HOUSE BILL NO. 426 "An Act providing for, relating to, and approving the issuance of certificates of participation for the construction, acquisition, and equipping of the Alaska Scientific Crime Detection Laboratory in Anchorage; providing notice of and authorizing the commissioner of the Department of Administration to enter into a lease-purchase agreement with the Department of Public Safety for the Alaska Scientific Crime Detection Laboratory; and providing for an effective date." 2:24:27 PM JOSEPH MASTERS, COMMISSIONER, DEPARTMENT OF PUBLIC SAFETY, explained what the crime lab does and urged passage of the legislation. He elaborated that HB 426 provides $75,750,000 in funding for a new state crime lab. The existing crime lab is outdated and inefficient. A crime lab replacement would provide state of the art scientific analysis of the evidence in a timelier manner that could result in swifter arrests and convictions; enhancing protection for Alaskans. He added that a new crime lab is a key component in the Governor's sexual assault and domestic violence initiative. Sexual assault and domestic violence cases contribute to half of the workload of the crime lab. The new lab is vital to the initiative's goals; to prosecute perpetrators and prevention. He furthered that a new lab will protect the innocent from false accusations with timely processing of evidence and exonerates the wrongly convicted. Commissioner Masters stated that the new crime lab has the capacity and technology to meet the existing and future crime analysis needs of the state. The current inadequate crime lab is the main reason crime evidence analysis cannot be processed in a timely manner or cannot be processed at the facility at all which creates backlogs and delays. The crime lab has become "reactive" to major crimes only. He reported that a new crime lab would enable a "proactive" and preventive approach to combating all types of crime. He pointed out that an expected increase in the state population of 140,000 by 2013 will significantly increase demand for the crime lab services. Commissioner Masters reported that previous legislative approval for leasing a twelve acre site from the municipality of Anchorage for one dollar per year for the next fifty years with an additional twenty five year extension, $8,000,000 for design work, and $8,800,000 for site preparation demonstrates past legislative support for the project. He added that the project team trimmed $20,000,000 from the initial estimated cost. Construction of the crime lab is expected to create 250 jobs and employ fifteen subcontractors. 2:30:55 PM Commissioner Masters emphasized the difficulty of putting a price tag on the value of public safety and security for Alaskans. Representative Austerman asked if the total cost of the lab is approximately $92.5 million. Commissioner Masters affirmed. He clarified that HB 426 provides $75,750,000 along with the previous appropriations invested in the replacement lab that totals $16.8 million. Representative Foster asked whether future needs were considered in the design. Commissioner Masters replied that the lab design meets current and future needs up to 20 years. Representative Kelly referred to the earlier proposed project, high cost of the lab, and legislative directives to scale back the project and costs. He noted that was successful and wondered whether the facility would still be adequate. Commissioner Masters noted that nineteen percent of the footprint is shelved space to allow for future expansion and with the flexibility to add new technology and techniques as they are developed. 2:35:35 PM Vice-Chair Thomas referred to the high crime statistics in Alaska and queried why the new lab would make a difference. Commissioner Masters responded that there would be an immediate increase in efficiency of twenty percent, directly related to adequate use of space and equipment for all types work processes and analysis in the lab. ORIN DYM, MANAGER, FORENSIC LABORATORY, DEPARTMENT OF PUBLIC SAFETY, reported that sexual assault cases are backed up to 2007 and often property crime evidence is not submitted in consideration of the backlog. He emphasized that the crime analysis situation in the state "is so bad". He stated that, "we are the clog in the pipes of justice." Vice-Chair Thomas asked if the lab would increase cold case capabilities. Commissioner Masters informed that the cold case homicide unit is an investigative unit in the operations department. All of their work that requires scientific analysis is sent to the state crime lab. Representative Salmon asked if autopsies would be performed at the crime lab. 2:39:29 PM Commissioner Masters reported that autopsies are performed at the Department of Health and Social Services lab, which works closely with the Department of Public Safety lab as needed on criminal cases. Representative Foster asked if equipment is included in the total cost of the lab. Mr. Dym affirmed. Co-Chair Hawker opened public testimony. Co-Chair Hawker Closed public testimony. Co-Chair Hawker requested discussion of the fiscal notes and the proposed funding mechanism; the certificate of participation concept. DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL BOND BANK AUTHORITY, DEPARTMENT OF REVENUE, stated that the bill authorizes issuance of $750,000,000 in certificates of participation to fund the crime lab. The amount of $750,000 is associated with costs to sell the certificates. He explained how the certificates of participation are secured. The state enters into a subject to appropriation lease with a trustee. The trustee is granted a title position in the facility. The lease is fractionalized into $5,000 certificates that are similar to bonds but legally distinct from them. The certificates are sold in the same way as any bond issue; by a combination of serial bonds or term bonds that would follow a yield curve from year one to twenty years with various interest rates for the different maturities. The various rates would blend into an aggregated rate estimated at 4.2%. He added that the project would participate in the federal stimulus program [The American Recovery and Reinvestment Act](ARRA) via the Build America Bond Program that would provide direct subsidies by reduction in the annual debt service in the amount of $300,000 - $400,000 per annum. The program would allow for the sale of a combination of tax exempt bonds at the short end of the yield curve and taxable bonds at the long end of the yield curve and receive a direct subsidy from the federal government of thirty five percent of the interest expense. 2:45:58 PM Co-Chair Hawker asked if market conditions are appropriate for the state to enter into this type of transaction. Mr. Mitchell affirmed. He believed that the financial markets have stabilized and the conditions are favorable for long term debt. Vice-Chair Thomas if there is a cap on how much stimulus money can be used. Mr. Mitchell replied that there is no limit on the ability to use the bond program. Representative Fairclough queried if the building is designed to energy efficient standards. MATT TANAKA, CRIME LAB PROJECT MANAGER, DEPARTMENT OF TRANSPORTATION AND PUBLIC FACILITIES, offered that the building design is complex but energy efficient as possible. Representative Fairclough stated that she heard the answer as no. Mr. Tanaka countered that the answer was yes. Many design elements employed energy efficient systems but due to the complex nature of the design, it does not meet a specific energy efficiency standard. Energy costs were modeled in during the development of the project. Representative Fairclough asked if heated sidewalks were part of the design. Mr. Tanaka negated. 2:51:19 PM Representative Doogan asked for clarification of the term of the certificate. Mr. Mitchell explained that the term is for 20 years with a level debt service and interest payment due in FY 2011. He furthered that interest would be paid within six months of issuance with subsequent interest paid on a semi-annual basis. A principle payment would be paid in August, 2012. Representative Doogan cited the legislation on page 2, lines 21-24, "The estimated annual amount of rental obligations under the lease-purchase agreement is $5,600,000. The estimated total of lease payments for the full term of the lease-purchase agreement is $112,000,000." Representative Doogan asked if $112,000,000 was the repayment amount over twenty years. Mr. Mitchell affirmed. He clarified that amount is an estimate. He restated that with participation in The Build America Bond Program reduction in the annual debt service in the amount of $300,000 - $400,000 per year below the $5.600, 000. Representative Doogan asked if there is a substantial market for the certificates and if it is a safe course for the state to take. Mr. Mitchell remarked that this is an extremely common form of financing and is called a "subject to appropriation concept" in financial markets. The state has used the mechanism successfully in the past. An investor is compelled to purchase the certificates because non-payment by a state has legal negative credit ramifications and prohibitions to access capital for future projects. Representative Doogan wondered what the advantage is of certificates of participation over general obligation bonds. Mr. Mitchell reiterated that certificates of participation are a very common means for public financing for a single project. All of the other labs in the state were financed by this mechanism. He stated that the state gets a lower interest rate with general obligation bonds. However, general obligation bonds are usually used for funding multiple projects and the project cannot move forward until an election is held. He added that ARRA expires at the end of 2010. AARA is expected to extend but at a lower reimbursement rate of 33% so the risk in waiting is that you would give up nearly half of your advantage with general obligation bonds. Also, the state would take on interest rate risk because of waiting longer to sell at the end of the year instead of now in favorable market conditions. 2:58:11 PM Representative Doogan asked if there is a premium being paid to use certificates of participation instead of general obligation bonds. Mr. Mitchell replied that it would be an estimated $45,000 per year or $900,000 over the life of the loan. Representative Foster wondered what the rationale was to use certificates of participation instead of general obligation bonds. Mr. Mitchell stated he would not characterize increased interest payments as a premium. He felt that the rationale to use certificates of participation was the time sensitive nature of the ARRA expiration. Also, if GEO bonds are used and time is lost waiting for voter approval the risk is that the financial markets can become supply heavy at the end of the calendar year with the result of paying higher yields. In using certificates the state might be giving up the potential to have their best credit and lower interest rate with geo bonds but somewhat offset by selling into a more favorable market now with certificates and the ability for the project to move forward as soon as the bill becomes law. 3:02:19 PM Vice-Chair Thomas MOVED to report HB 426 out of Committee with individual recommendations and the accompanying fiscal note. There being NO OBJECTION, it was so ordered. HB 426 was REPORTED out of Committee with a "do pass" recommendation and with a new fiscal note from the Department of Revenue.