Legislature(1999 - 2000)
02/22/2000 03:36 PM House HES
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* first hearing in first committee of referral
+ teleconferenced
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+ teleconferenced
= bill was previously heard/scheduled
HB 322 - PUBLIC SCHOOL CONSTR/MAINTENANCE FUNDING Number 0556 CHAIRMAN DYSON announced the next order of business as House Bill No. 322, "An Act relating to the financing of construction and major maintenance of public school facilities; authorizing the commissioner of revenue to sell the right to receive a portion of the anticipated revenue from a certain tobacco litigation settlement to the Alaska Housing Finance Corporation; authorizing the issuance of bonds by the Alaska Housing Finance Corporation with proceeds to finance public school construction and major maintenance grants; providing for the creation of subsidiary corporations of the Alaska Housing Finance Corporation for the purpose of financing or facilitating the financing of public school construction and major maintenance grants; relating to the annual public school construction and major maintenance grant application and approval process; providing for allocation of additional reimbursement of public school construction debt; and providing for an effective date." Number 0537 KAREN REHFELD, Director, Education Support Services, Department of Education & Early Development (EED), came forward to present HB 322. She explained that HB 322 provides a mechanism for funding for school construction and major maintenance projects over the next three years. She provided the following testimony: With over a billion dollar investment in school facilities in this state, we cannot afford to neglect the major maintenance needs or replacement of schools when necessary. The Department of Education & Early Development has consistently advocated for a long-term stable source of funding for school construction and major maintenance projects. We think this legislation goes a long ways to accomplishing that. The legislation is designed to address three major goals: first, to provide adequate, safe places for children to learn by clearing up the backlog of statewide major maintenance and school construction projects; second, to address needs in both urban and rural school districts with an emphasis on addressing major maintenance projects quickly to avoid more costly future capital construction costs; and third, to address concerns that were raised in the Kasayulie lawsuit. The package totals $510 million including $360 million in grants for school construction and major maintenance, and $150 million for school debt retirement. The projects included in the Governor's package are funded in the order in which they are ranked on the department's priority list. As proposed, all 86 projects on the current major maintenance list and 40 of the 69 new construction projects would be funded. The current list then would be frozen over the next three years to allow these projects to be funded. The rationale behind the legislation is based on meeting the goals that I've outlined, sticking to the priority list and completing as many of the projects as possible over the three-year period. Adjustments to the amount of funding for particular projects and the final projects in the bill will need to be made as a result of appeals on the priority ranking that are being addressed right now and any other issues related to the Kasayulie settlement. CHAIRMAN DYSON asked about the appeals. MS. REHFELD explained that every year the department annually prepares a listing of school construction and major maintenance projects which is released on December 15. School districts who have issues with the ranking of their projects on those lists can appeal those decisions. A hearing officer is appointed and is addressing those appeals at this time. The State Board of Education & Early Development will meet in March and consider any of the decisions by the hearing officer, so the list will be final following the March meeting. MS. REHFELD continued her testimony: As the state continues to work on addressing the issues raised in the Kasayulie case, the legislation may need further modification. Mr. Baldwin, the Assistant Attorney General who is with me today, has been working on the Kasayulie case and is here to discuss not only the mechanics of the bill, but where we are with the plaintiffs at this time. Funding for school construction and major maintenance projects is critical in both rural and urban Alaska. This bill goes a long way towards addressing these needs, and we ask for your favorable consideration of this bill. Number 0240 JAMES BALDWIN, Assistant Attorney General, Governmental Affairs Section, Civil Division (Juneau), Department of Law, came forward to testify. He explained the idea of the bill is to authorize the sale of a part of the stream of revenue that is coming in from the tobacco settlement. Based on the best estimates of the value of that revenue stream, it is expected to raise approximately $260 million on the sale of that asset. There is a section in HB 322 that authorizes the sale through Alaska Housing Finance Corporation (AHFC). There are other sections in the bill that reaffirm the arrangement that the state has with Alaska Housing Finance Corporation which allows the corporation to use its general obligation debt capacity to issue another $100 million in bond proceeds for the purpose of constructing the facilities. The amount of bonds that are authorized to be sold is somewhat higher than that to cover for reserve funds and other financing requirements that could be imposed by the bond market in order to make the bonds marketable. The actual amount that can be raised is subject to the bond market, so the precise amount available for projects won't be known until the actual sale. There is sufficient authority built in to be able to do the projects that are set out in the bill. MR. BALDWIN noted that the bill also lists the projects that would be funded according to priorities listed in AS 14.11. "Construction, Rehabilitation, and Improvement of Schools and Education-Related Facilities." This bill was constructed largely in mind with resolving some of the claims that were faced in the Kasayulie lawsuit. That lawsuit was brought alleging discrimination in the way the state has funded certain rural schools in the state, and there are also claims in the case involving the administration of the Public School Trust Fund. He explained where the state is in the Kasayulie case. There have been discussions with the plaintiffs to determine what would resolve their claims. TAPE 00-20, SIDE A Number 0001 MR. BALDWIN said if the legislature agrees that this is something that is in the public interest to do, this case can be settled and resolved and the claims can be withdrawn, at least on the public facilities part of the case. He explained there are two parts of the case: the trust administration side and the public facilities side. The ability to resolve all of the claims in the case, in a global way, is difficult to do. They are not able to get there at this point in time so their discussions have centered on focusing on the public facilities side of the case, the ability to fund what had been identified as the needs in the rural school districts. Number 0100 REPRESENTATIVE KEMPLEN referred to page 13, lines 9-14. He asked about the reimbursement and if it would apply to the current school bonds that will go before the Anchorage voters in April. Number 0222 EDDY JEANS, Manager, School Finance and Facilities Section, Education Support Services, Department of Education & Early Development, came forward to answer that the majority of the Anchorage projects that will be before the voters in April will be covered under the allocation in SB 11, so this would be an additional allocation over and above that. REPRESENTATIVE KEMPLEN asked Mr. Jeans for more definitive information on the majority of the projects on the April ballot. Number 0280 REPRESENTATIVE COGHILL asked if taking the settlement monies through AHFC sidesteps general bonding practices. MR. BALDWIN replied that in other jurisdictions, it is becoming an accepted bonding technique to attempt to secure ties to the tobacco settlement for various reasons. Alaska would not be the first state in the nation to do that. There is an advantage to fixing the amount that can be derived from the settlement because there are certain variables that lead to the uncertainty of the amount of revenue the state might derive from this revenue stream over a period of time in the future. Other jurisdictions are doing this to eliminate the risk associated with waiting for that money to come in over the term of years that the settlement is going to provide it. REPRESENTATIVE COGHILL commented it seems to him that this should happen through the legislative process rather than AHFC. He wondered if that is going to create some trouble. MR. BALDWIN answered that this bill will use a revenue bonding approach to funding these facilities rather than some other approach. Some of the general obligation assets of the Alaska Housing Finance Corporation will be pledged rather than the full faith and credit of the state. REPRESENTATIVE COGHILL said he wanted to land on the policy call of the pledge of the assets. Obviously the Governor wants to put them in this particular setting, and it does keep the state from getting into a further bind through the Kasayulie case. There are a lot of health needs out there that the tobacco settlement was designed for. He suggested the health obligation of the tobacco settlement needs to be debated. REPRESENTATIVE KEMPLEN asked if using the revenue stream from the tobacco settlement was really dedicating that revenue stream to this indebtedness. MR. BALDWIN replied that he didn't believe so. He explained that the asset is being sold. Things like this have been done in the past where notes and mortgages have been sold to public corporations so the corporations could have the revenue streams. In some cases, the legislature has just given them away in order to capitalize the public corporations, but this would be an instance where the state would be getting value for the revenue stream. The state would be selling the revenue stream to AHFC and getting the proceeds that could then be spent on public schools. This bill is proposing to allow the legislature to cash in those future revenues now and then appropriate the funds; the legislature retains the power of appropriation. There is not a problem with dedicated fund prohibition. REPRESENTATIVE KEMPLEN asked if future legislatures were being precluded from using those revenues. MR. BALDWIN answered not all of them. This bill is not proposing to use all of the revenues. There will come a time when revenues are no longer needed to retire this particular indebtedness. REPRESENTATIVE WHITAKER asked about the dedicated funding. MR. BALDWIN explained typically the way a dedication works is that there is a revenue source that may only be used for a specific purpose. It comes in, and the legislature has no power or ability to use it for any other purpose. That is the invalid dedicated fund scenario. Here they are taking an asset, the right to receive money in the future, and they are selling those rights to the AHFC and the state is receiving back money for those rights. Those dollars are here in the present, and the legislature then would be appropriating those dollars for the projects in the bill. In that instance, the legislature is not deprived of its power of appropriation whatsoever; it has merely brought forward those revenues to the present and is exercising its powers. MR. BALDWIN clarified that what goes along with this bill would be appropriations set out in the capital budget which would be the way the legislature would be appropriating these dollars. REPRESENTATIVE COGHILL asked Mr. Baldwin to explain the subsidiary corporation structures. MR. BALDWIN explained that the various governments have secure ties, the tobacco revenue, and they have set up a separate entity or corporation that would actually be the issuer of the bonds that would be sold to raise the bond proceeds to buy the rights to receive the tobacco revenues. The idea of doing that is that it is recognized as a transaction that has some degree of risk. How the settlement is set up depends on some variables as to what amount of revenue can be received. The state would be gaining certainty by getting a set amount of money instead of the possibly fluctuating revenue stream. In order to make sure that the state and AHFC are insulated from the risk, a separate corporation is created for the issuance of the debt. The idea is to make it a less risky transaction for the state and AHFC to guard against what could happen in the future if there were some drastic reductions in the revenues that come in under the settlement. REPRESENTATIVE WHITAKER asked if the purchaser of the bonds were essentially under the onus of "buyer beware." MR. BALDWIN answered that is correct, but there will be very sophisticated investors who will understand the risks and the advantages of the transaction. REPRESENTATIVE WHITAKER asked if the revenue stream is somewhat erratic, would there be a higher interest rate associated with these bonds. MR. BALDWIN said there would be a certain rating, but he is not the person to talk to about that. He further explained that a separate corporate entity created specifically to deal with the funding mechanism will be the issuer of the bonds. REPRESENTATIVE WHITAKER asked if there would not be any incumbent or inherent liability for the state and/or AHFC. MR. BALDWIN said that is what they are striving for. Number 1095 CHAIRMAN DYSON expressed concern about the court case. He asked Mr. Baldwin what data the state presented to the court to show what the funding had been for construction. MR. BALDWIN said there was limited data presented. There was some data that showed there had been about $110 million appropriated. (He admitted he might not have the right dollar amount.) He further answered that there is not a lot stated in the opinion about what data the court did use to come it its decision. There was some limited information in the briefs, but it is not evident what the judge relied on in the opinion. CHAIRMAN DYSON asked Mr. Baldwin what years of the record of the money the state spent were given to the court by the state. MR. BALDWIN said he would have to check on that. He noted that the plaintiff concentrated on four or five fiscal years; he believed it was 1994-1998. CHAIRMAN DYSON said it is his understanding that the court literally relied upon the data that was supplied by the plaintiff, not by the state. Number 1196 MR. BALDWIN agreed that was accurate. CHAIRMAN DYSON asked Mr. Baldwin if the data supplied by the plaintiff was accurate. MR. BALDWIN answered he didn't believe it was complete. CHAIRMAN DYSON asked Mr. Baldwin if the state did a good job of putting on that case. Number 1217 MR. BALDWIN said he believed the state did a good job. He noted the state focused on some things that maybe other people wouldn't agree should have been focused on. The strategy at that point was to deal with the question about whether the constitution provides a fundamental right to education. He believes that is an unsettled area of the law in Alaska and other states. That strategy did not work with the trial judge. If it could be done over again, it might have been done differently. He can't say that those issues were handled badly. CHAIRMAN DYSON commented in layman's terms "we argued the law and not the facts." MR. BALDWIN agreed that was the strategy that was followed. It was a motion for partial summary judgment; it did not resolve the entire case. It was directed towards the law, and the strategy was to present it in a way that would indicate there were no genuine issues as to material facts. CHAIRMAN DYSON asked Mr. Baldwin if the state is going to appeal. Number 1293 MR. BALDWIN indicated that is a decision that hasn't had to be made yet because of the posture of the case. Appeal can only be done if there is a final judgment in a case. In this case there is a judgment on partial summary judgment which means there is not a total final judgment in the case. The plaintiff has moved to a procedure which is known as Rule 54(b) to certify that part of the case as being final. Since that motion was made, the state has not had a requirement to respond to the motion as yet, so the decision about appealing is not ripe. When the judgment has been made final, there is a 30 day window for appealing. There have been discussions to see if there is something that can be done to take the "wind out of the sails" of the plaintiff's claims. If there were substantial funding of public school projects by this legislature, he believes the state would have a better chance with this case than if there were not. Since there is a perceived willingness on the part of this legislature to fund a substantial amount of public school construction, it would be best to try to take advantage of that from the state's side of things. CHAIRMAN DYSON asked if the plaintiffs are going to proceed like that is the final decision on that portion that the judge decided. MR. BALDWIN explained that the plaintiffs have to convince the judge, that in the interest of justice, that decision on a part of the case should be certified as a final judgment. CHAIRMAN DYSON asked if that's what the plaintiffs have asked for and does the state have an opportunity to appeal. MR. BALDWIN noted the state has an opportunity to argue about that. He further explained that there is a stipulation with the other side that as long as they are talking about ways to work out the differences, the state needn't respond to that. CHAIRMAN DYSON asked if the portion of the decision that the plaintiffs have appealed to be final is some set of dollars or some number of buildings or what. Number 1435 MR. BALDWIN said it is just a decision on the principles of law concerning the discrimination claims as to whether or not the villages were discriminated against in the way the REAAs [Rural Education Attendance Area] and the state appropriated the dollars. There is also the Title VI claim as to whether or not it involves racial discrimination. CHAIRMAN DYSON said it seems to him that the facts did come into the case because the facts of the supposed discrimination in the dissemination of funds was a defacto discrimination. He asked how much money that was spent in the different years was a part of the evidence to prove the discrimination. MR. BALDWIN replied that the allegation had to do with whether or not the process in AS 14.11, amounted to discrimination or the failure to fund the projects that were set out on the list. The question was did they or did they not do that; that is the difficult part of the case. That is what carried the judge more than whether there was some parity provided over the past 10-20 years. The plaintiffs pressed the issue of was the statutory process followed for funding rural and urban schools. They argued very strongly and persuasively that it was not followed, and those are the arguments that the judge accepted. It was definitely a question of mixed law and fact. People might disagree as to what kind of facts bear on that: whether you can go back 20 years and make a case for parity based on that time period or whether you should only focus on the four or five fiscal years that were raised by the plaintiff. CHAIRMAN DYSON asked Mr. Baldwin if anyone brought up 1994 when the rural schools received $580 million. MR. BALDWIN replied he was not sure what numbers Chairman Dyson was using but he has done that analysis. He can say that the legislature has been very good in funding the major maintenance list. The proof gets more difficult in the construction list. CHAIRMAN DYSON asked if the state has the option of introducing any more evidence in the case. Number 1594 MR. BALDWIN replied he believes it is possible, but it is only at the discretion of the court. In his view, it would have to be done by asking the judge to open up the judgment under the theory that there has been a mistake, either in fact or law. It is difficult to do because the judge has to be convinced that he made a mistake on the law or the facts; there are lots of factors involved. It is not impossible, but it is not something to invest the family's money in. There may be possibilities: if on appeal, the Supreme Court has the power to suspend the rules and to permit supplementation of the record, but that is at the discretion of the Supreme Court, and the Supreme Court likes to consider itself as being a court that decides cases on the record that has been established in the lower courts. CHAIRMAN DYSON asked if the tobacco revenues were spent last year or haven't they been allocated in the Governor's budget this year. MS. REHFELD referred that question to Elmer Lindstrom from the Department of Health & Social Services. She explained that debt- service costs would come into play. There is some material on the financing mechanism on the fiscal notes having to do with the debt retirement program that could be a couple of years out. She said those costs are shown in general funds; the tobacco settlement stream that's been appropriated to this point is not considered in this packet. CHAIRMAN DYSON asked who was the judge in the case. MR. BALDWIN answered Judge Reese. He also answered Chairman Dyson that he has heard rumor that Judge Reese was with Alaska Legal Services and pled the Molly Hootch case, but he hasn't confirmed that. He further noted that Assistant Attorney General Tom Dahl presented the state's case. CHAIRMAN DYSON said it seems that the plaintiff is saying that the state needs to provide enough resources for the students to get a well-rounded education. He asked what the cutoff number should be of what provides a well-rounded education. MS. REHFELD noted she can't answer that question but understands where he is going. She further explained to Chairman Dyson that in those rural areas where there are children that require educational services, they should have adequate, safe facilities. CHAIRMAN DYSON asked if there was anything in this decision that indicates that a building is not enough, that there has to be a broader education program. MR. BALDWIN indicated the decision is dealing with concrete and steel. The judge is indicating that having appropriate facilities bears on the learning process and directly bears on the right to education. CHAIRMAN DYSON asked Mr. Baldwin if making this a general obligation bond was considered to give the people in the state a chance to vote on it. Number 1864 MR. BALDWIN answered if this were to be funded by a general obligation bond approach, that would be an acceptable approach, but there are certain advantages to this approach that would better allow the money that is raised to be focused on resolving problems in the rural school districts. It presents opportunities for "securitizing" an uncertain revenue source in the future. It allows a device used in the past which is the general obligation bonding capacity of AHFC. CHAIRMAN DYSON referred to the Kasayulie case and asked what is the criterion, and what did the judge find wrong with it that he would have the state do differently. MS. REHFELD answered that she doesn't believe that the judge found that there were any particular issues with the evaluation or prioritization of projects the department does in generating those lists. She believed that the question the judge raised was whether or not the department, in seeking and securing appropriations, had followed the list in actually doing that. MR. BALDWIN added the fact that the department had provided a reimbursement program for organized municipalities that was not available to the REAAs. In other words, the REAAs were required to go through the list and were required to rely on front-end appropriations from the legislature, which in the words of the court "didn't materialize in a general way or a uniform way." During this same period, there were substantial amounts of money that were made available under the bond reimbursement program for organized municipalities, and the plaintiffs felt there was a disparity in that treatment between the organized areas and the unorganized areas of the state. Number 2001 REPRESENTATIVE KEMPLEN referred to the fiscal note where it speaks about debt service. He asked: Why not use AHFC transfer payments to retire all of the debt? Why mix it up with the tobacco settlement money? Number 2029 BRAD PIERCE, Senior Policy Analyst, Office of the Director, Office of Management & Budget, Office of the Governor, came forward to answer questions. He informed Representative Kemplen that there isn't enough money. Somewhere around $360 million is needed for funding the list; about $260 million can be leveraged out the tobacco settlement, there is another $100 million in general obligation (GO) capacity in AHFC. REPRESENTATIVE KEMPLEN asked if that untapped capacity equals $100 million. MR. BALDWIN answered approximately, yes. REPRESENTATIVE KEMPLEN asked if AHFC pays the legislature a dividend. MR. BALDWIN agreed and noted that the amount is $103 million a year. About $53 million goes to AHFC capital projects and about $50 million goes to the general fund or to debt service. Right now about $34 million is being spent on debt service from the 1998 package which was $200 million dollars worth of bonds. Over the next five years about $100 million worth of projects will be financed. Mr. Baldwin further explained that about $260 million would be raised from the tobacco settlement, and that would be through 2021. It generates about $24 million a year. About $1.4 million will be taken off the top for anti-tobacco efforts. REPRESENTATIVE KEMPLEN asked when is a "right to receive" not an appropriation. Number 2181 MR. BALDWIN answered that an appropriation is when the legislature authorizes the expenditure of money from some funding source for a specific purpose. The right to receive is like a mortgage in the eyes of a lender. The lender has the right to receive the payments of principal and interest over a period of time. That particular right, that mortgage, can be sold to another investor or another lender. So there is quite a bit of difference between the concept of an appropriation and the right to receive. One is the right to expend money the other one is a right to receive it, to earn it. REPRESENTATIVE KEMPLEN commented, "It certainly appears that we're obligating and precluding future legislatures from spending the tobacco settlement revenue stream on health issues. That seems to be the relevant question for this committee." CHAIRMAN DYSON responded, "Only if you think that the tobacco settlement things ought to go to tobacco and health-related issues, which has a certain logic to it. REPRESENTATIVE KEMPLEN said it seems to him that the committee might want to get an interpretation or opinion from Legislative Legal and Research Services about the concepts of the right to receive and appropriation. CHAIRMAN DYSON said Representative Kemplen has raised an interesting question: Are judges' decisions going to usurp the role of the legislature in making appropriations and withdrawals of funds from the public accounts? CHAIRMAN DYSON suspended the hearing on HB 322. [HB 322 was heard and held.]
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