Legislature(1997 - 1998)
02/24/1998 05:04 PM House ITT
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 432 - AIRPORT REVENUE BONDS Number 0010 CHAIRMAN COWDERY announced the first order of business was HB 432, "An Act relating to the bond authorization for international airports revenue bonds; and providing for an effective date." In his sponsor statement, Chairman Cowdery explained that HB 432 would provide authorization for the state to issue up to $280 million in revenue bonds to pay for improvements to the Anchorage International Airport (AIA). The amount of the bonding authorization may change depending on information received during the committee process. He sponsored HB 432 because he supports the developments and improvements at the Anchorage International Airport; however, as the committee of first referral, he said it is the committee's job to develop a complete record on the issues involved in this project. He said the committee would try to surface as many questions about the underlying assumptions made to justify this project, although it may not be possible to get all the answers. He said that officials of the Department of Revenue, the Department of Transportation & Public Facilities (DOTPF) and the Anchorage International Airport may have to work hard to justify this project. Number 0038 CHAIRMAN COWDERY announced the committee was scheduled to meet until 7:00 p.m. and would reconvene at 5:00 p.m. the following evening at which time he would open up the meeting for questions. A follow-up meeting will be held in approximately one week. Number 0059 MARCO PIGNALBERI, Legislative Assistant to Representative John Cowdery, Alaska State Legislature said this bill amends the statutory bonding limit for the state of Alaska to seek international airport revenue bonds. The current limit is $100,825,000 and this bill would change the limit to $280,000,000. The difference between the old amount and the new amount is $179,175,000, which is the amount of new debt proposed to finance passenger terminal improvements at Anchorage International Airport. Number 0072 MR. PIGNALBERI continued this increased bonding authority is only one component of the financing for the proposed airport improvements. Another component includes federal highway funds for curbside improvements and a surface transportation access corridor. A third component is federal airport funding for ramp and airside improvements. The bonding cap contained in this bill is $25 million less than a similar bill introduced by the Governor. This bill contemplates an additional $25 million in federal funding; thus, reducing the amount the state needs to borrow. By taking the $25 million off the table, it will not be available to expand the project. MR. PIGNALBERI said the $179 million in proposed terminal improvements represents the single largest public works project the Department of Transportation & Public Facilities has ever undertaken. The wisdom of taking on such a high amount of debt, and whether the international airport revenue fund (IARF) can afford the debt, remains to be proven in the legislative committee hearing process. Several of the small air carriers have expressed concern that the proposed project is too large. They voted against it, but lost. Still, their concerns may be valid and we owe it to them to make the project no more expensive than is necessary. Number 0097 MR. PIGNALBERI further stated this bill is also notable for what it does not contain. It differs from the Governor's proposal in that it does not change the statutes to allow for undefined brokerage fees and unspecified obligations to be charged against the IARF. He noted that Chairman Cowdery as the sponsor of HB 432, would be willing to entertain narrow amendments, if necessary, and if the Departments of Revenue and Transportation and Public Facilities can justify any changes. Number 0112 KURT PARKAN, Deputy Commissioner, Department of Transportation & Public Facilities, expressed his appreciation to Chairman Cowdery for sponsoring HB 432 which the department considers to be an important project for the state of Alaska. The DOTPF has some concerns, however, on some of the elements of HB 432, specifically, the dollar amount. Number 0128 MR. PARKAN announced that Mort Plumb, Director, Anchorage International Airport, would be discussing the current status of the airport and the need for the development of this project. Leif Selkregg, program management consultant with the firm of RISE, Alaska who helped develop the program and the scope for the project will be testifying, followed by David Eberle, Program Director for Gateway Alaska. Mr. Parkan said that Mr. Eberle is currently the Director of Construction and Operations for the Central Region at the Department of Transportation & Public Facilities. His experience includes projects of this size; he was the project manager for the Bradley Lake Hydroelectric Plant; and project director for the northern intertie. The DOTPF felt fortunate to have someone with Mr. Eberle's experience on board as the project director for this particular project. MR. PARKAN noted that following Mr. Eberle's testimony, George King of Hudson AIPF will discuss the financial package and why this is the time is now to go forward with this project in terms of interest rates for bonds and other considerations. Mr. Parkan asked Mr. Plumb to present his testimony. Number 0176 MORT PLUMB, Director, Anchorage International Airport, said as director, he has a responsibility that is vitally important and very humbling, at times. It's a challenge that he takes very seriously and a challenge he has dedicated his total professional efforts, as well as the efforts of the professional airport team, to manage this resource in the best interest of the state. He said the terminal's existing deficiencies and need is substantial and has been carefully documented by a team of experts, along with the airlines in developing reasonable solutions to these problems. The growth of aviation and the aviation-related industries, is huge on a national and global scale. What is being presented to the committee at this hearing is only a small example of the challenges facing airports everywhere - updating outdated facilities and meeting increased need. Number 0195 MR. PLUMB said the plan being presented is conservative in its planning assessments. It is a phased approach with planning to the year 2015, but building to the year 2005. The plan is fiscally responsible; there are no general funds being used. The plan is a product of a close working relationship with the airlines which resulted in a positive vote for the project. Anchorage International Airport is the entry and exist point for most traveling Alaskans, tourist and business travelers. The airport is woefully out of balance at this time. The terminal facilities are unable to support the growing airside activity. For example, the airport has only 43 percent needed in the baggage claim area, 40 percent in the ticket lobby and inadequate curbside. Number 0272 MR. PLUMB recognizes the project as significant, but it is a project that must happen. The piecemeal approach to airport needs must be avoided; it's too expensive and valuable ground is being lost each year as the airport falls further behind in meeting the increasing facility needs. The plan being presented is the most cost effective way of keeping Anchorage International Airport as a part of the statewide economy, provide a safe and good quality environment for the traveling public, and to protect the investment of the shareholder's of the state of Alaska. CHAIRMAN COWDERY thanked Mr. Plumb for his testimony and asked Mr. Argue to present his comments. Number 0236 CLIFF ARGUE, Staff Vice President of Properties and Facilities, Alaska Airlines; and Chairman, Anchorage/Fairbanks Airlines Airport Affairs Committee, testified offnet from Seattle. He said the Anchorage/Fairbanks Airlines Airport Affairs Committee is comprised of 25 airlines who have signed lease and operating agreements with one or both of the international airports. Last November, the airlines voted in accordance with the agreement each had executed and long standing past practice, to approve the financing and construction of the proposed terminal redevelopment project at Anchorage International Airport with an estimated total cost of $191 million. During the voting process, the DOTPF pledged $26.5 million in federal highway funds to the project, leaving a net total of $164.5 million. The vote also approved the Alaska International Airport System (AIAS) to issue airport revenue bonds in an amount necessary to cover the new net project cost, financing and escalation with the understanding that AIAS would continue to "use its best efforts to obtain alternate sources of funding/financing to reduce airline cost exposure." It is the hope, but not certain at this time, that federal airport improvement funds will also be available to help in this regard. MR. ARGUE stated, "Based on this approval by the signatory airlines, I appear before you today to speak in favor of HB 432 representing those carriers who voted for the project." Having been involved for nearly 30 years in the planning and development of airport terminal facilities, he said the work to date on the Anchorage project is among the most thorough and professional such effort he has seen. The needs assessment, conceptual solutions and financing plan were carefully developed by an expert team of airport staff and consultants. There was excellent coordination with the airlines at every step in the process. Number 0271 MR. ARGUE said that his colleagues from a number of other airlines, including Reeve, Lynden, Northwest, United, Delta, Reno, America West, Federal Express and UPS all share his feeling on the quality of the process. The serious deficiencies in the existing Anchorage domestic terminal are well known, both as documented in the studies that Mr. Plumb spoke to earlier, and certainly experienced at one time or another by most people when traveling or meeting someone who is traveling. The plan to remedy these shortcoming between now and the year 2005 is sound and conservative. It will provide the citizens of Alaska and the many visitors from outside a modern, efficient and functional airport terminal serving the largest city and air transportation hub of the state. It will also allow passengers flying out of Anchorage to use the newest technologies to speed their progress through the terminal. The people at Alaska Airlines are especially excited about the opportunities this project presents for offering better customer service as quickly as possible. He urged committee members as they consider this legislation, to give the AIAS the maximum flexibility to issue the bonds necessary for the project all at one time. This is the most cost effective way to proceed rather than try to phase it. These bonds will be backed by airport revenues generated from rates, fees and charges to the airlines and in no way impact the state's general fund. The additional cost to the airlines, when considered on a cost per en planed passenger basis, is modest. The AIAS proposal is a prudent and reasonable approach to funding much needed improvements to one of the major economic engines of the state. Number 0295 MR. ARGUE requested the committee's favorable action to allow this project to move ahead in a timely and complete fashion. He thanked the committee for the opportunity to present his comments. Number 0297 CHAIRMAN COWDERY asked Mr. Argue to explain how the vote approval process works among the members of the Airline/Airport Affairs Committee. MR. ARGUE said that under the agreement, the DOTPF or the AIAS brings forward a list of capital projects to the carriers. Those projects are reviewed with the airport and then the voting takes place where each airline that is signatory to the agreement votes to either approve or disapprove. In order for a project not to be approved, it requires 66 2/3 percent of the airlines voting to disapprove a project, in which case the project is then eliminated from the DOTPF's capital program that comes forward to the legislature. However, that is only a one-year deferral and the following year, if the DOTPF deems the project is still necessary, it can be brought forward again and presented to the carriers. If the project is voted down a second time, the DOTPF can still bring it forward to the legislature. He explained this is a provision that was negotiated in 1985/1986 when the first agreements were signed; it's been renewed on two occasions and is similar to what's found in the voting procedures at various airports. He noted there are a number of variations on the voting process and this is just one of them. Number 0321 CHAIRMAN COWDERY asked if there is a time limit once a project is approved by the committee. MR. ARGUE replied, "In this case, we saw a financing plan that carried out the cost of this project would be spread on the bond debt service, and I don't have that document in front of me, I believe it's probably in about the 20 to 25 year time frame. Normally, most projects that are approved have a life of 25 years. Some equipment is less than that - I believe it's 10 to 15 years." CHAIRMAN COWDERY next asked Leif Selkregg to come forward to testify. Number 0337 LEIF SELKREGG, Program Management Consultant to the Anchorage International Airport and the Department of Transportation & Public Facilities, testified that in September 1996 AIA and the DOTPF assembled a planning team and initiated the planning process to develop the AIA terminal master plan for the planning horizon year 2015. He said this planning effort was supported a carefully developed needs assessment in a phased implementation program strategy. The planning team is comprised of leading national aviation planning consultants including TAMS Consultants for aviation forecasting, Landham (ph) and Brown for terminal master planning, Joe Hirsch (ph) & Associates for space programming, P & D Aviation for retail concession planning, and Hudson AIPF for financial planning. The planning team also includes Alaska based project management and architectural engineering firms who are working in the prime contract role, coordinating the multi- disciplined experts in integrating the plan into the Alaskan environment, RISE Alaska for program management support, McCool, Carlson, Green for architectural engineering and R&M Consultants for civil engineering. Number 0349 MR. SELKREGG discussed the process utilized to get to this stage. The planning team has worked closely with the airlines and AIA management to develop a partnership approach to the planning process. Based on a series of workshops, meetings and direct input, a preferred terminal master plan has been approved by the AIA management and the airlines to address today's needs and demand to the year 2005, while still maintaining maximum flexibility for terminal development beyond 2005 to 2015. He commented that getting to the preferred terminal master plan for 2005 required that a detailed aviation forecast and needs assessment be prepared. This was followed by the development of 14 separate master plan concepts; those master plan concepts were refined down to 4 and eventually 1 concept with supporting budget, schedule and plan of finance information which was presented to the committee. He noted that throughout the entire process there has been a discipline of internal peer review between the aviation consultants on both the forecasts and the needs assessment work. Number 0361 MR. SELKREGG said with regards to the aviation forecast, the TAMS aviation forecast for domestic enplanement growth at AIA to the year 2015 is projected to be 3.6 percent. He explained that forecast growth is shown as a straight line forecast, but in reality, it's comprised of peaks, valleys and plateaus. Growth at AIA over the next 10 years is forecast to be 4.8 percent, then slowing as the forecast horizon gets further away and more difficult to predict. Historical activity at AIA for the last seven years shows 4.65 percent growth; the Federal Aviation Administration (FAA) for AIA for the next 10 years is 4.13 percent and the Lee Fisher (ph) forecast which was prepared for AIA in 1993 is consistent with the TAMS forecast. To convert the forecast, enplanements in 1997 were 2,136,000 and predicted to grow to 2.5 million by the year 2000; and 3 million by the end of the year 2005. Number 0373 MR. SELKREGG said in terms of deficiencies, the domestic south terminal consists of three major sections which vary in age, condition and function. Concourse C was built in the 1950s and was originally designed for small propeller aircraft and has met the end of its useful life. Concourse B, built in the 1960s, was designed for jet aircraft with second level boarding and before the advent of passenger security screening in today's larger aircraft. Concourse A was built in the early 1980s to accommodate a unique mixture of secured and not secured flights. Since Concourse A was built 15 years ago, passenger traffic has increased at AIA by over 60 percent and the standards for security and levels of service have dramatically changed in the aviation sector. Number 0381 MR. SELKREGG explained that to meet today's needs and today's enplanement activities, AIA has only 43 percent of the baggage claim area required, 40 percent of the ticket lobby area required, and 89 percent of the jet gates required. There is a significant imbalance between the airside capacity, at 80 percent, and the publicside capacity, at 40 percent. He said that because of the unique peaking of activity at AIA in the summer months, the current domestic terminal area is at service levels D and F, which is a rating schedule of A-F. With the imminent demolition of Concourse C, AIA will be at 75 percent capacity on today's space needs and by the year 2000 it will be at 60 percent. He pointed out that a preferred terminal master plan concept has been developed and approved by the airlines. That came as a result of an intense six month planning process directly with the airlines requiring a high degree of involvement from the airlines. An evaluation process was developed that allowed the airlines to refine the preferred concept from the original pool of 14 concepts. Meeting with the airlines on a bi-weekly basis, the airlines input guided the planning team to the final development of the concept and implementation plan for construction of new and renovated components in a controlled roll out, triggered by need. Number 0346 MR. SELKREGG concluded the concept which has been approved by the airlines increases the capacity for five new jet gates to the north and seven new regional parking positions. This would bring the total number of jet gates to 24 and the regional parking positions to 20. In order to accomplish this program, there has to be cross- utilization between jet positions and regional aircraft positions which requires careful scheduling by the airlines. If the cross- utilization is not gotten with the airlines, additional jet gates will be required. The ticket lobby and baggage claim area has been extended to the west side of the existing terminal, the curbside and road system will be extended to accommodate the new terminal area, there will be a new tour group processing facilities and expanded retail space. MR. SELKREGG introduced David Eberle who would discuss the schedule and budget components. Number 0409 DAVE EBERLE, Director, Design and Construction, Central Region, Department of Transportation & Public Facilities, said he had been asked to become the program director for the Gateway Alaska project and the terminal redevelopment project. Presently, he is involved in the environmental assessment process for this project, including public participation and developing schematic designs for the terminal project. The construction of the project will actually take place over a five-year-period to help minimize impact on the airlines as well as the traveling public. The first step will involve the "enabling projects" which are small projects that are required in order to first relocate the regional carriers, as well as Delta Airlines. He explained that Delta Airlines will be temporarily relocated into the international terminal and the regional carriers will be distributed through the existing facility. After the enabling projects, Concourse C will be demolished, beginning as early as the beginning of 1999. Immediately following, will be the construction of the replacement Concourse C which could begin as early as the summer of 1999. It will take approximately 2 1/2 years to build that portion of the project. Once that is completed, some of the carriers will be moved into their permanent relocations, others will be on a temporary assignment and then the rehabilitation of the existing concourse will begin in two stages. The west half will be first and will take approximately one year, between the years 2001 and 2002. The east half will then be done between the years 2002 and 2003. Number 0430 MR. EBERLE referred to a drawing and explained that as parallel activities to the concourse development itself, the road work will be done which consists of widening the access road coming in as well as a new elevated section of the roadway and curbside adjacent to the new Concourse C. Also, a return radius will be completed to facilitate internal circulation within the airport which is presently not good. The parking area within the loop will also be improved. In addition to the roadside, airside improvements including new aprons paralleling the new structures, as well as some remote field stationing sites and overnight parking for aircraft away from the terminal will be undertaken. Number 0437 MR. EBERLE said that's most of the construction elements and relative timing of those elements. All work will be completed by the end of year 2003; ready for use in the year 2004. CHAIRMAN COWDERY referred to Concourse C and asked what the total extension would be in feet. MR. SELKREGG responded about 300 linear feet. Number 0444 REPRESENTATIVE GAIL PHILLIPS asked what plans had been made for the smaller carriers using Concourse C while it is being rebuilt. MR. EBERLE said those would be the regional carriers and there are two possible solutions. Delta Airlines will be moved to the international terminal, Alaska Airlines could be shifted, which would allow space for the regional carriers. Or, the regional carriers could actually move into the old Delta Airlines area. REPRESENTATIVE PHILLIPS assumed the area would have to be secured before construction began. MR. PLUMB confirmed that would be the two options available. The two gates would need to be secured, as it now an unsecured area. Number 0454 MR. EBERLE said with respect to project cost, the 1997 estimate prepared by Mr. Selkregg, is $191 million. If that amount is escalated to the midpoint of construction, allowing for inflation, it's about $205 million. The following is a breakdown by feature: enabling works, approximately $5 million; road and parking portion, about $34 million; terminal C replacement, approximately $84 million; airside improvements, roughly $38 million; and the renovation of the existing terminal is about $43 million, for a total of $205 million. He said the management plan to be used on this project is basically the same approach he used on Bradley Lake in the Anchorage/Fairbanks Intertie, and that is to do the majority of the work through the use of professional consultants with very little support from the in-house staff, itself. The Department of Transportation & Public Facilities is not going to be gearing up to do this project; existing staff will be used but primarily it will be consultant work. The design work for the terminal and all the road improvements will be by consultant, the airside improvements will be split between consultants and in-house staff, using existing staff, and the project management will be a combination of existing staff augmented by consultants. He found this to be a very effective way of managing and it avoids having to gear up an agency, only to layoff people later on. Other elements he would be involved with are the road projects between International Airport Road and the Seward Highway, which will be implemented on an as- needed basis and are part of the Federal Highway Statewide Transportation Improvement Program (STIP) process. Number 0472 MR. EBERLE stated in terms of funding source and plan of finance for this project, the estimated construction cost is $205 million. When the bond issuance cost and interest during construction are added in, the total cost is $230 million. The anticipated funding sources right now are $204 million in revenue bonds and $26 million in federal highway monies. In addition, the airport is attempting to secure additional funds through the Federal Aviation Administration (FAA) but that is uncertain at this time. Number 0481 REPRESENTATIVE PHILLIPS wanted to confirm for the record that the expansion or the work on the pipeline is not part of the project. MR. EBERLE confirmed that it is not part of the project. He announced that George King was available offnet to discuss the plan of finance. Number 0485 GEORGE KING, Financial Consultant, HUDSON AIPF, LLC, said he would address certain considerations relating to the financial plan for the project. The first item he would speak to is the purpose of the financial plan and the second is to outline the three key objectives and how those objectives have been met. Number 0489 MR. KING said the overall purpose of the financial plan is to be sure that funds will be delivered at the proper time and in the proper amount to support the project. In order to accomplish this, three principal objectives were set forth. First, to achieve low cost; second, to do so with low risk; and third, to maintain high flexibility. With respect to the first objective, the financial plan has met this objective in two principal ways. He said first of all we have the benefit of being in the lowest interest rate environment experienced in the last 20-30 years. Secondly, we also have the benefit of favorable federal tax law which allows the airport to issue tax exempt bonds. This is favorable federal tax law policy is in effect in recognition of the importance of airport projects throughout the country to the national transportation system. This is a discretionary authority that Congress has given airports at this time. Number 0497 MR. KING stated the second objective to achieve low cost with low risk has been met in three ways: 1) All sources of funds of the financial plan are within the control of the airport and the state of Alaska, collectively; 2) the plan has no hypothetical sources of funds on which the project is dependent; and 3) the plan approaches the funding by securing the complete funding up-front so the construction team can bid and construct the project in the most efficient and economical manner. Number 0509 MR. KING continued the third objection which is to meet the low cost and low risk objectives while maintaining high flexibility is met in two principal ways: 1) Incorporated in the bond resolution is 25 years of flexibility to meet the airport's commitment to "use its best efforts to obtain alternate sources of funding or financing to reduce airline cost exposure." This will be done by imposing a credit mechanism in the bond resolution to reduce on a dollar-for-dollar-basis the debt service on the bonds, using future funds received for the project originally financed by the bonds. MR. KING said in summary, he is very pleased with the plan of finance in that through a combination of hard work and fortunate circumstances, he feels very confident that a low cost, low risk, high flexibility delivery of funds to the project can be achieved in a timely way. Number 0522 CHAIRMAN COWDERY thanked Mr. King for his testimony. He referred to the brochure and asked Mr. Selkregg to explain the scope of the additional improvements being proposed in a separate cargo master plan. MR. SELKREGG responded the master plan for the cargo section is not a part of the terminal master planning process, so he deferred the question to Mr. Plumb who has a separate consulting team working on the cargo master plan. Number 0532 MR. PLUMB said the cargo master plan is a separate document, but will incorporate those principals which were found in the master plan done by Lee Fisher and also incorporate those which are part of the terminal master plan. Those improvements are yet to be identified, so the costs will have to wait until the improvements have been identified. He indicated that many of the improvements will be programmatic in that as certain facilities are required and triggered by the demand, the timing will correspond to that demand. He said, "We, for example, use, I think, approximately around a million dollars per square foot of taxiway, so depending on how far up we may have to put a taxiway, you could use that as a ballpark figure in gauging." In his opinion, it would be inappropriate to speculate at this time. CHAIRMAN COWDERY asked if there had always been a separate cargo master plan in the past. MR. PLUMB responded no. CHAIRMAN COWDERY inquired about the funding for the cargo master plan. MR. PLUMB recalled it would come from the advance project design money. CHAIRMAN COWDERY called on Ross Kinney from Department of Revenue. Number 0544 ROSS KINNEY, Deputy Commissioner, Treasury Division, Department of Revenue, said his purpose was to answer questions. He noted that George King was the financial advisor for this project, and the Department of Revenue prepared the fiscal notes based on Mr. King's information. CHAIRMAN COWDERY noted the fiscal note includes three interest rate scenarios and asked which rate was the likely rate if the project was to go forward this year. MR. KINNEY explained one of the schedules attached to the fiscal note has the current interest rates, as of this week. The second schedule adds 100 basis points, or 1 percent, to each of those rates and was recalculated; and the third schedule adds 200 basis points, or 2 percent to those rates. He stated, "When we sit here and take a look at what's going on in the world today, what's going on in the United States, what's going on with interest rates, we have to be a little bit careful in that we allow enough wriggle room, if you will, to ensure that we are not trying to sell a bill of goods to people that are dealing with the financing of this project. And I'm talking about the airlines in that case. And we don't want to create an expectation that we can't possibly meet. My recommendation to the committee would be take the schedule that takes the current interest rates, adds 200 basis points or 2 percent to those current rates, and use that as a rule of thumb to ensure that everyone's on the same sheet of music and agrees that this project should go forward at that level. That's not to say that based on the current market conditions, that we would issue bonds anywhere close to those rates. It would be more likely somewhere between the rates we see today and the 200 basis points. If this bond issue takes place within the next eight or nine months, hopefully we'll see these rates back off somewhat and we may see some even lower rates. It's really difficult for me to sit here and tell you that we can peg those numbers." Number 0578 MR. KING agreed with Mr. Kinney's comments and indicated he had some numbers to add for consideration to Chairman Cowdery's question. From 1977 to 1991, municipal market interest rates in the category where the bonds would be issued, were in excess of 7 percent, with a very brief period where it was below. From 1991 to 1993, long-term rates declined from about 7 percent to about 5 percent. TAPE 98-1, SIDE B Number 0001 MR. KING continued that from 1993 to 1994, the rates went back up from 5 percent to 7 percent. And from 1994 to present, rates came back down from 7 percent to 5 percent. So, the rates were above 7 percent from 1977 to 1991 and have been within the range of 7 percent to 5 percent from 1991 to the present. MR. KINNEY added that in January 1998, the state bond committee issued bonds for the public health facility in Anchorage, authorized by the legislature a year ago, and the true interest cost on that project over a 15-year period was 4.389 percent. He pointed out that debt was issued with credit enhancement, meaning that insurance had been acquired to guarantee a triple A rate. CHAIRMAN COWDERY asked if the sale of these bonds would have any impact on the bonding capacity for the Fairbanks airport. MR. KINNEY understands the two airports are combined into one enterprise fund and one of the major considerations in issuing revenue bonds for airport projects, is the coverage available to meet the debt service requirements. In this case, the net revenues of the two airports combined for the international airport system would be looked at to determine what that coverage is, which in turn would have an impact on the capacity to issue debt. In short, it would have an impact on the total amount of debt that could be issued until the coverage is raised. CHAIRMAN COWDERY acknowledged that Representative Rokeberg was present. REPRESENTATIVE PHILLIPS asked Mr. Kinney if, in the discussion on the bonding capabilities and the interest on the bonds, had there been any discussion regarding the additional bonding that the legislature is considering for deferred maintenance. MR. KINNEY said this bonding was entirely separate because the international airports are operated as an enterprise fund and only the revenues from the airport operations are used to pay this debt. It has no bearing on the general fund or its capability to issue debt because the sources of funding are two entirely different things. REPRESENTATIVE NORM ROKEBERG believed that Mr. Kinney's warning about the 200 basis point increase over the market rates is very conservative. He asked Mr. Kinney to explain the historic relationship between the 30-year long bond and an equivalent credit worthiness of a municipal or tax free bond. MR. KINNEY replied the differential varies and depends on the bond rating; tripe A, double A or A rated. REPRESENTATIVE ROKEBERG said to assume it was the same rating as a 30-year treasury bond. MR. KINNEY believed it would equal somewhere in the neighborhood of 75 to 100 basis points. MR. KING confirmed that Mr. Kinney's range was correct. He added that 75 basis points to about 120 basis points is the range, and it revolves most closely around 75 - 100 basis points. REPRESENTATIVE ROKEBERG inquired what the time frame would be for the issuance of the revenue bonds for this project. MR. KINNEY said with the possibility of interim financing being looked at, but the bond issue would be close to the first of the year, 1999. He directed the committee's attention to the schedules for the fiscal note which indicated the date of delivery of the bonds was October 1, 1998. There will be a need for financing early on and one of the things that may be considered in this project is whether a financing mechanism, called bond anticipation notes, is used in order to secure some interim financing in a small amount up-front to carry the project on or whether "we have to go for the whole ball of wax." He said it is important for the committee to be aware that this project exceeds the normal allowances by the Internal Revenue Service (IRS) for having issued the debt before it is totally committed or spent and a letter may have to be requested from the IRS to allow that to be done in order to meet the arbitrage requirements imposed by the IRS. That will dictate how much interim financing will be necessary and the possibility exists that it may have to be separated into two financings because normally the IRS requires that the proceeds of the bond issues be spent within 36 months unless the IRS has granted special dispensation to carry those proceeds longer. MR. KINNEY pointed out there are some restrictions on the amount of interest that can be earned on the proceeds, and if the yield on the bonds is exceeded, then the arbitrage calculations would need to be done and the excess proceeds would be rebated to the federal government. He acknowledged there are a number of things that come into play with this project that will dictate where we are, how we go about it, and certainly interest rates will play a large part of that. REPRESENTATIVE ROKEBERG asked if he was correct that there is a cap on industrial development bonds based on a statewide IRS (indisc. - mumbling) and there's a cap established by the IRS. MR. KINNEY confirmed that. REPRESENTATIVE ROKEBERG asked if these revenue bonds would in any way interrupt the industrial development bonds available to be issued in the state of Alaska. MR. KINNEY responded there is no connection. The competition right now within the state for those bonds lies with the Alaska Industrial Development and Export Authority (AIDEA), Alaska Housing Finance Corporation (AHFC) and the (indisc.) Corporation. REPRESENTATIVE ROKEBERG asked, "Mr. King, there's been a concern raised about the gross amount of financing -- you mentioned the mechanism but -- if in fact the bond issue was issued without or some $25 million less than has been requested by the Administration, what would the cost and time frame be to go back to the marketplace to go out and ask for additional monies for it - were it to be forthcoming or would it be necessary -- were it necessary?" MR. KING said from a cost point of view, it's hard to put an exact number on it, but he explained what the components of the cost would be. First, there would be additional transaction costs of needing to do over again what had been done the first time in terms of getting the legal disclosure documents together, printing the official statement, going to market and marketing the bonds, soliciting the purchasers, and closing the transaction. Those transaction costs could be calculated fairly specifically. The second category of cost is the unknown factor of what might happen to interest rates in the interim period. He said his previous examples of rate increases between 1993 to 1994 took place over a 12-month period. That would be the principal source of financial risk. REPRESENTATIVE COWDERY asked what 100 points would mean in terms of interest costs for this project. MR. KING said that 150 basis points on $100 million of bonds, which is about half of the project, would over the course of the term of issue cost about $30 million. He offered to calculate 100 basis points on the entire amount and provide that information to the committee at the next meeting. REPRESENTATIVE COWDERY asked how much money was currently in the international airport revenue fund. JOHN UNGAR, Controller, Alaska International Airport System, Department of Transportation & Public Facilities, said on June 30, the date of the last audit, there was approximately $75 million in the revenue fund. He pointed out that wasn't idle cash. Under the bond resolutions and operating agreement, they are required to keep about $35 million of that $75 million in reserves. The approximate remaining $35 million is set aside to complete capital projects that have been appropriated in prior years that are in various stages of completion. There was an excess of $5 million over what was required which was returned to the airlines in the following year's landing fee calculation. CHAIRMAN COWDERY asked how much debt is currently against the international airport revenue fund. MR. UNGAR said there is about $33 million outstanding of debt. REPRESENTATIVE KIM ELTON said in terms of revenue bonds, his line of thinking is that the revenue source would pay off the bonds over time. He referred to page 1, lines 12-14, and said this language seems to indicate that if revenues are short, the legislature can appropriate additional funds to pay off the bonds. MR. KINNEY said that was correct. In the event that the revenues were short, the legislature could, in fact, appropriate funds. REPRESENTATIVE ELTON asked if that was fairly standard language. MR. KINNEY said that gives the bondholders a level of comfort that they're assuming less risk than normal and the state derives a benefit as a result of a lower interest rate because of the perception, real or otherwise, so it is standard language to include those kinds of things. Some of the language put into the bill also provides credit enhancement where insurance is bought. The less risk, real or perceived, results in lower interest rates. REPRESENTATIVE ELTON said, "Cliff Argue who testified from Seattle suggested that in the authorizing legislation we ought to give as much flexibility as possible and I guess one of the questions about flexibility and I think maybe the representative across from me was maybe getting to that, also, is that it seems to me that we're better off if we don't if the additional federal airport dollars are there -- that we're better off giving enough authority for the $204 million rather than $179 million because you don't want to bind the hands too much. I know that there's a bill out there that we're not discussing, but I wonder if the chairman would give us a little bit of latitude to talk about that $25 million and whether or not in the financial markets, given that we don't know whether that additional money is out there, we're going to be able to capture it or corral it, you know, whether or not we ought not to be bonding for -- or giving authority for $204 million rather than $179 million." MR. KINNEY responded that looking at it from debt side, he believed that (indisc.) scale back the scope of the project for that amount of money and that's obviously one of the things that needs to be looked at. He added that a statement of sources and uses of funds has to be provided for potential investors so it is clear the project is adequately funded and the project will be completed. So if the feeling is there are not adequate funds to meet that, the project will have to be scaled back to the level of funding that can be secured. In conjunction with that, some of the latitude being discussed deals with some of the language in the Governor's bill in that it provides some things that have happened in the financial markets over the last 20 years that's not seen in the statutory language as it exists today. One of the flexibilities he thought Representative Elton was alluding to was simply the fact that interest can be capitalized, credit enhancements can be used, determine whether interest rate payments will be made monthly, quarterly, semi-annually or annually, and depending on how everything fits together will dictate how this package is put together, with the idea in mind to keep the cost down for the airlines. He concluded, "So you saw language, proposed amendments to the existing statute that provided some of those flexibilities and made some of those provisions extremely clear; that this is what we're doing, this is how we're doing it, and that goes along with our effort to try to keep the airlines informed as to what we're doing and what we're proposing. And they fully understand these latitudes and they expect that we, in fact, will take advantage of those that result in savings." CHAIRMAN COWDERY asked if he was correct in that if, in fact, it is determined that more money is needed a year or two down the road, the door has not been closed to an additional authorization. MR. KINNEY thought it would be up to the airport management and the Department of Transportation & Public Facilities, but obviously, it would be possible to come back before the legislature and ask for additional authorization to issue additional bonds. CHAIRMAN COWDERY referred to the $25 million in FAA monies available for this project, and asked if that $25 million was included in the amount of the bonds, would it be more difficult to convince the FAA there's a need for the money. MR. KINNEY said he couldn't answer that question. CHAIRMAN COWDERY said he had reason to believe the FAA would find a reason to not hold up the project .... MR. KINNEY pointed out that Mr. King had stated part of the bond resolution would include a statement to the effect that in the event additional money was forthcoming, that money would be utilized to retire the debt and in turn lower the fee to the air carriers. REPRESENTATIVE ELTON asked if the state does bond for the extra $25 million, are there constraints on those funds that aren't in HB 432 or in the Governor's bill? MR. KINNEY said yes, there are strings attached to this money. First, the original project must be completed before that money can be spent for anything other than what was originally specified. It will probably be set up with a "call feature" that will allow some of the bonds to be called and retired in the event excess monies were available. Or those monies could be applied to debt service before any additional projects would be approved by the legislature or by the airlines affairs group. CHAIRMAN COWDERY next called on Ron Simpson to present his testimony from Anchorage. RON SIMPSON, Manager, Airports Division, Federal Aviation Administration, Alaska Region, said his division was responsible for the administration of the airport improvement program (AIP) and provide federal funding for airport and (indisc.) development projects in Alaska. He said based on earlier testimony, it is clear that HB 432 contemplates an additional $25 million in funding from the FAA in support of the Anchorage international development project. He stated, "Let me say first off that we in the FAA strongly support the development proposals at Anchorage International. The airside improvement, the terminal expansion, as well as the access road improvements, we see as vital and important to the long-term needs of the airport." His comments today would be directed on financing and funding options in an attempt to give the committee a perspective as to what is available in the area of airport improvement funding and what the outlook would be. MR. SIMPSON pointed out that Anchorage International Airport receives funding from primarily two categories: Entitlement funding and discretionary funding. The entitlement funding has been averaging around $5.5 million a year and is based on a national formula that's distributed based on the overall AIP funding levels. It is distributed based on two categories; passenger entitlement, based on the annual number of passengers who use the airport, which averages about $2.6 million annually; and cargo entitlements, based on cargo weigh bills, which averages about $3 million annually. Those funds are pretty much guaranteed to the Anchorage International Airport as long as there is an AIP bill supporting that. The discretionary funding is the second category and is distributed competitively on a national basis. In FY 95, Anchorage received $2 million in discretionary funds, $2.1 million in FY 96 and $2.3 in FY 97. However, discretionary funds are tentative; there's no guarantee. He emphasized that Anchorage International Airport competes nationally with all other airports in the same category for discretionary funds. These discretionary funds are allocated based on priority as defined by the FAA's national priority system which focuses primarily on safety, security and capacity enhancements. In order to compete effectively for discretionary funds, projects submitted must be high priority projects. With respect to the development plans for Anchorage which include apron work, terminal work and access roads, he said the apron work is a relatively low national priority. The terminal building does not compete at all for discretionary money, but he understands the access road will be primarily funded with federal highway dollars. MR. SIMPSON said in looking at the strategy for FY 98, the FAA is contemplating about $6.25 million in discretionary requests, he thought the best advantage for securing discretionary dollars would be to approach financing these projects through the development of a letter of intent (LOI). He explained that a letter of intent primarily is a long-term plan for future commitment of AIP funds where the project far exceeds the anticipated entitlement levels, which is the case with Anchorage International Airport. The FAA's policy on letters of intent emphasizes four areas: 1) the projects must meet cost benefit analysis based on FAA methodology and approved forecasts; 2) the projects must significantly enhance the national air transportation system; 3) the projects must be ready projects; in other words, the planning, environmental and design must be completed and a complete funding strategy in place; and 4) the criteria looked at by the committee in FAA headquarters in approving letters of intent is the nonfederal financial commitment portion of the financial plan demonstrating how the letter of intent would be leveraged from nonfederal sources, such as airport revenue bonding. MR. SIMPSON continued the FAA is now in the process of working very closely with Anchorage International Airport on the letter of intent package which is due at FAA headquarters on March 1. The letter of intent description includes (indisc.) at approximately $13 million, overnight parking positions for passenger carriers at approximately $6 million, terminal apron reconstruction at approximately $23 million, including the terminal development, expansion, as well as replacing old pavement sections. The runway reconstruction is also included in the letter of intent package, phase II, at approximately $10.4 million. Overall, the letter of intent application amount will be about $48 million, but he cautioned committee members to bear in mind that "in items 1, 2, and 3 about $38 million is what's being contemplated (indisc.) including in House Bill 432." The letter of intent can be used by Anchorage to offset the airport revenue bonding expenditures; however, it very early in the process and we won't know exactly how much federal funds will be available in the way of discretionary dollars for Anchorage International Airport until decisions are made, probably in June or July. MR. SIMPSON said also from a funding strategy standpoint, he would be remiss if he didn't mention how projects of this magnitude are funded at other major airports throughout the country. He had spoken to the legislature previously about the importance of implementing a passenger facility charge (PFC) program in the state of Alaska. Actually, Anchorage International Airport could be earning anywhere from $5 million to $6 million annually from PFC collections. Basically, PFCs are a $3 per passenger user fee for use of the airport facility and are the most viable way to finance large airport infrastructure development projects. The PFCs provide a reliable stream for funding for long-term planning, especially for terminal building and landside improvements that do not compete well in terms of the FAA national priority system. Also, PFC revenues can be used to pay back debt service. MR. SIMPSON said in any event, the FAA fully supports the projects at Anchorage International Airport and will do everything possible to maximum the federal funding available to support these projects. CHAIRMAN COWDERY announced that Representative Mulder had joined the meeting. REPRESENTATIVE ROKEBERG asked how long Mr. Simpson had been in his current job with the FAA and how long had he been in Alaska. MR. SIMPSON said he had been in airports program since 1980 and in the Alaska region since 1991. REPRESENTATIVE ROKEBERG said that Mr. Simpson had indicated that no decisions would be made until June or July and asked if he was referring to decisions made at the FAA level. Also, he inquired if a congressional appropriation was required to fund the money. MR. SIMPSON said in answer to the first question, the decisions are made at the national level by the airports organization in FAA headquarters; and secondly, the legislative appropriation for the FY 98 program was passed last calendar year and there is funding available at this time. The funding he spoke to specifically in the area of entitlement funding, is available right now for Anchorage International Airport this fiscal year. REPRESENTATIVE ROKEBERG asked what the scope of those monies would be? Would it be the entire $48 million or would it be when the projects are approved by some trip-wire mechanism that's in the letter of intent? MR. SIMPSON explained the letter of intent is a long-term plan and along with it is a long-term funding strategy, and the funds for the letter of intent would be paid out over the term of the letter of intent agreement. So, for a project of this magnitude with a debt service over a number of years, the letter of intent federal financial commitment would also be over that term. REPRESENTATIVE ROKEBERG asked if he was correct in that the money is available now, but it would be paid out over a year so there would not be any other congressional funding of the monies. MR. SIMPSON clarified the letter of intent would primarily be the request for discretionary funds, which goes through the competitive process. The entitlement fund is a different pot of money. As the long term needs of Anchorage International Airport are looked at, it's not the best strategy to tie up entitlement funds throughout the term of a letter of intent if other nonfederal funding can be secured as well. The AIP program is funded through the next two fiscal years, at which time it will take additional action by Congress to either extend or prove continuation of the AIP program. REPRESENTATIVE ROKEBERG questioned if AIP funding was both entitlement and discretionary funding, but the letter of intent was discretionary funding. MR. SIMPSON responded that the letter of intent is basically a request for discretionary commitment from the federal government. REPRESENTATIVE ROKEBERG asked Mr. Simpson to expand on his cautionary comment about tying up entitlement monies. MR. SIMPSON said the airport does have an option to commit its entitlement fully to the letter of intent during the period of the letter of intent, so when other airport development needs that may develop during the term of the letter of intent agreement are looked at, it's not always the best strategy to tie up the airport's entitlements for the entire length of the letter of intent commitment. REPRESENTATIVE ROKEBERG asked, "Do you think if we have an LOI commitment for $48 million, it would hurt our chances to get additional funds on an entitlement basis?" MR. SIMPSON said the line of financial strategy would be to commit a portion of the entitlement funds, but not the entirety. That would certainly show local commitment to the overall letter of intent package. CHAIRMAN COWDERY thanked Mr. Simpson for his testimony and said the committee may have additional questions later. MR. SIMPSON acknowledged the funding picture is somewhat complex, but he said the $25 million contemplated by HB 432 is not guaranteed and FAA would have to have a good funding strategy as well as high priority projects to secure that level of funding. CHAIRMAN COWDERY asked Mano Frey to present his testimony from Anchorage. MANO FREY, President, Alaska AFL-CIO, testified that his job often requires him to travel outside the state, so he is familiar with a number of airports. He avoids going to Detroit at any cost because it's a terrible facility with not much hope in the near future of making it better. He has, however, been in a number of airports and often thought it would be nice if Anchorage had a facility like that. He said it is time for Concourse C to go, so he is pleased to see that one of the first phases would be to get rid of Concourse C and build a new wing so the traveling public can be better served. MR. FREY said that Alaska AFL-CIO, especially the construction unions that would be involved in this project, fully support the concept of Gateway Alaska which is much broader than just the funding of the airport improvements. It includes repairs to International Airport Road, widening of C Street, and other improvements. He encouraged cooperation between the legislature and the Administration in order that this plan may go forward and avoid any delays which would result in additional spending. He said this is easily the largest construction project in Anchorage's near term future and stressed the importance of getting the project underway as efficiently as possible. CHAIRMAN COWDERY stated he believed that everyone seated at the table and the majority of the people support this project. He thanked Mr. Mano for his testimony and asked Mr. Heyman to testify. DUANE HEYMAN, Executive Director, Commonwealth North, testified from Anchorage that Commonwealth North is a public policy research group with 350 members. On February 10, Commonwealth North passed a resolution in support of revitalizing the Anchorage International Airport. They endorsed the revitalization project as approved by the airlines and have requested the legislature to approve the authorizing legislation. He said there are a number of reasons for Commonwealth North's endorsement and emphasized the impact on Alaska's economy both now and in the future, plus the 11,000 jobs related to the airport. CHAIRMAN COWDERY noted that he and most of the other legislators had received the letter of endorsement from Commonwealth North. He thanked Mr. Heyman for his testimony and asked Ron Lance to begin his testimony. RON LANCE, General Manager, United Airlines, testified from Anchorage in support of the project and expressed support for the process of the projects in place. He said it's a very unique opportunity to participate in this project between the airlines and the airports and is satisfied that everyone involved has done their part. After working 12 years at the Anchorage International Airport, he is aware that the airport needs to be fixed. Hopefully, this project will take care of that. CHAIRMAN COWDERY thanked Ron Lance for his testimony and asked Joe Griffith for his comments. JOE GRIFFITH, Representative, Anchorage Chamber of Commerce, testified via teleconference from Anchorage. He said the Anchorage Chamber of Commerce had passed a resolution supporting this project. CHAIRMAN COWDERY noted that the letter from the Anchorage Chamber of Commerce was in committee files and thanked Mr. Griffith for his testimony. He asked Sherman Ernouf to testify next. SHERMAN ERNOUF, Special Assistant to Mayor Rick Mystrom, testified on behalf of Mayor Mystrom in support of this project. CHAIRMAN COWDERY inquired if there was anyone else waiting to testify? TAPE 98-2, SIDE A Number 0001 CHAIRMAN COWDERY said the committee would meet again the following evening at 5:00 p.m.
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