SENATE BILL NO. 312 An Act relating to school construction grants; and providing for an effective date. Upon reconvening the meeting, Co-chair Frank noted the teleconference availability of bond bank staff and bond counsel to speak to SB 312 and directed that it be brought before committee. The Co-chair stressed need to understand the impact of amendments offered by Senator Rieger, in terms of municipal issuance of debt. NORM LEVESQUE, Municipal Bond Band, testified via teleconference from Anchorage. He pointed out that language added by committee is difficult to comprehend. It has been interpreted by those working on the bill in many different ways. The language addresses premiums but not discounts. He referenced a recent MatSu Borough sale and explained that, as a net effect of the sale, the borough will end up with a discount of $17.0. Mr. Levesque said that he failed to comprehend the rationale behind the amendment. Premium and discount application is a marketing concept. What the state should be most concerned by is the net interest cost for the issue. Mr. Levesque advised that, this morning, the bond bank had a sale of $3.6 million in bonds. The net interest cost was 5.3212. That is an excellent rate for the ten-year term. ERIC WOHLFORTH, Bond Counsel, Alaska Municipal Bond Bank, next spoke via teleconference. He attested to the fact that the proposed amendment addresses a problem "which doesn't, in fact, exist." When municipal bonds are sold, they are sold with both an original issue premium and an original issue discount. That means that the maturities are offered for more or less than par. There are categories of bond purchasers who desire the high interest rate bonds that a bid for more than par produces, and there are categories of investors who prefer discount bonds. The bottom line is: Has the transaction, in its totality, produced the lowest net interest cost to the municipality? When bonds are sold at public or private sale, the drive is to produce the lowest net interest cost. Configuring a bond issue with premium and discount bonds is designed to attract a broad category of investors that prefer those kinds of bond issues. The fact that they are attracted broadens the market and tends to reduce the true interest cost to the lowest amount. With this legislation pending, the MatSu issue, $16,145,000 for school purposes, may have to bear an official statement for investors indicating that the legislation has been approved by committee. That particular issue is an example of why this is not the correct approach to limiting interest costs and reducing the amount taxpayers or the state must pay. The issue contains both premium and discount bonds. The net cost of the issue is basically a discount when the premiums are added and subtracted from the discount. The net interest cost was favorable. If the proposed legislation penalizes an issue for having premium bonds, it would, in like fashion, have to a have a formula that benefits the issue for having discount bonds. The bottom line is that the legislation is not necessary. It does not address a real issue in public finance in Alaska. Senator Sharp referenced a sale with the majority of the bonds due in four years at over 9.5% tax-exempt interest with a $15 premium. He then asked who would receive moneys over and above the face value. Mr. Wohlforth advised that the municipality receives the funds. With respect to that particular issue, subsequent bonds are being offered at a discount so that the premium produced by the earlier issue is reduced by the discount at which later maturities are sold. Senator Sharp noted legislation limiting bonding authority and suggested that issues such as that described above generate excess cash and obligate the state to extra interest payments. Mr. Wohlforth reiterated that later portions of the issue are sold at a discount so that the premium for early maturities is reduced by the discount for later maturities. Senator Sharp inquired concerning what would prevent a large premium on all the bonds and subsequent higher reimbursement by the state. Mr. Wohlforth acknowledged that he could not say that the foregoing would be a mathematical impossibility. Senator Sharp than asked how often the blend of premiums and discounts had been utilized. Mr. Wohlforth attested to numerous instances in which issues have had both original issue premium and discount bonds. He said he knew of no cases of the above-suggested abuse whereby an entire issue was sold at a premium. Senator Sharp reiterated that the exposure exists and sought assistance in development of corrective language. Discussion followed between Mr. Wohlforth and Senator Rieger concerning the particulars of the recent bond issue. Senator Rieger concurred in comments by Senator Sharp that language should be developed to avoid possible abuse. He expressed additional concern over ability to shift offsets for premiums and discounts over a shorter period than the legislation generally requires. Senator Rieger acknowledged that present amending language does not "get accurately at the potential abuse the committee would like to get at or at least preclude." Mr. Levesque concurred. Senator Kerttula voiced support for plugging what appears to be a potential loophole. Co-chair Pearce called for additional questions. None were forthcoming. She then advised that she would meet with Senator Rieger prior to bringing the bill back before committee. SB 312 was thus HELD in committee for subsequent discussion. ADJOURNMENT The meeting was adjourned at approximately 10:25 a.m.