Legislature(1997 - 1998)
03/19/1998 04:09 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 0014 CHAIRMAN COWDERY announced this was the fourth meeting of the International Trade and Tourism committee on HB 432 and it was his intention this would be the last meeting at which public testimony would be taken. He expected to have one more meeting on Tuesday, March 24 to consider amendments and hopefully move HB 432 to the next committee of referral. Number 0020 CHAIRMAN COWDERY said substantial effort has been made by many parties to analyze and digest a lot of information about this project. There's been cooperation among the airport staff, their consultants, his office and this committee's consultants. He acknowledged that Commissioner Perkins set the tone early on in the Department of Transportation & Public Facilities for complete disclosure and cooperation. Nevertheless, he said it had been reported to him that certain people were concerned about retribution from the nature of their testimony for or against certain aspects relating to this project. For the record he had checked with House Speaker Gail Phillips and Commissioner Perkins, and neither they nor he would tolerate any hint of retribution behavior toward anyone who testified before this committee or participated in any way in this public process. He urged any individual who felt threatened to speak with any committee member or their respective staff regarding any complaint of this nature. He believed such fears to be unwarranted; however, he wanted to provide assurance on the record of the legislature's willingness to protect the democratic process. Number 0049 CHAIRMAN COWDERY asked Edward Merlis to come forward to present his testimony at this time. Number 0055 EDWARD MERLIS, Senior Vice President of Government Affairs, Air Transport Association of America (ATA), testified in support of HB 432. He explained the ATA is the principal trade and service organization of the major airlines in the United States and their members fly 95 percent of all the passengers and cargo flown on U.S. flag airlines. The nine member airlines of ATA that fly to Alaska have signed a letter in support of this project and this legislation. He said the ATA believes the project is one which is properly sized, financially prudent and meets both current needs as well as anticipated near-term growth necessities. The Air Transport Association has been involved in the planning process, which Mr. Argue of Alaska Airlines will address, and found this project has been designed in such a way that it will accomplish ATA's needs for passengers and will be done in a very intelligent way financially. He said the members who had signed the letter are committed to paying for the cost of this - none of the cost will ultimately be borne by the citizens of the state through tax revenues; it will be borne by the airport users. Number 0088 MR. MERLIS stated compared to similar airport expansion projects ATA has been involved with in many communities across the United States, they are pleased to say this project might be the most intelligently designed, particularly from a price perspective. The Air Transport Association of America is pleased to endorse this project and urges the legislature to move expeditiously on HB 432. Number 0101 CHAIRMAN COWDERY wondered what ATA's expectation would be of increased costs for landing fees, terminal rent and other costs incurred at the airport if this project were to be approved for bonding at $180 million. MR. MERLIS responded the key issue is what is referred to as cost per enplanement. According to Mr. Argue of Alaska Airlines which will represent about 50 percent of the costs at the airport due to volume, it is their view the cost per enplanement would increase somewhere in the $1.50 range. That figure is actually quite modest, particularly when considering other airport expansion projects where cost increases, such as Denver, have been $20 per passenger. Passengers will not see much of that $1.50 rate when it's spread across the wide array of fares. CHAIRMAN COWDERY verified that Mr. Merlis was of the opinion that the increased cost per passenger would be in the $1.50 range. MR. MERLIS replied, "Well, I think it would range on a first class ticket from Anchorage to Washington D.C., which might cost as much as $2,000, an airline making that independent judgment might decide to raise the cost by $7.00 and on a discounted fare 30-day advance purchase for $100 ticket, they might put no increased cost for the passenger. That's part of the system that exists where an airline makes the decision of how to absorb the costs or pass the costs on to individual passengers." CHAIRMAN COWDERY asked if Mr. Merlis expected there to be some fluctuations on the landing fees and costs? MR. MERLIS said any new capital expenditure is going to necessitate some increased costs that would be passed on as the individual carriers see fit, depending on the category of ticket purchased. Number 0136 CHAIRMAN COWDERY asked Mr. Merlis how this project compared with others? MR. MERLIS said there were a number of comparatives, but one in particular in the same price range is the Baltimore-Washington International Airport which built an international terminal for $200 million at a time when international traffic had dropped 10 percent. On the other hand, this project is under $200 million at a time where there is a growth projection. He said one of the things that is most heartening is the consultation process that's existed between the airport, the department and the airlines. Number 0156 REPRESENTATIVE GAIL PHILLIPS asked if, based on the proposal for the baggage expansion, would there be any of the problems experienced by Denver. MR. MERLIS said that was a guaranteed no. He added the Denver baggage system alone cost $125 million. CHAIRMAN COWDERY asked if there were other questions for Mr. Merlis. Hearing none, he asked Cliff Argue to present his testimony at this time. CLIFF ARGUE, Staff Vice President of Properties and Facilities, Alaska Airlines; and Chairman, Anchorage/Fairbanks Airlines Airport Affairs Committee. He stated the Anchorage/Fairbanks Airlines Airport Affairs Committee is made up of the signatory carriers; that is those carriers that have signed operating agreements for the two airports. Inasmuch as he had testified at previous committee hearings, his testimony today would focus on three areas: process, product and payments. He said he has been involved with the process since the beginning and it is among the best he's seen at airports throughout the country. First of all, a needs assessment was completed which identified the deficiencies in the terminal complex. That was taken to the next step which was the development of 14 or 15 different concepts which were scored in terms of how they met the needs of the airport which eventually led to a preferred plan. The final product or preferred plan corrects a deficiency that has long been in the Anchorage terminal and many of the needs are now. In addition, the end product that has been presented provides for reasonable and modest future growth. The project as presented takes into account a modest growth rate that economic planners at Alaska Airlines and other carriers all feel is a very appropriate growth rate for the Anchorage area and for the people traveling through the Anchorage airport. Number 0215 MR. ARGUE stated the airlines are prepared to pay the bills. Mr. Merlis had mentioned the increased cost to Alaska Airlines and similar numbers are available for other carriers. He pointed out the cost increases are extremely conservative and modest in looking at the overall scheme of things. It keeps Anchorage as an airport that is very competitive with other airports throughout the country as far as rates, fees and charges, even after the bonds are sold. Number 0226 REPRESENTATIVE JOE RYAN generalized if this was his business with the given net revenues and losses over the past five or six years and he took this project to a banker to borrow $305 million for expansion, he thought he would have a difficult time selling it to the banker. However, this proposal is coming before this body and the state, who as the bonder, will be responsible for it. He asked Mr. Argue to explain why the state should be willing to take on this project. MR. ARGUE said he would comment briefly and then ask the Administration to follow-up. First, he had not seen the document indicating net revenues and losses that Representative Ryan had referred to, but he understood it was the published financial reports for the International Airport Revenue Fund (IARF). Additionally, he believes the problem arises in that the numbers referred to are from a straight accounting standpoint and don't take in to account the way in which the operating agreement works. In reality, as he understands it, the operating agreements provide that there really is no loss to the system; the landing fees and rentals are set to assure that all costs are covered. It's what is known as a residual agreement which means that whatever costs are not covered from other sources - whether it be concessions or tie downs, land leases or other fees are made up by the air carriers serving the airport. So, from an accounting standpoint, this total IARF deficit may be theoretically correct, but in practicality he didn't believe it is. He noted there will be fee increases which have been identified to help repay the bonds. CHAIRMAN COWDERY thanked Mr. Argue for his comments and asked John Ungar to stand by in Anchorage while other members of the Air Transport Association presented their testimony. Number 0280 REPRESENTATIVE NORMAN ROKEBERG asked Mr. Argue what the landing fee for a 737 would be at the Anchorage International Airport and the Fairbanks International Airport. MR. ARGUE said it would be the same amount; however, he didn't know the exact number. It's based on a rate per thousand pounds. REPRESENTATIVE ROKEBERG asked if it was Mr. Argue's testimony that the landing fee would be the same at Anchorage and Fairbanks. MR. ARGUE confirmed that. CHAIRMAN COWDERY asked Dennis Bird to come before the committee to present his remarks at this time. Number 0303 DENNIS BIRD, Managing Director for Alaska Operations, Federal Express, testified that Federal Express represents one of the major express cargo carriers atthe Anchorage International Airport. He said in looking at the whole process, at first glance one would think that perhaps Federal Express wouldn't have any interest in seeing upgrades and improvements to terminal facilities, specifically the project of the Anchorage International terminal expansion 2005. That, however, is simply not the case; Federal Express strongly supports HB 432 as well as the expansion for a number of reasons. The first reason is that the customers that come in to and exit that airport on a regular basis are also customers of Federal Express as well as every other business and business entity in the city of Anchorage and the state of Alaska. He said quite honestly he didn't think those customers were adequately serviced at this point in time. He pointed out that Federal Express has a responsibility toward their employees and he said, "Most certainly our employee base has grown to almost 1,008 in the state and of the 1,008, 350 plus - and soon to grow more - are pilots and we certainly use that airport on a daily basis to move our pilots in and out both for training as well as to position them on the line, so it's very important that we have very time definite, very certain service through that facility as well as on the airlines that handle it." More importantly, Federal Express looks at this as the opportunity to start building an infrastructure that will support the growth into the global operation he believes Anchorage International can become. He believes that an airport facility plays a large role in the decision of any international or multi-national company thinking about doing business in an area and in his opinion, Anchorage needs to make a better impression in order to move into the global arena. CHAIRMAN COWDERY asked if Mr. Bird expected there would be higher landing fees with this project. MR. BIRD replied he expected the fees would probably fluctuate and increase somewhat. CHAIRMAN COWDERY asked what effect the increased costs would have on the shippers. MR. BIRD said the way the pricing structure is set up, he didn't see any immediate impact just from the standpoint of being an Anchorage location. CHAIRMAN COWDERY asked Kurt Parkan to come before the committee. He noted the paperwork Mr. Parkan had given him had been distributed to committee members and acknowledged receipt of a letter from the Commissioner. Number 0356 KURT PARKAN, Deputy Commissioner, Department of Transportation & Public Facilities, noted he didn't have any testimony to present today. He said the department had responded in writing to questions that were raised at the previous meeting. In response to Representative Rokeberg's question regarding the landing fee for a 737, he said at the current 46 cent rate, it's just under $60. He said in terms of the letter, "Mr. Chairman, one of the questions that you had raised was, is it possible to come up with a time line and discussion of the project indiscrete contracts so that you could get a sense of how the project would be broken out, so that I understand your interest which are similar to our interest, is that local contractors - Alaskan based contractors - would be able to do the work. And in the letter from the commissioner, we do include on the back page a preliminary contracting plan that shows approximately 12 different contract bid packages with their estimated value and an award date - a tentative award date ... And clearly as we get closer to design, the fidelity of that schedule will be made clearer; certainly there is a lot of factors to take into consideration when you decide how to break up the project and once you've developed a detailed, critical path schedule to show where these projects are in that path, that helps you determine whether or not you want to have a project that may be small, for example if you had a $100,000 project that could hold up the rest of the project because they had failed to complete on time, you want to take another look at whether or not you go after such a small contract to begin with." CHAIRMAN COWDERY remarked the concern had been to assure the participation of as many Alaska contractors as possible. He referred to the $60 million for terminal C replacement and inquired if that represented one contract or if there would be separate contracts for demolition and construction. MR. PARKAN said he was unable to respond with any specificity at this point. CHAIRMAN COWDERY said it was his hope that it could be broken into more than one contract. He asked if there were other questions of Mr. Parkan. REPRESENTATIVE PHILLIPS remarked the big picture indicates that by the time this project is completed, there's going to be a need for more expansion and asked Mr. Parkan to reiterate why this project addresses such a short time frame and isn't projected for a longer and greater capacity. MR. PARKAN suggested that Mort Plumb could more adequately address that question. With respect to the question of de-icing which Representative Phillips had raised at a previous meeting, he noted the department is currently working on a report and will provide it to her separately. CHAIRMAN COWDERY asked Mort Plumb to come before the committee at this time. Number 0425 MORT PLUMB, Director, Anchorage International Airport, Department of Transportation & Public Facilities, said in response to Representative Phillips' question, he would like to tag on to the comments of Mr. Merlis and Mr. Argue. He stated, "There's certainly a lot of solutions to this issue and we worked, I think, very hard at trying to reach a consensus as much as we could, taking the inputs from all the people and just as we have seen, we are having certainly a challenge to present the program we currently have before you and to have presented a larger program probably would have been a greater challenge. Having said that, when we did our needs assessment, one of the things we thought was important was to come up with a master plan that looked out at least 20 years and we did that. And we incorporated many ideas to include the greenfield (ph) approach that Speaker Phillips had asked about before, I think that we had one of the premier consultants in this - Mr. Gary Blankenship with L & B - and I think that the people gathered in this room could testify to the competence and the credibility of Mr. Blankenship. So, we did come up with a proposal for the year 2015 and it was a phased approach and we phased that program in accordance with what we thought was reasonable from a financial possibility, for the lack of better words. And this again was done in consultation with the airlines as well as our own department. There were three possible break points that appeared to have merit. One was to build all of it - the 2015 solution. One was to build just what was needed to get to about 2001 or one was to go ahead and break it about 2005 which would incorporate taking care of the current deficiencies which we have which as you know we're at about the 40 percent range in the bag claim area and 43 in the ticketing area and without C concourse at about 75 percent and when we get to the year 2000, that goes down to 60 percent without C concourse. So, after a lot of deliberation, we made the cut at about 2005. Certainly there are other possibilities, but we arrived at that by using a matrix and weighting the proposals and it appeared that that was about a good break point to meet the current deficiencies, the forecast need and to fall within a reasonable financial program." Number 0458 REPRESENTATIVE ROKEBERG noted the costs for office space and counter space at AIA and inquired what those costs are in the Fairbanks airport? MR. PARKAN said the rent would be the same at both airports because it's part of the system and the operating agreement has the landing fees as well as the rents for similar airports for similar uses. REPRESENTATIVE ROKEBERG asked what the schedule was on the operating agreement? MR. PARKAN replied it comes due in June 2000. REPRESENTATIVE ROKEBERG referenced his earlier inquiry regarding the projected cost for the eight (indisc.) add-on that might be prospective for 2005 or 2015. MR. PARKAN didn't recall that inquiry and said the department would respond to Representative Rokeberg personally. Number 0473 CHAIRMAN COWDERY noted the committee had hired consultants and asked Mr. Wells and Mr. Noon to address the committee at this time. Number 0482 STEPHEN F. WELLS, Certified Internal Auditor, said that he and Dr. Heinz Noonan were hired to take an independent review of some of the questions that had been raised by committee members and to develop additional information regarding the project. He explained the approach taken had been to address the questions given to them by the legislature and to then look at additional information that may have come up during the process. That information was divided into the 14-page draft report before the committee and a brief summary of what he and Dr. Noonan determined to be important which resulted in five key issues being presented in an executive summary sent to the committee members today. Number 0495 MR. WELLS said he and Dr. Noonan feel the overall process that the airport has gone through with regards to the design has been excellent and that all reasonable and possible alternatives were examined and considered. He has been pleased with the overall cooperation and courtesy of the airport personnel. He does, however, think some of the informational data, particularly the financial data, needs to be entirely accurate and complete. Their review raised a couple of questions in their minds about whether that process was as controlled as it might be and their suggestion was that the international airport revenue fund controller and his staff needed to be a significant part of that process and that at the very least they review the financial information before it's released. That review was not taking place in either Anchorage or Fairbanks. He noted it could have a significant effect in the bond due diligence process and that's why they think it's such a significant issue. CHAIRMAN COWDERY confirmed that it didn't necessarily mean the information provided was wrong, but rather that it should have been reviewed by the controller before the information was released. MR. WELLS said that was correct; they were concerned about the process. In a couple of instances they found the information wasn't entirely accurate. MR. WELLS continued with his summary and said, "We felt that when we looked at the overall process with regards to what was being designed specifically for the concourse C and main terminal area, that we felt and saw in some of the testimony that there was concerns about how it might affect air cargo in the future and there seemed to be at certain points a lack of information with regards to how this might impact air cargo and its future development possibilities. We feel that because air cargo represents 70 percent of the revenue that's generated out there at the airport, that any significant - and since this is a very large project, it's significant - how that might impact future air cargo development is something that needs to be carefully considered and since the air cargo master plan has not been completed, we're not sure - and we need further information about how that might impact the development of air cargo at Anchorage International Airport. We see that as an unclear and somewhat undefined piece of information at this point. We do know that the airport has done some preparatory information in this regard because they did share with us the LOI packet that they provided to FAA recently and we see that there has been some work in regards to air cargo in that document. But it still remains kind of unclear to us." Number 0535 MR. WELLS further stated, "The other areas - there are two more - and it has to do with cost control and we think that there are two issues there and one has to do with certain aspects of this project, particularly as regards the main terminal which is an old building - not as old as concourse C, but it does have certain problems. We feel because of that it represents a significant risk and therefore potential exposure to increased costs as they get into that project." This had been discussed with Don Ketner who admitted that it was a risky portion of the project. So, from a cost control standpoint, he concluded there needs to be some oversight in this process to avoid the potential for increased costs. There isn't any mechanism in place to ensure the packet before the committee for approval is anything other than a total cost concept. It is his feeling that any of the alternatives considered by the airport could easily be implemented at any point in time which would have a significant impact on the cost. He recommended there should be some independent oversight throughout the process which could be carried out in a couple different ways. One would be through the international airport revenue funds controller's office and the other would be with an independent person reporting directly to the legislature. Number 0554 MR. WELLS said finally, it is their feeling that the impact to rates and fees is something that has been given a considerable amount of thought, but that there's an apples and oranges type comparison going on when a person looks at other airports around the country - the landing fees, in and of themselves is probably the wrong piece of information to try and compare. The reasoning for that is that even the industry itself uses a very complicated formula for determining what goes into landing fees and that can be different from one airport to the next. He thought it would be more appropriate to look at one or two aircraft and find out what it would cost for that particular aircraft to land at different airports. That may be a better way to compare how the rates will impact each airport in each location. Number 0565 CHAIRMAN COWDERY thanked Mr. Wells for his summary and said it was his understanding the landing fees include the fuel flowage fees at many of the airports; however, the landing fees the committee had discussed did not include those fees. MR. PARKAN referenced the comparative costs between airports and said that Mr. Plumb had some information that may be helpful. MR. PLUMB said, "As your consultants have identified, certainly in two weeks it's very difficult to get a handle on something that's as dynamic and complex as cargo operations at Anchorage International Airport and I think some good questions are posed and I think that there's certainly some very good and reasonable answers. As Mr. Parkan said, it's probably more appropriate to give a complete picture in a written response. I do have an apples to apples comparison here for passenger and cargo for a 747-200 and certainly we could get it for another aircraft and we can go - and I will submit this for the record - but as an example with the back-up material - at Anchorage for a 747-200, it's about $1,244 as compared to say Seattle which would be $3,471 or JFK at $3,429. And these are 1997 figures I might add, so some of these may have to be adjusted for currency, but others such as Taipei is $3,900 plus, Seoul Korea is $5,000 plus, Hong Kong $3,100 plus and again, that is down to - compared to the Anchorage price of $1,200 -- it's actually $1,244. Our closest competitor and one that we monitor very closely and very carefully and we certainly never want to lose the window of opportunity is Vancouver which is $1,600. And adjusted rates for 1998 which does have some currency adjustments but does not have the fidelity of this other material - again, we used $1,244 for Anchorage and $3,400 plus for Kennedy and I will submit these and the airports are Kennedy, Seattle, San Francisco, Los Angeles, Vancouver as compared to Anchorage. In Europe we have Amsterdam, Heathrow and Frankfurt. In Asia we have Taipei, Seoul, Hong Kong, Manila, Lumpur, Singapore and Sapporo and so I think this is sort of a global comparison which the committee may find interesting. We also have a comparison for passenger aircraft which was not asked." TAPE 98-7, SIDE B Number 0001 MR. PARKAN said, "These fees - these comparative analysis - and the source was I (indisc.) and several airport interviews that we've have had people do - they not only incorporate the landing fee, the fuel charge, the fuel flow, the taxes, but also what the handlers charge to turn the airplanes." He said currently the Anchorage International Airport is very competitive REPRESENTATIVE PHILLIPS commented the report prepared by Mr. Wells and Dr. Noonan is overall favorable to the project; however, they do state that another expansion project will be needed shortly after this project is completed. She asked Mr. Wells for his comments. MR. WELLS said in reviewing the different alternatives, they found three significant dates - the 2005 date, the 2010 date and the 2015 date. It appeared that a lot of work had gone into the estimates and projections as they applied to those three dates. He said, "What resulted from all that work that we were able to read in the short time frame was that it was quantifiable; you were able to identify that in fact the estimates showed that there would be a need for four additional gates at 2010, four more at 2015 based on their estimates, and that the enplaning passengers would increase from approximately four million to nine million, I believe. But we saw a significant increase in the passenger activity which we assumed would be the reason for the gates and what we see is that the total passenger count went from - this is on enplanements only - it's estimated three million in 2005 to four million before 2015, so there's a significant growth. The total passengers grew from six million in 2005 to nine million in 2015. So, we did see a significant increase in the volumes just in that short time frame and therefore we looked at what they had done to design for those projections and they do, in fact, have designs for taking care of that projected increase in traffic. So we questioned why they hadn't chosen 2015 as their ultimate date for building and how they were going to accommodate these projected needs. We didn't get all the costs related to these alternatives but I do feel they have that information available." REPRESENTATIVE PHILLIPS said considering their recommendations on cost control and instituting financial oversight, she wondered if it would be their professional determination this would be a good project to go forward with. MR. WELLS stated he had anticipated this question and had given a lot of thought about how to respond. He sympathized with the committee's position of having to decide whether to move forward with this project, but at the same time he can't take into consideration everything that needs to be considered by the committee, but rather he can only consider what he's seen so far which is mostly from a financial and planning perspective. Based on what he's seen overall, his response is yes, the state should move forward with this project; however, he cautioned the committee to move forward with some careful limits on the process. Having cost controls and oversight is one aspect of it and how the bonds are issued is another aspect. Number 0055 REPRESENTATIVE ROKEBERG referred to the statement on page 10 of the executive summary prepared by Mr. Wells and Dr. Noonan, "Specifically, there has been no written assurance from either FHWA or FAA that monies in specific amounts will be made available or are even eligible on the part of the FHWA" and asked if his interpretation was correct that any perspective funding through either the letter of intent or the AIP that there is no written assurance of federal funding nor is federal funding guaranteed. MR. WELLS said that was correct and added that was a good question for the staff of the Department of Transportation & Public Facilities with regards to history on how FHWA, particularly has participated in airport related projects. REPRESENTATIVE ROKEBERG referred to question 16 in the executive summary and asked Mr. Wells if it would be his recommendation to go with a bond authorization of $304 million or $280 million. MR. WELLS said first, he wasn't exactly sure where those numbers came from, but they are not his numbers. He has been using the round number of $200 million, but in actuality it's $204 million. REPRESENTATIVE ROKEBERG noted there had been some previous discussion regarding the possibility of $25 million of federal monies available for this project. Based on his assumption that's not an assured amount, he inquired if Mr. Wells would recommend sticking with the $204 million. MR. WELLS said there is no assurance for either the FAA or FHWA funding at this time. So, any monies presented as coming from either one of those two agencies is not guaranteed. He didn't believe that should have any effect on the $204 million; the $204 is the estimated total cost of the project. CHAIRMAN COWDERY asked Mr. Wells if he could expand on that. MR. PARKAN interjected there is no assurance of getting the additional FAA funding; application has been made for the LOI and the department should know some time this summer whether or not they were successful in getting those discretionary funds from the FAA. In his opinion, a good package was submitted, but there are some associated risk. On the other hand, he believes there is less risk associated with the federal highway dollars. The road leading to the airport is on the national highway system and does qualify for federal highway dollars. CHAIRMAN COWDERY said there had been some discussion regarding a reduction of the bond if the FAA money did actually come about. MR. PARKAN replied it would go to offset the debt, yes. Number 0101 REPRESENTATIVE ROKEBERG referred to Mr. Wells' remarks regarding interest rates on page 13 of the executive summary and asked, "Are you recommending I go out and buy a bunch of bonds right now, sir? Do you think the federal reserve will shave interest 100 to 125 basis points during the next 12 to 18 months -- I guess I should. Are you?" MR. WELLS remarked that he is a certified internal auditor, not a financial consultant so, even he doesn't follow his own information in this regard - he's much more conservative than that. Number 0115 CHAIRMAN COWDERY asked if the international airport controller would be required to provide the written assurances to go to bond? MR. PARKAN said the controller is clearly a part of the team on the entire project. CHAIRMAN COWDERY asked if the controller would give a professional opinion regarding the bond package. MR. PARKAN said he hoped so, since that's what the controller is there for. REPRESENTATIVE PHILLIPS said it appears that's one of the areas that needs to be improved upon. She asked, "Do you have in place when you go to submit the bond package, a provision for the controller to sign as a professional as his fiduciary responsibility, to sign the bond package stating that this is a true and clear picture as far as to the best of his knowledge ...." MR. PARKAN deferred that question to Ross Kinney. Number 0129 ROSS KINNEY, Deputy Commissioner, Department of Revenue, said the committee should be aware that during this process there are two financial advisers involved as well as a qualified bond counsel who will have to opine on all documents related to the sale of this issue; meaning that the auditing firm audits and opines on the financial statements, the bond attorneys will opine that all the documentation is legal, the legislature has approved it, the airport people have approved it, John Ungar will have to sign certain statements, the bond committee will have to sign certain statements. There will probably end up being more than a dozen individuals and about two dozen forms involved in the process before the documents actually make it to market. He said there will be more than enough eyes involved in the process. It's important to remember that when dealing with the national financial markets and getting involved with the Securities Exchange Commission and institutions of that caliber, all the "t's" will be crossed and "i's" dotted in order to ensure that it is a legal financial instrument that's being sold and that all the material included can be supported and documented. Number 0149 REPRESENTATIVE PHILLIPS said, "With all these people giving all of their opinions, and your last comment I think addressed my concern, not only will they be making the statement and making the opinions, giving their professional opinions that the documents are correct, that everything is correct, that everything is valid, but that they are also correct. So, when you say you want this dollar amount to do this amount of a project, that that is absolutely true and correct. And that is what that project is going to cost. So, you can shade the issue by saying, yes, they will give their opinion that everything is correct, everything is complete, everything is saleable, everything is repayable, but what I want to get at is the money that's being requested - is there going to be a financial opinion that that is the true amount of money that is needed for that part of the project or that project." MR. KINNEY said going back in history, he wanted to share some of the specific wording that was included in an official statement from a bond issue for the airport system that was done in 1986 or 1987. He said, "This project included improvements in the main domestic terminal, the international terminal area and the airfield area at the Anchorage airport. It also included Fairbanks elements and there were two pages - one for Anchorage, one for Fairbanks. As I mentioned during the last testimony, there is a statement of sources and uses and it talks about Anchorage elements - the main terminal, the parking garage gave a specific dollar amount - public parking lot - domestic terminal - expansion renovation - ramp area construction and totaled it all up. At the end the statement that was included in this particular document says, 'The Department expects that the sources of funds as outlined in the previous table will be sufficient to complete the project. In the event however that currently anticipated revenues should be insufficient, it is the intent of the Department to complete the project with some combination of additional transfers of IARF net revenues and the issuance of additional bonds, the completion bonds.' Having said that, this was one of those projects that included a bunch of those revenue sources that currently are unsure - same situation, same scenario. Because what we're trying to do is provide to the bondholder a level of certainty that we're going to have a project that is completed so that in the event there is a problem, they've got a fully completed project. It's just like you going to the bank and borrowing money to build a house - the bank wants to make sure that if they foreclose on this project, they've got a house they can sell, not one that's half way built. So, we're going to have to have some reasonable language in there, if you will, to give the bondholders that level of certainty that we're going to complete this project. So, we're not going to make a definitive that absolutely in fact we will do it for $204 million or $180 million or whatever the number is, but we will give them assurances that we will complete the project." REPRESENTATIVE PHILLIPS referred to the statement pertaining to going into the IARF fund and asked if that statement would be required to be verified by the owner/operators of the airport before it comes into the bond package? MR. KINNEY said the air carriers are responsible for the retirement of this debt and will have to be consulted all along, but they have agreed to pay whatever is necessary through the user charges and fees that the airport has the authority to establish through the operating agreement to pay this debt. And obviously, there are periodic adjustments made to landing fees and some of the other things included in the process because we may be receiving LOI money, federal highway money and other funds that would be used to apply against that debt. So, yes they will be involved in the process. He stated, "One other thing that we have to state is that we feel assured that we can do that and that we do not contemplate any other additional improvements will be made with this money other than those undertaken in the normal course of maintaining and operating the airport. Again, that's an assurance for the bondholders or the investors ...." CHAIRMAN COWDERY asked what length of time the vote of the airline operator committee was valid for. MR. PLUMB said it was his understanding it was to the end of the agreement. CHAIRMAN COWDERY asked then how long the term of agreement was for? MR. PARKAN said the current operating agreement expires in June 1999 and airports throughout the country have operating agreements that are five years which is not uncommon. Operating agreements continue to be modified or rolled over into the term - certainly the period during which the bonds for the existing project will be paid off. MR. PLUMB suggested that Chairman Cowdery's question was more of an airline question and perhaps Mr. Merlis could respond in writing as to how it's done in other areas for comparison. He added, "Our information has been that we have such a broad diversified base where we don't have a single carrier like you would as a Northwest at Minneapolis or United at O'Hare, that when weighed in the scales, we would come out very favorably because of our diversification in that market." CHAIRMAN COWDERY remarked there had been testimony that the controller wasn't involved in the figures that were presented to the committee and asked for clarification. MR. PARKAN said, "Again, we haven't looked at the report and we've only heard from Mr. Wells at this point, so we'd be happy to respond. But, clearly as I said before, the controller is a part of the team." CHAIRMAN COWDERY asked John Ungar if he could provide some clarification as to whether he was involved in the figures and the accuracy of the numbers presented on this legislation. Number 0248 MR. UNGAR said, "I guess the answer is yes and no. Typically, I'm a one person staff - I don't have a staff, so when I hear that the controller's office should be reviewing all these documents, I sort of gag a little. I did work with the financial consultant very closely making sure the rates and fee model worked similar to my rates and fee model. There was one exhibit that I believe Mr. Wells is referring to that went out in a package last week that I did not get a chance to review before it went out. Typically, I would never be involved in reviewing construction packages or (indisc.) for capital projects. That's always been done by a different arm within the Department of Transportation & Public Facilities that has the expertise in design and construction and my opinion of whether those numbers are accurate wouldn't buy us a cup of coffee. I'm not an estimator; I'm not a contractor, so as I said I do review the numbers that impact rates and fees. There was one schedule that I know, as far as project cost, that I did not review that possibly could have some minor errors. My role is more of a historian than a planner and I account for things after they happen, not before they happen." CHAIRMAN COWDERY assumed that based on Mr. Ungar's testimony, his involvement in this process is pretty normal from past involvement in similar projects. MR. UNGAR confirmed that. Number 0270 CHAIRMAN COWDERY asked Mr. Ungar to explain the role of the state bond commission in the airport fund. MR. UNGAR said typically once a project is ready to go to bonding, the Department of Revenue takes the lead - the airport is involved and the airlines are involved, but it then falls into the Department of Revenue's bailiwick. In response to the question that was raised as to whether he signs off on something, he is one of several people that have to make an attestation that the numbers seem adequate and that we can afford to do this project - as Mr. Kinney referred to, whether it's that the bonds are sufficient or there is adequate funds in case there is a shortfall - that we can guarantee the project will be complete. He said, "Quite honestly, the information that's been presented to date is all rates and fee model projections (indisc.) give the carriers an order of magnitude; when we go forward with an offering statement to sell bonds, the numbers are then put in to actual financial statements of actual numbers and pro formas that have to comply with generally accepted accounting principles. Not only myself, but our outside independent auditors will have to sign off on these and at that time, yes, I probably will get more involved looking and have some assumptions were derived as far as future costs and projections and revenues on the terminal." Number 0293 CHAIRMAN COWDERY asked if Mr. Ungar had an opinion as to whether the projected landing fee rate increase is sufficient to pay for the bonds? MR. UNGAR responded that under the current operating agreement, that's not an issue. He said, "Whatever we need to make sure that we can cover our operating, capital and debt service costs is how we factor in what our landing fee has to be. So, as long as we have the same principal agreement with a residual landing fee, there is no concern whether we can pay the bonds. It's the matter of the airlines and that's why they get a vote of what this does to their rates and whether they still feel that they can afford our rates and be competitive." CHAIRMAN COWDERY asked if Mr. Kinney had anything to add to Mr. Ungar's comments. Number 0301 MR. KINNEY referred to Chairman Cowdery's question regarding the role of the state bond committee and said essentially it's charged with the responsibility for the issuance of all state debt. As the statute currently reads with respect to this airport, the state bond committee then has the responsibility to issue any debt on behalf of the airport system. There are a couple reasons for that; one being the state bond committee has the mechanisms in place with the bond attorneys under contract; it's in the business of issuing debt for various things throughout the state in addition to having the contacts with the financial markets and all the players in the broad scheme. He stated there are really three people involved in the state bond committee - the commissioner of the Department of Administration, the commissioner of the Department of Commerce and Economic Development who has delegated that authority to the director of the Division of Investments, and the commissioner of Revenue who has delegated the authority to Mr. Kinney. The state debt manager is staffed to the state bond committee. Number 0320 REPRESENTATIVE ELDON MULDER said, "Looking in your crystal ball in terms of bond rates - right now obviously they're very low - one of the arguments about doing the entire package is the fact that you could actually have far greater buying power because the bond rates, bond sales are very low. What does the future look like - looking into your crystal ball?" MR. KINNEY replied his crystal ball is no better than anyone else. He added that he is in a difficult position - he sits on both sides of the fence in that one of his other jobs is the responsibility of investment of state funds and in that position, he's not issuing debt, but buying it. He added, "When we look at this thing, we believe that currently we are experiencing some of the lowest rates that we've seen in the last 20 to 25 years. When you take a look at interest rates two days ago, we're looking at 3.8 percent in year one and in year 20, we're looking at 5 percent. And I am of the opinion - and it's kind of like John Ungar - what it'll get you a cup of coffee maybe - is that we're not going to have an opportunity to look at these rates again because we believe there's going to be some other factors come into play such as the Asian (indisc.), oil and a number of other things, that will have a tendency to drive rates slightly higher as we go out longer. We believe that if we have the opportunity, we should issue this debt as a package at one time for a couple reasons - one because of interest rates, but number two, when we get into a multi-issue thing, we're paying for these opinions more than one time so that gets to be expensive. The other thing that we have the advantage of when we issue this debt is simply the fact that if we're wrong, if rates are higher than they ultimately end up being, we do have the ability to go in and refinance this debt which I think John and other members of the administration of the airport as well as the air carriers will tell you, we in fact have done. We currently have two issues outstanding for the airport - one of those issues will be retired prior to the time that we begin to make payments on the new debt in the event that you authorize this, so we'll see a reduction in the existing...." Number 0355 REPRESENTATIVE RYAN asked if there were call provisions in these bonds and if so, was a higher premium paid for those bonds? MR. KINNEY replied the premium was higher for a call provision, but in order to minimize that assurance is given to the bondholder that they will be able to hold on to that instrument for a period of time. In this case, it will probably be recommended the call provision not take effect until ten years, so there would be a period where the buyer of the bonds would have a guarantee to hold on to that investment and wouldn't be penalized with a short term deal. REPRESENTATIVE RYAN inquired if his previous question in terms of who would lend money with this kind of a pro forma. MR. PARKAN said it was briefly discussed earlier and added he had received the report just before the meeting and hadn't had an opportunity to really look at it, so a response would be provided at the next meeting. MR. UNGAR interjected that he wasn't sure where these numbers were coming from. The international airport revenue system has enlarged $7 million a year; it's set up like a utility to break even and the records reflect that money has been made every year or it's been a break even situation before depreciation. He stated that rates are always set to ensure that operating, capital and debt service expenses are covered. In his ten year tenure, there has never been a shortfall. Number 0393 CHAIRMAN COWDERY asked how much does the insurance cost to raise the rating from A to AAA? MR. KINNEY said it varies and depends on market conditions and spreads between the rates. He said, "What will happen is that we will have to go in and make a judgment at the time as to whether or not the premium we have to pay for the insurance is less than what the spread reduction would be on the other side. On a bond issue of this size, it's going to be a fairly substantial amount of money - I wouldn't venture a guess. But if there's not a savings as a result of reduction in interest rate that's greater than the cost of the premium, we will not consider credit enhancement - I will not recommend credit enhancement for this project. And that's a judgment that we always make." He noted the spreads are extremely narrow in the fixed income markets. He said with the rates as they are, it just depends on how they're staggered and how much principal comes in later rather than sooner. The commissioner of the Department of Transportation & Public Facilities will have to sign a statement to the effect that he will ensure there is debt service coverage available in the international airport fund that is equivalent to 1.3 or 130 percent of the annual debt service payments and the carriers will be charged whatever is necessary in order to do that. Those types of assurances make a difference in the premium because the risk is perceived to be substantially less. REPRESENTATIVE RYAN recalled seeing a figure of $20 some million for insurance and wondered why the state couldn't arbitrage at it's own. MR. KINNEY replied, "What we're looking at is an assurance for an individual investor or a major institutional investor and the state of Alaska does not carry the same kind of weight that NBIA or AMBAC would carry in guaranteeing that kind of debt. When you look at our fiscal situation within the state of Alaska and the price of oil and the budget deficit, people are going to say where are you going to come up with the money to pay this debt in the event that there's a default by the international airports? And that's a difficult question to answer at this point because I wouldn't know what to say." CHAIRMAN COWDERY asked if there were any further comments at this time? MR. KINNEY noted that Mr. Plumb had just pointed out that the booklet provided for the committee is pegged at 4.7 as an estimate and it's his belief that would be a very conservative or a high estimate in this case. CHAIRMAN COWDERY thanked committee members and the participants for their testimony. He announced the committee would meet again at 4:00 p.m. on Tuesday.
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