SSTA - 2/29/96 SB 207 REVENUE BONDS: WATER & WASTE PROJECTS Number 585 SENATOR SHARP brought up SB 207 as the next order of business before the Senate State Affairs Committee and called the first witness. Number 570 KEITH KELTON, Director, Division of Facility Construction & Operation, Department of Environmental Conservation, representing the governor, prime sponsor of SB 207, stated the bill would attempt to solve a financing problem facing Alaskan communities. Mr. Kelton relayed information to the committee which is contained in members' bill packets. This information was previously relayed to the Senate Community and Regional Affairs Committee. Number 550 MR. KELTON explains flow charts showing how the program would work. Copies of those charts were given to the committee. DEC is proposing that the 30 million corpus be leveraged into a larger source of funding. SB 207, which was drafted with the help of the Department of Revenue, the Department of Law, and outside bond counsel, is patterned after similar legislation from 20 other states and would expand available revenue to continue a current clean-water program. Amendments made to SB 207 in the Senate Community & Regional Affairs Committee limited the annual sale of bonds to $15,000,000. After bond and sale costs, that leaves about $13,300,000 available for loans. The federal/state match program will have a contribution. But since the Clean Water Act is currently under reauthorization, we don't know what that dollar figure will be. So that will ultimately have the effect of increasing the incoming cash. Mr. Kelton noted that the figures in the chart are for illustrative purposes only, and that they can fluctuate. Number 495 MR. KELTON commented that DEC is very pleased with the amendments made by the CRA committee. Number 485 SENATOR LEMAN asked if 10% costs for bond sales are normal. MR. KELTON responded those are normal costs, assuming the bonds are AA rated. Costs would increase if the bond rating falls. There are provisions in the legislation which would attempt to maintain the rating at AA. One of those is the state-aid intercept, on page 5 of SB 207. That would specify that if there is a default, the state agencies would have the opportunity to take any revenue enhancements coming to a community from the state. They couldn't take dedicated funds, but they could take undedicated funds to apply to the debt. That particular provision, by itself, enhances the bond rating from A to AA, and would save about $2,800,000 over a twenty-year period on each $10,000,000 issuance. So the bond costs are very high, and they can go much higher without the language contained in the legislation. Number 475 MR. KELTON stated another aspect is that bond proceeds could be used for the 20% state match to federal contributions, if SB 207 is passed. Currently that 20% comes out of the general fund, so that would save the state some money. Number 467 SENATOR LEMAN asked if there is a maximum limit for any single project. MR. KELTON replied one project could arguably use all the funds for one year; it is not DEC's intent to do that though. There were amendments discussed in Senate CRA Committee. One suggestion that was made was that any one project would be limited to half of an annual allocation. DEC conducts an annual intended use plan for this fund, which ranks and coordinates funding for projects. It would not be DEC's intent to allocate an entire year's allocation to one project. SENATOR LEMAN commented that this fund could be a source for the Anchorage Water Project. Yet any one portion of that would probably use at least half of the available money. MR. KELTON responded that committee members have in their bill packets a list of past projects and potential future projects. However, this program does not fund water projects; it only funds wastewater and solid waste projects. To get back to Senator Leman's premise, this program has funded many large projects in Anchorage, including a $10,000,000 addition to the Anchorage Landfill. Senator Leman has raised a concern, especially of a lot of the smaller communities who might visualize no money being available if Anchorage were to suck it all up in one year. DEC would hope to prevent that, with or without statutory language. SENATOR LEMAN asked why water projects aren't funded from this program. Is there another source for water projects? MR. KELTON replied that this particular program is under the Federal Clean Water Act, which only addresses wastewater projects. There is a very strong likelihood that there will be a similar program in place for drinking water within the next year, as soon as congress reauthorizes the Safe-Drinking Water Act. SENATOR LEMAN thought Alaska had two different programs, one for wastewater, and one for water. Number 430 MR. KELTON responded Senator Leman is correct: there are two authorizations in the Alaska Clean-Water Fund. One addresses wastewater, which is capitalized by the federal government. There is also a corresponding state only section, which would allow this type of program for drinking-water projects. However, that would require capitalization by the state, and it's never been capitalized. There is probably little advantage to using that program, as long as there is a grants program in place. SENATOR LEMAN remembers proposing capitalizing the drinking-water program, but he thinks Senator Duncan blocked it. CHAIRMAN SHARP asked what the current annual amount from the federal government was. MR. KELTON responded that for each federal dollar, the state matches it 20%. The last federal appropriation was about $7,500,000. The state's portion of that would be 20% of that for another $1,500,000. That would mean an annual increase of $9,000,000. Passage of SB 207 this year would allow us to have a larger corpus, because as new loans are made, the corpus decreases. So the sooner this passes, the larger the corpus will be. CHAIRMAN SHARP asked where the original funding came from that makes up the current corpus of $30,000,000. MR. KELTON responded the corpus is made up of several years' accumulation of state and federal appropriations. Over the last two years, demand for the program has doubled, to the point where in two years, at the current rate of demand, the fund will be diminished. CHAIRMAN SHARP asked if all the funds going out are in the form of loans, and not grants. Number 395 MR. KELTON responded that this program is entirely a loan program. Over the six-year history of this program, there has never been a single late payment. SENATOR LEMAN asked for an explanation of "other qualified entity". MR. KELTON responded that term was added primarily at the direction of Senator Torgerson, who was concerned that service districts and other entities that might lie outside an incorporated community's boundary be allowed to work in conjunction with a community to secure these funds, as long as the revenue stream was dedicated back. So basically, we cannot make a loan to any entity unless an incorporated community is part of the contractual agreement. But it does clarify that it is intended to benefit service districts and other entities outside incorporated boundaries. Number 370 BERDA WILLSON, Assistant Manager - Nome Joint Utilities, also speaking on behalf of the City of Nome, testifying from Nome, supports SB 207. She stated that both NJU and the City of Nome have taken advantage of this fund. With the decline in state revenues, municipalities are hard pressed to find low-cost funding such as this. She supported removing language giving state agencies access to this fund: she does not think it would be fair for municipalities to have to compete against the state for these funds. It was noted that Mr. Lee Sharp was on-line via teleconference to answer questions regarding bond ratings. Number 335 MARK EARNEST, Manager, City of Unalaska, testifying from Unalaska, supports SB 207. Like communities throughout the state, Unalaska is facing significant financial impacts resulting from unfunded federal mandates. The largest of those for Unalaska is the landfill. We also have an upgrade due for our wastewater treatment plant with an estimated cost of $6,300,000. Unalaska is also looking at possible costs of $16,000,000 for the water system, plus $500,000 in operating costs. To put these costs in perspective, the population of Unalaska is about 4,000. Mr. Earnest stated that Unalaska has to proceed with these projects; they are not optional. However, even with available grants and rate increases, they cannot do it all themselves. They really need to be able to turn to a low-interest loan program, such as the program that SB 207 would establish. He encouraged support of SB 207. Number 300 CHAIRMAN SHARP asked if the bonds will contain a reference to the full faith and credit of the State of Alaska. MR. KELTON does not think that is a condition on the revenue bonds. ROSS KINNEY, Deputy Commissioner, Department of Revenue, stated Mr. Kelton is correct: the bonds would not pledge full faith and credit of the State of Alaska. The revenue stream pledged by the communities would be the collateral. Number 285 CHAIRMAN SHARP asked how the loan application would work. MR. KELTON responded that one of the advantages of revenue bonds is that they do not require voter approval. So a project can be initiated more quickly with just assembly action authorizing an application to the department for these funds. There has to be a dedicated user-fee stream coming back that can be applied toward repayment of the bond. This program would be available for wastewater and solid waste projects. The tie to solid waste projects is the threat for groundwater pollution potential. Point or non-point source, or even an estuarian enhancement could be funded, even though we've never had one of those. Number 265 CHAIRMAN SHARP asked if this would be an avenue for local governments to apply for funding for solid waste programs. MR. KELTON responded it would, and Anchorage has already done so. CHAIRMAN SHARP asked the pleasure of the committee. Number 240 SENATOR LEMAN thinks SB 207 is a good source of funds for wastewater and solid waste projects, and gets away from the concept of grants. Senator Leman made a motion to discharge CSSB 207(CRA) and accompanying zero fiscal notes [from DEC & DOR] from the Senate State Affairs Committee with individual recommendations. CHAIRMAN SHARP commented the state is duty-bound to give as much access to funding as possible, and this pool-type arrangement should result in a lower interest rate than municipalities could get individually. CHAIRMAN SHARP, hearing no objection, stated SB 207 was released from committee. SSTA - 2/29/96 SB 207 REVENUE BONDS: WATER & WASTE PROJECTS Number 180 SENATOR LEMAN noted that he might have a conflict of interest on SB 207, as he is a consulting engineer.