Legislature(2019 - 2020)ADAMS ROOM 519

05/11/2019 09:00 AM House FINANCE

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Heard & Held
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Heard & Held
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Moved CSHB 87(FIN) Out of Committee
                  HOUSE FINANCE COMMITTEE                                                                                       
                       May 11, 2019                                                                                             
                         9:00 a.m.                                                                                              
9:00:21 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Wilson  called the House Finance  Committee meeting                                                                    
to order at 9:00 a.m.                                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Neal Foster, Co-Chair                                                                                            
Representative Tammie Wilson, Co-Chair                                                                                          
Representative Jennifer Johnston, Vice-Chair                                                                                    
Representative Dan Ortiz, Vice-Chair                                                                                            
Representative Ben Carpenter                                                                                                    
Representative Andy Josephson                                                                                                   
Representative Gary Knopp                                                                                                       
Representative Bart LeBon                                                                                                       
Representative Colleen Sullivan-Leonard                                                                                         
Representative Cathy Tilton                                                                                                     
MEMBERS ABSENT                                                                                                                
Representative Kelly Merrick                                                                                                    
ALSO PRESENT                                                                                                                  
Representative  Jennifer Johnston,  Sponsor; Angela  Rodell,                                                                    
Executive Director, Alaska  Permanent Fund Corporation; Lynn                                                                    
Gattis,   Staff,  Representative   Tammie  Wilson;   Maridon                                                                    
Boario,  Staff,   Senator  Lyman  Hoffman;   Heidi  Teshner,                                                                    
Administrative  Services Director,  Department of  Education                                                                    
and  Early Development,  Office  of  Management and  Budget;                                                                    
Christine  O'Conner,  Executive   Director,  Alaska  Telecom                                                                    
Association;   Patience   Frederickson,   Director,   Alaska                                                                    
Division of Libraries, Archives,  and Museums, Department of                                                                    
Education and Early Development.                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
Mike Coons, Association of  Mature American Citizens (AMAC),                                                                    
Palmer; Herman  Morgan, Self,  Aniak; Dan  Britton, Interior                                                                    
Gas Utility, Fairbanks.                                                                                                         
HB 87     LIQUEFIED NATURAL GAS STORAGE TAX CREDIT                                                                              
          CSHB 87(FIN)  was REPORTED  out of  committee with                                                                    
          four  "do   pass"  recommendations  and   six  "no                                                                    
          recommendation" recommendations  and with  one new                                                                    
          indeterminate fiscal  note from the  Department of                                                                    
HB 139    AK PERM. FUND CORP. PROCUREMENT EXEMPTION                                                                             
          HB 139 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
CSSB 74(FIN)                                                                                                                    
          INTERNET FOR SCHOOLS                                                                                                  
          CSSB 74(FIN) was HEARD and HELD in committee for                                                                      
          further consideration.                                                                                                
HOUSE BILL NO. 139                                                                                                            
     "An  Act   providing  an   exemption  from   the  state                                                                    
     procurement  code for  the  acquisition of  investment-                                                                    
     related  services for  assets managed  by the  Board of                                                                    
    Trustees of the Alaska Permanent Fund Corporation."                                                                         
9:00:52 AM                                                                                                                    
REPRESENTATIVE JENNIFER JOHNSTON, SPONSOR, read from a                                                                          
prepared statement to introduce the bill:                                                                                       
     Thank you  for your willingness to  consider House Bill                                                                    
     139 this  morning. House Bill 139  grants an additional                                                                    
     exemption  to  the  state's  procurement  code  to  the                                                                    
     Alaska  Permanent  Fund   Corporation  (APFC)  for  the                                                                    
     purposes  of evaluating  and managing  investments. The                                                                    
     types of investments this exemption  would apply to are                                                                    
     often  very profitable  for our  state. Under  existing                                                                    
     law,   the   corporation   exempt   from   the   states                                                                    
     procurement  code  when  it requires  income  producing                                                                    
     assets or delegates  its investment authority. However,                                                                    
     they  must comply  with  the  state's procurement  code                                                                    
     when evaluating  and managing the assets  in which they                                                                    
     invest. The change proposed in  this bill would allow a                                                                    
     timeline that better aligns with the pace of the                                                                           
     market in which APFC works and would result in a more                                                                      
     streamlined process.                                                                                                       
9:02:15 AM                                                                                                                    
Representative Sullivan-Leonard asked for  an example of why                                                                    
changing  statute   would  be   important  for   the  Alaska                                                                    
Permanent  Fund  Corporation   (APFC).  Vice-Chair  Johnston                                                                    
answered  that  the  corporation  was  involved  in  private                                                                    
equity   investments.  She   indicated   that  without   the                                                                    
exemption, the  cost of evaluating  private equity  was paid                                                                    
to  an investment  manager  that may  charge  more than  the                                                                    
state would thorough contracts with internal expertise.                                                                         
ANGELA  RODELL, EXECUTIVE  DIRECTOR,  ALASKA PERMANENT  FUND                                                                    
CORPORATION,  agreed   that  there  were   numerous  private                                                                    
investments  made  by  APFC  that  required  subject  matter                                                                    
expertise  or  going  through  the  procurement  process  to                                                                    
directly  invest. Currently,  the corporation  hired outside                                                                    
managers to  swiftly move the transaction  forward. The bill                                                                    
would streamline the  process and reduce the  costs that was                                                                    
necessary   to   act   on    the   types   of   investments.                                                                    
Representative Sullivan-Leonard asked  for verification that                                                                    
there was  a time element  involved and by  sidestepping the                                                                    
procurement  process the  investments were  quickly secured.                                                                    
Ms. Rodell affirmed the statement.                                                                                              
Vice-Chair Ortiz  asked how long  APFC had been  without the                                                                    
exemption. He wondered  if there was any  downside to making                                                                    
the  adjustment. Ms.  Rodell answered  that  they had  begun                                                                    
private  equity investments  in the  2008 to  2009 timeframe                                                                    
and was  a more  recent development. Vice-Chair  Ortiz asked                                                                    
if  there  was any  downside  to  allowing the  change.  Ms.                                                                    
Rodell answered in the negative.                                                                                                
9:05:29 AM                                                                                                                    
Representative  Knopp considered  how  the procurement  code                                                                    
applied  to the  work  done  by APFC.  He  deduced that  the                                                                    
exemption would  allow the corporation  to enter  into short                                                                    
term  contracts with  external fund  managers. He  asked how                                                                    
the  state's  procurement  code exemption  related  to  sole                                                                    
source contracts.  Ms. Rodell  responded that  presently the                                                                    
corporation was  fully subject to state's  procurement code,                                                                    
apart from purchasing investments.  She exemplified that the                                                                    
corporation  could  expend $250  million  to  buy an  office                                                                    
building  but it  could  not directly  hire  an engineer  to                                                                    
inspect  the  building  without   going  through  the  state                                                                    
procurement code. She detailed that  the code had a timeline                                                                    
for an open bid process that tended  to be 14 to 21 days. In                                                                    
addition, a committee  to evaluate and score  the bids along                                                                    
with a  10-day notice of  intent to award was  required. The                                                                    
notice time  allowed for grievances by  the bidding parties.                                                                    
She explained  that if a  building was  for sale that  had a                                                                    
30-day open  period to complete  the inspection  the current                                                                    
procurement process  would miss  the purchasing  window. She                                                                    
added  that that  the code  included a  limited process  for                                                                    
contracts that  were less than  $100,000, but in  many cases                                                                    
the  subject  matter requirements  were  in  excess of  that                                                                    
amount, which did not make  the limited process feasible for                                                                    
APFC.  Representative  Knopp  asked  whether  the  APFC  was                                                                    
limited  to  investments  up to  $250  million.  Ms.  Rodell                                                                    
answered  the  corporation  was permitted  to  purchase  any                                                                    
investment of  any size. Representative Knopp  verified that                                                                    
the  exemption was  for subject  matter analysis  with costs                                                                    
exceeding $100,000.  Ms. Rodell  answered that  the $100,000                                                                    
limit  had just  been one  example. She  furthered that  any                                                                    
type of  expertise; i.e. doctors or  medical researchers for                                                                    
a  biotech  investment -  any  expertise  that was  not  the                                                                    
acting   fiduciary  fund   managers  were   the  third-party                                                                    
outsourcing referred  to by Vice-Chair Johnston.  She stated                                                                    
that   the  exemption   was  an   effort  to   allow  direct                                                                    
investments while  eliminating fund manager fees  and having                                                                    
the expertise  at the table  to act within a  timely manner.                                                                    
Many investment  purchases operated on a  short timeframe of                                                                    
up  to  3 months.  Representative  Knopp  asked whether  the                                                                    
investments operated under earnest agreements.                                                                                  
9:09:30 AM                                                                                                                    
Ms. Rodell replied that earnest  agreement features were not                                                                    
part of private investment transactions.                                                                                        
Co-Chair Wilson  asked how much  business the APFC  had lost                                                                    
because  it lacked  the exemption.  Ms. Rodell  replied that                                                                    
the answer was  difficult to quantify. She  shared that APFC                                                                    
looked at  6 to 10  investment opportunities each  year that                                                                    
required the process  and had passed on roughly  five to ten                                                                    
investments each  year. Co-Chair  Wilson asked  whether APFC                                                                    
had passed on the investments  because they did not have the                                                                    
exemption or if other  reasons applied. Ms. Rodell responded                                                                    
that the reasons varied and  when the corporation identified                                                                    
the  process as  a problem,  they  hired a  fund manager  to                                                                    
handle  the process.  Co-Chair  Wilson  understood that  the                                                                    
APFC  could bypass  the  state's process,  but  it was  more                                                                    
costly  without the  exemption.  Ms. Rodell  replied in  the                                                                    
affirmative and  confirmed that it was  much more expensive.                                                                    
Co-Chair Wilson  asked for documentation showing  the costs.                                                                    
Ms. Rodell answered that the  documentation was difficult to                                                                    
provide  but  would comply.  She  explained  that when  APFC                                                                    
sought investments  through a fund manager,  the manager was                                                                    
entitled  to a  share of  excess profit  and a  threshold of                                                                    
performance  was  added to  the  contract.  In the  case  of                                                                    
excess  profit  over  and above  the  expected  return,  the                                                                    
excess was referred  to as "carried interest."  The fund was                                                                    
entitled  to  a percentage;  the  industry  standard was  20                                                                    
percent  of the  excess profit  went to  the manager  and 80                                                                    
percent to APFC. The exemption  would mean APFC captured all                                                                    
the excess profit through  direct investing. She accentuated                                                                    
that the  process made  it difficult  to quantify  to costs.                                                                    
The  corporation had  been attempting  to  make more  direct                                                                    
investments through internal managers.  The bill did not ask                                                                    
for  a  full  procurement  code exemption.  The  bill  would                                                                    
provide   expanded   authority   when   considering   direct                                                                    
investments allowing  APFC to bring in  expertise and return                                                                    
more excess profit  to the state. Co-Chair  Wilson asked for                                                                    
information  on  the process  they  used  in the  past  five                                                                    
years. She  wanted to  determine how often  APFC had  to use                                                                    
the outside  process Ms. Rodell  just described.  Ms. Rodell                                                                    
agreed to follow up.                                                                                                            
9:13:02 AM                                                                                                                    
Representative Carpenter deduced  that the corporation could                                                                    
do what  it wanted to  do; it  just took longer.  Ms. Rodell                                                                    
affirmed. Representative  Carpenter asked whether  there was                                                                    
a higher  risk involved  in doing things  in a  shorter time                                                                    
period.  Ms. Rodell  answered that  when APFC  conducted due                                                                    
diligence  on  an  investment  the window  was  open  for  a                                                                    
specific time  period - typically  30 to 45 days.  The state                                                                    
procurement  code did  not  enable APFC  to  act within  the                                                                    
timeframe. She detailed  that in terms of  risk, the ability                                                                    
to  hire subject  matter  experts within  10  days and  work                                                                    
closely  with them  for 30  days versus  relying on  outside                                                                    
investors  created  a  different risk  profile.  There  were                                                                    
risks to both processes, but  the effort was to provide more                                                                    
comfort in the due diligence process, not increase risk.                                                                        
Representative Josephson construed that  APFC paid a fee for                                                                    
an  expert through  an investment  manager and  subsequently                                                                    
paid  them  a  share  of   the  profits  from  a  successful                                                                    
investment. He asked for  verification. Ms. Rodell responded                                                                    
affirmatively. She  recapped the  process she  had explained                                                                    
earlier.  Representative  Josephson  restated  his  question                                                                    
whether the manager profited  from Alaska's investments. Ms.                                                                    
Rodell responded in the affirmative.  She furthered that the                                                                    
investment  manager acted  as the  fiduciary  and needed  to                                                                    
evaluate   the  investment   and  access   risk  for   their                                                                    
investors. The investor was at  risk and did not serve their                                                                    
interests to "rubber stamp" an investment.                                                                                      
9:17:16 AM                                                                                                                    
Representative Josephson gave an  example of APFC wanting to                                                                    
purchase a building in Manhattan.  He asked whether what the                                                                    
corporation paid for  the investment was a  matter of public                                                                    
record.  Ms. Rodell  answered in  the affirmative  and added                                                                    
that  all  the  expenses associated  with  investments  were                                                                    
reported quarterly.  Representative Josephson  asked whether                                                                    
the process could  be taken advantage of.  He hypothesized a                                                                    
situation  where  the  state   had  always  hired  the  same                                                                    
architect  in  Denver. Ms.  Rodell  thought  it was  a  fair                                                                    
question.  She  believed  that  it  was  necessary  for  the                                                                    
corporation  to continue  to  maintain  an internal  process                                                                    
that scrutinized and  distributed contracts. The corporation                                                                    
used a number of outside  consultants to weigh in and ensure                                                                    
a  procedure "passed  the smell  test." She  elaborated that                                                                    
the performance of the funds   portfolio was an indicator of                                                                    
the quality  of the  due diligence  undertaken by  APFC. She                                                                    
expected that the investments would perform well.                                                                               
Representative  LeBon  thought  the discussion  was  "mixing                                                                    
apples and oranges." He elaborated  that the issue was about                                                                    
the  global  market  for  venture  capital  investments  and                                                                    
working with  a fund  manager to invest  in a  business. Ms.                                                                    
Rodell  answered  that all  the  issues  encompassed in  the                                                                    
entire discussion were relevant  and included his example as                                                                    
well as  an engineer evaluation  of a building and  a market                                                                    
assessment  to  sell  "widgets  in  Europe."  Representative                                                                    
LeBon asked for verification that  APFC would still have the                                                                    
fiduciary responsibility  to perform  diligence and  was not                                                                    
trying to  shortcut the process.  Ms. Rodell replied  in the                                                                    
affirmative.   Representative   LeBon  surmised   that   the                                                                    
corporation was attempting  to build a base  of expertise in                                                                    
order to make many types  of investments and was seeking the                                                                    
flexibility to  call on  the experts  quickly in  a timeline                                                                    
that fit the opportunity to  make the investment and respond                                                                    
to market opportunities. He asked  whether his statement was                                                                    
"fair." Ms. Rodell agreed with his summation.                                                                                   
Co-Chair Wilson  asked whether it  mattered if there  was an                                                                    
in-house versus  external manager.  Ms. Rodell  replied that                                                                    
if APFC  undertook the process  they had to  operate through                                                                    
the procurement  process versus  when the  corporation hired                                                                    
an external manager  and invested in a  fund the transaction                                                                    
was  exempt from  the procurement  process. Co-Chair  Wilson                                                                    
asked whether  the arrangement  was exclusive  to buildings.                                                                    
Ms. Rodell reiterated  that the process was for  any type of                                                                    
9:22:44 AM                                                                                                                    
Co-Chair Foster believed a similar  bill had been before the                                                                    
legislature  in  the  past.  He  asked  if  there  were  any                                                                    
negatives that they should be  aware of. Ms. Rodell answered                                                                    
that the  prior bill  provided a full  procurement exemption                                                                    
like  the  full exemptions  allowed  the  ARM Board,  Alaska                                                                    
Housing  Finance Corporation  (AHFC),  AIDA,  and all  other                                                                    
quasi-agencies like  APFC. She  elaborated that  the current                                                                    
bill  was  a  compromise  and  had  been  developed  by  the                                                                    
corporation at the  request of the trustees.  The change was                                                                    
a  priority of  the  board.  She did  not  see any  negative                                                                    
aspects  to  the  bill  and  ideally  would  prefer  a  full                                                                    
exemption. Co-Chair  Foster surmised that the  answer to the                                                                    
concern  was  a  more targeted  procurement  exemption.  Ms.                                                                    
Rodell affirmed.                                                                                                                
Representative   Carpenter  did   not  want   to  defend   a                                                                    
procurement process  that exceeded 50  days, but he  did not                                                                    
know the process.  He asked what parts of  the process would                                                                    
be omitted by the exemption.                                                                                                    
Co-Chair  Wilson   interjected  that   she  was   trying  to                                                                    
understand  if the  overall procurement  system was  broken.                                                                    
She felt  that it was not  the problem of APFC  if the whole                                                                    
system was broken.                                                                                                              
9:25:41 AM                                                                                                                    
Ms. Rodell answered  that the state procurement  code was in                                                                    
place  to purchase  everything  state  government needed  to                                                                    
operate -  from pencils  to furniture  and all  other items.                                                                    
She observed  that the code  was written more  for commodity                                                                    
acquisitions than  services. The  code was designed  to give                                                                    
comfort  to the  public that  a competitive  process was  in                                                                    
place. In  APFC's case, the  code caused the  corporation to                                                                    
pay more  for services  because they were  forced to  use an                                                                    
alternative   method   for  necessary   investment   related                                                                    
services. She believed the balance  point had to be weighed.                                                                    
She  could not  speak to  the  procurement code  and how  it                                                                    
worked  for   other  departments  like  the   Department  of                                                                    
Transportation  and  Public   Facilities  (DOT).  The  board                                                                    
wanted the  corporation   in charge  of the  decision making                                                                    
process to more align with  the fund's investment goals. The                                                                    
exemption  offered an  opportunity for  APFC to  create more                                                                    
value for the  state. She offered that 4 years  ago the fund                                                                    
totaled $52  billion and was  currently $66 billion  after a                                                                    
$2.7 billion transfer in FY  19 to the states  Treasury. The                                                                    
corporation took  its stewardship  seriously and  looked for                                                                    
ways  to  save  costs.   She  believed  that  the  exemption                                                                    
provided the tools  for APFC to tap into  expertise that was                                                                    
not needed  daily and reduced the  investment costs thereby,                                                                    
increasing returns.                                                                                                             
9:28:55 AM                                                                                                                    
Representative Carpenter  needed more clarity on  what parts                                                                    
of  the process  would be  eliminated by  the exemption.  He                                                                    
thought the person in charge  of the procurement process was                                                                    
better  suited  to answer  the  question.  He was  concerned                                                                    
there  was an  "unwieldy"  procurement process  but did  not                                                                    
favor   providing   exemptions    when   the   process   was                                                                    
challenging.  He felt  that the  procurement  code served  a                                                                    
purpose. He determined  that the process needed  to be fixed                                                                    
or improved but  was not a justification  to make exemptions                                                                    
from the  process. He  concluded that  without understanding                                                                    
the  process  that  was  being exempted  he  was  unable  to                                                                    
support the legislation.                                                                                                        
Co-Chair  Wilson noted  that the  committee could  hear from                                                                    
the Department of Administration (DOA) at a future hearing.                                                                     
Co-Chair   Foster   referenced  Representative   Carpenter's                                                                    
concern.  He   suggested  a   chart  illustrating   how  the                                                                    
procurement process works.                                                                                                      
Ms.  Rodell  referenced  a  document  provided  in  members'                                                                    
packets  [titled "APFC  Legislative Initiative:  Procurement                                                                    
Streamlining"]  (copy on  file). She  communicated that  the                                                                    
timeframe information  was included  in a chart  format. She                                                                    
pointed  to the  timeline information  with and  without the                                                                    
procurement code process.                                                                                                       
Co-Chair Wilson  interjected to reference the  document. She                                                                    
asked Ms.  Rodell to  speak to what  was eliminated  via the                                                                    
exemption. Ms. Rodell responded that  the 21 day notice, and                                                                    
the  10 day  protest  period would  be eliminated.  Co-Chair                                                                    
Wilson asked  what would  happen if  the protest  period was                                                                    
removed. She deemed  that the ability to  protest a contract                                                                    
award would be eliminated.                                                                                                      
9:33:03 AM                                                                                                                    
Ms.  Rodell confirmed  her conclusion.  She maintained  that                                                                    
the idea of  the exemption was to enable  the corporation to                                                                    
hire  a  subject matter  expert  without  much bidding.  She                                                                    
delineated  that  the contracts  would  not  be sole  source                                                                    
contracts  but  were  considered limited  source  contracts.                                                                    
Very  few individuals  had  the expertise  for  much of  the                                                                    
subject matter. Co-Chair Wilson  reiterated her concern that                                                                    
if  someone disagreed  with the  process there  would be  no                                                                    
period  for protest.  She suggested  shortening the  protest                                                                    
Vice-Chair Johnston  noted that the bill  requested a degree                                                                    
of  flexibility. She  referenced  private equity  investment                                                                    
and the speed at which  the market was operating at present.                                                                    
She pointed  to Silicon Valley  and the biomedical  field as                                                                    
examples. She observed  that in order for APFC to  get in on                                                                    
the  "ground floor"  of some  of the  investments without  a                                                                    
fund  manager "it  was  necessary to  be  good and  somewhat                                                                    
flexible."   She  provided   a  historical   example  of   a                                                                    
biomedical  fund  investment  that  had done  well  for  the                                                                    
Permanent  Fund   (PF)  and  the  investment   manager.  The                                                                    
corporation  invested  directly   before  the  company  went                                                                    
public on  the stock market  and garnered large  profits for                                                                    
the state but  also the fund manager. The  APFC was starting                                                                    
to get  sophisticated enough to  do some of the  work itself                                                                    
that would involve hiring a  small group of market analysts.                                                                    
The question  to the  committee was  whether they  wanted to                                                                    
stay with the  status quo and be dependent  on fund managers                                                                    
and   make  less   on  the   investment  by   following  the                                                                    
procurement  code. Alternatively,  did they  want a  process                                                                    
for APFC  to hire  someone with  strong expertise  and bring                                                                    
the corporation to  the private equity table.  She asked Ms.                                                                    
Rodell how often the option would be used annually.                                                                             
9:37:30 AM                                                                                                                    
Ms.  Rodell   answered  the  fund   would  use   the  option                                                                    
approximately 10  to 12  times per  year. She  reported that                                                                    
APFC  was spending  $1.2  billion or  so  on private  equity                                                                    
investments per  year and  guessed the  answer based  on the                                                                    
Co-Chair Wilson believed that  the committee's due diligence                                                                    
required determining  whether the timeframe in  the bill was                                                                    
accurate. She thought  everyone wanted the fund  to have the                                                                    
ability to  purchase investments but maintained  her concern                                                                    
over  relinquishing  "checks  and  balances"  that  were  in                                                                    
Representative Knopp  shared that prior exemptions  from the                                                                    
procurement code  with the  Department of  Corrections (DOC)                                                                    
and  the recent  sole source  contract issues  with the  new                                                                    
administration  created   concerns  over   procurement  code                                                                    
exemptions.  He wanted  to understand  the implications.  He                                                                    
remarked that  managing assets and  acquiring them  were two                                                                    
separate  processes.  He   wondered  whether  external  fund                                                                    
managers  had the  discretion to  acquire assets  or if  the                                                                    
decision  was  made initially  through  the  APFC board.  He                                                                    
asked who  performed the due diligence.  Ms. Rodell answered                                                                    
that  external   fund  managers  conducted  their   own  due                                                                    
diligence. Representative  Knopp deduced that  the exemption                                                                    
would  apply  to  investments by  APFC  and  their  internal                                                                    
management. Ms. Rodell replied affirmatively.                                                                                   
Representative LeBon  surmised that  a venture  capital firm                                                                    
would already  have performed its  own due  diligence before                                                                    
offering an  opportunity to a  potential client.  Ms. Rodell                                                                    
agreed with the statement.                                                                                                      
9:41:37 AM                                                                                                                    
Representative  LeBon communicated  that  a venture  capital                                                                    
firm valued its offering and  divided the amount into shares                                                                    
that  were  purchased by  a  group  of investors.  He  asked                                                                    
whether his  statement was correct.  Ms. Rodell  answered in                                                                    
the affirmative.  Representative LeBon stated that  when the                                                                    
opportunities  were  offered time  was  of  the essence.  He                                                                    
stated  that  if a  ninety  day  window of  opportunity  was                                                                    
offered the  bill would be unnecessary.  Ms. Rodell affirmed                                                                    
his  conclusion.   Representative  LeBon  stated   that  the                                                                    
investor  set   the  clock.  Ms.  Rodell   agreed  with  the                                                                    
statement.  Representative LeBon  was  attempting to  "frame                                                                    
the   discussion"  and   pointed  out   the  need   for  the                                                                    
Representative Josephson  noted that there were  50 existing                                                                    
exemptions to  the procurement code.  The bill  would create                                                                    
the fifty-first  exemption. He asked  how to avoid  any sort                                                                    
of  long-term "coziness"  between the  contractor and  APFC.                                                                    
Ms. Rodell  answered that if  the corporation  was fortunate                                                                    
to get  the exemption the  process would be imbedded  in the                                                                    
investment policy  process that  was reviewed  frequently by                                                                    
the  APFC  board.  There  was   a  regular  review  trustees                                                                    
conducted  on performance  and  existing investment  manager                                                                    
relationships. The  boards  reporting  requirements extended                                                                    
to the public. She reassured  the committee there would be a                                                                    
process in place with the intent to avoid "coziness."                                                                           
9:45:08 AM                                                                                                                    
Representative Josephson  emphasized that along  with APFC's                                                                    
ability to be  nimble and act quickly  the corporation would                                                                    
retain  more  of the  profit  that  currently went  to  fund                                                                    
managers.   He  deduced   that  the   exemption  was   about                                                                    
increasing  profit   for  the  state.  He   asked  for  more                                                                    
information regarding the  increased profitability under the                                                                    
exemption.  Ms. Rodell  replied that  APFC would  report the                                                                    
size  of  the  investment  manager  fees  in  total  at  its                                                                    
upcoming  board meeting.  She detailed  that currently,  the                                                                    
carried interest profit sharing piece  was in excess of $100                                                                    
million.  The asset  class was  approximately $9  billion at                                                                    
present and had  returns of almost 33 percent in  FY 18. The                                                                    
entirety of  the fund  was not invested  in the  asset class                                                                    
because it  was too  high risk  and illiquid.  She furthered                                                                    
that  the  goal  was  a balanced  asset  portfolio  and  the                                                                    
current discussion included roughly  12 percent of the fund.                                                                    
When the fees  were paid, APFC received 80  percent, but the                                                                    
corporation  would like  to capture  more  of the  lucrative                                                                    
returns. She  explained that the  method to capture  more of                                                                    
the lucrative  returns was to  "reduce the levels"  - either                                                                    
directly or through a fund.  The corporation had used a fund                                                                    
called  a "fund  to funds."  The fund  to funds  encompassed                                                                    
hiring a  fund to choose the  funds for APFC that  chose the                                                                    
underlying   investments   or   portfolio   companies.   The                                                                    
corporation initially employed the  fund to fund method, but                                                                    
over time  APFC had gotten rid  of most of the  fund to fund                                                                    
categories   to  reduce   expenses   and  was   additionally                                                                    
considering  how to  reduce reliance  on  fund managers  and                                                                    
allow  the corporation  to  examine portfolio  opportunities                                                                    
and invest more directly. The  bill would provide a resource                                                                    
to engage in the process more directly.                                                                                         
Co-Chair  Wilson wondered  how  the  legislature would  know                                                                    
whether  the  exemption  was   the wrong  way  to  go.   She                                                                    
trusted Ms.  Rodell but inquired  how the  legislature could                                                                    
judge  whether reinstating  the "extra  parameters" embedded                                                                    
in the procurement  code was necessary if  the exemption was                                                                    
9:49:39 AM                                                                                                                    
Ms.  Rodell answered  that she  would judge  success in  the                                                                    
return  metric.  She  explained  that  APFC  determined  its                                                                    
returns by measuring itself against  a passive benchmark; as                                                                    
if  a   computer  was  choosing   the  investments,   and  a                                                                    
performance   benchmark  that   indicated  how   the  active                                                                    
managers were  performing. The two benchmarks  indicated how                                                                    
well the  internal staff was  performing over and  above the                                                                    
external managers. She added  that market influences created                                                                    
poor performance  and the benchmarks eliminated  the "market                                                                    
noise" from  the performance to understand  where investment                                                                    
selection  was driving  value to  the fund.  She noted  that                                                                    
each  asset class  had its  own  performance benchmark  that                                                                    
assessed whether the  fund was consistently underperforming.                                                                    
If the  corporation was  awarding too  much to  one contract                                                                    
that lead  to bad investments  it would be reflected  in the                                                                    
numbers on a quarterly basis.                                                                                                   
Representative  Sullivan-Leonard stated  her support  of the                                                                    
9:51:40 AM                                                                                                                    
Representative  Carpenter  asked  about  the  value  of  the                                                                    
investment decision procurement example  on the left side of                                                                    
the table  on page 2  of the APFC document  that illustrated                                                                    
the review  process. He  noted the  inclusion of  a Proposal                                                                    
Evaluation  Committee (PEC)  under the  existing procurement                                                                    
process  and felt  that  it was  indicative  a  good  review                                                                    
process.  He  observed that good management  of public funds                                                                    
was not  adversarial to flexibility for  the corporation. He                                                                    
wondered whether  a partial exemption  "may be at  odds with                                                                    
good  management." He  suggested the  committee examine  why                                                                    
the  procurement  process  was   necessary  and  answer  the                                                                    
question of what exactly was going to be exempt.                                                                                
Co-Chair Wilson noted that an  employee from the procurement                                                                    
office  at  DOA would  address  the  committee at  a  future                                                                    
meeting. She  thought it  would be  interesting to  find out                                                                    
why the procurement steps were initially implemented.                                                                           
Representative Josephson asked what  value came from the RFP                                                                    
(Request  for  Proposals)  process.   He  wondered  how  the                                                                    
corporation was  guided to "names that  were predictable" to                                                                    
the  corporation. Ms.  Rodell replied  that the  corporation                                                                    
had  a network  of people  it  interacted with  that held  a                                                                    
variety   of   expertise   for  the   different   types   of                                                                    
investments. For example,  if APFC was looking  to invest in                                                                    
an Australian infrastructure project  it would probably call                                                                    
for recommendations  on expertise  from the managers  of the                                                                    
two Australian sovereign wealth  funds that APFC invested in                                                                    
and  had experience  with. The  RFP process  would "make  it                                                                    
difficult" to proceed in the manner she just described.                                                                         
9:55:11 AM                                                                                                                    
Representative  LeBon indicated  that the  opportunity costs                                                                    
that were  lost if the  corporation never had the  chance to                                                                    
follow up  on an investment  were difficult to  measure. Ms.                                                                    
Rodell  agreed  with  the  statement.  Representative  LeBon                                                                    
suspected the  procurement process  had been  written before                                                                    
the inception of APFC. He  asked how many other agencies had                                                                    
asked  for  the  same   modification  from  the  procurement                                                                    
process. He suspected  the answer was very few  or none. Ms.                                                                    
Rodell replied  that the Alaska Retirement  Management Board                                                                    
(ARMB)  was completely  exempt  from  the state  procurement                                                                    
Co-Chair Wilson OPENED public testimony.                                                                                        
9:56:25 AM                                                                                                                    
MIKE COONS, ASSOCIATION OF  MATURE AMERICAN CITIZENS (AMAC),                                                                    
PALMER  (via teleconference),  opposed  the legislation.  He                                                                    
recounted Ms. Rodells  testimony  that previous requests for                                                                    
the exemption was  not granted. He stated that  his faith in                                                                    
the  Permanent Fund  process was  extremely low.  He thought                                                                    
once the  current Permanent Fund  issues were taken  care of                                                                    
and the  trust of the  public had been regained  perhaps, he                                                                    
could support the bill.                                                                                                         
Co-Chair  Wilson  asked if  Mr.  Coons  would be  sending  a                                                                    
letter in  from AMAC. Mr.  Coons replied that he  would try.                                                                    
Co-Chair  Wilson  asked  what  AMAC  stood  for.  Mr.  Coons                                                                    
answered  that  it  stood  for  the  Association  of  Mature                                                                    
American Citizens. Co-Chair Wilson  asked if he was speaking                                                                    
on his own  behalf or the organization.  Mr. Coons indicated                                                                    
that he was speaking on behalf  of the chapter and agreed to                                                                    
send a letter.                                                                                                                  
10:00:50 AM                                                                                                                   
HERMAN  MORGAN, SELF,  ANIAK (via  teleconference), did  not                                                                    
support the bill.  He did not trust the  legislature. He did                                                                    
not  support  using money  from  the  Permanent Fund  for  a                                                                    
gasline. He thought the legislature  needed to listen to the                                                                    
people of Alaska.                                                                                                               
Co-Chair   Wilson  clarified   that  the   bill  was   about                                                                    
procurement and not the dividend.                                                                                               
Co-Chair Wilson CLOSED public testimony.                                                                                        
Ms.  Rodell   reviewed  the  zero   fiscal  note   from  the                                                                    
Department of  Revenue, APFC.  She believed  the legislation                                                                    
would not increase costs.                                                                                                       
Co-Chair Wilson  asked if  the Department  of Administration                                                                    
would  have   to  write  any  regulations   related  to  the                                                                    
proposal. Ms. Rodell answered in the negative.                                                                                  
Co-Chair Wilson noted the bill would be heard again.                                                                            
HB  139  was  HEARD  and   HELD  in  committee  for  further                                                                    
HOUSE BILL NO. 87                                                                                                             
     "An Act extending the liquefied natural gas storage                                                                        
     facility tax credit; and providing for an effective                                                                        
10:04:21 AM                                                                                                                   
Co-Chair  Wilson  referenced  the document  she  distributed                                                                    
earlier  in the  member's  packets  titled "Interior  Alaska                                                                    
Natural   Gas  Utility   Schedule   of  Sustainable   Energy                                                                    
Transmission  and Supply  (SETS)  Loan Funds  as  of May  9,                                                                    
2019" (copy  on file).  She emphasized  that the  SETS funds                                                                    
were a loan  fund. She questioned where the  funding to move                                                                    
the tanks from  Fairbanks to the North Pole  would come from                                                                    
and if  the project would  only supply Fairbanks  if funding                                                                    
was insufficient.                                                                                                               
DAN   BRITTON,   INTERIOR   GAS  UTILITY,   FAIRBANKS   (via                                                                    
teleconference),  reviewed the  formerly cited  document. He                                                                    
pointed to the SETS fund  totaling $125 million. He read the                                                                    
following from the document:                                                                                                    
          North Pole Distribution System     $29,346,778                                                                        
          Fairbanks Distribution System      $14,806,184                                                                        
          Fairbanks 5.25M Gallon Storage Facility                                                                               
          North Pole Storage Facility        $678,542                                                                           
          Pentex Acquisition                 $21,208,913                                                                      
          Total Proceeds Used                $103,066,697                                                                       
          Remaining Loan Proceeds            $21,933,303                                                                        
     Remaining Committed Project Uses                                                                                         
          Fairbanks 5.25M Gallon Storage     $18,147,587                                                                        
          Fairbanks and North Pole Customer Service                                                                             
          Connections                        $1,992,250                                                                         
          North Pole Storage Facility        $993,466                                                                           
          Titan 2 & 3 FEED                   $800,000                                                                         
          Total Remaining Committed Project Uses                                                                                
          Remaining Loan Proceeds            $0                                                                                 
Mr.  Britton  indicated  that the  Interior  Energy  Project                                                                    
(IEP)  had  the  ability  to  issue  Conduit  Revenue  Bonds                                                                    
through Alaska  Industrial Development and  Export Authority                                                                    
(AIDEA)  that was  backed  by the  moral  obligation of  the                                                                    
state of up  to $150 million. The project  hired a financial                                                                    
advisor  and  began  the  process   of  preparing  the  bond                                                                    
package. The  initial bond issuance would  total $75 million                                                                    
to cover  the cost to  construct the liquefaction  plant and                                                                    
Fairbanks   Gas  Storage   Facility.  The   IEP  secured   a                                                                    
commitment of $14  million in funding from a  local bank and                                                                    
requested access to  a $7.5 million line of  credit from the                                                                    
Fairbanks North  Star Borough who assessed  whether to allow                                                                    
the line of  credit to proceed. He concluded  that the short                                                                    
term funds and the bond  funding he described were the funds                                                                    
IEP would employ to fund the projects.                                                                                          
10:09:23 AM                                                                                                                   
Co-Chair Wilson asked for verification  that the project was                                                                    
over  $200 million  in  debt. Mr.  Britton  answered in  the                                                                    
negative. He  clarified that the total  indebtedness was the                                                                    
$125  million  in  SETS funding.  The  bond  issuance  would                                                                    
subsequently create  a total  indebtedness of  $200 million.                                                                    
The SETS loans had a  15-year deferral accruing no principal                                                                    
payments  or  interest  along  with  an  additional  5  year                                                                    
further deferral  if the conversion process  was slower than                                                                    
anticipated.  The  $125 million  was  flexible  debt put  in                                                                    
place  by  the  legislature  to  remove  some  of  the  risk                                                                    
associated with the conversion.                                                                                                 
Representative Knopp asked  about the construction timeframe                                                                    
and total  cost associated with the  liquefaction plant. Mr.                                                                    
Britton answered  that the  liquefaction expansion  cost $50                                                                    
million. He  explained that construction  was on  a two-year                                                                    
timeframe  beginning in  the fall  of  2019 and  an RFP  was                                                                    
issued for liquefaction and  pretreatment equipment that was                                                                    
part of the front end engineering and design process.                                                                           
10:11:28 AM                                                                                                                   
Vice-Chair Johnston  MOVED to  ADOPT the  proposed committee                                                                    
substitute (CS)  for HB 87, Work  Draft 31-LS0619\U (Nauman,                                                                    
5/9/19). There being NO OBJECTION, it was so ordered.                                                                           
Co-Chair Wilson  asked for her  staff to review  the changes                                                                    
in the CS.                                                                                                                      
LYNN GATTIS,  STAFF, REPRESENTATIVE TAMMIE  WILSON, reviewed                                                                    
the changes  in the CS. She  relayed that on page  1, line 7                                                                    
the date  was changed  from January 30,  2021 to  January 1,                                                                    
2021 and on  page 2, line 9 (a) $7.5  million was changed to                                                                    
$5 million. She  added that on page 2, lines  10 (b) through                                                                    
11 were deleted.                                                                                                                
Representative LeBon discussed that  the North Pole facility                                                                    
tanks  were currently  located in  South Fairbanks  and were                                                                    
previously owned by Fairbanks  Natural Gas. He asked whether                                                                    
he  was  correct. Mr.  Britton  affirmed  the statement.  He                                                                    
furthered  that  the North  Pole  facility  would allow  the                                                                    
tanks to be moved to  that location. The relocation required                                                                    
the  installation  of  vaporization  equipment  to  vaporize                                                                    
liquid natural  gas (LNG). Representative  LeBon ascertained                                                                    
that the  IEP had  two parts:  The Fairbanks  component that                                                                    
included  the 5.25  million tank  that  was currently  under                                                                    
construction  and  the North  Pole  component  that was  not                                                                    
connected to  the Fairbanks market. He  wondered whether his                                                                    
statement  was  accurate.  Mr.   Britton  responded  in  the                                                                    
affirmative.  He elaborated  that the  two systems  were not                                                                    
connected at  present but would eventually  be connected and                                                                    
the same  rates would be  charged. They would be  managed as                                                                    
one service  area but were  currently independent.  The only                                                                    
way to  provide gas  service in  North Pole  was to  add the                                                                    
storage facility that  would provide LNG to  pipes that were                                                                    
currently  under  nitrogen  pressure.  Representative  LeBon                                                                    
asked how  large the North  Pole piece was in  comparison to                                                                    
the Fairbanks  component. Mr. Britton answered  that the IEP                                                                    
had installed 72  miles of the distribution  system in North                                                                    
Pole and  Fairbanks had over  140 miles of  the distribution                                                                    
system  with  plans to  expand  the  North Pole  system.  He                                                                    
elucidated  that   the  demand   primarily  came   from  the                                                                    
Fairbanks  area.  North Pole  would  account  for around  35                                                                    
percent  of  the  total  demand  versus  the  core  area  of                                                                    
Fairbanks at 65 percent.                                                                                                        
10:16:47 AM                                                                                                                   
Representative  LeBon asked  if  the LNG  supply lines  were                                                                    
almost  completed. Mr.  Britton answered  that the  Interior                                                                    
Gas Utility (IGU) had completed  most of the Phase 1 planned                                                                    
distribution  system and  the next  phases of  expansion for                                                                    
North  Pole  would  come  in  future  years  when  expansion                                                                    
estimates were confirmed, and the demand increased.                                                                             
Co-Chair  Wilson asked  why the  two systems  were separate.                                                                    
Mr. Britton  answered that until  June 2018 the  two systems                                                                    
had  been  under  separate ownership.  They  were  currently                                                                    
under  common ownership  through the  purchase of  Pentex by                                                                    
IGU,  which provided  the   opportunity to  connect the  two                                                                    
systems. The original system was  not designed for expansion                                                                    
into the  North Pole.  Providing service  to the  North Pole                                                                    
required  proper  pressure  that  necessitated  the  storage                                                                    
facility in North Pole.                                                                                                         
10:18:39 AM                                                                                                                   
Vice-Chair  Ortiz  asked  whether  HB 87  extended  the  tax                                                                    
credit  program  for  up  to   $15  million.  He  asked  for                                                                    
Co-Chair Wilson  replied in the negative.  She detailed that                                                                    
the project  was extended  for one year  and the  cost could                                                                    
not exceed more  than $5 million; any  additional amount was                                                                    
not covered  under the  tax credit  program and  the project                                                                    
had to  be completed  to the  point of  commercialization to                                                                    
qualify for  the credit.  She clarified  that that  the "old                                                                    
program" that  included the $15  million tax  credit program                                                                    
expired on  the date  as planned. The  bill provided  a one-                                                                    
year extension  and lowered  the credit  to $5  million. She                                                                    
added  that  if  the  IGU could  commercialize  its  storage                                                                    
plants by  December 31,  2019 they  would still  be eligible                                                                    
for  the $15  million tax  credit, failing  that they  would                                                                    
fall   under  the   $5   million   plan.  Vice-Chair   Ortiz                                                                    
appreciated the clarification.                                                                                                  
Co-Chair  Wilson offered  that the  Fairbanks areas   energy                                                                    
costs  were not  equalized with  of  the cost  of energy  in                                                                    
Anchorage,  but  she desired  an  eventual  end of  the  tax                                                                    
credit program.  She learned  that areas  of the  Mat-Su and                                                                    
bush still heavily relied on diesel fuel.                                                                                       
Representative Carpenter  wondered about the length  of time                                                                    
it  would take  to  repay the  tax  credit. Co-Chair  Wilson                                                                    
answered that the project would  not generate revenue to the                                                                    
state. The project was a  benefit to the Interior for paying                                                                    
a high cost for energy for many years.                                                                                          
Vice-Chair Ortiz asked if the $5  million would be a part of                                                                    
the  bonding   option.  Co-Chair  Wilson  answered   in  the                                                                    
negative and  added that bonding  would come first  in order                                                                    
to complete the  Fairbanks project. The IEP had  to be ready                                                                    
for commercialization  by the deadlines  to be  eligible for                                                                    
the tax credit. She noted that  there was a chance IEU would                                                                    
not  complete  the  program  in  time;  therefore,  the  tax                                                                    
credits would be void.                                                                                                          
10:23:47 AM                                                                                                                   
Vice-Chair Johnston asked about the fiscal note.                                                                                
Co-Chair Wilson  answered that the bill  reduced the maximum                                                                    
amount of the credit to $5  million of the costs incurred to                                                                    
establish or  expand the facility if  the facility commences                                                                    
commercial operation on or after  January 1, 2020 and before                                                                    
January 1, 2021. She explained  that the tax credit depended                                                                    
on the  timing of the  projects  completion and  whether the                                                                    
Department  of  Revenue  (DOR) bond  issuance  for  the  tax                                                                    
credits was sufficient  to include the credits  for IEP. The                                                                    
project would have to wait  in line behind other tax credits                                                                    
or may  never receive  it, since  it ultimately  depended on                                                                    
appropriation by the legislature.                                                                                               
10:25:04 AM                                                                                                                   
Vice-Chair  Johnston MOVED  to  REPORT CSHB  87(FIN) out  of                                                                    
committee   with   individual    recommendations   and   the                                                                    
accompanying fiscal note.                                                                                                       
CSHB 87(FIN)  was REPORTED  out of  committee with  four "do                                                                    
pass"   recommendations   and    six   "no   recommendation"                                                                    
recommendations and  with one new indeterminate  fiscal note                                                                    
from the Department of Revenue.                                                                                                 
10:25:52 AM                                                                                                                   
AT EASE                                                                                                                         
10:27:25 AM                                                                                                                   
CS FOR SENATE BILL NO. 74(FIN)                                                                                                
     "An Act relating to funding for Internet services for                                                                      
     school districts; and providing for an effective                                                                           
10:27:28 AM                                                                                                                   
Co-Chair Wilson reported  the companion bill HB  75 had been                                                                    
heard previously and public testimony had been taken.                                                                           
MARIDON BOARIO,  STAFF, SENATOR  LYMAN HOFFMAN,  , discussed                                                                    
the sponsor statement for SB 74 (copy on file):                                                                                 
     SB 74  increases the broadband requirement  for schools                                                                    
     from  10  megabits per  second  (Mbps)  to 25  Mbps  of                                                                    
     download  speed and  provides funding  to help  schools                                                                    
     reach  the   25  Mbps  through  the   School  Broadband                                                                    
     Assistance Grant (BAG).                                                                                                    
     Districts   that  qualify   for  discounted   rate  for                                                                    
     internet services under  the Federal Universal Services                                                                    
     Program are eligible.                                                                                                      
     The Universal  Service Administrative  Company, Schools                                                                    
     and  Libraries  Program,  commonly known  as  "E-rate,"                                                                    
     provides  discounts  of  up   to  90  percent  to  help                                                                    
     eligible  schools and  libraries in  the United  States                                                                    
     obtain   affordable  telecommunications   and  internet                                                                    
     The School BAG  was established in 2014  and created to                                                                    
     assist schools to reach internet  download speeds of 10                                                                    
     Mbps. Currently  the grant funds  may be used  to cover                                                                    
     eligible  costs incurred  by the  school districts  for                                                                    
     schools that have  less than 10 Mbps  each fiscal year.                                                                    
     Since 2014 new and  improved technologies and increases                                                                    
     to internet  services have allowed for  more and faster                                                                    
     delivery  of internet  services.  Because  the cost  of                                                                    
     internet  in some  rural districts  has decreased,  the                                                                    
     annual  internet  costs  have  fallen  below  the  2014                                                                    
     benchmark  established by  state law.  To allow  school                                                                    
     districts  to  utilize  these   advances,  SB  74  will                                                                    
     increase the minimum requirement of  Mbps from 10 to 25                                                                    
     which will increase the  amount of Broadband Assistance                                                                    
     Grants  (BAG)   that  the  state  can   pay  to  school                                                                    
     In  2019,  80  schools  in  20  school  districts  will                                                                    
     benefit from the school BAG awards.                                                                                        
     The   funding  leverages   federal   E-rate  funds   at                                                                    
     approximately 8:1. The program  allows for leverage for                                                                    
     up  to 9:1  based on  a  formula for  free and  reduced                                                                    
     lunch calculation by district.                                                                                             
     Thank  you for  your  consideration of  SB  74 to  help                                                                    
     bring improved  broadband services to rural  Alaska and                                                                    
     improve service for schools across the state.                                                                              
     I  urge your  support  of this  legislation to  provide                                                                    
     Alaskan  students,  classrooms  and  teachers  and  all                                                                    
     educators better access to the digital world.                                                                              
10:30:25 AM                                                                                                                   
Ms. Boario  indicated that the  state BAG  (Broadband Access                                                                    
Grant)program  was  designed  to help  schools  cover  their                                                                    
share of the  E-rate costs of approximately  20 percent. The                                                                    
legislature  implemented the  program  to increase  internet                                                                    
speeds  by helping  school districts  cover their  broadband                                                                    
expenses after  the federal E-rate subsidy  was applied. She                                                                    
added that  the program was  voluntary, and the  grants were                                                                    
awarded in August each year.  She noted that the grant could                                                                    
serve  up to  170 schools  in 30  school districts  totaling                                                                    
over 20 thousand students.                                                                                                      
Co-Chair Wilson asked  for an explanation of  the changes in                                                                    
the Senate Finance Committee  Substitute version. Ms. Boario                                                                    
explained that a question arose  about whether the increased                                                                    
funding  for the  grant program  would impact  the disparity                                                                    
test for  the federal impact  aid. In addition,  the funding                                                                    
was  not  distributed  equally across  the  districts  which                                                                    
could affect the disparity test.  Co-Chair Wilson asked what                                                                    
districts were  included in the  disparity test.  Ms. Boario                                                                    
replied that  because the funding  was different due  to the                                                                    
higher broadband  costs in some districts;  districts paying                                                                    
more received  higher federal subsidy and  BAG grant awards,                                                                    
which  could affect  the disparity  test. The  districts did                                                                    
not receive equal funding. Co-Chair  Wilson asked Ms. Boario                                                                    
to cite where in the bill  the changes were made. Ms. Boario                                                                    
answered that  on page  1, line  10, Section  2 and  page 2,                                                                    
line  6, Section  3 additional  conditional effect  language                                                                    
was inserted as follows:                                                                                                        
     Sec. 2.  The uncodified law  of the State of  Alaska is                                                                    
     amended by adding a new section to read:                                                                                   
        CONDITIONAL EFFECT;  NOTIFICATION. (a) Section  1 of                                                                    
     this Act takes effect 13  only if, on or before January                                                                    
     1,  2020,   the  Department  of  Education   and  Early                                                                    
     Development has received  certification from the United                                                                    
     States  Department  of  Education that  E-rate  funding                                                                    
     under  the federal  universal services  program may  be                                                                    
     excluded from the  federal 1 disparity test  2 under 34                                                                    
     C.F.R. 222.160-169, as amended.                                                                                            
     Sec. 3.  If, under sec. 2  of this Act, sec.  1 of this                                                                    
     Act takes  effect, it  takes effect  the day  after the                                                                    
     date   the   commissioner   of  education   and   early                                                                    
     development  receives  certification  from  the  United                                                                    
     States Department of Education.                                                                                            
Co-Chair  Wilson  asked   how  long  it  took   to  get  the                                                                    
certification and whether it was  requested in the past. Ms.                                                                    
Boario answered  that it had  never been request for  the E-                                                                    
rate program. However, she was  aware that the Department of                                                                    
Transportation  and  Public   Facilities  (DOT)  funds  were                                                                    
exempted from the disparity test.                                                                                               
HEIDI TESHNER, ADMINISTRATIVE  SERVICES DIRECTOR, DEPARTMENT                                                                    
OF  EDUCATION AND  EARLY DEVELOPMENT,  OFFICE OF  MANAGEMENT                                                                    
AND   BUDGET,  answered   that   the  certification   waiver                                                                    
requested  from   the  United  States  (US)   Department  of                                                                    
Education  asked  if  the   E-rate  funding  that  districts                                                                    
received  could  be  moved  to a  special  revenue  fund  or                                                                    
removed completely  from the  calculation for  the disparity                                                                    
Co-Chair  Wilson asked  how long  the  waiver process  would                                                                    
take.  Ms. Teshner  hoped that  the  certification would  be                                                                    
issued in  several weeks. Co-Chair  Wilson spoke to  the BAG                                                                    
awards for  2019. She observed  that the grants  were mostly                                                                    
awarded  to  rural schools.  She  asked  whether most  urban                                                                    
schools paid for their own internet.                                                                                            
10:34:40 AM                                                                                                                   
Ms.  Boario answered  yes  "conditionally." Primarily  rural                                                                    
schools were affected  due to the high cost  of internet and                                                                    
urban schools were  able to obtain high  speed internet much                                                                    
cheaper  than  in rural  areas  and  the grants  applied  to                                                                    
schools  only  receiving  10 Mbps.  Technically  the  grants                                                                    
applied  to all  schools, but  some schools  were ineligible                                                                    
due to better connectivity.  Co-Chair Wilson had never known                                                                    
her school district to  not  want money.  She knew Fairbanks                                                                    
had problems  with its internet  service at times  and could                                                                    
not  perform testing  in all  schools on  the same  day. She                                                                    
asked  for  clarification   regarding  eligibility  for  the                                                                    
grant. Ms.  Boario replied that  the e-rate  funding federal                                                                    
subsidy  was utilized  by  all schools  in  Alaska. The  BAG                                                                    
grant  only  provided  additional funding  to  schools  that                                                                    
qualified  to help  increase their  speeds to  25 Mbps.  Co-                                                                    
Chair Wilson  wondered why the  fiscal note was  $7 million.                                                                    
She determined  that the  $7  million would be added  to the                                                                    
$1 million and cover a  number of years. Ms. Boario affirmed                                                                    
her statement.                                                                                                                  
10:37:38 AM                                                                                                                   
Co-Chair Wilson stated that she  misspoke. She reported that                                                                    
the  BAG  grant  covered  172 schools  which  increased  the                                                                    
megabit threshold  for each  School from  10 megabits  to 25                                                                    
megabits  per  second and  continue  paying  the $7  million                                                                    
amount  for   years  to  come.   Ms.  Boario   affirmed  her                                                                    
statement.  She acknowledged  that it  was a  grant program,                                                                    
but costs  were expected  to decline over  the years  as the                                                                    
coverage  increased. Co-Chair  Wilson had  heard from  prior                                                                    
testimony  that  most  of  the   areas  had  more  than  one                                                                    
provider. She did not believe  the information was accurate.                                                                    
She wanted to  know what private company  would be receiving                                                                    
$7  million  of  state  funds. Co-Chair  Wilson  wanted  the                                                                    
committee  to  understand  that  the  state  was  paying  an                                                                    
additional $7  million each year  with passage of  the bill.                                                                    
She was interested in  information regarding the competition                                                                    
that existed among internet providers for the $7 million.                                                                       
10:40:10 AM                                                                                                                   
CHRISTINE  O'CONNER,  EXECUTIVE   DIRECTOR,  ALASKA  TELECOM                                                                    
ASSOCIATION,  answered  that  there  was a  minimum  of  two                                                                    
providers  in  every  area  according to  a  survey  of  the                                                                    
association's members.  There was a satellite  provider that                                                                    
covered the entire  state and was very active  in bidding on                                                                    
e-rate contracts.  In addition,  all locations  had existing                                                                    
landline  providers that  bid on  fixed broadband  services.                                                                    
She  stressed  that  the  e-rate  rules  required  that  all                                                                    
landline providers bid  on E-rate RFPs. In  many areas there                                                                    
were three  or four  providers. She  offered the  example of                                                                    
vigorous competition  among 4 providers in  Nome for bidding                                                                    
to provide E-rate  service, which drove down  the rates. She                                                                    
noted a 37 percent decrease  in broadband rates for schools.                                                                    
The  competition   created  new  partnerships   amongst  the                                                                    
providers  and  e-rate  rules   encouraged  schools  to  bid                                                                    
together  as  consortiums.  She reported  that  the  factors                                                                    
happened within  the last few  years and were  driving rates                                                                    
down.  However, gaps  in service  still existed  due to  the                                                                    
need for and more  infrastructure. Co-Chair Wilson asked for                                                                    
more information. She had not  seen a drop in internet costs                                                                    
for   schools.  She   wanted   to   better  understand   the                                                                    
Representative  Carpenter  asked  how  the  FY  19  10  mbps                                                                    
program numbers  predicted the  FY 21  25 mbps  numbers. Ms.                                                                    
Teshner answered  that the note  used the average FY  19 BAG                                                                    
grant  in order  to  determine  a cost  if  all 172  schools                                                                    
applied for  the grant. She  mentioned that the  average was                                                                    
the best data the department  had to approximate the cost to                                                                    
raise  speeds  from   10  mbps  to 25  mbps.  Representative                                                                    
Carpenter referred  to the following language  in the fiscal                                                                    
note analysis:                                                                                                                  
     This $1,487.5 will need to be  funded in all of the out                                                                    
     years, in  order to pay  for 0-10mbps internet coverage                                                                  
     in  tandem   with  current  fiscal  note   that  covers                                                                    
     10-25mbps. The  entire  program  will continue  as  one                                                                  
     application for up to 25mbps.                                                                                              
Representative Carpenter  wondered whether the  actual total                                                                    
was  $8.6  million  versus  $7.1   million,  which  was  not                                                                    
reflected in  the fiscal  note. Ms.  Teshner replied  in the                                                                    
Co-Chair Wilson  asked why FY  20 did  not show the  over $1                                                                    
million currently  awarded to  grants. Ms.  Teshner answered                                                                    
that when the  department was told to only  report the costs                                                                    
necessary for the  speed increase from 10mbps  to 25mbps and                                                                    
the  $1.4 million  figure was  included in  the analysis  to                                                                    
show that  amount was needed  to continue  the 0 mbps  to 10                                                                    
mbps  program as  well. Co-Chair  Wilson thought  the entire                                                                    
amount should be  reflected in the FY 20  cost. She reported                                                                    
that before  the change from 10  mbps to 25 mbps  the school                                                                    
districts were asked to show how  they were able to fund the                                                                    
25 mbps increase.  She asked why the grant  was increased if                                                                    
the  school districts  demonstrated they  were able  to fund                                                                    
the increase. Ms. Teshner answered  that the fiscal note was                                                                    
an  estimate. Co-Chair  Wilson  restated  her question.  She                                                                    
clarified her  question and  asked why  the grants  would be                                                                    
necessary.  Ms.  Teshner  answered   that  the  program  was                                                                    
voluntary and based  on a baseline number and  if costs went                                                                    
below  the  baseline  level the  school  district  would  no                                                                    
longer qualify because the overall  cost would decrease. She                                                                    
deferred  to Patience  Frederickson,  from  the Division  of                                                                    
Library,  Archives,  and Museums  who  ran  the program  for                                                                    
further clarification.                                                                                                          
10:48:13 AM                                                                                                                   
Co-Chair  Wilson was  not blaming  any  school district  for                                                                    
getting funds.  She pondered why  the grants amounted  to up                                                                    
to $8  million when  many districts  could pay  for internet                                                                    
PATIENCE   FREDERICKSON,   DIRECTOR,  ALASKA   DIVISION   OF                                                                    
LIBRARIES,  ARCHIVES, AND  MUSEUMS, DEPARTMENT  OF EDUCATION                                                                    
AND   EARLY   DEVELOPMENT,   responded   that   the   E-rate                                                                    
application asks the  school to certify that  they can repay                                                                    
the  remaining  portion  of   the  bill.  Therefore,  school                                                                    
districts only applied  for the E-rate if they  know the BAG                                                                    
grant was  available. The districts  could not apply  for 25                                                                    
mbps  in the  current year  because the  bill did  not exist                                                                    
during the  application period. Districts  would be  able to                                                                    
apply  for  25  mbps  during  the  next  application  period                                                                    
knowing  that the  BAG grant  was available  to pay  for the                                                                    
remainder   of  the   E-rate.   She   reiterated  that   the                                                                    
certification was  not on the  state application, it  was on                                                                    
the federal  application. Co-Chair Wilson surmised  that all                                                                    
the  bill  was essentially  doing  was  securing E-rate  BAG                                                                    
grant funding in the outyears.  Ms. Frederickson answered in                                                                    
the  affirmative. She  furthered that  the program  had been                                                                    
designed  to increase  levels of  internet speeds.  Co-Chair                                                                    
Wilson wondered why the legislature  would not just increase                                                                    
the Base Student Allocation (BSA).                                                                                              
10:51:13 AM                                                                                                                   
Ms. Frederickson replied that she  was not conversant on the                                                                    
BSA  program.  She  suspected  the  reason  was  because  it                                                                    
included the  federal E-rate funding. She  detailed that the                                                                    
genesis of the BAG program came  out of the OWL (Online With                                                                    
Libraries)  program,   which  helped  libraries   achieve  a                                                                    
certain speed of  internet to enable them  to participate in                                                                    
a video conference network. The  idea behind the OWL program                                                                    
was  to  combine  E-rate,  library,  and  grant  funding  to                                                                    
increase the internet  speeds. The BAG program  was based on                                                                    
Co-Chair   Wilson  remarked   that  the   OWL  funding   was                                                                    
appropriated in all school districts.  She asked whether she                                                                    
was correct. Ms. Frederickson answered  in the negative. The                                                                    
OWL program video conference network  was available in every                                                                    
public  library, but  the subsidy  went to  approximately 20                                                                    
public  libraries. Co-Chair  Wilson  requested  the list  of                                                                    
libraries involved in OWL.                                                                                                      
Vice-Chair  Johnston remembered  that the  Nome bidding  war                                                                    
happened because it was cheaper  to provide the higher speed                                                                    
25  mbps  than  the  lower speed  internet.  She  asked  for                                                                    
10:53:46 AM                                                                                                                   
Ms.  O'Conner  answered that  she  was  unfamiliar with  the                                                                    
details  but  thought  Ms.  Fredericksons   recounting  made                                                                    
sense.  She  acknowledged  that  Nome  had  relatively  good                                                                    
connectivity  and   multiple  providers.   Relatively  large                                                                    
bandwidth was  purchased "in  bulk" and 10  mbps was  a very                                                                    
small  amount.  Vice-Chair  Johnston considered  the  fiscal                                                                    
note  and  improved  technology. She  thought  the  scenario                                                                    
could be  repeated in  the rest of  the state  with improved                                                                    
satellite  technology  and  as  competition  increased.  She                                                                    
deduced  that the  fiscal note  was currently  high, but  it                                                                    
could decrease  with improved technology in  the future. Ms.                                                                    
O'Conner  agreed with  her  conclusion.  She indicated  that                                                                    
multiple projects were  coming online in the  near future in                                                                    
Alaska.  Every   company  was  taking  advantage   of  newly                                                                    
stabilized federal  funding for increased  connectivity. She                                                                    
noted  that   the  lower  orbit  satellite   technology  was                                                                    
untested and was not imminent.                                                                                                  
10:55:57 AM                                                                                                                   
Ms.  Frederickson concurred  with Ms.  O'Conner's assessment                                                                    
and  noted she  had  experienced lower  costs  with the  BAG                                                                    
program. She pointed  out that in the  program's early years                                                                    
the average BAG  grant was $30 thousand and  fell to $17,000                                                                    
within 5 years. She determined  that as the cost of internet                                                                    
decreased  to get  to 10  mbps the  mathematical formula  to                                                                    
qualify remained  at the 2014  benchmark and  districts fell                                                                    
out of the  program due to decreased costs; in  FY 19 awards                                                                    
declined from 119 to 80.                                                                                                        
Co-Chair Wilson  pondered whether the funds  belonged in the                                                                    
BSA as an ongoing cost.                                                                                                         
Representative    Carpenter   noted    that   the    federal                                                                    
government's  standard was  100 mbps.  He deemed  that   100                                                                    
mbps was  currently cost prohibitive in  Alaska. He imagined                                                                    
that once  districts obtained 25  mbps there would  be later                                                                    
discussions  about  increasing  the  speed to  50  mbps  and                                                                    
higher.  He asked  if currently  low earth  orbit satellites                                                                    
were over Alaska. Ms. O'Conner answered in the negative.                                                                        
Representative   Carpenter   recounted  that   in   previous                                                                    
testimony a  school district testifier  had been  unaware of                                                                    
what the cost had been to  increase from 10 mbps to 25 mbps.                                                                    
He inquired  how it  was known that  the program  would cost                                                                    
$7.1  million. Ms.  Frederickson  answered  that the  fiscal                                                                    
note  was estimated  from current  costs. She  observed that                                                                    
the problem was  the competitive bid process  for the e-rate                                                                    
10:59:10 AM                                                                                                                   
Representative Carpenter  understood the  process of  how it                                                                    
was purchased but "we  don't put a bid in to  find out if we                                                                    
can afford  it." Ms. Frederickson  replied that  the process                                                                    
was  confidential,  and  she  did not  have  access  to  the                                                                    
Co-Chair   Wilson   asked   whether  the   information   was                                                                    
confidential  to the  school districts.  She commented  that                                                                    
the school  districts were queried  about the costs  and one                                                                    
response  was received.  She hoped  the  districts knew  how                                                                    
much  their  portion  of  the E-rate  costs  would  be  when                                                                    
applying for the  BAG grant program since it  was a separate                                                                    
process from  the federal  E-rate program.  Ms. Frederickson                                                                    
responded that  with passage  of SB  74 she  would establish                                                                    
new  benchmarks  based on  what  the  school districts  were                                                                    
paying  in  January  2020.   Subsequently,  the  school  BAG                                                                    
program schools   would never pay  more than what  they were                                                                    
paying  in January  2020.   The costs  would  be frozen  the                                                                    
districts would  rely on the  BAG program for  the remainder                                                                    
of costs.  She acknowledged that  she was not  answering the                                                                    
question correctly.                                                                                                             
11:00:46 AM                                                                                                                   
Representative   Carpenter   interposed    an   analogy   to                                                                    
illustrate  the question.  He exemplified  a business   that                                                                    
wanted to  increase its bandwidth  from 10 mbps to  25 mbps.                                                                    
The business would  go to a provider for a  quote to know if                                                                    
it  had the  money available  to  pay for  the increase.  He                                                                    
declared that  the state had  the opposite process  and paid                                                                    
over  $8  million  without  knowing  the  actual  costs.  He                                                                    
characterized the process as  "backwards." He contended that                                                                    
a  district should  know what  the  increased service  would                                                                    
cost.  He  wanted to  know  what  the  actual cost  was  but                                                                    
discerned  that the  costs  were  unknown. Ms.  Frederickson                                                                    
agreed that  the costs were  unknown. She restated  that the                                                                    
cost was  based on  the current  program "and  some cocktail                                                                    
napkin figures" and  noted that "it was the  best they could                                                                    
come up with."                                                                                                                  
Ms.  Boario  understood  the  statements  and  questions  by                                                                    
Representative Carpenter.  She explained that  the confusion                                                                    
sprang  from receiving  federal funding  first. She  thought                                                                    
that  knowing how  the E-rate  contracts went  to bid  might                                                                    
provide more clarity.                                                                                                           
Co-Chair Wilson  stated that her  issue was why the  BSA did                                                                    
not  cover  the  costs.  Additionally,  the  federal  e-rate                                                                    
program required  to know whether the  districts could cover                                                                    
the  remaining costs.  It was  her understanding  the school                                                                    
districts  had the  money for  the  increased bandwidth  and                                                                    
they  relied  on the  BAG  program  to cover  the  remaining                                                                    
costs.  Ms.  Boario  clarified  that  it  was  rural  school                                                                    
districts that could  not cover the costs on  their own. Co-                                                                    
Chair  Wilson cited  prior  districts'  testimony that  they                                                                    
could cover  the costs.  In addition,  she was  unaware that                                                                    
the costs were ongoing each year.                                                                                               
11:05:03 AM                                                                                                                   
Representative  Josephson asked  for  clarity regarding  the                                                                    
proprietary  information.  Ms.  Frederickson  answered  that                                                                    
when the  school districts utilize the  E-rate computer they                                                                    
enter  each  school  and the  amount  of  broadband  service                                                                    
desired  for each  school.  The  internet service  providers                                                                    
submitted  the   bids  for  each   school,  which   was  the                                                                    
proprietary information  the state did not  have. They could                                                                    
not tease out the information  that answered what the actual                                                                    
costs were. She added that in  the first year of the program                                                                    
they had received  $5 million from the  legislature and only                                                                    
$3.5 million had been used.                                                                                                     
Co-Chair Wilson  requested that the sponsor  provide further                                                                    
information regarding the committees questions.                                                                                 
Representative Josephson asked  whether Regional Educational                                                                    
Attendance  Area  (REAA)  schools  absorbed  internet  costs                                                                    
through the BSA  or if they dropped out of  the BAG program.                                                                    
Ms.  Frederickson  replied  in the  affirmative,  but  asked                                                                    
members to  bear in  mind that  if a  district chose  not to                                                                    
apply it was because the competition had driven cost down.                                                                      
Co-Chair Wilson  recognized the many questions  and concerns                                                                    
about the  bill. She  asked members  to keep  an eye  on the                                                                    
schedule for future hearings.                                                                                                   
CSSB 74(FIN) was HEARD and HELD in committee for further                                                                        
11:08:34 AM                                                                                                                   
The meeting was adjourned at 11:08 a.m.                                                                                         

Document Name Date/Time Subjects
HB 87 CS WORKDRAFT FIN v.U.pdf HFIN 5/11/2019 9:00:00 AM
HB 87
HB 87 SETS Loan Funds Interior.pdf HFIN 5/11/2019 9:00:00 AM
HB 87
SB 74 Additional Document - FY15-FY19 School BAG By District - DEED 5.10.19.pdf HFIN 5/11/2019 9:00:00 AM
SB 74
SB 74 Additional Document - FY 2019 School BAG Awards by District and School - DEED 5.10.19.pdf HFIN 5/11/2019 9:00:00 AM
SB 74
SB 74 Additonal Document - AK Broadband and Satellite Networks Map 5.10.19.pdf HFIN 5/11/2019 9:00:00 AM
SB 74
SB 74 Additonal Document - FY2019 Schools Under 25 - DEED_FCC 5.10.19.pdf HFIN 5/11/2019 9:00:00 AM
SB 74
SB 74 AK Networks through 2010.pdf HFIN 5/11/2019 9:00:00 AM
SB 74
SB 74 AK Networks through 2017.pdf HFIN 5/11/2019 9:00:00 AM
SB 74
SB 74 Oppose Document 5.10.19.pdf HFIN 5/11/2019 9:00:00 AM
SB 74
SB 74 Sectional Analysis 5.10.19.pdf HFIN 5/11/2019 9:00:00 AM
SB 74
SB 74 Sponsor Statement 5.10.19.pdf HFIN 5/11/2019 9:00:00 AM
SB 74
SB 74 Summary of Changes 5.10.19.pdf HFIN 5/11/2019 9:00:00 AM
SB 74
SB 74 Supporting Document (2) 5.10.19.pdf HFIN 5/11/2019 9:00:00 AM
SB 74
SB 74 Supporting Document 5.10.19.pdf HFIN 5/11/2019 9:00:00 AM
SB 74
HB139 Sponsor Statement 4.17.19.pdf HFIN 5/11/2019 9:00:00 AM
HB 139
HB139 Supporting Information- APFC 4.17.19.pdf HFIN 5/11/2019 9:00:00 AM
HB 139