HOUSE BILL 236 "An Act giving notice of and approving a lease-purchase agreement by the Department of Administration for an office building in Anchorage; relating to the financing of the lease-purchase agreement; and providing for an effective date." DUGAN PETTY, DIRECTOR, DIVISION OF GENERAL SERVICES, DEPARTMENT OF ADMINISTRATION, referenced the fiscal note, component serial number #81, and the follow-up information included in that packet. He began with reference to Page #3 of the Bank of America Executive Summary. [Copy on file]. This page provides an analysis of a 20 year/ 40 year evaluation scenario and would provide the requested information. Mr. Petty commented that a low case and market case scenario had been modeled in the packet. Page #3 of the handout provides a graphic demonstration. The Committee requested that the Department provide a continuation of existing leases as a baseline to compare the Bank scenario to. Page (market rates), prior Frontier lease rate (1994=$3.28), continued leasing (current rates) and the purchase of the Bank of America (BOA) building. Representative J. Davies asked if the upward slope of the graph represented the 4%. Mr. Petty replied that the 4% slope was adjusted for the leases, 35% of the base rent. The slope appears to be gaining on the other lines representing a 4% adjustment on the 100%, whereas, in that case, it would represent the operation and maintenance expense including a 4% factored adjustment. That explains why a market adjustment exists. Page #4 provides the net change. There has been no change in the continuation of the lease scenario. The adjusted market rate demonstrates the numbers used on the upper end. The significant changes are in the second two of the "Purchase BOA Building" scenario. 3 At the request of the Committee, the Department re-adjusted the operating expenses, maintenance and repairs; also the capital reserves were removed in order to demonstrate what the State pays for repairs and maintenance. That information is part of the spread sheet cost benefit analysis. Additionally, property tax was included and identified upon the projected 1997 Municipality of Anchorage property tax, based upon Amendment #1, property tax on the privately sold interest. [Copy on file]. Mr. Petty advised that the business improvement district was added in order to clearly define that it be funded. That addition constitutes the special assessment, agreed to by the Department and which they plan to participate in throughout the life of the assessment. Page #9 of the fiscal note provides more complete information on the operating and maintenance costs associated with the building. The high management level costs have been adjusted down. Snow removal was added and then removed from repairs and maintenance costs; parking was also added. The Department understands that the building will have the needed amount of parking space, using a standard which stipulates that one parking space will be provided for each 357 square feet. Additionally, added into the contract would be eighty-four spaces at $45 dollars per month. Mr. Petty spoke to the maintenance and capital reserves. He pointed out that the Department had included some capital reserves in the capital numbers. He spoke to the changes in those numbers. The fiscal note does not reflect the $80 thousand dollar cost, although, it does show the cost benefit analysis with consideration to long term reserves. Mr. Petty referenced Page #16, which identifies the reexamination of the cost assumptions associated with moving in and tenant improvements. He pointed out that those numbers would add $1 million dollars back for project costs. Included would be the American with Disabilities Act (ADA) upgrades and code compliances. Sufficient funds have been allocated to tenant improvements. He believed he had sufficiently addressed the changes requested by the Committee. Representative Martin asked if a study of the public transportation accessibility for the building had been overlooked. Mr. Petty pointed out that the building is located close to the bus depot. FORREST BROWNE, STATE INVESTMENT OFFICER, DEPARTMENT OF REVENUE, stated that the Department has worked on 4 restructuring the financing. He spoke to the fiscal note provided by the Department. The bill authorizes lease- purchase financing of less than $38.9 million dollars to purchase the Bank of America building in Anchorage, with annual lease payments of less than $4.07 million dollars and total lease payments of less than $81.4 million dollars. A financing plan has been structured for the State to acquire the property within the above guidelines. It would include the use of taxable certificates of participation for four (4) years, followed by the use of tax-exempt certificates of participation for 16 years, for a total term of twenty years. The financing plan defers lease payments for two years and gives the State flexibility on converting to tax-exempt financing depending on future operational events in the building and on future interest rates. RANDY WELDER, LEGISLATIVE AUDITOR, LEGISLATIVE BUDGET AND AUDIT COMMITTEE, responded to his memo which summarized the results prepared by the Division of Legislative Audit investigating requested information. The long term investment would be a good deal for the State; reviewing additional information, he acknowledged that the short term concerns had been addressed. The Legislative Audit Division agrees with the analysis and believes that the acquisition of the proposed office building would be in the best interest for the State. Representative Foster questioned if the Division's conclusion would hold true if the worst case scenario had been adopted. Mr. Welker responded that the proposal before the Committee was the "worst case scenario". The first concern is the time-line; when the lease expires in the Frontier Building and then making space available in the Bank of America (BOA) building. The tenants remaining in the BOA Center would be paying a higher rate than the State would want to pay. The longer the time current tenants remain in the BOA Center, general fund will make money. Mr. Welker characterized the BOA purchase close to a 80-90% worst case scenario. MITCH GRAVO, REPRESENTATIVE, FRONTIER BUILDING OWNERS, ANCHORAGE, commented that the Legislature had solicited an offer from the owners of the Frontier Building at the last hearing. He noted that it was their intent to provide a long-term lease offer very soon. He requested that the Committee examine that proposal before making their decision. Mr. Gravo pointed out that there are many people in Anchorage who want to testify on the proposed legislation and who have not had the opportunity to do so. Mr. Gravo 5 believed that the House Finance Committee would be the appropriate forum for that testimony, and requested the bill be held. Co-Chair Therriault commented that because of legislative time constraints, it would be prudent for the Committee to take action on the legislation at this time. He noted that public testimony could be taken in the House Rules Committee. Co-Chair Therriault MOVED to adopt Amendment #1. [Copy on file]. He stated that the amendment provides that municipal property tax would be paid on the square footage held by the third party lessors. Co-Chair Therriault pointed out that the spread sheets indicate those numbers had been factored in and would cushion the impact to Anchorage residents. There being NO OBJECTION, Amendment #1 was adopted. (Tape Change HFC 97-111, Side 2). Representative Martin MOVED to report CS HB 236 (FIN) out of Committee with individual recommendations and with the accompanying fiscal notes. Representative Kohring OBJECTED, pointing out that it was the Legislature's intent to cut the budget and reduce government. As an alternative to acquiring the building, he proposed: 1. Lease less spaces through a reduction of state employees; and/or 2. Explore renegotiating existing leases. Co-Chair Therriault pointed out that the legislation does not propose any new construction. The State will be paying less rent while providing a savings. Representative Kohring WITHDREW his OBJECTION to passage of the legislation. There being NO further OBJECTION, it was passed. CS HB 236 (FIN) was reported out of Committee with "individual recommendations" and with new fiscal notes two by the Department of Administration and one by the Department of Revenue.