Legislature(1997 - 1998)

03/05/1997 01:33 PM Senate CRA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
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       SSSB 37 EDUCATION FACILITIES FINANCING AUTHORITY                      
           SB 111 APPROP: EDUCATION FACILITIES FUND                          
                                                                               
  CHAIRMAN MACKIE  called the Senate Community & Regional Affairs              
 Committee meeting to order at 1:33 p.m.  All committee members were           
 in attendance.                                                                
                                                                               
 CHAIRMAN MACKIE  brought SSSB 37 and SB 111 before the committee              
 and, as prime sponsor of the legislation, turned the gavel over to            
 Vice Chairman Wilken before presenting an overview on the bill.               
                                                                               
 Chairman Mackie explained the original SB 37 was a general                    
 obligation bonding bill, which would allow for the sale of g.o.               
 bonds for school construction in the state.  However, because there           
 wasn't a lot of interest being generated in the g.o. bonding                  
 concept, he decided to go to the facilities financing authority               
 concept contained in the sponsor substitute.                                  
                                                                               
 SSSB 37 would take $1.2 billion from the Constitutional Budget                
 Reserve Fund (CBR) and create the Education Facilities Financing              
 Authority, which is similar to AIDEA and AHFC.  The $1.2 billion              
 from the CBR would be managed by the Permanent Fund Corporation.              
 He emphasized that the principal of $1.2 billion would not be                 
 spent, but would be used to generate interest earnings through the            
 management of the permanent fund to finance and repay revenue bonds           
 that would be issued and sold by the authority to construct schools           
 throughout the state of Alaska.  He stressed this is not a raid on            
 the CBR  -- it is what he believes to be a creative option that's             
 out there.  It is an option he believes the Legislature should take           
 a look at to deal with the ever growing major maintenance and new             
 construction needs throughout the schools in Alaska as well as the            
 University of Alaska, which has major deferred maintenance problems           
 and new construction needs as well.                                           
                                                                               
 Chairman Mackie advised that the legislation authorizes the                   
 following $500 million worth of school construction and repair                
 projects: (1) $285 million in projects selected from the DOE                  
 priority list for small schools and rural areas of the state; (2)             
 $135 million for projects selected from priority lists submitted by           
 large municipal school districts; and (3) $80 million for                     
 University of Alaska projects and a large backlog of deferred                 
 maintenance needs.                                                            
 He has felt from the start that unless there was fairness that was            
 applied to any effort, regardless of who introduces a bill, nothing           
 is going to happen unless there is equity in both the urban and the           
 rural areas of the state.  He added that all of the projects would            
 be funded 100 percent and would not require a local match.                    
                                                                               
 In closing, Chairman Mackie pointed out that revenues from the CBR            
 are factored into the long-term budget plan, and this legislation             
 would take from that, so it is a policy question that will need to            
 be debated further as the bill goes through the process.                      
                                                                               
 Number 155                                                                    
                                                                               
  SENATOR HOFFMAN  asked if because the legislation takes the money            
 from the Constitutional Budget Reserve Fund, it would require a               
 three-quarters vote for passage, and  CHAIRMAN MACKIE  acknowledged           
 that it would.                                                                
                                                                               
 Number 160                                                                    
                                                                               
 Vice Chairman Wilken returned the gavel to Chairman Mackie.                   
                                                                               
 Number 170                                                                    
                                                                               
  STEVE MCPHETRES , Executive Director, Alaska Council of School               
 Administrators, expressed appreciation for the introduction of the            
 legislation, which, he said, is an effort to put another idea on              
 the table to bring about a solution for a long-term problem: school           
 projects that have been listed year in and year out, and they                 
 continue to become more and more of a problem.                                
                                                                               
 Mr. McPhetres said g.o. bonds do not allow for a good long-term               
 plan for addressing the long-term needs of school facilities across           
 the state of Alaska.  He said in their efforts to come up with a              
 possible solution to present to the Legislature this year, they               
 came up with this concept of establishing the Educational                     
 Facilities Fund.  He also pointed out that the control of the fund            
 and the control of the projects still maintain themselves in the              
 power of the Legislature.                                                     
                                                                               
 The school administrators believe that this legislation is a good             
 effort in not only addressing one issue, but three issues that are            
 there: (1) the municipal school districts who have continued to               
 have growth problems; (2) the long-term needs of rural Alaska that            
 have been out there and have not been addressed; and (3) the                  
 University of Alaska's tremendous major maintenance that needs to             
 be addressed.                                                                 
                                                                               
 Concluding, Mr. McPhetres said his organization is fully supportive           
 of SSSB 37 and he expressed their willingness to continue to work             
 with the committees in seeing that it becomes a reality.                      
                                                                               
 Number 230                                                                    
                                                                               
  BOB LERESCHE , an investment banker representing Cominco Alaska,             
 said Senator Mackie, himself and others have been working in trying           
 to figure out the best way to meet the great need that exists for             
 school construction and major maintenance projects.   He said there           
 are four or five other alternatives, but he believes this new                 
 alternative is the best way to meet the present needs while neither           
 draining the CBRF nor busting the budget plan.  In addition, it               
 provides the advantage of establishing an agency that would last              
 for a long time and allow a really organized, measured way to meet            
 these school needs as they arise, and to meet them under strict               
 criteria and legislative authorization for each one.                          
                                                                               
 Presenting a brief overview on the legislation, Mr. LeResche said             
 the bill establishes the Educational Facilities Finance Authority             
 within the Department of Education.  Sitting on the three-member              
 board of directors would be the commissioner of education,                    
 commissioner of revenue and the commissioner of transportation and            
 public facilities.  The bill also establishes an Educational                  
 Facilities Fund, which is  an asset of the authority.                         
                                                                               
 The authority would be authorized to do three things:                         
                                                                               
  1.  Sell their bonds directly and finance the schools                        
 directly.  This could be done only upon approval of the specific              
 projects by the Legislature.  This method would be used primarily             
 for rural jurisdictions and small municipalities which don't have             
 sufficient tax bases to issue their own bonds;                                
                                                                               
  2.  It could contract with municipalities who could sell their               
 bonds, to pay a designated percentage of net debt service on                  
 municipal bonds issued to finance schools; and                                
                                                                               
  3.  It could contract with the University of Alaska to                       
 reimburse up to 100 percent of university bonds issued.                       
                                                                               
 Mr. LeResche said this concept sounds similar to what has gone on             
 in the past, but there is an important difference.  Under this bill           
 the municipalities would actually have a contracted reimbursement             
 obligation from this authority, which would greatly improve the               
 credit of their bonds and thereby lower the interest rate.  He said           
 that really firms up without an annual argument over what level of            
 debt service to appropriate.                                                  
                                                                               
 Other highlights of the bill outlined by Mr. LeResche were:                   
                                                                               
  -- Some of the earnings of the fund would be applied to debt                 
 service and the reimbursement agreements.                                     
                                                                               
  -- The fund would be managed by the Permanent Fund Corporation               
 under its basic statute.                                                      
                                                                               
  -- The bill would initially authorize $500 million worth of                  
 school construction and repair projects.                                      
                                                                               
  -- Future legislatures could continue to authorize more bonds                
 and reimbursement agreements within the financial capabilities of             
 the education facilities fund.  The fund would have bonding                   
 capacity equal to or exceeding the initial $1.2 billion                       
 capitalization, without risking the original $1.2 billion corpus.             
                                                                               
  -- Under reasonable projections of future demands on the fund,               
 the fund would continue to grow if its investments yielded more               
 than they had to pay on the bonds they issue.  He said he is quite            
 sure this would occur with proper management of the authority.                
                                                                               
 Mr. LeResche said when people start talking about the fine points             
 of arbitrage and tax law, this is not that complicated.  It is                
 something that has been done for years for the private sector                 
 through AHFC and AIDEA.                                                       
                                                                               
 Mr. LeResche noted that there has been criticism of this concept              
 relating to tax law, and it is a question as to whether or not the            
 yield from the fund would have to be restricted to match the                  
 interest rate of the bonds.  He said he quite certain that his bill           
 has been drafted around that problem and there is a high level of             
 probability that a large portion of the fund will escape this yield           
 restriction problem.                                                          
                                                                               
 Number 382                                                                    
                                                                               
 SENATOR HOFFMAN  said the bill provides putting $1.2 billion into             
 the fund and spending $500 million in 1997, and he asked what how             
 much would be available in subsequent years.   CHAIRMAN MACKIE                
 clarified that if the $500 million is spent initially and $60                 
 million a year for the next 15 years, the earnings would sustain              
 that.  If only the $500 million worth of projects is done right               
 now, the fund would actually grow from $1.2 billion to $1.5 billion           
 at that end of that term.                                                     
                                                                               
  CHAIRMAN MACKIE  noted the King Salmon, Anchorage, Cordova, Kenai            
 and Kodiak teleconference sites were listening in to the meeting              
 and that testimony would be taken from witnesses waiting to testify           
 at the Fairbanks, Mat-Su, Tok and Sitka sites.                                
                                                                               
 Number 414                                                                    
                                                                               
  JOHN HOLST , Superintendent of the Sitka School District testifying          
 in Sitka, commended Senator Mackie for sponsoring the bill.  He               
 said he is particularly pleased because the legislation contains              
 two renovation projects for the Sitka School District that have               
 been on the list for nearly 10 years, as well as the completion of            
 UAS Sitka classrooms.                                                         
                                                                               
 Number 445                                                                    
                                                                               
  CARL ROSE , Executive Director, Association of Alaska School Boards,         
 noted he had offered written testimony in support of SSSB 37 and SB
 111.  He said this solution to address school construction and                
 major maintenance needs has come of age.  He said we have deferred            
 maintenance for some period of time and our inability to address it           
 through our capital budget and other means available through                  
 municipal bonding, etc., has not met our needs.                               
                                                                               
 Mr. Rose said we've built these schools, and the question is if we            
 can't adequately maintain them, what is the end result.  Right now,           
 school districts are looking at the issue of insurability.  The               
 ability to continue to insure the schools throughout Alaska with              
 the loss rate of $1.5 million per year over the last year in terms            
 of fire loss is a major issue, and the inability to maintain these            
 facilities in such a fashion that they become susceptible to fire             
 and loss.  He cautioned the failure to maintain insurability                  
 statewide passes the issue on to the Legislature; if these schools            
 are uninsurable, the Legislature stands fully accountable for any             
 loss that takes place.                                                        
                                                                               
 Number 475                                                                    
                                                                               
  DARROL HARGRAVES , testifying from Tok, noted that other states that         
 have attempted to use their oil wealth and resources in a similar             
 manner have been very happy with it over the decades.   He said               
 this may be one of the finest things that has been done for a                 
 permanent basis with oil reserve revenues that have come to the               
 state.                                                                        
                                                                               
 Mr. Hargraves said he does have some concerns from a local and a              
 statewide perspective.  He said with a half billion dollars being             
 thrown on the street at one time, there will be a rush of design              
 people coming back into the state, as has happened in the past.               
 He suggested it would better to set up a way to maintain a steady             
 stream in smaller increments which would provide much more                    
 stability and consistency across the state.  He also suggested                
 looking at putting two additional people from the private sector on           
 the board of directors, as well as including in the legislation a             
 CIP list for picking priorities for funding that has gone through             
 some kind of approval process.                                                
                                                                               
 Number 520                                                                    
                                                                               
  WENDY REDMAN , Vice President, Statewide University of Alaska                
 System, expressed appreciation that the Legislature is putting the            
 issue of deferred maintenance back on the table in a big and                  
 significant way.  She noted approximately 45 percent of the state             
 facilities are university facilities, and that this has been the              
 number one priority for the Board of Regents.                                 
                                                                               
 The problem that the university is looking at today is about $165             
 million for housing and non-housing.  The issue requires a two-               
 pronged approach:  one is to make sure that the maintenance                   
 accounts in their operating budget are brought up to par at the               
 same time they are trying to do the deferred maintenance.  At the             
 same time that the university has been taking reductions from the             
 Legislature, in the last two years they have moved about $3.5                 
 million out of programs into the maintenance budget.  By the end of           
 FY 98, they will move another $3.5 out of program into maintenance            
 to bring those budgets up to par.                                             
                                                                               
 Ms. Redman pointed out that the majority of deferred maintenance              
 projects are small projects that are done with local hire.  She               
 agreed with Mr. Hargraves comments about the importance of having             
 a plan on how those projects will hit the street.                             
                                                                               
 In closing, Ms. Redman suggested that since the university does               
 have nearly half of all of the state facilities, the committee may            
 want to consider putting a representative from the Board of Regents           
 on the authority's board of directors.                                        
                                                                               
 Number 570                                                                    
                                                                               
  DON MOORE , Manager of the Matanuska-Susitna Borough, said in a              
 borough with perhaps the fastest growing school district in the               
 state of Alaska, they have a pressing need for new construction of            
 facilities.  They have approximately 70 temporary portable                    
 classrooms spread throughout their district housing a large portion           
 of their students.                                                            
                                                                               
  TAPE 97-8, SIDE B                                                            
 Number 001                                                                    
                                                                               
 Mr. Moore commented that there is something to be said for the idea           
 about including and requiring a local match in the funding for                
 these projects either through local government bonded indebtedness            
 or by whatever means.  A local election on the project would help             
 to authenticate that the project is question is indeed something              
 that the people want.  The local government would then have a stake           
 in the ownership of the facility.  Also, it would provide                     
 additional leverage to the funds that are available.                          
                                                                               
 Number 030                                                                    
                                                                               
  AL WEINBERG , representing the Kashunamiut School District and the           
 Citizens for the Educational Advancement of Alaska's Children, said           
 as far as the K-12 public schools are concerned, the Department of            
 Education has identified in the first year of six-year plans that             
 are presently on the table about $615 million worth of new                    
 construction or major maintenance that needs to be done at some               
 time.  He said with $615 million it takes about $17 million a year            
 just to keep up with the inflationary growth of construction and              
 maintenance cost on that amount of money.  The biggest problem that           
 has faced the state in terms of getting rid of this backlog, or at            
 least addressing the backlog, is the lack of a long-term, stable              
 source of funds so these projects can be systematically taken off             
 the books and in some kind of a reasonable priority order.                    
                                                                               
 Mr. Weinberg related the groups he represents are concerned about             
 equity in the way the state spends future funds and their concern             
 is in many ways based on the way the state has spent its funds                
 recently for capital projects for public schools.  In the last nine           
 years, the state has spent $1.3 billion for capital projects in the           
 public schools, but 93 percent of that money has gone to municipal            
 districts leaving only about seven percent that has gone to REAA's,           
 which have no capacity to bond, no capacity to raise and collect              
 taxes.                                                                        
                                                                               
 In closing, Mr. Weinberg encouraged creating a long-term stable               
 source of revenue to deal with these problems and then to address             
 the problems on the basis of demonstrated need as opposed to                  
 geography, community wealth, or political power.                              
                                                                               
 Number 126                                                                    
                                                                               
  LEN MACKLER , Facilities Director of the Fairbanks School District,          
 said he was testifying as the statewide president of the Council of           
 Education and Facilities Planners.  He related a calculation done             
 for the bond reimbursement committee two years ago showed that in             
 just new students coming into the state the construction needs for            
 new seats and new classrooms was around $100 million a year.                  
 However, the maintenance and renewal needs of the existing                    
 facilities in the state just keeps on going and going.  He stressed           
 the need to come up with a solution to this problem and his group             
 thinks this is an excellent start, an excellent vehicle that's                
 being proposed to solve this problem in the short term and the long           
 term.                                                                         
                                                                               
 Number 158                                                                    
                                                                               
  CHAIRMAN MACKIE  asked Mr. Mackler if he was comfortable with the            
 manner in which the Fairbanks projects were listed in the bill in             
 terms of the priorities of his school district.   MR. MACKLER                 
 acknowledged he was, and he added the district has a consistent               
 six-year plan that the board reviews and agrees to every year, and            
 the projects in the bill are the first year of their six-year plan.           
                                                                               
 Number 170                                                                    
                                                                               
  KEVIN RITCHIE , representing the Alaska Municipal League (AML) and           
 the Alaska Conference of Mayors, thanked Senator Mackie for his               
 sponsorship of SSSB 37, which he said is a top AML and Alaska                 
 Conference of Mayors priority.  He said this is a critical part of            
 the state budget problem because if we don't fix what we currently            
 have and expand what we need to it turns into a health safety                 
 problem.  In the longer term, the cost of deterioration and the               
 cost of inflation team up to significantly increase the costs that            
 are being deferred to the future each year.  He urged the                     
 committee's support and consideration of the legislation.                     
                                                                               
 Number 210                                                                    
                                                                               
  LARRY WIGET , Director of Government Relations for the Anchorage             
 School District, voiced the district's support for the concept of             
 creating the Educational Facilities Financing Authority and the               
 Educational Facilities Fund, which he said is a responsible,                  
 innovative way to address the needs of schools now and in the                 
 future.                                                                       
                                                                               
 Number 230                                                                    
                                                                               
  SAM TOWARAK , speaking on behalf of the Bond Reimbursement & Grant           
 Committee, said the major issue facing the education facilities is            
 the need to establish a stable long-term source of funding for K -            
 12 facility projects, which is an integral part of a comprehensive            
 plan for statewide capital needs.  To implement this, projects                
 should be funded in the priority order established in the statutory           
 ranking system, and the committee and the Department of Education             
 should continue to develop, review and adopt facility related                 
 standards.                                                                    
                                                                               
 Number 355                                                                    
                                                                               
  CHAIRMAN MACKIE  asked Mr. Towarak his thoughts on the Legislature           
 identifying some standards for the distribution of these monies and           
  MR. TOWARAK  suggested charging the Educational Facilities Authority         
 with managing the dollars so that it has a maximum impact on the              
 local economy.                                                                
                                                                               
 Number 336                                                                    
                                                                               
  SENATOR WILKEN  said he thinks the concept of the legislation is             
 exciting, but the thing that bothers him the most about it is that            
 it's a initial policy statement on how the Legislature is going to            
 deal with the CBR, now at $3.4 billion with the possibility of                
 being up to close to $5 billion by the end of the year.  There are            
 now three plans on what to do with the CBR, and he said the worst             
 thing we could do is piecemeal it to death and to find out some               
 years down the path that we don't have a CBR anymore and we're back           
 to the permanent fund.  He wants to give careful consideration to             
 a policy statement that will have to be made about what to do with            
 the CBR.                                                                      
                                                                               
                                                                               
  CHAIRMAN MACKIE  stated it was his intention to hold the legislation         
 over to the Friday meeting.  He then adjourned the meeting at 3:10            
 p.m.                                                                          

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