CS FOR SENATE BILL NO. 269(FIN) "An Act relating to the waiver of volume cap of recovery zone economic development bonds authorized by 26 U.S.C. 1400U-2 and reallocation by the Alaska Municipal Bond Bank Authority of the waived volume cap; relating to the waiver of volume cap of recovery zone facility bonds authorized by 26 U.S.C. 1400U-3 and reallocation by the Alaska Industrial Development and Export Authority of the waived volume cap; increasing the total amount of bonds and notes that the Alaska Municipal Bond Bank Authority may have outstanding; relating to revenue bonds and to obligations secured by lease that are issued by the Alaska Municipal Bond Bank Authority; relating to allocations of tax credit and bonding limits imposed by the federal government; and providing for an effective date." 9:26:00 AM DEVIN MITCHELL, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL BOND BANK, DEPARTMENT OF REVENUE, reported that the primary portion of the bill would use federal allocations to finance certain recovery zone bonds and other tax credit structures. There are also aspects that relate specifically to the bond bank, including an increase in the borrowing level of the bank from $750 million to $1 billion. He added that the bond bank issues obligation bonds to the state. The cap has been increased several times over the past six years. The revolving balance is currently approximately $120 million. Mr. Mitchell explained that the increase is being requested in light of historical community need as well as projected need and opportunities. Other changes related to the bond bank are in the revenue bond allowances. Currently, the bond bank is not allowed to participate in hydroelectric project loans; SB 269 would eliminate that restriction. Restrictions against loaning to the state and participating in revenue bond loans buying existing buildings would also be eliminated. He thought the restrictions were put in place when revenue bond statutes of the corporation were created and were outdated. The ability of communities to borrow money would be improved. Mr. Mitchell spoke to American Recovery and Reinvestment Act (ARRA) allocations made to the Department of Labor and Workforce Development (DLWD) for labor statistics. He explained the Build America Bond Program, which provided an opportunity for the issuer of tax-exempt debt to benefit through a direct subsidy from the U.S. Treasury rather than selling the tax exempt debt to an investor and having the investor benefit. The rate on the bond program is 35 percent. Billions of dollars have been issued in 2009 and 2010. He explained the structure as a combination of tax- exempt and taxable bonds; there is a yield curve in every market that typically starts with lower interest rates and climbs to higher rates later in the maturity schedule. There has been a break-over point between years eight and twelve of the maturity schedule; switching over the Build America Bond Program during that time is beneficial. The investor has to pay taxes, but the department gets a 35 percent subsidy. The benefit has been as much as 2 percent in interest rate reduction. The recovery zone economic development bond allocation provides for a 45 percent subsidy rather than 35 percent. Mr. Mitchell related that the bill would provide ability to use the allocations. The final portion of the bill is the allocation of other tax credit structures through the state bond committee, including qualified school construction bonds and energy credit bonds. There is a $28.9 million allocation for the school construction bond program without a means to allocate the money to communities, who are eligible for 100 percent reimbursement on interest expense. 9:34:48 AM Representative Fairclough asked when municipal bank bond authority was last raised. Mr. Mitchel1 replied two and a half years ago. MARK DAVIS, ECONOMIC DEVELOPMENT OFFICER, ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY (AIDEA), DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, added that AIDEA would undertake the reallocation of recovery zone facility bonds. He detailed that the bonds are tax-free bonds that could cover private activity bonds. He noted that the problem with the allocation is that some cannot be used and some are too small. He provided the example of the Aleutians East Borough receiving a zero allocation because of unemployment, while the Aleutians West census area received a $7 million allocation that cannot be used as it is not a governmental entity. In addition, the City and Borough of Yakutat received an allocation of only $148,000, which is too small to use. Senate Bill 269 would allow AIDEA to reallocate funds to boroughs that could not otherwise use them. Mr. Davis stressed that timing is important as the bonds will expire January 1, 2011; the facility bonds will not be used without SB 269. He noted that the facility bonds that AIDEA would acquire are tax exempt and could be used for any industrial, commercial, retail, or office use (country clubs and massage parlors are excluded). The bonds would be used as private activity conduit bonds as AIDEA's bond authority has sunset. Regulations would be issued; AIDEA is directed on page 7 to use regulations that would try to reallocate the bonds back to the areas from which they came. Representative Doogan requested more information about the building segment in Section 4. Mr. Mitchell explained that the typical issue with the language is the partnering of a community with a state agency. For example, when a department rents office space from a municipality the bond bank is not allowed to provide lower-cost capital to the community for the project. 9:39:38 AM Representative Doogan wanted a specific example. Mr. Mitchell relayed being approached by Bethel regarding a building that would have accommodated a combination of state agencies and city agencies; the bond bank was not able to help. Representative Doogan queried the issue with equipment. Mr. Mitchell responded that the intent of the amendment was that there is no need to exclude equipment. Certificates of participation can theoretically be issued for equipment, or a lease for equipment can be entered into. The ability to help with lower-cost capital for equipment is limited. Representative Doogan pointed to two possible definitions of "equipment." The first is buying a fire truck; another is equipment to finish buildings. He asked whether the legislation was looking for a way to bond fire trucks or assist in the expensive process of equipment to get a project up and running. Mr. Mitchell believed the fire truck example was more fitting. He alluded to safely checks that limit the ability to fund anything through the program. For example, there is a credit review process. There must be an ability to repay. Secondly, when issuing tax-exempt debt, an entity is limited in various ways by the necessity of having an obligation in compliance with Internal Revenue Service (IRS) rules. For example, what is financed must be durable; the life of the debt cannot exceed the life of the assets. He did not think the program would be used to replace other means of financing equipment like computers. 9:43:48 AM Representative Austerman asked for a clearer explanation of what the legislation would do. Mr. Mitchell replied that the $750 million borrowing limit could be exceeded, based on the historical use of the program by communities and the projected need around the state. He emphasized that the bond bank is a moral obligation of the state; there is a statutory requirement for a reserve fund that is pledged to the bond issue and about one year of debt service. The pooled reserve is larger than any one bond issue. The bond bank is required to ask the state for replenishment when there is a draw on the reserve due to borrower default. The statutory framework creates a moral obligation or intent to replenish. He noted that there has never been a need to replenish. Representative Gara remarked that the federal proposal seemed useful. He asked whether there was interest in the bond projects. Mr. Mitchell believed that the allocations would be utilized, particularly the economic development bonds. He noted that there are boroughs that have already used the bonds: Ketchikan Gateway Borough had a $3,744,000 allocation and Juneau has a $7,586,000 allocation planned for May. Ketchikan was able to get cost of capital on a 30- year note at 3.35 percent, for example. He detailed the financing strategy to get the greatest benefit where interest rates would be highest. He believed any community issuing debt would welcome the opportunity. 9:48:24 AM Representative Foster summarized that the bill would raise the cap so that local governments could take advantage of lower interest rate economic development and facility bonds. He queried the risk of increasing the cap on the maximum authority of the bond bank. Mr. Mitchell responded that there were layers of credit in between the state's general fund and the particular obligation. He believed the risk was not significant. Mr. Davis added that AIDEA's bonds would be conduit bonds; there would be no risk to AIDEA. The bond obligations go from the bond holder to the bond issuer; AIDEA steps out of the process. Representative Austerman spoke of the debt in California and wondered how high Alaska's guarantee of the bonds should go. Mr. Mitchell replied that the $750 million cap has developed over 40 years. Borrowers have become more self-reliant in recent years as obtaining capital funds from the state has become more difficult. He stated that his comfort level was high compared with the alternatives because communities would be paying more without the program. For example, the bond bank worked with the City and Borough of Juneau to fund the Bartlett [Regional Hospital] expansion; the revenue bond on its own would have paid about $10 million more in interest over the life of the bond without the bond bank. The projects would have been accomplished but at higher cost to the state through higher interest rates. He emphasized that the program has already been successful and is an alternative that would help communities save money. Co-Chair Stoltze closed public testimony. 9:53:22 AM Representative Doogan pointed to the density of the language in the first line of the fiscal note. Co-Chair Hawker explained that the fiscal note acknowledges that a legal framework and advisory costs would be needed in order to accommodate the reallocation of the funds. He thought the $80,000 was a fair price and that it was worth the investment to help communities. Vice-Chair Thomas MOVED to report CSSB 269(FIN) out of Committee with individual recommendations and the accompanying fiscal notes. There being NO OBJECTION, it was so ordered. CSSB 269(FIN) was REPORTED out of Committee with no recommendation and previously published fiscal notes: FN 1 (CED), FN2 (REV). 9:55:35 AM AT EASE 10:00:14 AM RECONVENED