HOUSE BILL NO. 268 "An Act relating to the Alaska Municipal Bond Bank Authority." 9:08:16 AM Co-Chair Foster MOVED to ADOPT proposed committee substitute for HB 268, Work Draft 31-LS1440\U (Klein, 3/10/20)(copy on file). Co-Chair Johnston OBJECTED for discussion. ERIN SHINE, STAFF, REPRESENTATIVE JENNIFER JOHNSTON, relayed that the one difference between the version that came to the committee and the committee substitute (CS) before members, version U, was that the previous version eliminated the $102.5 million project limit for a single regional health organization project. The cap was removed completely. In the CS on page 3, lines 21-22, the section was reinserted with an increased project limit to $250 million. Representative Josephson asked why the cap was increased. Co-Chair Johnson indicated the explanation would be provided by the sponsor. Co-Chair Johnston WITHDREW her OBJECTION. There being NO OBJECTION, it was so ordered. 9:10:06 AM REPRESENTATIVE BART LEBON, SPONSOR, explained that the purpose of the bill was to expand the availability of credit for Alaska's regional health organizations as well as assist the University of Alaska with potential debt refinancing opportunities. Currently, the University's access to the Alaska Municipal Bond Bank was limited. Representative LeBon provided a brief history of the Bond Bank. About 5 years prior, access to the Alaska Municipal Bond Bank by regional health organizations was established in statute. However, at the time it was established in statute the funding was limited to 49 percent of the cost of a project and capped at $102 million. The goal of making a change was to allow up to 100 percent financing through the Alaska Municipal Bond Bank and to raise the cap from $102 million to $250 million. It raised the ceiling on the total funding through the Bond Bank to $500 million. The goal of the legislation was to give Alaska's regional health organizations and the University of Alaska an additional tool in their toolboxes. Representative LeBon indicated that to finance a project currently entities were always looking for the best deal possible whether through a private bank, participation loans, or a bond bank. Part of determining the best deal was determining how much could be financed through the lender. Some lenders might go up to 95 percent and others might be more comfortable at 75 percent. He mentioned a law that came out in 2014 that limited regional health organizations from borrowing more than 49 percent of a project's cost through bond banking creating a condition that forced the regional health organization to seek partnerships. Sometimes partnerships could benefit an organization. He spoke of his banking days and a number of partnerships where there was a lead lender in a deal who would assist in putting together partnerships to benefit the client or customer. The legislation would give the regional health organizations additional options. Representative LeBon discussed repayment and collateral risks. He explained that it was difficult to define collateral risk in a traditional way regarding a regional health organization. He provided an example of a traditional collateral risk to a bank. If a home owner did not pay back a home loan, the bank would foreclose on the home. He opined that it was unlikely any bank would want to foreclose on a regional health organization. The risk would likely be cash flow and, the credit risk would be managed. The bill allowed for multiple or single lenders and provided the option for the Alaska Municipal Bond Bank to be the lead lender. He indicated his staff would provide further details. 9:15:23 AM ANNE RITTGERS, STAFF, REPRESENTATIVE BART LEBON, explained that there were also a few changes to lending to the University of Alaska. It removed the project scope limiting bond bank participation to only heating and energy projects. It also raised the UA project participation cap from $87.5 million to $500 million. Representative Josephson asked if it was possible that the borrower would have more leverage to negotiate with partners. Representative LeBon responded in the affirmative. Additional options helped to drive down rates and provided other benefits. Representative Sullivan-Leonard saw the benefits of the legislation. She wondered if there were any projects that Representative LeBon was aware of that had not been established because of how the bond rating was currently. Therefore, the legislation being presented would assist in their endeavor. Representative LeBon was not aware of any projects that lacked financing opportunities. He suggested that if an entity was forced to partner with multiple lenders, it would also force a parody agreement from the multiple lenders. It required a balanced playing field among lenders. The borrower was also required to be aware of the relationships. It was rare in partnerships that the borrower could favor one lender over another. He continued that a parody relationship had to be clearly defined and respected. It was also important for all parties involved in the transaction to have defined agreements in place. He suggested that the more parties that were involved in a transaction, the more complicated the parody agreement became. He relayed an experience in which there were four partners. The four partners had to reach a common agreement on how the financing would take place. Once the agreement was reached, the partners had to share the agreement with the borrower who rejected the agreement. His point was that the more players involved in a deal, the more complicated the deal would likely become. Representative Wool asked if there was any competition between Alaska Industrial Development and Export Authority (AIDEA) and the banking industry. Representative LeBon did not believe the banking industry would be threatened by the legislation. In his experience, at times a banking entity might be brought in to do the interim financing such as construction financing. The takeout would be AIDEA, USDA, or the Alaska Municipal Bond Bank Authority. Some entities would not do interim construction financing and would look to the private banks for assistance. He had done several projects statewide in which the bank financed the construction of a building providing the take out. He also understood that the Bond Bank could help with construction financing. 9:20:20 AM Representative Wool commented that it looked like several millions were available. He assumed that the funds were for something other than construction. He asked about the 6-fold increase from $87 million to $500 million and the kinds of projects that would need a $500,000 bond bank loan. Representative LeBon thought most of the financing would be related to building a facility and not to purchasing equipment. Equipment was a depreciable asset with a short life. There were other ways to finance or purchase equipment. The biggest benefit for the University was that it would have another option if debt came up for renewal, debt was recallable, or refinancing rates became more favorable. He thought there might be opportunities for the University to lower its debt service because of current low interest rates. Representative Knopp wondered if in Representative LeBon's banking days he ever financed 100 percent of a home purchase. He referenced the fiscal note and read from it: In the event of a default by the University or a regional health organization that participates in this program the State of Alaska would be asked to provide for that debt service, and if the State failed to act on that request a loss of market access, impacts on investor confidence and current credit rating would be expected. Representative Knopp reported that since 2006 his hospital had taken on hundreds of millions of bond debt for expansion purposes. Since the passage of the Affordable Care Act the area did away with service area mill rates and sold revenue bonds to help to pay down debt. The result was the responsibility was taken from the borough and placed in the hands of the facilities. He was concerned with the state getting overburdened with debt. He wondered if it was possible for the state to avoid having the liability of a revenue bond issuance. He thought the institutions should have some skin in the game. Representative LeBon responded that the loan-to-value issue in traditional bank loans was important. He recalled that the bank always tried to keep a maximum 80 percent loan to value. He responded to the representative's question about debt service and repayment ability. The loan approval process by a banker weighed what the project could afford to pay back and the predictability of its revenue stream. He wanted to invite a couple of experts to the table. Representative Josephson asked Representative LeBon to define "Takeout." Representative LeBon responded that a takeout was the lender who followed the construction lender and took out the construction loan and converted it into a long-term mortgage. 9:25:50 AM DEVIN MITCHELL, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL BOND BANK AUTHORITY, DEPARTMENT OF REVENUE, introduced himself. LUKE WELLES, SENIOR DIRECTOR OF BUSINESS DEVELOPMENT ALASKA NATIVE TRIBAL HEALTH CONSORTIUM, introduced himself. He had been on the board of the Alaska Municipal Bond Bank and was currently the chair. Mr. Mitchell responded to Representative Knopp's question about 100 percent of a project financing and his concerns related to loan to equity issues. He explained that the Bond Bank was not a commercial bank, rather, it was a public corporation of the State of Alaska. The corporation issued bonds but did not make mortgage loans. He continued that when the corporation looked to an organization, it did not look at a specific asset being financed. It looked at the cashflow-generating capabilities of the organization and what could be pledged to secure the bonds that the Bond Bank would be purchasing from the organization. In the case of regional health organizations, they had some revenues that were not pledge-able, certain federal receipts, and other revenues that were pledge-able. The Alaska Municipal Bond Bank Authority created a lock box situation with the pledge-able revenues in which all the insurance payments, the co-payments, and Medicare and Medicaid receipts that could be pledged flowed through a trustee bank. The trustee bank would have irrevocable control of the account and would ensure that the funding paid debt service before being used for other purposes of the organization. Mr. Mitchell continued that the organizations had other cashflow associated with the non-pledge-able revenues they received from Indian Health Service (IHS) or from joint- venture agreements that they could rely on to ensure their operations would remain intact even with a diversion of revenue. The Bond Bank would require coverage to be in place such that the amount of revenue coming in would exceed the debt service amount paid on the bonds issued by the bank. In previous instances involving regional health organizations and the Bond Bank, coverage had been robust equal to multiple times the amount. In a normal revenue situation, coverage might be equal to 1.5 times the amount. He added that when the Bond Bank sold bonds it implemented provisions to avoid a diminution of the credit pledge. The bank conducted an additional bond test ensuring that historical or projected revenue (based on changes in rates and charges) would be sufficient to repay the bonds that might be issued after those of the Bond Bank and provide coverage on the bonds. Co-Chair Johnston asked if there was a way to define the capacity of the Alaska Municipal Bond Bank. Mr. Mitchell responded that in the current instance, the Bond Bank, as a public corporation, obtained its credit rating based on a moral obligation pledge of the State of Alaska. The Alaska Municipal Bond Bank Authority had existed since 1975 and had never had to rely on a moral obligation pledge. All the loans that had been made had been paid by the underlying borrowers. The program was not a grant or risk program. A speculative idea without an expectation of being paid 100 percent would not qualify for the program. In the case of the regional health organizations and capacity, it would be a matter of the organizations themselves. The University was a different animal. It was like a conduit revenue bond program unlike a traditional bond bank program which originally started with municipalities. 9:30:53 AM Representative Josephson asked Mr. Mitchell to describe how the University was a different animal. Mr. Mitchell responded that the University was a subagency of the state which received much of its funding from the state already. The Alaska Municipal Bond Bank Authority had participated with the University in the past. The Bond Bank had a statute that allowed for the interception of state funds appropriated to one or any of the borrowers prior to disbursement to the lender. The University, with the payments it received from the State of Alaska, fell into a different credit analysis category. The Bond Bank did not have to be quite as stringent with the University as it was with the regional health organizations. The Bond Bank only made loans it expected to get repaid. However, the coverage requirements for the University could possibly be reduced. Representative LeBon indicated the University had a representative online. 9:32:04 AM Representative Josephson noted the University was trying to decrease its square footage. Ten years previously, it made sense to build the Alaska Airlines Arena in his district. Presently, it would not make sense. He asked if the Alaska Municipal Bond Bank Authority considered all factors. Mr. Mitchell indicated that the University had its own requirements to fulfill in order to issue bonds. It also typically had to have legislative approval to do so. He noted that the Bond Bank was not like a credit card available for use by the University, rather it was an option the University could exercise if it was already planning on borrowing money. The University would look at issuing bonds on its own based on its credit, or it would consider using the Bond Bank, whichever option cost less. The University's chief financial officer, Myron Dosch, had undertaken analysis in the current interest rate environment. It appeared the University would save money if it refinanced its portfolio through the Bond Bank rather than independently. He concluded that given the strong linkage between the State of Alaska and the University, it was not a step sideways to allow the Bond Bank to help the University save money. MYRON DOSCH, CHIEF FINANCIAL OFFICER, UNIVERSITY OF ALASKA, FAIRBANKS, spoke in support of the bill. He concurred with the comments made by Representative LeBon and Mr. Mitchell. The bill would provide the opportunity to borrow or refinance obligations at lower interest rates by accessing credit through the Municipal Bond Bank Authority. He suggested that by avoiding interest costs the University would have more money for operations. The University had been able to quantify its position. In the current interest rate environment, if the University were to issue a bond for either new money or refinancing in the amount of about $50 million over 30 years, the interest rate would be better by about .15 percent. The saving would be approximately $50,000 per year or about $1.5 million over the life of the bond. He saw the bill as a way of making opportunities more viable. Mr. Dosch continued that the University did not anticipate any new construction projects in the next 2 to 3 years. Accessing credit through the Bond Bank would provide an opportunity that it would assess in the future. He reiterated that the University had the authority to issue bonds in its own name which it had done in the past. There were other state statute provisions that limited the size of the bonds the University could issue without seeking legislative authority. The board made its decision based on the University's debt capacity and the mission of any given project. The board was very judicious about debt. Representative Wool asked for the University's current total debt amount. Mr. Dosch responded that the aggregate total debt was $297 million. Currently, the annual debt service was about $28 million. Representative Wool noted that the bill would allow for $500 million in debt service per project. He asked if that limit exceeded the cost of any project the University had undertaken in the past. Mr. Dosch responded in the affirmative. He noted that the bill did not provide any additional authority from the University's perspective. It was merely an avenue for the University to access credit. The University would remain bound by its own authority to issue debt in its name as well as the other statute AS.14.40.253. He explained that when there was a project with expected annual debt service that exceeded $2.5 million, the statute required the University to seek separate approval from the Legislature. 9:39:42 AM Representative Carpenter asked who currently owned the bonds related to the University. Mr. Bosch responded that the University bonds were on the general market and sold on the capital market. They generally had a 10-year call. He elaborated that when the University refinanced, the existing bond holders were paid off and new bonds were reissued. The bonds were owned in the general market - traded and sold in mutual funds, insurance companies, and the like. Representative Carpenter was curious if there were other organizations that had access to bonding authorities other than the University and regional health organizations. Mr. Mitchell responded that through the program there were other authorized borrowers who had the capability of financing 100 percent of the University's projects. He detailed that the projects themselves were not providing the security or source for repayment. For example, on a general obligation pledge of the City of Kenai or Soldotna, the Bond Bank was not worried about the library or the public safety building being financed. Instead, the Bond Bank was worried about the property tax base or sales tax base being able to provide revenue to be used to pay a bond. Representative Carpenter noted the significant healthcare inflation in the state. He wondered how the cost of inflation would impact payment risk. He also wondered how getting a handle on inflation would impact payment risk specifically for health care organizations. Mr. Mitchell indicated the Bond Bank would rely on the current construct and on experts to provide information on the expectation in the current market. In terms of the risks moving forward, he thought they were of legitimate concern. He deferred to others. 9:42:51 AM Mr. Welles responded that he would break up the question into several questions. He reported that the healthcare facilities being discussed were tribally owned by regional health organizations. The joint venture projects in which facilities were being built included all people within their respective communities. He indicated that reimbursement was primarily through Medicaid (State of Alaska), Medicare (federal government), and third-party insurance with price regulations. Tribal health was unique in that for an individual on Medicaid who was a tribal member of one of the 229 federally recognized tribes in the state, their health care cost was the responsibility of the federal government rather than the state. He noted the 100 percent Federal Medical Assistance Percentage (FMAP) when a member received health care through a tribal health organization. Mr. Welles relayed that the current projects slated to expand community health services included a $20 million project in Kotzebue, an $87 million project in Kodiak, a $15 million project in Seward, a $20 million project in Cordova, and a new hospital project in Sitka estimated to cost more than $300 million. The projects were joint ventures with IHS providing a unique stream of revenue. He explained that when a tribal health organization entered into an agreement with IHS to build an infrastructure project (hospital or clinic), the IHS entered into an agreement with the organization to pay for staffing, operations, and maintenance costs of the facility for 20 years upon the project's completion. The agreement was entered into as part of compact funding tied to self- determination. He elaborated that for the past 35 years Alaska's tribes had looked to the federal government for funding through Public Law 93.6.38. The law allowed for the tribes to take the funding to form regional health organizations. Mr. Welles continued that the baseline funding for the organizations came from the federal government and was negotiated every year. The regional health organizations were able to bill for third-party care including Medicare, Medicaid, and third-parties. He indicated that the rates of reimbursement for Medicaid and Medicare were cost-based rates. A cost-based rate was an all-inclusive rate determined by taking all of the allowable costs under Medicare rules each year in the cost reports divided by the number of allowable patient encounters. In turn, the cost per encounter for in-patient services and out-patient services could be determined. Once determined, the cost- based rate was forwarded to the regional health organizations addressing the issue of price inflation. The projects would provide equal opportunity, improved access to and quality of care, and a significant boost to telemedicine services. Representative Carpenter surmised that if the legislature made the decision to bond, the public would pick up 100 percent of the debt. However, if the conditions changed, the public would be more on the hook than it would be under current law. He was unsure whether federal funds would continue to flow at the same level over the next couple of decades. He thought the situation was challenging and that it was likely that money would dry up. If so, the state would pick up the risk on the bonds more so with the proposed legislation. 9:49:32 AM Mr. Mitchell indicated the Alaska Municipal Bond Bank Authority would address the issue through the rate covenant concept in which pledge-able revenues would be a multiple factor of the debt service. There would be limitations on the ability to pledge the revenue. If the revenue diminished in the future, a default would not occur until the diminishment was significant. In the current instance, there was additional comfort that the operation would continue because of the funding packages Mr. Welles described, even if 100 percent of the pledge-able revenues were taken. He reiterated that the Alaska Municipal Bond Bank Authority's process in issuing loans was conservative and, there was a 100 percent expectation of their repayment. The authority tried to accommodate for potential future negative events. It was possible there might be a scenario in which measures were not conservative enough. However, the Bond Bank tried to incorporate any concerns in its process. Co-Chair Foster heard Mr. Welles mention FMAP. He asked for an example. He noted that there was a hospital in Kotzebue that might be able to take advantage of the program. He asked if a long-term care facility would be a good example. Mr. Welles responded that Tim Gilbert, the President and CEO of the Maniilaq Association, had provided a letter of support and information about the association's project submitted to IHS. He relayed that although many projects across the United States had been submitted to IHS, five of ten of the selected projects were in Alaska. One of them was the Maniilaq Association's project in Kotzebue. He explained that the project would expand dental services and other outpatient ancillary clinic services at its facility. The Maniilaq facility was the hub for 12 surrounding communities outside of Kotzebue. The Maniilaq Association owned and operated the clinics in the surrounding communities referring patients to Kotzebue when they needed a greater care of service. Co-Chair Foster was familiar with the long-term facility model. He suggested that if a tribal member had to be placed in a facility not associated with IHS or FMAP, it was his understanding that the federal government would only be responsible for 50 percent of the cost and the state would be responsible for the other 50 percent. Ideally, a tribal member would be placed in a facility that was IHS owned where the federal government paid 100 percent of the costs. He asked if part of the reason for the legislation was to free the state from having to pay the 50 percent. He asked how the legislation applied to dental services. Mr. Welles explained that the regional health organizations had traditionally provided dental and behavioral health services. Whereas, specialty care and tertiary hospital care had been provided at the Alaska Native Medical Center in Anchorage. If a person needed to see a specialist such as a dermatologist or a cardiologist, they would have to be seen in Anchorage. The regional health organizations provided local care to Alaska Natives and non-natives. Mr. Welles addressed Co-Chair Foster's question about dental services. He relayed that Mr. Gilbert spoke of an organic growth and a need to expand dental services within the Maniilaq facility. The association also wanted to be able to offer more services closer to home keeping costs as low as possible. He noted a large pediatric dental need in Alaska. Enhancing facilities to handle the pediatric dental need in the rural areas was an important goal. Mr. Mitchell pointed out that there was an existing provision in statute that required the Department of Health and Social Services (DHSS) to agree that a project would glean a financial benefit to the state and improve quality of care. He continued that partnerships were created in 2015 to ensure both, particularly in rural Alaska. 9:56:52 AM Representative Wool used his community-owned hospital as an example. He wondered if it would be eligible to apply to the Bond Bank. Mr. Mitchell responded that the Fairbanks Hospital would not be eligible to apply directly to the Bond Bank, as it was a non-profit facility. He noted that the Bond Bank had a loan with a long-term care facility in Juneau, Wildflower Court. He elaborated that the City and Borough of Juneau (CBJ) applied to the Bond Bank because they had a close association with Wildflower Court it was co-located with Bartlett Regional Hospital, a place where patients went after surgery to convalesce, and a place to receive end-of-life care. The facilities were on land owned by CBJ. He noted there was an agreement in place that if Wildflower Court were to fail, Bartlett Hospital would take over operations of the facility. Otherwise, the organization would be looking to issue bonds on a conduit basis through some entity such as Alaska Industrial Development and Export Authority (AIDEA) or the Fairbanks North Star Borough. The borough or the city would have to be willing to commit financially to the Bond Bank, as their credit would be pledged. If the non-profit were to fail, the municipality would take on the debt. Representative LeBon asked to hear from Ms. Gayhart. 9:59:20 AM RENEE GAYHART, DIRECTOR, DIVISION OF HEALTH CARE SERVICES, DEPARTMENT OF HEALTH AND SOCIAL SERVICES referenced 2 lines on page 2. She explained that when the Bond Bank received a project, the department took a look at it from a health and social services perspective. The Medicaid Office and the Office of Rate Review evaluated the project. She continued that in many cases the project would entail a build or an enhancement of existing services. The department considered whether the project would divert travel as new services were added. Some examples included increasing the number of available dental chairs or enhancing facilities in the outlying areas in order to perform dental crowns locally. The department reviewed travel costs, potential revenue generation, and the costs for additional hospital beds or dental services. Ms. Gayhart addressed Representative Carpenter's question regarding inflation. The department did not set the rates for tribal health organizations they were set in the federal register by IHS. The department paid the set rates and was reimbursed 100 percent. She indicated things were more complicated with reclaiming. She noted the state health official letter that came out in 2016. She reported that in some cases when tribal members went to non-tribal sites, if the requirements of the state health official letter were met, the state would receive 100 percent reimbursement. Additional analysis had to be completed to assess how much Medicaid would contribute or alleviate from the state's expenses. Expenses would include items such as transportation or services in another region. The Medicaid Office and the Office of Rate Review compiled the numbers and sent them to the Commissioner's Office to be reviewed and forwarded to the Bond Bank. The information included what the state would contribute. She conveyed that Medicaid was a different payer mix in every region with the Medicaid population being a factor. Ms. Gayhardt relayed that there was another piece that had to be analyzed. There were several non-native Medicaid beneficiaries that went to tribal health organizations in the regions. They met the regular match qualifications. The state would pay the all-inclusive IHS rate but only receive a reimbursement rate of 50 percent. The State Medicaid Office had a detailed analysis of the numbers before they were sent to the Bond Bank. The department weighed in either supporting or remaining neutral on a project. 10:02:48 AM Representative Carpenter wondered what other avenues were available for moving forward with projects if the bill did not pass. Mr. Welles indicated that there were other alternatives. Typically, the other options entailed paying additional interest costs. He used the new hospital project in Sitka as an example. He indicated that the entity was large enough to get its own credit rating and issue its own bonds. More than likely they would receive an A+ or AA rating based on their financials having the same raking as the Bond Bank and the ability to stand alone. Mr. Welles continued that the Maniilaq Association might be able to get its own credit rating and issue its own bonds, but perhaps at a credit rating less than that of the Bond Bank at higher interest rates. He noted that a commercial bank was also an option. He reported that the Tanana Chiefs Conference was one of the first entities to go through the Bond Bank. They were able to refinance and save more than $30 million in interest charges for the life of the financing. He mentioned going to Fitch and Moody's to get credit ratings and provide them with information. Subsequently, with the follow up issuance of bonds in the market they were found to be a good credit risk. In September Tanana Chief Conference Received its own credit rating (single A) and issued $126 million of bonds on their own with a 30-year term and an interest rate of 3.4 percent. He noted several tools in the tool box. Representative Wool brought up the hospital in Sitka for $300 million. He noted that the current cap for a project was $102 million. He asked if the Sitka project was dependent on the cap being raised. Mr. Welles replied that it would be helpful to have the cap raised. He noted the project in Bethel associated with Yukon-Kuskokwim Health Corporation (YKHC) was 50 percent to the cap. He relayed that the new hospital was a joint venture project with the U.S. Department of Agriculture (USDA). He was aware of similar projects in Sitka and Anchorage. He added that the larger projects could stand on their own. 10:07:04 AM Representative Wool asked if the cost of the Tanana Chief Conference project was $127 million. Mr. Welles indicated that the amount applied to multiple projects. Representative Wool clarified that the figure reflected the construction cost of the original project. Mr. Welles indicated that the $127 million was the refinancing amount of the original project which was $87 million. There were additional projects underway next door to Fairbanks Memorial Hospital (FMH). Representative Knopp asked about the hospital in Sitka and whether it changed hands. Mr. Welles responded that the Sitka Community Hospital had been taken over by Sitka Community Health Services (SEARHC) - the two hospitals were becoming one. 10:08:10 AM AT EASE 10:08:30 AM RECONVENED Co-Chair Johnston OPENED Public Testimony. 10:08:48 AM Co-Chair Johnston CLOSED Public Testimony. Co-Chair Johnston would be setting the bill aside. HB 264 was HEARD and HELD in committee for further consideration. 10:09:11 AM AT EASE 10:09:32 AM RECONVENED