SSSB 37 EDUCATION FACILITIES FINANCING AUTHORITY   SB 111 APPROP: EDUCATION FACILITIES FUND CHAIRMAN MACKIE called the Senate Community & Regional Affairs Committee meeting to order at 1:33 p.m. All committee members were in attendance. CHAIRMAN MACKIE brought SSSB 37 and SB 111 before the committee and, as prime sponsor of the legislation, turned the gavel over to Vice Chairman Wilken before presenting an overview on the bill. Chairman Mackie explained the original SB 37 was a general obligation bonding bill, which would allow for the sale of g.o. bonds for school construction in the state. However, because there wasn't a lot of interest being generated in the g.o. bonding concept, he decided to go to the facilities financing authority concept contained in the sponsor substitute. SSSB 37 would take $1.2 billion from the Constitutional Budget Reserve Fund (CBR) and create the Education Facilities Financing Authority, which is similar to AIDEA and AHFC. The $1.2 billion from the CBR would be managed by the Permanent Fund Corporation. He emphasized that the principal of $1.2 billion would not be spent, but would be used to generate interest earnings through the management of the permanent fund to finance and repay revenue bonds that would be issued and sold by the authority to construct schools throughout the state of Alaska. He stressed this is not a raid on the CBR -- it is what he believes to be a creative option that's out there. It is an option he believes the Legislature should take a look at to deal with the ever growing major maintenance and new construction needs throughout the schools in Alaska as well as the University of Alaska, which has major deferred maintenance problems and new construction needs as well. Chairman Mackie advised that the legislation authorizes the following $500 million worth of school construction and repair projects: (1) $285 million in projects selected from the DOE priority list for small schools and rural areas of the state; (2) $135 million for projects selected from priority lists submitted by large municipal school districts; and (3) $80 million for University of Alaska projects and a large backlog of deferred maintenance needs. He has felt from the start that unless there was fairness that was applied to any effort, regardless of who introduces a bill, nothing is going to happen unless there is equity in both the urban and the rural areas of the state. He added that all of the projects would be funded 100 percent and would not require a local match. In closing, Chairman Mackie pointed out that revenues from the CBR are factored into the long-term budget plan, and this legislation would take from that, so it is a policy question that will need to be debated further as the bill goes through the process. Number 155 SENATOR HOFFMAN asked if because the legislation takes the money from the Constitutional Budget Reserve Fund, it would require a three-quarters vote for passage, and CHAIRMAN MACKIE acknowledged that it would. Number 160 Vice Chairman Wilken returned the gavel to Chairman Mackie. Number 170 STEVE MCPHETRES , Executive Director, Alaska Council of School Administrators, expressed appreciation for the introduction of the legislation, which, he said, is an effort to put another idea on the table to bring about a solution for a long-term problem: school projects that have been listed year in and year out, and they continue to become more and more of a problem. Mr. McPhetres said g.o. bonds do not allow for a good long-term plan for addressing the long-term needs of school facilities across the state of Alaska. He said in their efforts to come up with a possible solution to present to the Legislature this year, they came up with this concept of establishing the Educational Facilities Fund. He also pointed out that the control of the fund and the control of the projects still maintain themselves in the power of the Legislature. The school administrators believe that this legislation is a good effort in not only addressing one issue, but three issues that are there: (1) the municipal school districts who have continued to have growth problems; (2) the long-term needs of rural Alaska that have been out there and have not been addressed; and (3) the University of Alaska's tremendous major maintenance that needs to be addressed. Concluding, Mr. McPhetres said his organization is fully supportive of SSSB 37 and he expressed their willingness to continue to work with the committees in seeing that it becomes a reality. Number 230 BOB LERESCHE , an investment banker representing Cominco Alaska, said Senator Mackie, himself and others have been working in trying to figure out the best way to meet the great need that exists for school construction and major maintenance projects. He said there are four or five other alternatives, but he believes this new alternative is the best way to meet the present needs while neither draining the CBRF nor busting the budget plan. In addition, it provides the advantage of establishing an agency that would last for a long time and allow a really organized, measured way to meet these school needs as they arise, and to meet them under strict criteria and legislative authorization for each one. Presenting a brief overview on the legislation, Mr. LeResche said the bill establishes the Educational Facilities Finance Authority within the Department of Education. Sitting on the three-member board of directors would be the commissioner of education, commissioner of revenue and the commissioner of transportation and public facilities. The bill also establishes an Educational Facilities Fund, which is an asset of the authority. The authority would be authorized to do three things: 1. Sell their bonds directly and finance the schools directly. This could be done only upon approval of the specific projects by the Legislature. This method would be used primarily for rural jurisdictions and small municipalities which don't have sufficient tax bases to issue their own bonds; 2. It could contract with municipalities who could sell their bonds, to pay a designated percentage of net debt service on municipal bonds issued to finance schools; and 3. It could contract with the University of Alaska to reimburse up to 100 percent of university bonds issued. Mr. LeResche said this concept sounds similar to what has gone on in the past, but there is an important difference. Under this bill the municipalities would actually have a contracted reimbursement obligation from this authority, which would greatly improve the credit of their bonds and thereby lower the interest rate. He said that really firms up without an annual argument over what level of debt service to appropriate. Other highlights of the bill outlined by Mr. LeResche were: -- Some of the earnings of the fund would be applied to debt service and the reimbursement agreements. -- The fund would be managed by the Permanent Fund Corporation under its basic statute. -- The bill would initially authorize $500 million worth of school construction and repair projects. -- Future legislatures could continue to authorize more bonds and reimbursement agreements within the financial capabilities of the education facilities fund. The fund would have bonding capacity equal to or exceeding the initial $1.2 billion capitalization, without risking the original $1.2 billion corpus. -- Under reasonable projections of future demands on the fund, the fund would continue to grow if its investments yielded more than they had to pay on the bonds they issue. He said he is quite sure this would occur with proper management of the authority. Mr. LeResche said when people start talking about the fine points of arbitrage and tax law, this is not that complicated. It is something that has been done for years for the private sector through AHFC and AIDEA. Mr. LeResche noted that there has been criticism of this concept relating to tax law, and it is a question as to whether or not the yield from the fund would have to be restricted to match the interest rate of the bonds. He said he quite certain that his bill has been drafted around that problem and there is a high level of probability that a large portion of the fund will escape this yield restriction problem. Number 382 SENATOR HOFFMAN said the bill provides putting $1.2 billion into the fund and spending $500 million in 1997, and he asked what how much would be available in subsequent years. CHAIRMAN MACKIE clarified that if the $500 million is spent initially and $60 million a year for the next 15 years, the earnings would sustain that. If only the $500 million worth of projects is done right now, the fund would actually grow from $1.2 billion to $1.5 billion at that end of that term. CHAIRMAN MACKIE noted the King Salmon, Anchorage, Cordova, Kenai and Kodiak teleconference sites were listening in to the meeting and that testimony would be taken from witnesses waiting to testify at the Fairbanks, Mat-Su, Tok and Sitka sites. Number 414 JOHN HOLST , Superintendent of the Sitka School District testifying in Sitka, commended Senator Mackie for sponsoring the bill. He said he is particularly pleased because the legislation contains two renovation projects for the Sitka School District that have been on the list for nearly 10 years, as well as the completion of UAS Sitka classrooms. Number 445 CARL ROSE , Executive Director, Association of Alaska School Boards, noted he had offered written testimony in support of SSSB 37 and SB 111. He said this solution to address school construction and major maintenance needs has come of age. He said we have deferred maintenance for some period of time and our inability to address it through our capital budget and other means available through municipal bonding, etc., has not met our needs. Mr. Rose said we've built these schools, and the question is if we can't adequately maintain them, what is the end result. Right now, school districts are looking at the issue of insurability. The ability to continue to insure the schools throughout Alaska with the loss rate of $1.5 million per year over the last year in terms of fire loss is a major issue, and the inability to maintain these facilities in such a fashion that they become susceptible to fire and loss. He cautioned the failure to maintain insurability statewide passes the issue on to the Legislature; if these schools are uninsurable, the Legislature stands fully accountable for any loss that takes place. Number 475 DARROL HARGRAVES , testifying from Tok, noted that other states that have attempted to use their oil wealth and resources in a similar manner have been very happy with it over the decades. He said this may be one of the finest things that has been done for a permanent basis with oil reserve revenues that have come to the state. Mr. Hargraves said he does have some concerns from a local and a statewide perspective. He said with a half billion dollars being thrown on the street at one time, there will be a rush of design people coming back into the state, as has happened in the past. He suggested it would better to set up a way to maintain a steady stream in smaller increments which would provide much more stability and consistency across the state. He also suggested looking at putting two additional people from the private sector on the board of directors, as well as including in the legislation a CIP list for picking priorities for funding that has gone through some kind of approval process. Number 520 WENDY REDMAN , Vice President, Statewide University of Alaska System, expressed appreciation that the Legislature is putting the issue of deferred maintenance back on the table in a big and significant way. She noted approximately 45 percent of the state facilities are university facilities, and that this has been the number one priority for the Board of Regents. The problem that the university is looking at today is about $165 million for housing and non-housing. The issue requires a two- pronged approach: one is to make sure that the maintenance accounts in their operating budget are brought up to par at the same time they are trying to do the deferred maintenance. At the same time that the university has been taking reductions from the Legislature, in the last two years they have moved about $3.5 million out of programs into the maintenance budget. By the end of FY 98, they will move another $3.5 out of program into maintenance to bring those budgets up to par. Ms. Redman pointed out that the majority of deferred maintenance projects are small projects that are done with local hire. She agreed with Mr. Hargraves comments about the importance of having a plan on how those projects will hit the street. In closing, Ms. Redman suggested that since the university does have nearly half of all of the state facilities, the committee may want to consider putting a representative from the Board of Regents on the authority's board of directors. Number 570 DON MOORE , Manager of the Matanuska-Susitna Borough, said in a borough with perhaps the fastest growing school district in the state of Alaska, they have a pressing need for new construction of facilities. They have approximately 70 temporary portable classrooms spread throughout their district housing a large portion of their students. TAPE 97-8, SIDE B Number 001 Mr. Moore commented that there is something to be said for the idea about including and requiring a local match in the funding for these projects either through local government bonded indebtedness or by whatever means. A local election on the project would help to authenticate that the project is question is indeed something that the people want. The local government would then have a stake in the ownership of the facility. Also, it would provide additional leverage to the funds that are available. Number 030 AL WEINBERG , representing the Kashunamiut School District and the Citizens for the Educational Advancement of Alaska's Children, said as far as the K-12 public schools are concerned, the Department of Education has identified in the first year of six-year plans that are presently on the table about $615 million worth of new construction or major maintenance that needs to be done at some time. He said with $615 million it takes about $17 million a year just to keep up with the inflationary growth of construction and maintenance cost on that amount of money. The biggest problem that has faced the state in terms of getting rid of this backlog, or at least addressing the backlog, is the lack of a long-term, stable source of funds so these projects can be systematically taken off the books and in some kind of a reasonable priority order. Mr. Weinberg related the groups he represents are concerned about equity in the way the state spends future funds and their concern is in many ways based on the way the state has spent its funds recently for capital projects for public schools. In the last nine years, the state has spent $1.3 billion for capital projects in the public schools, but 93 percent of that money has gone to municipal districts leaving only about seven percent that has gone to REAA's, which have no capacity to bond, no capacity to raise and collect taxes. In closing, Mr. Weinberg encouraged creating a long-term stable source of revenue to deal with these problems and then to address the problems on the basis of demonstrated need as opposed to geography, community wealth, or political power. Number 126 LEN MACKLER , Facilities Director of the Fairbanks School District, said he was testifying as the statewide president of the Council of Education and Facilities Planners. He related a calculation done for the bond reimbursement committee two years ago showed that in just new students coming into the state the construction needs for new seats and new classrooms was around $100 million a year. However, the maintenance and renewal needs of the existing facilities in the state just keeps on going and going. He stressed the need to come up with a solution to this problem and his group thinks this is an excellent start, an excellent vehicle that's being proposed to solve this problem in the short term and the long term. Number 158 CHAIRMAN MACKIE asked Mr. Mackler if he was comfortable with the manner in which the Fairbanks projects were listed in the bill in terms of the priorities of his school district. MR. MACKLER acknowledged he was, and he added the district has a consistent six-year plan that the board reviews and agrees to every year, and the projects in the bill are the first year of their six-year plan. Number 170 KEVIN RITCHIE , representing the Alaska Municipal League (AML) and the Alaska Conference of Mayors, thanked Senator Mackie for his sponsorship of SSSB 37, which he said is a top AML and Alaska Conference of Mayors priority. He said this is a critical part of the state budget problem because if we don't fix what we currently have and expand what we need to it turns into a health safety problem. In the longer term, the cost of deterioration and the cost of inflation team up to significantly increase the costs that are being deferred to the future each year. He urged the committee's support and consideration of the legislation. Number 210 LARRY WIGET , Director of Government Relations for the Anchorage School District, voiced the district's support for the concept of creating the Educational Facilities Financing Authority and the Educational Facilities Fund, which he said is a responsible, innovative way to address the needs of schools now and in the future. Number 230 SAM TOWARAK , speaking on behalf of the Bond Reimbursement & Grant Committee, said the major issue facing the education facilities is the need to establish a stable long-term source of funding for K - 12 facility projects, which is an integral part of a comprehensive plan for statewide capital needs. To implement this, projects should be funded in the priority order established in the statutory ranking system, and the committee and the Department of Education should continue to develop, review and adopt facility related standards. Number 355 CHAIRMAN MACKIE asked Mr. Towarak his thoughts on the Legislature identifying some standards for the distribution of these monies and MR. TOWARAK suggested charging the Educational Facilities Authority with managing the dollars so that it has a maximum impact on the local economy. Number 336 SENATOR WILKEN said he thinks the concept of the legislation is exciting, but the thing that bothers him the most about it is that it's a initial policy statement on how the Legislature is going to deal with the CBR, now at $3.4 billion with the possibility of being up to close to $5 billion by the end of the year. There are now three plans on what to do with the CBR, and he said the worst thing we could do is piecemeal it to death and to find out some years down the path that we don't have a CBR anymore and we're back to the permanent fund. He wants to give careful consideration to a policy statement that will have to be made about what to do with the CBR. CHAIRMAN MACKIE stated it was his intention to hold the legislation over to the Friday meeting. He then adjourned the meeting at 3:10 p.m.