HB 123-CLEAN WATER FUND: LINKED DEPOSITS  1:04:12 PM CO-CHAIR SEATON announced that the first order of business is HOUSE BILL NO. 123, "An Act relating to the Alaska clean water fund." 1:04:57 PM KATIE KOESTER, Staff, Representative Paul Seaton, Alaska State Legislature, introduced HB 123 on behalf of Representative Seaton, sponsor. She said the bill would expand access to the Alaska Clean Water Fund, which is a revolving fund comprised of mostly federal dollars for the purpose of improving the water systems in the state. Currently, only municipalities and state agencies have access to these clean water dollars and HB 123 would broaden the access to that fund. The Alaska Clean Water Fund is used mostly by municipalities for point source pollution, such as septic systems. Nonpoint source pollution dollars are also in the fund and these are the type of programs that are being talked about under HB 123. An example of what would not fall under HB 123 is a private company borrowing Clean Water Fund money for a giant private septic system. Those systems are point source pollution and are only available to municipalities and state agencies. 1:06:18 PM MS. KOESTER explained that HB 123 would establish a "linked deposit program" to access the Clean Water Fund dollars. A linked deposit would allow the state agency to put Clean Water Fund dollars into a bank and then the bank would loan that money to the borrower. The relationship between the state and bank would be a certificate of deposit: the state would basically be investing those Clean Water Fund dollars in a bank and then the bank's responsibility would be to vet an applicant or prospective borrower, which is who is being referred to when talking about expanding access to Clean Water Fund dollars. The bank would also have the responsibility to collect payment and follow up on any loan defaults. MS. KOESTER related how the program would work. A non-profit organization would bring a project to the Department of Environmental Conservation (DEC) for approval. The department would make sure it is an eligible project that falls under the mission of the Clean Water Fund. Eligible projects would include anything that would contribute to a healthy watershed, such as green space development, on-site septic systems, agricultural best practices, storm water management, and brownfield remediation, to name a few. The definition for eligible nonpoint source pollution projects is broad because when talking about runoff, rainwater, and streams it is hard to point a finger at it. 1:08:36 PM MS. KOESTER pointed out that this program is used in many other states. The committee packets include examples about some agricultural, brownfield remediation, and on-site septic system programs instituted in Ohio as a way to broaden access to Clean Water Fund dollars. She drew attention to a booklet on members' desks from the Homer Soil and Water Conservation District [entitled Landscape Suitability Map] that is a manual on best practices for development. The district received a grant to develop a landscape suitability map of the entire Homer area and identify projects that could be used for green development of subdivisions and land use in the Homer area. MS. KOESTER provided an example of how this linked deposit program could be used under HB 123 for the bettering of Alaska's water systems. The Homer Soil and Water Conservation District would take these best management practices to DEC. The department would determine and approve the eligibility of projects for Clean Water Fund dollars, such as stormwater management, leaving green space in a subdivision, and other practices outlined in the booklet. Once approved by DEC, the developer would go through a development accreditation process with the Homer Soil and Water Conservation District. Then the developer would go to a bank for a project loan using these Clean Water Fund dollars that the state has put into the bank and for which the bank is paying a below-market value rate to the state. The bank would charge the developer an amount to administer this loan. 1:11:39 PM MS. KOESTER noted that broadening access to these Clean Water Fund dollars has been successful in other states because it provides a market driven incentive for healthy water systems, rather than using enforcement. She directed attention to the Alaska Clean Water Fund Intended Use Plan for Fiscal Year 2009 in the committee packet. She read from page 2, long term goal 5, which states: "Increase the pace at which available funds are loaned by marketing to existing and potential new eligible entities by expanding the overall funds usage. Potential new entities may include lending to non-profit organizations for water quality type of projects, and to homeowners through a link-deposit program for on-site septic system improvements." 1:12:55 PM CO-CHAIR FEIGE understood the state would deposit money with the bank, the bank would pay a lower-than-market interest rate to the state for use of that money, and then the bank would loan that money to people, entities, or non-profits. He asked what interest rate the bank would charge. MS. KOESTER replied the bank would charge an interest rate that it feels acceptable for its risk in assuming that borrower. She confirmed that Co-Chair Feige's understanding of the program is correct. CO-CHAIR FEIGE inquired what risk the bank would be taking since it is the state's money. MS. KOESTER responded there is still a risk that the borrower might default. The real reason why the risk is on the bank is so that the bank will do the proper vetting of that applicant. The applicant would have to have collateral or a credit score or go through any other type of process necessary to access a loan. The difference is that someone might not be able to get a loan for some of these projects because the capital does not exist without being able to access the Clean Water Fund dollars. 1:14:25 PM CO-CHAIR FEIGE asked how much of the current funding stream is being utilized by the municipalities and other qualified entities that are presently allowed to borrow from the fund. MS. KOESTER deferred to DEC for the exact numbers. However, based on her conversations with the U.S. Environmental Protection Agency (EPA) about the goals that were established to increase the access and increase the lending of the funds, it is the sponsor's belief that there is room in that fund to expand access. 1:15:19 PM REPRESENTATIVE P. WILSON understood the state provides the money, but she inquired whether the money comes directly from the state or from the federal government. She further inquired whether the state gets this money back when the bank is repaid. MS. KOESTER answered that the Clean Water Fund is mostly federal dollars, so it is a federal-state revolving loan fund that exists in all the states for cleaning up water systems. The state would get the money back from the banks along with a lower-than-market interest. It would be just like the state is investing funds in a bank instead of right now where all of those loans are issued to municipalities or state agencies and for which a lower-than-market value interest rate is applied. The state gets those dollars back at a nominal interest rate and that is why it is a revolving fund - it keeps growing and the state is able to expand programs. 1:16:55 PM REPRESENTATIVE KAWASAKI asked how much money is in the fund and how much is encumbered. MS. KOESTER understood that the fund is at around $45 million. She deferred to DEC to answer the question in more detail. REPRESENTATIVE KAWASAKI observed in paragraph 2 of the sponsor statement that community organizations, developers, non-profits, and individuals would have access to borrowing these funds. He inquired whether a Native village corporation, a cooperative that is regulated by "RCA", or a community supported agricultural farm would be included as eligible borrowers. MS. KOESTER understood that any type of organization would be eligible and would not have to be a non-profit. The money just has to be spent on projects that are eligible for Clean Water Fund dollars. REPRESENTATIVE KAWASAKI requested a broader definition of what the Clean Water Fund currently spends money on. 1:18:55 PM REPRESENTATIVE MUNOZ asked whether Ms. Koester's referral to "state funds" means the funds that are in the Clean Water Fund now. MS. KOESTER replied correct, she is talking about the Alaska Clean Water Revolving Loan Fund. She allowed it is confusing because that fund is federal dollars, but the state has control over those dollars. 1:19:22 PM REPRESENTATIVE MUNOZ requested further explanation about what would be linked under the bill. MS. KOESTER explained that the Clean Water Fund is already available to municipalities, so right now municipalities can already apply to DEC for a loan under that fund. Under HB 123, access to this fund would be expanded by saying that an individual, through a bank, can have access to Clean Water Fund dollars with an eligible project. The state's treasury would put an amount of money in a bank as a certificate of deposit, say $100. The bank would pay interest to the state, say 2 percent, over the life of the loan. The bank would then loan that $100 to say, John, a developer in Homer, who is doing a green development that will have a green space. The bank would charge John an interest rate of 7 percent, of which 5 percent is to cover the bank's risk of loaning to John and 2 percent is to cover its administration fee to the state. 1:21:26 PM CO-CHAIR SEATON interjected that the relation of this linked deposit system is the developer can get cheaper capital, and can have access to capital, when the interest rate might otherwise prevent the development from going forward. At extremely low interest rates this might not be beneficial, but when interest rates go high developers have a hard time getting money economically enough to do a development; thus the linked deposit would allow for water systems to be improved, whether that is catchment ponds or other water system improvements. Water systems does not just mean water to the house, it means water systems flowing down through a planned development. REPRESENTATIVE MUNOZ inquired whether the fund grows as loans are paid off with interest, or is the fund meant to stay at the level of $45 million. MS. KOESTER responded that the Alaska Clean Water Fund does grow and the interest received is re-loaned to other qualified projects. That is how it currently works and how it would continue to work. 1:23:26 PM REPRESENTATIVE GARDNER understood that HB 123 would expand the entities that can borrow the money that is essentially federal money that the state has control of. But rather than have DEC or the state take the loan applications and provide administration, it would be done through a bank and the bank is willing to provide a lower interest rate because it has the security of the state's certificate of deposit. MS. KOESTER confirmed that this is correct. REPRESENTATIVE GARDNER noted that the language that would be added by HB 123 is "to persons, municipalities, or other qualified entities...." She asked what that specifically really means. For example, Kensington Mine has built settling pools next to its roads so that the runoff does not go directly into streams, which is clearly a water quality issue. She asked whether Kensington Mine would be a qualified entity for a loan for something like these settling ponds. MS. KOESTER allowed that the sponsor has struggled with "qualified entities" because if it is defined too tightly then no one is really eligible. She said her understanding is that Kensington Mine would be eligible by working through the approval process that the project is eligible for. REPRESENTATIVE GARDNER commented that if large industrial groups such as those on the North Slope are eligible, there would need to be a limitation on the scale so that one or two big groups did not take all the funds and leave "John in Homer" without access to the money. MS. KOESTER agreed, saying limitations on the money would have to be developed because there is a need for municipalities. She deferred to DEC to speak to the current limitations. 1:26:15 PM CO-CHAIR FEIGE observed that the first section of HB 123 defines the projects, which is the existing law: public wastewater collection, treatment, or discharge systems; nonpoint sources of pollution; and estuary conservation and management programs. He inquired why private persons would need to be added because it seems to him that persons do not have the responsibility for any of those particular projects. MS. KOESTER answered that individual persons would not be added for point source pollution projects, such as solid waste management systems. There are two sections of the fund - point source and nonpoint source. Individual borrowers would be eligible for nonpoint source pollution because it is much more difficult to point a finger at something like pesticide runoff or a development that has issues with pavement and stormwater management that are harder to mitigate. So, the bill would really provide a market incentive for individuals to consider those aspects when developing. CO-CHAIR FEIGE asked whether the Alaska Clean Water Revolving Loan Fund is just different terminology for the same thing or is something different. MS. KOESTER replied it is the Alaska Clean Water Revolving Loan Fund and HB 123 would just expand the eligible borrowers to a portion of that fund, which is the nonpoint source pollution portion of that fund. 1:28:32 PM REPRESENTATIVE FOSTER inquired whether any pushback is expected from state agencies or municipalities that fear the $45 million might not grow and so more people would be fighting for this piece of the pie that is not growing. MS. KOESTER responded she believes municipalities have first priority. It is the sponsor's understanding that Alaska could be taking advantage of more clean water opportunities. Municipalities are not using the fund at this point in time to a level that would indicate there is an over-demand on the fund. REPRESENTATIVE FOSTER asked how much of the fund is encumbered. MS. KOESTER deferred to DEC. REPRESENTATIVE P. WILSON inquired how many applications there are per year and said she would like to hear from DEC. CO-CHAIR SEATON confirmed that DEC would be speaking later. 1:30:28 PM REPRESENTATIVE HERRON understood banks would like it because they can make money, but more importantly if a bank can invest in a project that enhances the bank's investment in a project or collateral or neighbor projects it is in its best interest to borrow this money from the state to lend out so that the bank can protect those projects that may be surrounding a respective project. He inquired whether this specific legislation has been tried in a previous Alaska legislature. MS. KOESTER answered that House Bill 200 was introduced last year but was not heard. 1:31:37 PM REPRESENTATIVE MUNOZ related that at a recent hearing before the House Community and Regional Affairs Standing Committee, the City of Unalaska testified that it is considering upgrades to its water discharge system to go from a primary system to secondary. She asked whether Unalaska would be eligible for these funds and, if so, whether the fund large is enough to support those new requirements that the EPA is bringing forward for many of Alaska's coastal communities. MS. KOESTER replied that the City of Unalaska is already eligible for those funds. From her limited understanding of the potential implications of that decision, she said it is much larger than what many of the state's funds combined would be able to handle. 1:32:27 PM CO-CHAIR FEIGE surmised the upcoming requirements described by Representative Munoz are beyond the current ability of the [Alaska Clean Water Fund] to fund. MS. KOESTER understood there is some potential coming from the EPA for changes to its requirements that would have far-reaching ramifications for many communities. However, she said she does not know very much about this because it is very new and there are a lot of assumptions as to which communities may or may not be targeted, including some in the sponsor's district. CO-CHAIR FEIGE, regarding page 2, line 14, of HB 123 that states the department "shall" establish a linked deposit loan program, asked whether it would be better to say "may" so as to give DEC the option of doing this depending upon demand. MS. KOESTER responded that that would be a policy call; the differences between "shall" and "may" are very large. Either way, statutory authority is needed to hold Clean Water dollars somewhere besides the treasury. 1:34:59 PM LYNN KENT, Director, Division of Water, Department of Environmental Conservation (DEC), explained that DEC administers two separate funds: the Drinking Water Revolving Loan Fund and the Clean Water Revolving Loan Fund that is the subject of HB 123. The Drinking Water Revolving Loan Fund is tapped out right now and no dollars are available beyond the annual appropriation to the fund in the federal grant. The Clean Water Revolving Loan Fund is about $390 million, of which a balance of about $42 million is currently available. While that may seem like a large amount of money, there are some communities poised to seek some very large loans from that fund, as was just heard, and that has the potential to tap out the fund in a hurry. Currently the loan fund is being used primarily for communities for their wastewater collection, treatment, and disposal systems. The department does fund some nonpoint projects through solid waste projects and stormwater projects, again through loans to communities. MS. KENT, regarding the question of whether large industrial businesses could get loans under HB 123, said the answer is yes and no. She said she believes they would be prohibited from getting a loan for an activity that is regulated under the point source requirements of the Clean Water Act. The Kensington Mine stormwater example that was cited earlier is actually a permitted discharge at the mine, so the mine would likely not be eligible for a nonpoint source loan through this linked deposit program. She said she believes that under the way the bill is currently set up, private industry could seek loans for activities that are nonpoint source pollution oriented. 1:37:36 PM MS. KENT, regarding the question about the source of the funds, explained that the fund consists of the annual appropriation by the EPA, the interest the state receives on the portions of the fund that are loaned out, and the repayments of the previous loans that have been issued. While the fund is growing from that perspective, DEC is concerned that federal appropriations that have been helping to capitalize the fund are proposed to take some pretty severe hits this year. REPRESENTATIVE GARDNER requested a definition of the difference between point source and nonpoint source. MS. KENT answered that a point source is a discharge from a facility that comes from what EPA calls a discreet conveyance, such as a pipe from a treatment plant that discharges to a surface water. Nonpoint source discharge does not come from a discreet conveyance; for example, pollution from dog droppings, herbicides, or fertilizers that are from the lawn of a city park and that through rainfall run off into a creek or surface water. Another nonpoint example is rain falling onto parking lots that then runs off, carrying oils and grease from cars into the creek. The EPA does not have a regulatory program for nonpoint source discharges. 1:39:36 PM REPRESENTATIVE KAWASAKI inquired how DEC would define a person or other qualified entity for purposes of the regulations. MS. KENT replied that DEC would have to write regulations to implement HB 123, but as the bill is currently written the eligible entity would not preclude anyone who has a project that would be eligible under the terms of the revolving loan fund. So, eligible entity could include a private individual or a private business so long as the person or entity had a nonpoint source project that fell within the allowable projects under the fund. 1:40:21 PM REPRESENTATIVE P. WILSON, regarding Unalaska having to meet new EPA requirements, noted that Unalaska goes through a huge amount of water because of the number of processors located there. She surmised that many municipalities may be faced with having to meet these new EPA requirements. She asked how much money the State of Alaska receives from the federal government and whether the program would be able to provide funds to all qualified entities if the program is kept as it is now. MS. KENT responded that the municipalities are always requesting money from DEC, not just for new facilities but also for upgrading and replacing current facilities and to accommodate growth in the community. Therefore, it is not always a new or higher regulatory standard that causes municipalities to seek a loan from the department. Right now the department is receiving about $12 million annually in federal allocations for this fund and the demand for the funds is going up and up. A few years ago DEC had a much larger balance in this fund; the balance is going down and DEC expects it to tap out very soon. 1:42:36 PM REPRESENTATIVE P. WILSON inquired whether the fund would be able to handle adding more eligible entities for these loans, given that the state may be receiving less money from the federal government in coming years and that municipalities will be needing upgrades. MS. KENT answered that it all comes down to prioritization on use of the fund. When conducting its annual scoring process, the department primarily looks at the immediate health needs that would result from a given project. So, once the funds are tapped out, what is likely to happen is that those projects that meet an immediate health need would outscore projects that do not provide such an immediate health benefit. In further response to Representative P. Wilson, she said she does not think DEC's eligibility criteria for the loan programs have changed since the fund's inception. 1:44:35 PM CO-CHAIR SEATON opened public testimony on HB 123. 1:44:53 PM DEVONY LEHNER, Private Developer, said HB 123 would allow another group of potentially eligible recipients to come on line, but that she sees no downside to passing the bill because the state would still have the flexibility to determine where the money is allocated. She noted that she is a private developer and that individual private developers have profound long-term effects that can either increase or minimize the demands on municipal systems. She and her husband are strong advocates of trying to minimize demands on municipal systems and keeping environmental effects from transferring offsite. 1:46:57 PM MS. LEHNER stated that she and her husband are developing an 80- acre conservation subdivision, called Stream Hill Park. It is located inside Homer city limits so there are many hoops that must be jumped through. Over half of the subdivision has been set aside in permanent green space that is primarily drainages, not creeks which require a buffer anyway. These drainages are for handling large amounts of water coming from within the subdivision as well as from outside it. She noted that there are many piecemeal developments uphill from Stream Hill Park, so her subdivision represents a system between upslope and downslope development that can handle lots of water. She and her husband have tried to create many ways where water can be flowed, infiltrated, and cleaned so that it will not become a problem downslope. She pointed out that impervious surfaces are created by development which causes much more runoff. So, if no mechanisms are put in place for looking at these things long term, the city will end up with more and more runoff and already the city often has more than it can effectively handle. 1:48:49 PM MS. LEHNER noted that there is a rippling effect of benefits when developers, particularly those that control relatively large parcels, are encouraged to look at ways of developing so as to minimize the demands on municipal services. There are currently no incentives to do what she and her husband are trying to do in their development and they have had to work hard with taxing entities to explain that these parks and open spaces are set aside as non-developable lands for forever and so should not be taxed as developable. A developer has lots of issues to deal with when trying to pro-actively develop in ways that maximize watershed and community benefits, so any kind of incentive could be significant for encouraging developers to look at approaches that have long-time benefits to the municipality and the community. She and her husband have put a trail in their open space system that is used by many Homer residents. Thus, in addition to open space protecting water quality, it provides outdoor activity, quality of life, and health benefits. MS. LEHNER added that the benefits are diverse, widespread, and long term. She urged members to consider the value of allowing developers to have access to these kinds of funds through this linked deposit program because developers really shape the communities in which they are developing. It is better to have the developments designed in appropriate and long-term environmentally conscious sustainable ways than to be giving money to municipalities to deal after the fact with the problems created by poorly designed developments. 1:51:33 PM REPRESENTATIVE P. WILSON inquired whether the U.S. Army Corps of Engineers would consider the 40 acres of land set aside in Ms. Lehner's subdivision as wetlands. MS. LEHNER replied that very little of the area set aside in her subdivision is mapped as wetlands. Kenai Peninsula wetlands were classified and mapped in 2005 at a scale of 1:25,000 and those are the maps used by the corps. Virtually none of the areas that she and her husband have set aside are mapped as wetlands even though they convey water downhill. She and her husband are setting aside much larger areas than what would be required by the minimum regulatory standards. 1:52:44 PM CO-CHAIR FEIGE commented that Ms. Lehner's subdivision sounds like a very nice development that would be a good investment. He asked whether Ms. Lehner could not go to a bank and borrow money to do this same thing. MS. LEHNER responded that she and her husband have a credit line of over $2 million with a bank. However, she pointed out, when developing within the city the developer is required to put in sewer, water, and paved roads. The lots in her subdivision range from one-quarter to one-half acre in size which is a more expensive way to go than the more traditional way of having roughly one-acre individual parcels with no green space and where the buyer must put in an on-site septic and figure out how to put in a well or have water delivered. Such a traditional development would have required much less money up front for infrastructure, but it would not have created a significant open space system. She said her testimony today is talking about folks in the future who would be able to get a lower interest rate than she and her husband were able to get. That lower interest rate would encourage and allow developers to use this beneficial type of approach. CO-CHAIR SEATON held over HB 123.