HOUSE BILL NO. 281 An Act providing for the issuance of general obligation bonds in the amount of $665,000,000 for the purposes of paying the cost of design, construction, and renovation of public elementary and secondary schools, renovation of state buildings, capital improvements at the University of Alaska, and capital improvements to state harbors; and providing for an effective date. Co-Chair Mulder observed that there have been a number of legal questions regarding if this fund would be dedicated. He provided members with a legal opinion from James L. Baldwin, Assistant Attorney General, Department of Law, dated 4/15/00. [Copy on File]. DEVON MITCHELL, DEBT MANAGER, DEPARTMENT OF REVENUE, provided information on the legislation. He explained that he has had limited conversations with the State's Bond Counsel. The issuing entity, an arm of Alaska Housing Finance Corporation (AHFC), would be responsible for the issuance. Mr. Mitchell explained that the Commissioner of Department of Revenue would negotiate a sale of the revenue stream to the subsidiary of AHFC. The securitization of the revenue stream would be set up with a 40-year nominal debt service schedule. This is the minimal amount that is required to be paid over a 40-year life, being the worst case scenario. The amortization would be flexible. If revenues are above that level, which is the expectation, all of the revenues, less $1.4 million dollars, would be applied to debt service. The average life would be reduced to 10 years. In response to a question by Co-Chair Mulder, Mr. Mitchell explained that the $269 million dollar target was based on market conditions, the expectation that investment grade bonds would be issued, and the cash flow that is expected from the Tobacco settlement. The requirement of security which would be required from the cash flow, limits how far a revenue stream can be stretched when it is being securitized. Investors are willing to take risks within an investment grade scale. If the amount were increased there would be a higher interest cost. He noted that more would be paid for the capital if the revenue stream were spread because it would be a higher risk for the investor. Co-Chair Mulder questioned what would happen if $269 million dollars was not derived from the sale. Mr. Mitchell did not know. He observed that the legislation authorizes the commissioner to sell the revenue stream to reach the target. He clarified that the State's hand would not be tipped by stating the amount desired and that the State bond counsel would not have a role in the issuance. In response to a question by Representative Williams, Mr. Mitchell explained that the revenue stream is complex. There is a base amount in the settlement that is on going. There is an initial payment amount and there are strategic contribution payments that come in from 2007 to 2018. The on-going payment and the strategic contributions are adjusted for inflation and volume. Inflation pushes the number up and volume adjustment pushes the number down. There are a variety of opinions on how the adjustments would impact the revenue stream over time. In order to obtain something close to a single A rate bond issuance, there has to be an assumption of a 2.5 percent decline overtime. A requirement exists to be within an annual debt service amount that would allow volume adjustments to be made. Speculations on increased smokers would be penalized in the bond issuance. Mr. Mitchell provided the analogy of a person with a known salary, attempting to get a bank loan. The bank allows a home payment of 20 percent of their income, which is based on the opinion of how much of disposable income could be used on the home. Vice Chair Bunde noted that Section 5 was dropped out of the bill, the School Major Maintenance Grant Fund. EDDIE JEANS, DEPUTY COMMISSIONER, DEPARTMENT OF EDUCATION AND EARLY DEVELOPMENT, provided information on the HB 281. He thought that section had been inadvertently included in the legislation. Co-Chair Mulder asked if Section 5 would inadvertently suspend the local match. Mr. Jeans noted that Section 5 suspended the evaluation process of the Capital Improvement Projects (CIP) list. The projects that are in the bill are the ones in which the State share and the local match has been applied. Co-Chair Therriault questioned how the State guaranteed that 70 percent would be covered. He asked what would happen if the project came under budget. Mr. Jeans noted that grant agreements are issued on every project. If the cost were under the local match, it would be adjusted to assure that the local match is 30 percent. That authority is under AS 14.11.088. He noted that when local communities go out for bonds, they are reimbursed on a bond schedule. Projects in the bill are grants and can be adjusted by the authority listed in AS 14.11.088. Co-Chair Mulder questioned if AS 14.11.088 should be included. Mr. Jeans did not think it was necessary. The local match requirement for school construction grants is established. Co-Chair Therriault referred to Page 3, Line 12. He noted that AHFC "shall" make the proceeds of the bonds issued under that section available to the Department. On Page 3, Line 22, the legislation states that the provision is subject to an appropriation. He noted that the legislation is not an appropriation bill. Mr. Jeans explained that the dollar amounts would have to be listed in a capital budget bill. Co-Chair Therriault questioned if the dedicated fund argument was based on the use of "shall" and if replacing it with "may" would alleviate the problems. Representative J. Davies noted that Line 11 indicates that the pledge would be subject to agreements and appropriation. Co-Chair Mulder stated that there have been discussions regarding inclusion in the capital bill. The decision would be to add an introduction to an appropriation bill to accompany the HB 281. Co-Chair Therriault questioned if the projects would need to be listed in the accompanying capital bill. Mr. Jeans stated that inclusion of a list would tie the projects between the two bills. Co-Chair Mulder agreed. ANNALEE MCCONNELL, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET, OFFICE OF THE GOVERNOR, spoke in support of the discussion. She agreed that the projects would not be needed, but that they could add convenience. The administration supports the use of Tobacco Funds securitization. She emphasized that the securitization approach assists in shifting risk about the future of the tobacco companies to the bondholders and would allow projects to be done now. There is a timing issue which must be addressed. She observed that other states are attempting to securitize against the risk. There is $10 - $15 billion dollars of investment opportunities nationwide. She estimated that the capacity could be tapped before another legislative session. Ms. McConnell provided members with a letter indicating states aligning themselves to securitize their tobacco revenues. [Copy on File]. Co-Chair Mulder acknowledged that other states are attempting to securitize those revenues. Co-Chair Mulder questioned what would happen if the capacity were met before the State's issuance. Ms. McConnell responded that then there would not be a very good market for the bonds. She stressed that the State is well positioned to move quickly. She clarified that after the bonds are paid the revenue of the Tobacco Settlement would go into the general fund. Co-Chair Mulder noted that "annually" should be inserted on Page 2, Line 7 and Line 24 after "$1,400,000". Ms. McConnell stressed that K-12 and university education makes sense as part of the tobacco securitization plan. She maintained that the amount for K-12 funding should be increased. She observed that there are other vehicles to handle transportation projects and added that it is important to go through the priority list. She recognized the need for balance between the districts that can do their own bonding and those that can't. She recommended a combination of school debt reimbursement going further down the list for major maintenance and school construction. Ms. McConnell believed that it would be possible to do all of the major maintenance. She concluded that HB 281 is the right vehicle. JOHN BITNEY, LEGISLATIVE LIAISON, ALASKA HOUSING FINANCE CORPORATION, DEPARTMENT OF REVENUE, provided information on the legislation. He pointed out that there are two timing issues: ? The purchase of the assets; and ? The issuance. Mr. Bitney clarified that these could happen at the same time depending on the cash flow. He stated that AHFC would try to complete the transactions by the upcoming fall. He agreed that actions of other states are an issue. In response to a question by Co-Chair Mulder, Mr. Bitney responded that the goal would be set up as an agreement that would not require the districts to concern themselves with the issuance of the bonds. Co-Chair Mulder asked if the issue of risk in relationship to the funds as a dedicated revenue stream has been discussed with bond counsel. Mr. Bitney stated that there had been some discussion with their bond counsel and that they have been requested to look at the concern. The AHFC bond counsel did not indicate that it was a problem in earlier conversations. He observed that the concern is that there is a pledge of the revenue stream for debt service payments. He pointed out that the State was reimbursed up front for the right to purchase the revenue stream. He noted that it has been viewed by AHFC as a purchase and that dedication is a non-issue. Ms. McConnell clarified that even if the money was available, communities would have to go through a bidding process and that construction would probably not happen this year. Co-Chair Mulder pointed out that Mr. Baldwin's letter had omitted "not" on Page 2. JAMES BALDWIN, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW, provided information on the legislation. He agreed that his letter should have stated that "this transaction does not violate the dedicated fund prohibition." He explained that under Alaska law, the term "property" is defined to include what is known as a chosen action; the right to receive something pursuant to a court type proceeding. That is a recognized type of property in Alaska and other jurisdictions. Since, it is property, it can be sold or conveyed by a State agency, given proper authority by the Legislature. The legislation grants the proper authority. (TAPE CHANGE, HFC 00 - 126, Side 2) Mr. Baldwin explained that it would pick out a period of time, stream of revenue, would reserve certain amounts for tobacco programs and to convey this property right to AHFC in the form of a true sale. There have been other ways that these transactions have been done in the State by contributing the property to another entity. He added that because of the dedicated fund prohibition, it would be a cleaner transaction and would support the validity better if it were a clean sale. The Department proposed that the bonds are issued for the projects, and in the capital bill, it would be appropriated proceeds for those projects, which would cover any indicated fund addressed. The Legislature would retain its ability to appropriate the proceeds. Co-Chair Mulder asked about the protection of a separate bill. Mr. Baldwin explained the Governor's approach, which would have a bond authorization and actual appropriations would be somewhere else in an appropriation bill. Co-Chair Therriault referenced the Four Dam Pool process. He asked the amount in the Governor's bill for the appropriations. Mr. Baldwin replied that their numbers were in the Capital Bill as amendments. He noted that a similar approach was taken with the approval of the rural development loans in the AIDEA bill. There is a well established precedence treating these as property rights that can be sold. Co-Chair Therriault noted that there is a prohibition against substantive legislation and appropriations in the same bill. Mr. Baldwin encouraged the Committee to take the appropriation step. He noted that sometimes in a bonding context, the bonding bill itself could be viewed as proper authorization. In the proposed situation, it would be better to have a separate appropriation. Co-Chair Mulder asked if the revenue stream was expected to flow between two points without an appropriation. That arrangement could be vulnerable under Article 9, Section 13 of the State Constitution. By selling the State assets and then appropriating them money back to those entities could conflict with Article 9. Mr. Baldwin interjected that there would not be a problem and that it would be a sensible transaction. It would address the problem that the dedicated fund was attempting to remedy, that being, taking a revenue source and removing it completely from the Legislature's discretion and appropriating it for any purpose it wants. Co-Chair Therriault noted that clearly, AHFC does not own the revenue stream. He asked if the Legislature would have to consider a two step process to transfer that revenue stream over to that ownership. Mr. Baldwin noted that the Governor proposed that authority could be given to Department of Revenue to convey it. Then the conveyance was made to AHFC, and they would be given value for that. Then the Legislature would appropriate the value which was received back. He suggested an additional step would be to appropriate the revenue. Describing it could get "messy". The easiest approach would be to authorize revenue to convey it in such a way that satisfies bondholders. Co-Chair Mulder referenced Section 3, "the sale of right to receive anticipated special revenue..". He asked if that language would satisfy what Mr. Baldwin was referencing. Mr. Baldwin stated it would. The next step would be to separate appropriations of that money. Later in the bill would be the authorization of specific capital projects, and their needs as a step to appropriation, beyond that. Ms. McConnell added that there was another aspect in the process. The point is to protect the State from the risk that the ultimate amount of payment would be less than anticipated. It is important to insure that the State's full faith and credit is not involved. There are aspects of the proposed transaction that do not have to do with the mechanics of the sale, but to insure that the bond holders do not become limited. She acknowledged that would add to the complexity of the issue, at the same time, providing for greater safety. Co-Chair Therriault asked about the revenue stream for the capital projects. Mr. Baldwin replied that the fund source would be corporate receipts. Co-Chair Therriault asked if the projects would be pro-rated. Mr. Baldwin replied that current language of the bill states that the fees would be allocated. Mr. Baldwin added that the projects are allocations and if you run short in one project, you could reallocate to another. That is how a shortage would be addressed. There would be an issuance for a set principle amount. It is an allocated process and can reallocate to another project. Co-Chair Therriault asked if that would address the issue should a project come in over budget. Mr. Baldwin explained that in the Legislative Drafting Manual, a General Obligation (GO) bond issue would take the allocation approach. AHFC would be managing the funds. Co-Chair Therriault did not like the idea of AHFC deciding, when short of capital, which areas would be cut. He suggested that it is important to determine if the money would flow out of Department of Education and Early Development. Co-Chair Mulder suggested that it would be an interesting "turf war". He asked if AFHC would be at risk with that structure. Mr. Baldwin replied that would be determined in how the structure plan was determined. Ms. McConnell interjected, that aspect had not yet been covered. She noted that once it was in the market, would be the time to determine much more. She noted that they would come back to the Legislature to determine how to move forward. Representative J. Davies recommended cleaning up language on Page 2, Line 27, and Page 6, Line 26. He noted that there needs to be a method to reconcile that language. He pointed out that how to deal with the shortfall is included in the appropriation language contained in the second vehicle. Co- Chair Mulder agreed that reconciliation would be a way to address that concern. Co-Chair Therriault asked to clarify the mechanism. He did not think that AHFC would be "fronting" the State money and then going out and recouping the transfer. Mr. Baldwin understood that AHFC would hold the funds for a certain amount of time and then the Department of Education and Early Development would make the request, and then the funds would be transferred. AHFC would be holding the funds as long as they can. Co-Chair Therriault pointed out that would occur after the sale. Representative J. Davies commented that normally when something like this is established, there is a fund to which the money can be transferred. He asked if there was a school construction fund. Mr. Bitney noted that in 1998, when SB 360 passed, it was the last $200 million dollars of AHFC general obligation bonds. In that session, the appropriation fund source was created called AHFC Bond Proceeds. All the appropriations for each project in the capital budget were given its own fund source. Mr. Jeans indicated that the Department did not perceive that to be a problem. Vice Chair Bunde asked what would happen if there was too much money. Ms. McConnell explained that the way it was structured, it is not just a 40-year bond plan. The idea was to pay it back more quickly. She noted that $1.4 would be reserved before AHFC was to receive any of the revenue stream. Representative J. Davies commented that if there were excess funds, they would presumably reside at AHFC. If they were in an account called AHFC proceeds, then the Legislature would know where they were and how to find them. Co-Chair Mulder asked if the Department had anticipated preparing an amendment to address what would happen in the case of a shortfall. He noted that there is an appropriation bill in Committee, the Governor's Capitol budget. He advised that there is a committee substitute being prepared that would marry the two recommendations. Co-Chair Therriault referenced Page 5, the University deferred maintenance project and asked if it was essential to "lock" the University into those different categories. He pointed out that in the past, they had been linked together to give the University flexibility. He recommended in the new committee substitute to have the language structured to indicate deferred maintenance/renewal/code of compliance. Co-Chair Mulder questioned if the Bond Council would care where the money was spent as long as there was revenue coming in. Mr. Bitney replied that this would need to be done for public purposes. The only instance where that could be a problem would be in situations where grants were provided to non profit agencies. Co-Chair Mulder agreed that the new committee substitute should reflect as an allocation toward the University for deferred maintenance/code compliance/renewal replacement. Representative Williams asked where the numbers came from. Co-Chair Mulder replied that the numbers came from the University. Co-Chair Mulder replied that the list came from the actual University list and in consultation with the specific campuses. Representative Williams noted that he was concerned with moving the money around. Ms. McConnell noted that the Administration recommended clustering the deferred maintenance projects to avoid extra accounting. That would be consistent with how other deferred maintenance projects have been addressed. Representative J. Davies advised that each item was an estimate. The language would provide the University more flexibility. WENDY REDMAN, VICE PRESIDENT, STATEWIDE SERVICES, UNIVERSITY OF ALASKA, FAIRBANKS, noted that the money is allocated to the individual campuses. There is a detailed list of the deferred maintenance and code compliance projects. The list contains the top priority projects from each campus. The money would not move from campus to campus. There are many points of accountability on how the money is spent. Representative Austerman observed that renewal and replacement could be listed as deferred maintenance. Ms. Redman reiterated that the deferred maintenance was the University's highest priority. The deferred maintenance is the renewal and replacement that did not get done last year. In fact it has not been done for many years. She noted that with the AHFC bond with $35 million dollars in deferred maintenance, this was the wording used and that it provided flexibility to address some of the unexpected thing that may come up. Representative J. Davies pointed out that the Board of Regents has to approve each project and each expenditure. Co-Chair Mulder advised that there would be a new committee substitute drafted which would consolidate all the concerns which had been voiced. Representative Grussendorf asked what happened to the original premise of HB 281. He spoke about transferring harbors to the local municipalities. Co-Chair Mulder clarified that it was still the intent that harbors be transferred to the local communities. He noted that the Department of Transportation and Public Facilities would be addressing that concern. With regard to the Sitka project, unfortunately, there was only one harbor not placed into HB 269. Representative Grussendorf emphasized that the communities that he represents are coastal communities and that they could take over these operations and turn them into an enterprise. Representative Phillips pointed out that every community on the list had made the agreement that they would take it over. Representative Grussendorf advised that there had been some added that were not on the original list. Representative J. Davies asked if all the projects were in fact "ready to go" in the next year or so. Representative Phillips assured members that her district was ready. Representative Grussendorf noted that in the original HB 281, there was a three-year period in which there would be $10 million dollars available. This is no longer the approach. Co-Chair Mulder commented that they would continue to work on the language so to expand that concept. HB 281 was HELD in Committee for further consideration.