SB 207 REVENUE BONDS: WATER & WASTE PROJECTS  CHAIRMAN TORGERSON called the Senate Community & Regional Affairs Committee meeting to order at 1:32 p.m. and introduced SB 207 as the only order of business before the committee. KEITH KELTON, Division Director of Facility Construction & Operation within DEC, supported SB 207. He said that he would be using the "Leveraging the Clean Water Fund" chart as a guide for his overview. SB 207 modifies an existing statute in order to take advantage of available money for capital construction. He mentioned that 20 other states have utilized this leverage and much has been learned from their experiences. The Alaska Clean Water Fund (ACWF) is the statute that is being modified. ACWF is a fund that is put in place by the federal government and matched by the state. There will be approximately $80 million in the fund at the end of this fiscal year. Mr. Kelton explained that ACWF is available to fund low-interest loans for wastewater projects, primarily collection systems and treatment plants. The fund can be used for land fills if there is a wastewater component to the facility. Currently, ACWF receives money from federal capitalization grants and state appropriations which is loaned to municipal projects with a repayment mechanism. Of the $80 million currently available to the State, about $50 million has been loaned to existing projects. Therefore, a $30 million unobligated balance is available for new loans. Mr. Kelton emphasized that the obligation rates on this money is increasing; the current obligation rate is $13 million per year. The available $30 million would be used within two to three years. He explained that DEC wants to create a mechanism allowing DEC to leverage the $30 million remaining. In order to achieve that goal the $30 million should be used as a corpus, revenue bonds should be sold, and the money should be leveraged two or three times to one according to the market. Mr. Kelton pointed out that the statute changes can be seen on the bottom half of the chart. A Bond Redemption Fund (BRF) is established. The ACWF balance goes through the BRF and pays the bond issuance costs. The bonds are then sold by the State Bond Committee (SBC) and their Trustee who then issue and sell the bonds to investors. When the investors buy the bonds, the proceeds return to the ACWF in order to fund additional loans for projects and create the repayment stream again. Then the bonds and investors are paid. In conclusion, Mr. Kelton stated that this bill would allow leverage of the existing dollars in order to allow the funding of more projects. If ACWF can fund $60 million worth of projects from the $30 million, then some of the demand on the State's General Fund would be alleviated. He mentioned that there is federal legislation which establishes a similar system for drinking water which is expected to be in place within a year or so. Number 108 SENATOR KELLY asked if the drinking water fund would be placed in the ACWF or a separate fund? KEITH KELTON informed the committee that there are several different concepts, one of which would allow, 30 percent of either fund to cross over between the two programs. Mr. Kelton emphasized that there would be two funds, but cross over may be allowed. Mr. Kelton explained that passing this legislation is advantageous because most of the $30 million would be retained for leveraging. Delays would cause a decrease in the $30 million so that the remaining corpus would not offer a large amount to leverage. Mr. Kelton noted that the reauthorization of the Clean Water Act is still pending in Congress. CHAIRMAN TORGERSON inquired as to how this would be self-limiting. Number 138 ROSS KINNEY, Deputy Commissioner of Revenue in the Treasury Division, felt that the limits would be determined by the marketplace, the amount of money in the corpus fund, and the distribution of loans. The income stream would be utilized as the pledge for the repayment of the bonds. As the credits are reviewed in relation to the communities, the interest rate on the bonds will be dictated. Therefore, a limiting factor would be placed on the amount committed. Other techniques, such as insurance of the corpus of the fund, could be used depending on the circumstances. Mr. Kinney emphasized that market conditions would be limiting, so establishing limits in the bill would be meaningless. CHAIRMAN TORGERSON said that he did not know which state agencies would be allowed to borrow from this fund. He did not believe there would be a limit if buying and refinancing debt occurred. ROSS KINNEY posed the following scenario. If bonds were issued at a rate of seven percent and the marketplace interest rates fell in the next two or three years, those bonds could be refinanced by issuing new bonds to retire existing bonds. Utilizing the new bonds and the income stream from the loans would pay for the new bonds based on the lower rate of interest. Mr. Kinney noted that his example assumes that special provisions such as call features would be allowed. Refinancing is dependent upon what is outstanding and whether there is a realized savings based on interest rates; there is a limit on that. Revenue bonds require a dedicated revenue stream - proceeds derived from the borrowing. Mr. Kinney pointed out that SB 207 contains some provisions that allow for state intercept which serves as protection for the bondholders. CHAIRMAN TORGERSON referred to Section 8 of the bill when surmising that any state agency or department that relied on the legislature for appropriations would not qualify. Would they not qualify because they do not have a dedicated source of revenue? ROSS KINNEY said that was a legal question. In his opinion, the revenue stream would have to be present, available and pledged. Mr. Kinney acknowledged that there is a dedication problem in the State. Most of the revenue bonding mechanisms that are utilized in Alaska are lease purchase agreements with nonappropriation clauses. Number 252 SENATOR HOFFMAN pointed out that the legislature appropriates on an annual basis due to the Constitution. How can the constitutional provisions regarding the dedicated fund be dealt with if the legislature is not the one appropriating on an annual basis? ROSS KINNEY explained that the dedicated revenue stream in this case refers to that revenue coming from communities and municipalities. The revenue stream based on this bond issue would come from other places than the state budget which would be utilized to make the payments. SENATOR KELLY asked if this was the Municipal Bond Bank? ROSS KINNEY said that it is different than the Municipal Bond Bank. There are limitations within the bond bank legislation which prevent the bond bank from assuming a program of this nature. Mr. Kinney recalled that there had been some joint meetings in June of 1994 in order to review the option of running this program through Alaska's Municipal Bond Bank. The statutory language of the bond bank necessitates that the bond bank make a profit. Mr. Kinney stated that this program is not necessarily going to generate a profit. Therefore, statutory language changes would have been required within the bond bank in order to implement a program that did not generate a profit. There may be some problems with existing loans with the bond bank when some of the same communities may be required to generate revenue in one instance and not another. The grants from DEC are very specific. KEITH KELTON explained that the bond bank buys existing debt which means the community must already have incurred a debt. The program established in SB 207 loans money to a community without a municipal debt being incurred first. The program in SB 207 could save a point of interest. Currently, ACWF is the lowest interest loan available to construct infrastructure facilities in Alaska. Number 320 SENATOR KELLY pointed out that SB 207 seems to be expanding this program to state agencies as stated in Section 8 of the bill. Now the State is allowed to go into debt without passage in the legislature; where is the balance of power? ROSS KINNEY said that the balance of power would come from the revenue stream that DEC could provide. SENATOR KELLY interjected that DEC cannot provide revenue stream unless the legislature appropriates it each year. A revenue stream cannot be guaranteed. ROSS KINNEY replied that under a revenue bond program, there would be almost no opportunity for the participation of those subject to annual appropriations utilizing a pure revenue bond. SENATOR KELLY inquired as to why this was being extended to state agencies. CHAIRMAN TORGERSON asked Ms. Sansone to discuss why state agencies are being added to this program. MARIE SANSONE, Assistant Attorney General of the Civil Division of the Department of Law, explained that the expansion to state agencies is derived from a DEC policy decision. The Clean Water Act does allow the use of the fund by state agencies as well as municipalities. If the state agencies are left in SB 207, the funding available to them would have to be received from outside of the revenues from the bond program. The Clean Water Fund encompasses money from federal grants, matching state appropriations, interest, and loan repayments. Therefore, there are types of money in the fund which could be utilized by state agencies. Ms. Sansone noted that any concern regarding the control of the use of the fund by state agencies could be addressed in the appropriations process. She informed the committee that state agencies had been added at the request of DEC. Number 362 SENATOR KELLY inquired as to the advantage DEC saw when extending the program to itself. KEITH KELTON stated that this issue could be eliminated without any detriment to the program. Mr. Kelton explained that state agencies were added because they were an eligible requirement under federal law. There are many programs operated by state agencies and within DEC which are eligible for this type of funding. Mr. Kelton pointed out that the clean-up of contaminated ground waters by petroleum tanks could be an eligible cost. A state agency cannot pay for that cost with an appropriation because it would not meet the revenue stream requirements. If that money were loaned to people who dedicated their repayment stream as with the wastewater projects, it would be a feasible alternative. Mr. Kelton did not anticipate that the other applications would be a major use of the fund. SENATOR KELLY reminded everyone that the word "leverage" really referred to debt. This would allow others to place Alaska in debt for which the State would be responsible. KEITH KELTON reiterated that this program has existed in 20 other states for seven years. In response to Senator Kelly, Mr. Kelton said that this program had been utilized in the State of California. There has not been a default nationwide in the program's seven years. In Alaska, there has not been a late payment in the six years of the program's existance. He explained that a portion of the leveraging concept would limit the sale of bonds to an amount that could be absorbed if default occurred. CHAIRMAN TORGERSON asked if it would be better to establish a cap; would that hinder the program? KEITH KELTON did not believe it would pose a hinderance, but suggested that perhaps a leveraging amount would be more appropriate than a numerical amount. Mr. Kelton suggested a limit of two to one and said that he could offer specific language later. Number 412 SENATOR ZHAROFF inquired as to how a state agency would repay money borrowed from the ACWF. KEITH KELTON explained that the only manner in which the money could be repaid or loaned would be if there was a dedicated payment stream coming back to that state agency for the project it was billed; it could not depend upon state appropriations. SENATOR KELLY asked if the Matanuska ferry requested money to refurbish and rebuild its wastewater treatment plant, could they borrow money from this fund and repay it with the revenue stream from the Alaska Marine Highway system fund. KEITH KELTON said that he could not answer that. Unless the agency can commit a revenue stream without an act of the legislature over the life of the debt, the agency cannot utilize this program. SENATOR KELLY asked if that authority was being given in this legislation. KEITH KELTON did not believe that one could dedicate revenue in Alaska without an amendment to the Constitution. This seems to be one of the problems. SENATOR KELLY asked how that was dealt with regarding the student loan revolving fund. KEITH KELTON pointed out that it is a separate corporation. There was a capitalization and statutory language allowing specific functions under certain guidelines and restrictions. SENATOR KELLY assumed that the State could not let the student loan program go under. The State would have to bail it out just as with this program. KEITH KELTON indicated that debt of any type which was issued by the State or through one of the corporations such as Alaska Housing and Alaska Student Loan, would have an impact on future credit or bond rating of Alaska. He reminded everyone that SB 207 does not refer to a full faith and credit pledge; that necessitates a higher rate of interest, but we may be required to retain a debt service reserve or a bond redemption reserve equal to one annual installment of principal interest on the debt. If there is default in various communities, the program may apply the intercept program. There is a period of over one year in which corrective action may be taken. For their own protection, bond holders will require those type of mechanisms for the more risky investments. At the same time, those mechanisms help by allowing the borrowing of money at a cheaper rate. The SBC is reviewing the types of plans Alaska is including since we are currently spending more than we are receiving annually; they are concerned about Alaska's ability to issue debt. In Mr. Kelton's opinion, Alaska is not going to enjoy freedom with the time of maturity schedules nor will Alaska be able to borrow without stringent controls until an Operating Budget and Capital Budget are established. Number 490 CHAIRMAN TORGERSON asked if the Municipal Bond Bank had an intercept clause in their language. ROSS KINNEY replied yes. That clause ensures the rating that the Municipal Bond Bank enjoys. Alaska's financial advisor for the SBC strongly recommended that an intercept clause be included in this legislation in order to ensure as high a rating as possible as well as ensuring as low an interest rate to the borrowing communities as possible. SENATOR KELLY inquired as to the meaning of the section entitled "ENFORCEMENT BY BONDOWNER"; what legal powers does that section give the bondowner? MARIE SANSONE explained that the bonds are normally considered to be a contract between the state or the agency issuing the bond and the bondowner. If a bondowner felt that the state was not living up to the obligations of the bond resolution or the statute, the bondowner could seek to enforce the contractual arrangement. Ms. Sansone noted that sometimes the bondowner will challenge the legal provisions of the bond in order to test them prior to investment. This section allows the bondowner to proceed to State court if they feel the obligations are not being met. The 10 percent was established in order to eliminate frivolous suits by people not holding many bonds. Ms. Sansone pointed out that there is also a provision requiring that any lawsuit be heard in the First Judicial District at Juneau in order to avoid the selection of a more favorable forum. SENATOR KELLY asked if the sections, "STATE AID INTERCEPT", "PLEDGE OF THE STATE" and "ENFORCEMENT BY BONDOWNER" are also in the Municipal Bond Bank legislation. MARIE SANSONE believed that those sections are included in the Municipal Bond Bank. SENATOR KELLY requested that Ms. Sansone determine if these sections are in fact in the Municipal Bond Bank legislation. Number 543 CHAIRMAN TORGERSON asked why the language on lines 17-18, on page 10 was added. MARIE SANSONE believed that the language was added to strengthen the value of the debt in order to support the bond. The language was an addition by the Bond Council which reflected the recommendations of the SBC or the financial advisor. CHAIRMAN TORGERSON expressed concern with how that would translate into the allocation of dollars when determining the criteria for a project. Chairman Torgerson seemed to believe the person with the most in their reserves would rate higher than others. ROSS KINNEY explained that "sufficient reserves" referred to money set aside at the time the loan is committed. Normally in a reserve situation, the borrower would be required to set aside the reserves by borrowing the money. That reserve would be used first to meet a payment in the event of a default. The reserve would be based upon the amount available to the borrower or a portion of the fund would set these reserves aside based on a percentage of their loan. If a community with no rating or payment history and a small source of revenue with little possibility of intercepted money from the State pursues a loan, their reserve requirement may be higher. The reserve requirement offers a period of time for corrective action in order to avoid an immediate default with no remedy. CHAIRMAN TORGERSON assumed that reserves set aside by municipalities for future mitigation problems with water, sewage, and solid waste were not subject to such restrictions. ROSS KINNEY understood Chairman Torgerson to be speaking to the fact that Governmental Accounting Standards Board has required that a substantial amount of financial assurances be available in the event of ground water contamination as a result of solid waste landfill. This would ensure that sufficient money is being accumulated on a pay as you go basis so that there is the ability, during the closure and post closure period, to monitor for some years after the facility closes. That change occurred about three years ago. He discussed Kenai's situation. Mr. Kinney emphasized that the previously described situation is a separate issue; the money cannot be utilized for the purposes of meeting these same requirements. Number 580 SENATOR KELLY indicated that the bondholder's should assume some of the risk. ROSS KINNEY said that there is a risk factor. The risk factor is determined by the loaner and is based on the interest rate they demand which is determined by the project for which the money is being loaned. Mr. Kinney acknowledged that there are advantages to dealing with the government in this situation in that these are tax exempt transactions. Therefore, the interest rate is lower. TAPE 96-3, SIDE B SENATOR KELLY asked if SB 207 was drafted by legislative drafters or by the Administration's attorneys. KEITH KELTON said that the Administration's attorneys drafted the bill. SENATOR KELLY referred to page 8, line 27 when recommending that such language structure should be avoided. SENATOR ZHAROFF pointed out that there is no provision for a dedicated fund to pay back revenue bonds. There will probably not be a repayment schedule. He noted that the departments had testified that there would not be a problem with eliminating state agencies from this bill. The legislature has no control over state agencies as the bill is currently written. KEITH KELTON suggested that an authority could be incorporated into the bill. He explained that an authority would combine jurisdictions of political boundaries for purposes of a certain project. He said that a portion of the definition of a "state agency" should remain in order to cover the "authority" situation. SENATOR ZHAROFF expressed concern with the effect this legislation would have on smaller communities. He asked that caution be taken on this. Senator Zharoff did not believe that there had been a constitutionally correct example with the dedication of fund prohibition. SENATOR KELLY mentioned that there is no future in cutting cash spending today only to go into debt tomorrow. KEITH KELTON noted that the definition of "state agency" could apply to housing authorities. They may build projects and receive commitments from some of the users of the facilities in order to obligate that revenue stream to pay the debt. SENATOR ZHAROFF said that if it's a separate legislative appropriation, then it should be addressed. The point that there is no cap on this entire process was reiterated. That raised the red flags to begin with. SENATOR KELLY asked if Alaska would be pledging its faith and credit to repay these bonds. KEITH KELTON said that is not the case. Mr. Kelton explained that the pledge is for a revenue stream from the borrowers to pay this. The bill is not necessarily pledging full faith and credits of municipalities either, but their revenue stream is being pledged. In order to pledge the full faith and credit of the State of Alaska, a referendum must be held. In the cases of Airport Bonds, Alaska Housing and the Student Loan Corporation, the revenue stream derived from an income generating function is being pledged; no vote has to be taken. Mr. Kelton informed the committee that normally, revenue types are done for enterprise funds such as water, sewer, etc. The payment of the bonds in this case are actually being given by the user of the provided service not the general taxpayer. SENATOR RANDY PHILLIPS posed the following scenario: Anchorage International Airport takes a down-turn and their bonds go belly up; what would happen? KEITH KELTON said that the Department of Transportation could begin the liquidation of facilities and other necessary actions. That is a state function which would be achieved through a liquidation measure. In response to Senator Randy Phillips, Mr. Kelton agreed that at that time the full faith and credit of Alaska would not be involved. SENATOR KELLY said that in the end, the State of Alaska cannot allow any of these groups to go under and maintain credibility. SENATOR ZHAROFF interjected that back up parallels the ACWF to the Airport Fund although, the Airport Fund has a cap and is subject to appropriation. Number 505 SENATOR KELLY asked if the legislature is required to authorize each year all the bond proceeds from the revolving Airport Fund. CHAIRMAN TORGERSON pointed out that the bill says that the SBC must give the Commissioner of Administration the money necessary to pay for the bond that year. SENATOR RANDY PHILLIPS interjected that it had to go through the General Fund and be approved first. SENATOR KELLY agreed and said that there is a provision in the budget dealing with that loan fund in which those projects are authorized each year. CHAIRMAN TORGERSON asked if the references to hazardous wastes on page 11, lines 4 and 21 in the bill provide the authority to loan money for hazardous waste management. Chairman Torgerson seemed to think that was a different direction than the bill intended. KEITH KELTON explained that this section of the bill modifies current statute which does refer to hazardous waste. The change deleting "facility" and adding "system", was done in order make the language consistent between the two statutes. The reference to solid and hazardous waste does not apply to the intention of the bill. CHAIRMAN TORGERSON was concerned that the issue of hazardous waste was being incorporated into the bonding stream. KEITH KELTON reiterated that this was existing language, but it could be changed. Number 470 In response to Senator Kelly, KEITH KELTON explained that a public process is utilized in order to develop an annual intended use plan which defines the projects that would be funded. The demand for this money has been considerably less than the available money. The legislature is provided with an annual report which defines all the activities of the program in the preceding year. SENATOR KELLY expressed concern that this could be another open pocketbook for debt in Alaska. Municipalities can tax in order to repay revenue bonds if the revenues do not fulfill the expectations. SENATOR ZHAROFF said that in various areas of Alaska there is a serious sewer and water problem. A large revenue stream is being taken in order to leverage more money to complete more of these projects, however we are limiting this to areas that already have the ability to do such projects. CHAIRMAN TORGERSON referred to page 8, line 5 when indicating that there had been suggestions to broaden the definition of "committee" in the bill. KEITH KELTON informed everyone that the bond community has a standard definition of "committee", but there is a trustee who assists in the management recommendations. ROSS KINNEY pointed out that the SBC is authorized by statute to issue these types of debt within certain limitations. In regard to these types of issues, the definition should be retained unless language changes to other statutes dealing with authority of the SBC were to be proposed. Mr. Kinney assured the committee that a bond sale would not be authorized or approved without the consent of the SBC and the opinion from the financial advisor. CHAIRMAN TORGERSON asked if the word "may" on page 6, line 13 was used in order to allow that the proceeds of the bond would not all go to the functions of AS 46.03.032. ROSS KINNEY explained that an allowable expenditure under the proceeds of a bond sale is the cost of the sale itself. That would include the cost of the financial advisor and the bond attorney as well as associated administrative costs. In addition, there may be custodial bank fees which would be an allowable expenditure. Mr. Kinney believed that "may" was the correct word. Number 388 A discussion ensued between Senator Randy Phillips and Keith Kelton regarding the technologies and their applicability in rural Alaska. In response to Senator Randy Phillips and Senator Hoffman, ROSS KINNEY explained that one of the criteria for clean water is that local governments have an O&M capability. Before a facility is built a utility collection fee system, an 80 percent collection rate, and trained operators must be in place. Those measures are done in order to eliminate the possibility of failure. Number 290 SENATOR ZHAROFF inquired as to the beneficiaries of SB 207. ROSS KINNEY said that the beneficiaries would be the residents of the larger urban communities. The communities must have a dedicated revenue stream before the loan will be made. CHAIRMAN TORGERSON said that when the committee receives the discussed language changes, a CS would be written and the bill would be heard again. There being no further business before the committee, the meeting was adjourned at 2:50 p.m.