to Vandenberg, Germany; it
is shown to all potential clients to market AADC.
2:39:26 PM
Representative Crawford appreciated the video. He pointed
out that the road had been in place before the launch was
built and that there is a Department of Transportation &
Public Facilities station in place to maintain it. He asked
about future projects. Mr. Ladner explained that the
facility was built in order to protect viewers from the
increment weather, by providing an indoor environment.
2:42:16 PM
Mr. Ladner addressed safety distances that are essential to
maintain. He thought that a third pad would entice entities
that want to use a big pad. Alaska Aerospace Development
Corporation continues to request federal funds. There are
potential customers out there. Everyone knows that safety
and environment are important.
Representative Crawford pointed out that one launch pad is
locked in, while the rest are in development. Mr. Ladner
agreed and observed that MDA has contracted for three
launches each year but because of delays, usually only one
happens.
2:44:56 PM
Representative Gara inquired if it was possible to take a
dividend from federal funds. Co-Chair Meyer requested the
question be held.
JEROME SELBY, (TESTIFIED VIA TELECONFERENCE), MAYOR, KODIAK
BOROUGH, spoke in opposition to the legislation. He urged
that the money be maintained and that opportunities for
future launches be retained. He maintained that a dividend
would reduce AADC's capital funds. He addressed
scholarships currently offered by AADC. He spoke to the
road and noted that it had been paid for by federal funds,
reducing the State's contribution. Mr. Selby stressed that
the road is now being used for increased recreation.
2:49:59 PM
Vice Chair Stoltze noted that the statute provides for an
assessment of local & municipal taxes; he questioned what
other contributions had been made. Mr. Selby emphasized the
economic positive impact of $15 to $25 million dollars a
year in salaries and the number of visitors that come for
launches. The economic impact has been "huge" to that
community. He reiterated the benefits of having a paved
road and the scholarships offered.
Representative Gara observed that the facility does not pay
property taxes to the Borough. He questioned if the State
gives the Borough any funds in lieu of taxes. Mr. Selby
noted there were no payments made by the State.
2:53:36 PM
JOHN WILLIAMS, (TESTIFIED VIA TELECONFERENCE) MAYOR, KENAI
PENINSULA BOROUGH, testified in opposition to the
legislation. He pointed out that Section 2 assumes that
some of the dividend may be appropriated to the Teacher
Retirement System (TRS). He pointed out the prohibition of
dedicated funds. He did not think AADC should be compared
to the Alaska Housing Finance Corporation (AHFC) & Alaska
Industrial Development and Export Authority (AIDEA). They
have entirely separate missions and do not contribute to the
economy in the same manner. It is important to recognize
the federal requirements for accounting restrictions and
allocation of funds. All AADC money has been federally
earmarked for missile defense since 1993.
Mr. Williams pointed out that AADC is a high tech operation
and maintained that they need more time before dividends are
discussed. He noted the benefit of their location in
relationship to polar orbits. He spoke to the ability of
providing a dividend from federal funds.
The unrestricted funds are being kept in reserve for long
term maintenance and continued operations during the launch
calendar. That calendar does not require "day by day"
financing but other aspects of operation do.
Mr. Williams spoke to the community contribution aspect of
the Board. The Challenge Learning Center was built as an
adjunct to the AADC; it was built with federal funds as part
of a third wheel to the launch facility. He maintained that
AADC has contributed to the schools and has brought in funds
from other groups that have contributed heavily to other
areas. He reiterated the scholarship fund contributions &
observed that many funds have come to fruition as a result
of AADC. He concluded that a high tech industry has been
created for the State of Alaska. He warned against taking
dividends.
3:01:59 PM
ERICK CAMPBELL, (TESTIFIED VIA TELECONFERENCE), CPA, ALASKA
AEROSPACE DEVELOPMENT CORPORATION (AADC), ANCHORAGE, spoke
against the Corporation's ability to pay a dividend, noting
th
that his determination was based on a June 30, 2006 audit,
indicating that AADC had $15 million dollars in cash & and
of that amount, $12 million dollars was deferred revenue,
belonging to the federal government until spent on approved
projects. There is another $1.7 million dollars of
liabilities not included the Public Employees Retirement
System (PERS) obligation, which leaves $1.4 million dollars
for operations. Operating expenses for the past two years
averaged around $20 million dollars.
Mr. Campbell summarized at this time, there is approximately
one month reserve for operations. He recommends that at a
minimum, there are three to six months reserves built up.
To pay a dividend would make it difficult for AADC to meet
it reserves.
3:03:47 PM
Representative Hawker questioned when the Committee could
anticipate receiving a dividend payment from the
Corporation. Mr. Campbell stated that would depend upon the
marketing success and when the third launch pad is finished.
Federal dollars can not be used for State dividends.
Representative Kelly interjected that the obligation could
be "turned out" and asked if the debt could be assessed
against the federal government. Mr. Campbell explained that
expenses are normally required to be directly related to the
contract.
3:05:39 PM
Representative Kelly continued to question if a subsidiary
could pay back the parent. Mr. Campbell felt that repayment
could come later in the year. Representative Kelly noted
the State has invested over $20 million dollars,
recommending that a 5% payback should occur at $1 million
dollars, or three times the scholarship value. He asked if
AADC could make such a payment. Mr. Campbell did not know.
3:10:03 PM
EMIL NOTTI, COMMISSIONER, DEPARTMENT OF COMMERCE, COMMUNITY
AND ECONOMIC DEVELOPMENT, observed that the Agency received
$15 million dollars for construction costs and the State
paved 20-miles of the road, costing an additional $20
million dollars. Commissioner Notti agreed that the agency
should pay the State a dividend, but observed that the
question is when. He maintained that an examination by the
Legislative Budget and Audit (LBA) could provide direction.
In response to a question by Co-Chair Meyer, Commissioner
Notti clarified that there is no audit request at present
time.
3:11:54 PM
Vice Chair Stoltze acknowledged the need for better
accounting and direction through legislative discussion.
Representative Hawker referred to the enabling statutes and
questioned if the entity would ever be economically
profitable. He observed that the statutes are within the
University of Alaska portion and affiliated by the
University. The statutes prohibit termination if it is
detrimental to the University. He questioned if AADC should
be put under the University's purview. Commissioner Notti
did not have an opinion regarding such a change.
3:14:42 PM
PUBLIC TESTIMONY CLOSED
Ms. Anderson responded to the issue of taxes. She clarified
that as long as the federal government is the customer of
AADC, the government does not allow for payment of taxes.
Any funds would have to come out of the profit of the
corporation. Interest on debt is not allowed. She
reiterated the importance of a third launch paid.
Co-Chair Meyer noted his intent to hold the bill in
Committee.
Representative Gara questioned if there is anything in
statute that would preclude AADC seeking private funding.
Mr. Ladner advised that there is nothing in statute, which
precludes that.
3:18:10 PM
In response to a question by Representative Kelly regarding
the State's obligation on the road, Mr. Ladner explained
that before paving was done with funds from the federal
government, a portion of the road on a school route; was not
maintained. He noted that AADC bought a grader and has
taken care of the road maintenance and will continue to
provide that service. He addressed the use of federal
funds, using a debt document, a copy of the loan. That
grant document could be provided and it would not qualify as
a loan document.
3:20:35 PM
Representative Kelly summarized that if there was going to
be a dividend, it would have to come though the private
sector contracts. Mr. Ladner was uncertain about that.
Representative Kelly emphasized that the intent was to find
a way to bring funds into the State from their initial
investment.
Co-Chair Meyer added his intent to maximize all the State's
investments. Co-Chair Chenault pointed out that some State
funding had been used for the road.
HB 218 was HEARD and HELD in Committee for further
consideration.
3:22:51 PM
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