SENATE BILL NO. 338 An Act relating to the issuance of revenue bonds for acquisition and construction of the Alaska Discovery Center for the Ship Creek Project in Anchorage; relating to a study of the feasibility and financial viability of the Alaska Discovery Center; relating to construction of the Alaska Discovery Center; and providing for an effective date. Co-chair Pearce directed that SB 338 be brought on for discussion, referenced correspondence of this date from Wohlforth, Argetsinger, Johnson & Brecht as well as a copy of the 1984 session law establishing the railroad, and noted the teleconference participation of Ken Vassar from Anchorage and Mark LoPatin from Detroit. The Co-chair next directed attention to CSSB 338 (L&C), page 1, line 7, and noted need to correct the session law citation from sec. 1(a) to sec. 1(b). NOTE - The proper citation was subsequently determined to be sec. 1(a)(1)(B). Senator Kelly MOVED to effect the technical change. No objection having been raised, IT WAS SO ORDERED. MARK LoPATIN, of LoPatin & Company, spoke via teleconference from Detroit, Michigan. He concurred in dovetailing aspects of SB 148 and SB 338. He stressed need to ensure that the railroad understands that approval of SB 338 as a legislative action should not impinge on the $10 million and $50 million limitations set forth in SB 148. Addressing concerns raised by Senator Sharp regarding use of tax exempt financing for other than railroad related purposes, Mr. LoPatin acknowledged that the benefit is a quirk in federal law which was part of the original transfer act. He stressed that the federal government has no ability to prevent the railroad, as an agency of the state, from selling tax exempt bonds for railroad purposes. That includes rolling stock, track, storage, etc. That right will not be impacted by "our using it." If the benefit was abused or disappeared, the railroad would continue to have the federal right to sell tax exempt bonds for public purposes/railroad purposes. Mr. LoPatin acknowledged that the federal government could eliminate the benefit, but, in doing so, it would be eliminating the benefit for all public agencies. He advised that he could not conceive of a situation where it would "just apply to the railroad." The railroad receives this benefit because it is owned by the State of Alaska. The benefit allows the railroad to "go out and do non-railroad purposes." The transfer act contemplated non-railroad oriented activities that would generate revenue to support railroad oriented activity. In response to questions from Co-chair Frank, Senator Kelly advised that provisions of CSSB 338 (L&C) were intended to guard against "a half built building." The bottom line is that if the project does not work, the railroad has a building which can be used for something. Discussion followed regarding lease arrangements and owner, bondholder, and railroad interest in the project in case of default. Mr. LoPatin acknowledged that the bondholders would stand in primary position to take over operation of the facility. They would not do so without assurance of a return on capital. They would, however, continue to pay rent to the railroad, or they too would be in default, and the railroad would own the facility, free and clear. The railroad's interest is prior to and superior to other interests. Discussion followed concerning lease terms for the 120 acres. Mr. LoPatin explained that the owner of the project is responsible for rent payments to the railroad. Should the owner default, the bondholders have a period of time to cure the default. If they decline to do so, their interest is extinguished. The railroad, state, and municipality would be under no legal or moral obligation to make payments. He further advised that he would have no objection to language, suggested by Co-chair Frank, that the state and/or the railroad would be under no obligation to cure the default. End: SFC-94, #32, Side 2 Begin: SFC-94, #34, Side 1 Co-chair Frank inquired concerning fair market aspects of the rental agreements with the railroad. Mr. LoPatin explained that as each piece of land is "carved out," there is a new appraisal, and a new rental rate is structured. Discussion of lease assignments followed. Senator Sharp noted that it appears that, statutorily, the board of directors of the Alaska Railroad is required to exercise substantial discretionary power over the project in review of studies to determine whether the center is feasible and financially viable, etc. He then suggested that the foregoing exudes a sense of direct project involvement and responsibility. He further questioned language at page 2, line 3, stating that the "Alaska Railroad Corporation may loan the proceeds from the sale of revenue bonds . . . ." Mr. LoPatin directed attention to correspondence (copy appended as Attachment A) from Wohlforth, Argetsinger, Johnson & Brecht and noted that requirements for a feasibility study make a strong case for the fact that the railroad has no obligation to repay these bonds. They are purely revenue bonds. KEN VASSAR, Wohlforth, Argetsinger, Johnson & Brecht, next testified via teleconference from Anchorage. He acknowledged the connection between the railroad and the project but stressed that the connection does not translate to a legal or moral obligation with respect to the bonds. The legislation is extremely clear on that point. The bonds are payable solely from revenues pledged for the bonds and not from any other source. Railroad control of aspects of the project does not impact that issue. As background information, Mr. Vassar explained that in order for the bonds to be tax exempt, they must be issued by the railroad. The proceeds of bond sales will accrue to the railroad which will, in turn, lend the proceeds to the developer. Repayment of the loan and land lease payments will be made from revenues from the project. The loan payments will then repay the bonds. Mr. Vassar stressed that the proposed bonds will not create state debt. Senator Sharp again voiced need to hear from the railroad. Co-chair Pearce asked if the railroad board had taken action on the project. Mr. Hickey responded negatively. He said the board had reviewed the project, and there is support for the overall proposal. The board has not yet made a decision as to whether or not the railroad will issue the bonds. That decision will not be made until a number of thing happen, including the independent feasibility study. Senator Kelly asked if the board was "gun-shy." Mr. Hickey acknowledged that since the proposed project represents "the first use of this authority," the board has reservations. In response to questions from Co-chair Frank, Mr. Vassar described the sequence of events should the project be approved. The railroad corporation would issue its bonds, and underwriters selected by the corporation would buy the bonds. Proceeds from the sale of bonds would flow to a trustee--a large bank with trust powers, capable of handling the accounts and doing the paperwork. The trustee would deposit the proceeds of the bond sale into an account that would be used to make the loan to the developer. Mr. Vassar voiced his belief that the bank would handle the loan similar to a construction loan with release of funds upon completion of phases until the project is complete. Following distribution of the loan, the trustee would thereafter be responsible for collection of revenues to pay back bond holders. Co-chair Pearce noted that the board must feel a certain level of comfort with the LoPatin proposal since the railroad hired Mr. LoPatin to "do the development" over strenuous objections by AEDC and others in Anchorage. She then directed that SB 148 and SB 338 be HELD in committee pending future discussion with Mr. Hatfield and members of the board of directors of the railroad.