HOUSE BILL NO. 140 "An Act authorizing the Alaska Railroad Corporation to issue revenue bonds to finance a positive train control rail transportation safety project that qualifies for federal financial participation; and providing for an effective date." Co-Chair Thompson reviewed the meeting agenda and indicated he would not be moving either of the scheduled bills out of committee. 1:33:51 PM JANE PIERSON, CHIEF OF STAFF, REPRESENTATIVE STEVE THOMPSON, introduced herself and told a personal story about riding on the Alaska railroad from Seward to Anchorage. She read the sponsor statement: HB 140 will authorize the Alaska Railroad Corporation (ARRC) to issue up to $37 million in tax-exempt bonds backed by Federal Transit Administration (FTA) formula funds received annually by ARRC. Bond proceeds will be used to finance Positive Train Control (PTC): a safety program mandated by the federal government without any correlating funding, which is estimated to cost ARRC approximately $158 million. ARRC proposes to refinance $66 million in existing bonds and extend the repayment date in order to issue an additional $37 million in bonds to pay for a major portion of the remaining $55 million in PTC costs. Under AS.42.40.285 ARRC is required to receive legislative approval to issue bonds. In no event will the general credit of the State of Alaska or ARRC be pledged for the repayment of these bonds. AS.42.40.500 requires that all liabilities incurred by ARRC shall be satisfied "exclusively" from the assets or revenue of ARRC and not the State. Debt payment for the bonds will come from a portion of Federal Transit Administration (FTA) formula funds which are statutorily mandated by Federal law and received annually by ARRC. Issuing debt backed by FTA formula funds is authorized through FTA regulation and has already been used by ARRC to issue bonds. PTC is technology designed to stop or slow a train before human-error causes an accident to occur. In 2008, the federal Rail Safety Improvement Act required certain railroads to install a fully functional PTC system by the end of 2015; by virtue of its passenger service, ARRC is subject to this requirement. A failure to implement PTC will force ARRC to severely curtail or eliminate passenger service and/or face severe fines for non-compliance. Estimates for this large research and development project indicate that it will cost approximately $158 million to implement. Since 1997, ARRC has invested $68.9 million to develop a PTC system. In 2013 and 2014, ARRC received an additional $19.1 million and $15 million respectively from the State of Alaska to continue work on PTC. Between 2016 and 2018, an additional $55 million will be required for ARRC to complete the development and installation of PTC by 2018. This figure does not include the estimated $5 million to $7 million per year of operating and capital maintenance costs related to the system that ARRC will fund after PTC is installed. She added that the bond issuance would leave the additional $18 million to complete the project for the funding package. She noted that if ARRC did not show that it was making a good-faith effort to implement PTC, the Federal Railroad Administration could implement fines up to $100 thousand per day. She concluded her introduction of the bill and mentioned that Bill O'Leary, ARRC's President and Chief Executive Officer, and Linda Leary, ARRC's Board Chair were in the audience available for questions. She also indicated Barbara Amy, ARRC's Chief Financial Officer, was online and available for questions. 1:38:37 PM Co-Chair Thompson relayed that Co-Chair Neuman and Representative Gattis had joined the meeting and asked if any committee members had questions. Vice-Chair Saddler wondered if anyone had any ideas on how to increase revenue to pay for the additional $5 million to $7 million per year for the operational expense of the PTC system. WILLIAM G. O'LEARY, PRESIDENT AND CEO, ALASKA RAILROAD CORPORATION, responded that the $5 million to $7 million would be the ongoing costs to maintain the system once installed. He anticipated taking the maintenance funding from the railroad's operating and capital budgets. The railroad had been in a series of flux with the drops in key revenue streams including federal monies. He thought that funding would be a challenge starting in 2019. Co-Chair Thompson asked about how much gross revenue the state received from passenger service. Mr. O'Leary estimated that the annual gross revenue for passenger services was between $26 million to $27 million. He reported that passenger activity had grown over recent years. Vice-Chair Saddler asked Mr. O'Leary if the cost of the PTC was paid for through passenger fees. Mr. O'Leary responded in the negative. He signified that ARRC would be exploring different revenue options. He opined that the railroad was operating in a competitive market place and raising fees could lead to more competition. He assured the committee that ARRC would be reevaluating its entire fee structure. 1:41:44 PM Representative Gara commented that over the years the railroad had not made a consistent net revenue. He wondered about the railroad's net revenue in real estate operations, for example, over the previous five years. Mr. O'Leary responded that the revenue bonds would not be a credit for ARRC. He continued that the only supporting revenue stream for the bonds would be the Federal Transit Administration (FTA) formula monies, federal monies the railroad received annually. He relayed that over the previous ten years ARRC had received between $29 million to $36 million per year in FTA funds. The funds came as a result of ARRC offering year-round scheduled passenger service. The corporation itself had a net income of $11 million to $14 million over the previous five years. Representative Gara asked if Mr. O'Leary had full confidence that the railroad would be able to repay the revenue bonds. Mr. O'Leary responded that since the credit of the railroad would not be supporting the bonds, the only revenue that would be applied were FTA monies. He furthered that FTA funds were up for reauthorization in congress as part of the national transportation reauthorization. He explained that the funding that ARRC received was part of formula monies that supported many other passenger train lines all over the country. He expressed his confidence in the funds continuing into the future. Otherwise, he surmised there would be too great an impact on the populous of the states. Representative Gara commented that the bill seemed fine. He expressed concern that the railroad would come back to the state for funds to pay for the bonds in the future. For example, if ARRC received $30 million in federal funds but began to lose more than that as a railroad operation, he wondered if ARRC would come to the state for additional funds. He wanted to know whether Mr. O'Leary was confident that ARRC had enough internal revenue to avoid coming to the state for help with the bond repayment. Mr. O'Leary responded, "Yes." He explained that the bond indenture was written such that the bond holders' debt service payments were made before the federal revenue could be used for any other purpose. Representative Gara suggested that ARRC had been making approximately $11 million to $14 million in net revenue. He wondered if it included the $29 million to $36 million from the federal government. Otherwise, he surmised ARRC was losing money. Mr. O'Leary responded positively that the net revenue included the federal funds. However, the monies that came in did not flow into net income. The funds were used for capital activities. He continued that the FTA funds were used for debt service first and then for capital activities. 1:46:17 PM Representative Gara wanted to confirm that ARRC would be revenue positive even without FTA funding. He asked that if ARRC was using the FTA money for capital expenses and the funds were now pledged to pay for the revenue bond, was there any foreseeable circumstance in which ARRC would have to come to the state for additional money. He wondered if ARRC would always have a positive net revenue. Mr. O'Leary stated that in his view there would be sufficient revenue and that ARRC would not be coming to the state for any kind of operating subsidy. Representative Wilson asked about funding for the previous two years. Mr. O'Leary responded that in the past two years ARRC had received state general fund (GF) monies totaling $34 million. Prior to that, since 1997, AARC used federal monies including ear marks and formula funds, and revenue generated from internal railroad operations. Representative Wilson asked why ARRC was not asking for GF monies. Mr. O'Leary replied that ARRC started out looking for GF monies, but was quickly disabused of the notion. Alaska Railroad Corporation (ARRC) was challenged by members of the [Finance] committee to think creatively about how to move the project forward without $55 million in GF funding. Representative Wilson thanked Mr. O'Leary for his efforts. Vice-Chair Saddler asked if other states had used their FTA revenue stream to pay for PTC. He wondered if Alaska's approach had been used previously. Mr. O'Leary confirmed that the approach had been used in other states. He furthered that ARRC had used the approach in 2006 when the railroad issued its first bonds. Vice-Chair Saddler asked how it had worked for the state in the past and for other railroads. Mr. O'Leary believed that it had worked well for ARRC and for other railroads to leverage FTA funds. The funds were consistent, coming from FTA, and provided the opportunity to finish projects that would have otherwise taken much longer to complete. Vice-Chair Saddler asked about the federal funding stream. He wondered if it stemmed from a freight surcharge or if it was a full faith in credit with the federal government. Mr. O'Leary relayed that the monies came from the mass transit account in the highway trust fund. Vice-Chair Saddler asked how the highway trust fund was fueled. Mr. O'Leary responded that the fund was augmented by a federal gas tax. Representative Kawasaki suggested that in previous committee meetings with Department of Transportation and Public Facilities it was reported that the federal highway trust fund was shrinking. He wondered how ARRC would be affected. Mr. O'Leary indicated that there was risk in the federal reauthorization concerning how the highway trust fund would be funded and at what levels. However, congress was investigating different approaches alternate to a flat gas tax. He noted the possibility of a mileage-based approach. Alaska Railroad Corporation believed the outflows from the federal government would continue in a similar form. Co-Chair Thompson signified that his understanding was that the bond holders were aware of the risk of FTA dollars going away. Mr. O'Leary responded affirmatively. He reported that there were very explicit disclosures on all of the bond-offering documents that showed there was no pledge of full faith in credit of the state, nor of ARRC, but rather the only security for the bonds was the formula money that ARRC received from FTA. 1:51:00 PM Co-Chair Thompson asked if the timing was critical for ARRC to secure the bonds in the current year. Mr. O'Leary responded that the timing was extremely critical. The railroad was not quite living hand-to-mouth on the project but explained that ARRC would need to have an infusion of cash by June 2015 or July 2015. Vice-Chair Saddler wonder about the interest rate associated with the bonds. Mr. O'Leary reported that the modeling ARRC was doing with a financial advisor was based on an interest rate below 2.5 percent. Co-Chair Thompson commented that if the state waited a year the interest rate could jump to 5 percent or 7 percent. He added that an interest rate of 2.5 percent was a good rate. Vice-Chair Saddler asked about what would happened if ARRC did not receive authority from the legislature in the current year. Mr. O'Leary stated that ARRC would have a significant problem. He elaborated that the railroad would not be able to enter into any further contracts or spend additional funds which would result in the project coming to a complete halt. Alaska Railroad Corporation would not be acting in good faith in the eyes of the Federal Railroad Administration, the railroad regulator. The consequences of not implementing PTC within the designated timeline could lead to fines of up to $100 thousand per day and eventually the inability to provide passenger service. He noted that not only would ARRC lose $26 million to $27 million in gross revenues for passenger service, ARRC would no longer be eligible to receive FTA funding. There would be a very different model for ARRC going forward. He referred to it as a, "death spiral." Vice-Chair Saddler followed up by asking if it was possible that the Federal Railroad Administration would issue waivers for the PTC requirement. Mr. O'Leary responded in the negative. He relayed that he had recently been in Washington D.C. the prior week to meet with Alaska's congressional delegation and with federal regulators. He cited that the consistent message from all parties was that there was no way for ARRC to get out of meeting the PTC requirement. HB 140 was HEARD and HELD in committee for further consideration. Co-Chair Thompson relayed a personal story about Mr. O'Leary's mom. Representative Gara interjected that he knew that Linda Leary was a good fisherman. LINDA LEARY, BOARD CHAIR, BOARD OF DIRECTORS, ALASKA RAILROAD CORPORATION, thanked the committee for hearing HB 140 and admitted to loving to fish. Co-Chair Thompson acknowledged Sharon Kelly from the Speaker's office and wished her a happy birthday. He followed by bringing up the next agenda item, HB 30. 1:56:12 PM