Legislature(1999 - 2000)
04/10/2000 03:20 PM Senate RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 304-CLEAN WATER FUND/DRINKING WATER FUND
MR. DAN EASTON, Director of Facility Construction and Operations
for the Department of Environmental Conservation (DEC), gave the
following overview of HB 304. He noted Mike Burns of DEC, Deven
Mitchell of the Department of Revenue, and Craig Tillery,
Assistant Attorney General, were also available to answer
questions. HB 304 pertains to DEC's two low interest loan
programs to construct drinking water and wastewater projects in
communities. HB 304 provides DEC with the same bonding authority
for both funds; it currently has bonding authority for the clean
water fund only. Second, HB 304 provides DEC with a long term
method to pay program operating costs from the loan fund so that
DEC does not have to rely on general funds. Third, the Senate
Finance Committee substitute added a provision to expand
eligibility for the loan programs to include certain types of
privately owned water and sewer utilities.
MR. EASTON explained that every year DEC is eligible for a
federal grant that must be matched with State money in a ratio of
5 to 1. Each loan program gets about $7.5 to $8 million of
federal money and $1.5 million from the general fund. That money
is loaned to communities on a reimbursement basis and communities
repay the loans with interest. The balance of the funds also
earn investment interest.
MR. EASTON stated that HB 304 is a cost-saving measure. DEC is
requesting bonding authority so that in the future, if the EPA
grants cease, it will have the authority to sell bonds and put
the money in the loan programs. In the short term, bonding
authority will give DEC the option of using bond proceeds as the
State match portion and to retire the bond indebtedness with
interest earned on the $1.5 million general fund amount. DEC has
bonding authority for the clean water fund so it will use that
method for the FY 2001 capital budget. If HB 304 is enacted, DEC
could do the same for the drinking water fund beginning in FY
2002.
CHAIRMAN HALFORD asked if DEC's investments are in the tax exempt
market or the taxable market.
MR. MIKE BURNS replied that he believes they are all tax exempt.
CHAIRMAN HALFORD asked if DEC can earn enough in that
differential to cover the operating costs of the programs.
MR. DEVON MITCHELL replied that the loans that are made within
the fund are loaned at a subsidized rate to municipalities.
CHAIRMAN HALFORD clarified that DEC is going to sell tax exempt
bonds so it will get the benefit of the tax exemption and the
rate on the bonds to come up with the State's share. Also, DEC
will have money in that account that it will invest in the
market. He asked if that investment can be invested to get the
highest possible rate or whether there are vigorous rules
governing how that tax exempt money can be invested.
MR. MITCHELL answered the arbitrage rules would apply so DEC
could not exceed the yield it was paying on the bonds. He
explained that DEC is contemplating paying off the money obtained
through bonding immediately. That would allow interest earnings
within the fund to be used as the State match for the federal
receipts.
CHAIRMAN HALFORD asked if DEC will be going to the bond market to
get the match for the federal funds but as soon as the federal
funds are received, DEC will use existing money to pay off the
bond.
MR. MITCHELL said that is correct.
MR. EASTON added that the rules about these loan funds are
prescribed in federal law and are designed to keep the states
from using the funds for anything other than drinking water and
waste water projects. Once money is put in the fund, it must
stay in the fund or be recirculated as loans to communities. One
exception to that rule is a provision that allows the use of
interest earned on the fund to retire bond debt. The federal
government included that provision so that the states could use
bonding mechanisms to capitalize their loan funds.
Number 550
CHAIRMAN HALFORD said these funds have grown by the amount the
State has appropriated annually. He asked if the State will no
longer be appropriating money once DEC goes to a bonding
mechanism.
MR. EASTON said that is correct.
CHAIRMAN HALFORD surmised that the growth rate of the funds will
stop.
MR. EASTON said that DEC has projected the growth rate will slow
down by about two percent.
MR. BURNS explained the rate will be a little higher because the
funds will continue to grow with federal grants that DEC will
receive each year plus the interest received from loans.
MR. EASTON added DEC has projected that over the next ten years,
this mechanism will take about two percent of the growth out of
the fund.
CHAIRMAN HALFORD indicated the growth based on the State's share
of the match will be lost but not the growth from the federal
share in the overall capitalization.
SENATOR PETE KELLY asked if the current rules of the loan fund
require the State match to be from general fund dollars.
MR. EASTON said that is correct.
SENATOR TAYLOR asked if an additional benefit of HB 304 will be
that personnel costs for the program will be shifted out of DEC's
budget and funded with proceeds from that account.
MR. EASTON replied that actually, personnel are currently funded
out of a portion of the federal grant, so as long as DEC
continues to get the federal grant, it can continue to fund its
personnel. The problem is that the federal grant for the
wastewater program will stop in 2003 and for the drinking water
program in 2008. The second purpose of this legislation is to
give DEC a contingency plan to use when the federal grant stops.
HB 304 will allow DEC to split the repayment string. HB 304
sets up an administrative fund for each loan fund. A small
portion of the community repayment funds will be deposited into
an income account in the administrative account. DEC will
continue to request that capital funds be appropriated to an
operating account every year and then it would ask that those
funds be transferred to DEC's operating budget to be used for
personnel costs.
SENATOR MACKIE asked if the source of the money will be from the
loan program.
MR. EASTON said basically, yes. He explained if a portion of the
repayment was not split off, it could not be used for program
operating costs. No general funds will be used to support the
program.
CHAIRMAN HALFORD asked Mr. Easton to elaborate on the new
entities that will be eligible to participate.
MR. EASTON explained that the House Finance Committee substitute
made eligible, for both loan programs, privately owned utilities
that are certified and economically regulated by the Regulatory
Commission of Alaska (RCA). By state law, privately owned
utilities would be eligible for both drinking water and waste
water loans. Under federal law however, they will not be
eligible for waste water loans. The bill contains a delayed
effective date of two years to generate revenues to deal with the
additional costs and to develop regulations. Beginning FY 2002,
DEC will be able to make loans to privately owned, certified and
economically regulated drinking water utilities.
Number 870
MR. MITCHELL noted that one concern he heard about participation
by private utilities relates to the tax exempt status of any bond
issuance that might occur with the long term borrowing concept.
If private participation within the pool exceeds ten percent, a
tax question would arise and tax exempt bonds could no longer be
issued. He indicated that problem is "down the road."
CHAIRMAN HALFORD asked if there is a distinction between private
for-profit and private non-profit entities.
MR. EASTON said that no distinction is made in HB 304 but he is
not aware of whether RCA makes that distinction.
CHAIRMAN HALFORD asked if DEC uses all of the money made
available each year.
MR. EASTON said it does.
CHAIRMAN HALFORD expressed concern about private for-profit
utilities competing in a government-run system. He wondered
about adding a non-profit requirement to the private utilities
provision to provide some level of protection.
CHAIRMAN HALFORD took public testimony.
MR. DAVE SOULAK, the City Manager of the City of Wrangell, stated
support for HB 304 because it provides more economical loans for
communities. Both the clean water and the drinking water funds
will be self supporting by the year 2002 and will save the
general fund over $3 million per year. These programs allow
communities to save time and money. DEC's programs offer
communities loans at two percent less than conventional funding
sources and, with passage of HB 304, three percent. Communities
can easily explain to DEC personnel their operational costs and
maintenance systems which are difficult to explain to personnel
at conventional financing institutions. HB 304 will create a
win-win situation: the State will save $3 million for the next
two years and lower interest rates will provide savings to
communities.
MR. BRUCE JONES, the Public Works Director for the City of
Petersburg, stated that Petersburg is very interested in seeing
HB 304 pass. Petersburg has two loan agreements with DEC. If HB
304 passes, the lower interest rate will save Petersburg
approximately $35,000 per year. He agrees that HB 304 will
create a win-win situation.
CHAIRMAN HALFORD asked if the small communities have expressed
concern about allowing private for-profit entities to compete in
this program.
Number 1267
MR. JONES replied he supports giving private utilities access to
the loan funds because the purpose of the program is to preserve
public health. His only concern is that the private for-profit
entities be required to be regulated by the RCA and that they
compete on a level playing field.
MR. SOULAK commented that all funds have been granted this year.
He feels it is incumbent upon the State to help municipalities
which are not for-profit. For-profit utilities provide dividends
to their shareholders.
CHAIRMAN HALFORD asked what level of subsidy flows through these
programs.
Number 1353
MR. EASTON said the interest rate on the loans is currently 4.1
percent, which is 75 percent of the municipal bond index, so it
is three-quarters of what a city would pay if it sold bonds. In
addition, cities do not have to pay the assorted bonding costs.
CHAIRMAN HALFORD said, in that case, he suspects private
utilities will use this program.
MR. EASTON said Alaska currently regulates about 22 economically
regulated and certified private utilities. DEC does not expect a
huge run on the loan funds and, in fact, the loan funds have done
well and are getting bigger. Some communities are leery of
sharing the pie, but DEC thinks that economic regulation and
certification will force for-profit entities to pass on any
savings realized through the low-interest programs to the
customers through the rate structure. DEC also discussed the
fact that some privately owned utilities may pose a higher risk
than municipalities, and they may take more time and energy, so
the bill contains a provision that allows DEC to apportion costs
so that municipalities pay a lower interest rate than the
privately owned utilities.
CHAIRMAN HALFORD asked if DEC could provide a State cost-of-funds
analysis. If HB 304 can pass on a benefit at no cost to the
State, some concerns will be alleviated. He said he was thinking
the bill could contain a provision that prohibits the interest
rate to private entities from being lower than the overall cost
of funds to the State. He questioned whether the State should
privatize the subsidy for for-profit corporations if private
utilities are in competition with municipalities and local
governments.
Number 1594
MR. EASTON pointed out that DEC sees a real benefit to improving
drinking water quality and a fairly sizeable number of Alaska's
population is served by private drinking water utilities. DEC
feels that expanding the eligibility will result in improved
drinking water.
SENATOR TAYLOR suggested adding a provision that limits the
subsidy to private utilities so that, although the competition
is for the same pot of funds, the private utilities will have to
pay more to play. He thought the lower interest rate will
provide a huge incentive for private utilities to participate.
He suggested specifying in the bill that a different interest
rate will apply to private for-profit utilities, possibly 100
percent of whatever amount the municipal bond bank sells at.
CHAIRMAN HALFORD added that a higher interest rate will also make
the fund grow faster. He asked Mr. Easton to prepare language
for a possible amendment and announced he would hold the bill.
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