SENATE BILL NO. 310 "An Act providing for and relating to the issuance of general obligation bonds for the purpose of paying the state cost of school, University of Alaska, and port and harbor capital projects; and providing for an effective date." TAMERA COOK, Director, Division of Legal and Research Services, testified that this legislation consists of typical language for a general obligation (GO) bond bill. She shared that GO bonds have the full faith and credit of the State Of Alaska and that the state constitution requires approval by the voters. She noted that the bonding language was devised by Bond Council with assistance for the Attorney General and the (previously named) Division of Legal Services, and has remained virtually unchanged for 30 years. She stressed that the language is rigid and that Bond Council requires a GO bond bill must be drafted in this precise format. This legislation, she pointed out has no deviation from the established format. Mr. Cook relayed earlier conversations between Co-Chair Torgerson, Jim Baldwin of the Department of Law and herself related to the "single subject" question. She opined that proposing the issuance of bonds for schools, roads and other capital projects within one bill follows the provisions of the single-subject rule. She stressed that although the courts have made "mumblings" to the contrary, no ruling has ever been issued against this. She noted that most of the comments made stating that different types of projects in the same bill do not meet the single subject rule, are issued in the form of dissenting opinions. Ms. Cook told the Committee that Mr. Baldwin recommends dividing the capital projects into two separate bills, one for education projects and the other for transportation projects, to avoid the problem. She also stated that most attorneys feel that it is a matter of time before the court finally issues an adverse ruling on the single subject question and that Mr. Baldwin did not want that to happen on a GO bond bill. She added that Mr. Baldwin also thought that Bond Council might decide that the risk of litigation might hamper the marketability of the bonds. She qualified that she was not in a position to weigh this matter, although she recognized the arguments on both sides. Senator Adams asked what change could made to the bill's title that would insure against a single subject rule challenge. Ms. Cook responded that no title change for this bill would avoid the single-subject challenge, because the title requirement and the single subject requirement are completely separate constitution issues. The title requirement, she explained relates to notice of what is contained in the bill. She noted that this bill gives appropriate notice that the bill includes school projects, university projects and port and harbor projects. The issue, she said is whether the bond proposal could be placed before the voters as a package, requiring them to "take it or leave it" on all the projects. She attested that although the bill complies with the single subject rule as established in the past, the courts are waiting for a vehicle to issue an adverse ruling to change the requirements. Ms. Cook stressed that just the potential litigation on the question of the single subject rule may be enough to drastically delay the issuance of the bonds and the subsequent funding for the projects. Senator Adams asked about the impact on the ability for municipal participation in the school capital projects. Ms. Cook replied that municipalities could not participate in the issuance of GO bonds with the full state backing. However, she noted that additional school-related capital projects could be added to the bonds. Senator Phillips asked of the bonds that previously passed, if any maintenance and operations were included or if all the projects were for capital improvements. Ms. Cook was unsure and would research the question. She did stress that bonds could not be issued for operation functions according to the state constitution. She qualified that if a maintenance project was substantial, such as a building addition or a new roof, it would qualify as a capital project. Day to day or year to year maintenance, she said would not qualify. Ms. Cook continued that the court has looked at the issue of what qualifies as a capital project for bond purposes as well and found a capital project is something that has historically been financed with GO bonds. Secondly, she said the courts also consider whether the improvement will have a substantial life span of at least as long as the bond repayment. Senator Phillips listed some of the proposed projects as heating ventilation, gym floor replacement, heating coil replacement, fire alarms, carpeting, district-wide major maintenance for the Anchorage School Board, and deferred maintenance for the University of Alaska. He wanted to know it these projects qualify as capital improvements under the GO bond criterion. Ms. Cook did not know what those maintenance items would be, but noted that the shorter the life span of the project, the more problematic the question of whether GO bonds can be used to fund them. She added that she knew of some municipalities that have issued GO bonds for such items as computer equipment, which she thought has a relatively short life span. She said those types of uses of the bonds have not yet been challenged, so there is not a specific court ruling on the matter. Senator Phillips indicated that he would research the included projects in the GO packages approved between the late 1960s through 1980. DEVEN MITCHELL, Debt Manager, Treasury Division, Department of Revenue added his assessment to the debate of whether the proposed projects qualify for GO bonds and whether the package fits the single subject. He agreed with Ms. Cook that there is room for interpretation and that the potential is there for problems. Mr. Mitchell addressed the concern that marketing the bonds would be difficult because of the perception of the litigation risk. He stated that buyers would still want to purchase bonds, but that there could be higher interest rates. He noted that if litigation were introduced prior to the issuance of bonds the department would not want to proceed with a market effort until the matter was decided. Senator Phillips asked if deferred maintenance items legally qualify for GO bond funding. Mr. Mitchell deferred to the Department of Law but qualified that previous municipal bonds that he has dealt with have included maintenance projects. JIM BALDWIN, Assistant Attorney General, Governmental Affairs Section, Civil Division, Department of Law responded to the same question saying he needed to do research before giving an opinion. He did point out that the constitution states, "capital improvements" and noted that the Attorney General's Office has issued past opinions where the term is strictly construed. He interpreted the meaning of capital improvement to include "concrete and steel and not repair". He stated that major roof repair would probably be considered for GO bonds. Co-Chair Torgerson had understood the criterion to include a project that extends the life of the building regardless of the size of project. However, he thought the witness was saying something different. He requested the witness research the matter. Senator Adams remarked that he wanted to make the title as broad as possible to avoid this problem. He suggested, "An Act providing for and related to the issuance of general obligation bonds for the purpose of capital improvement projects in the State Of Alaska." Mr. Baldwin cautioned of the need to take care not to confuse the descriptive rule, dictating how the title must accurately describe the contents of the legislation, with the single subject rule. Co-Chair Torgerson commented that the title isn't really the problem. He stated that the only connection between the school projects and the ports and harbor projects is the bond package and the provisions stipulating how those bonds would be issued and managed. The projects themselves are not interrelated, he remarked. Mr. Baldwin shared that the court has ruled that a bill has to follow a general theme. Senator Adams asked if the witness felt it would be better to separate the bonding into two bills, one for education projects and the other for ports and harbors. He voiced a concern about garnering public support for either one. Mr. Baldwin thought it would be better to have separate bills for legal reasons. He could not speak on the political reasons for having one or two bills. Co-Chair Torgerson asked if the bond package approved in 1978 was one bill or if it was split. Mr. Baldwin believed the projects were separated. Co-Chair Torgerson asked if the witness thought the relationship between the university and schools was close enough to remain together on one bill. Mr. Baldwin recalled a similar instance involving the university and schools. He did not remember the outcome but believed the court would not find a great distinction between primary, secondary or post-secondary type schools. Mr. Baldwin stated that he could research the question and return an opinion to the Committee later in the day. Co-Chair Torgerson asked the witness to review the relationship between the university and schools and comment on the appropriateness of bonding major maintenance items. AT EASE 10:00 AM / 10:19 AM Amendment #1: This amendment inserts a new item on page 4, after line 6. University of Alaska - 7,642,600 Southeast Egan Building Classroom Addition Senator Adams moved for adoption. Co-Chair Torgerson objected. Senator Adams explained that design was completed in 1995 for this project, but no funding has been provided to cover construction costs. He detailed the plan for 16 new classroom spaces, including a lecture hall that would seat 150 students. Senator Adams expressed that the applications for first- time students are up 39 percent this year and the campus lacks adequate classroom space. This inhibits the growth of the student bases, which he stressed is needed to become a financially sound, self-supporting institution. A roll call was taken on the motion. IN FAVOR: Senator Adams OPPOSED: Senator Leman, Senator Wilken, Senator Green, Co- Chair Parnell and Co-Chair Torgerson ABSENT: Senator Phillips, Senator Donley and Senator P. Kelly The motion FAILED (1-5-3) The amendment FAILED to be adopted. Amendment #2: This amendment inserts new bill sections on page 5, line 10 to read: Sec. 4. AS 14.11.100(a) is amended by adding a new paragraph to read: (10) subject to (h), (i), (j), and (p) of this section and after projects financed by the bonds, notes, or other indebtedness have been approved by the commissioner, 70 percent of payments made by a municipality during the fiscal year for the retirement of principal and interest on outstanding bonds, notes, or other indebtedness authorized by the qualified voters of the municipality on or after July 1, 1997, to pay the costs that exceed $200,000 of school construction projects and major maintenance projects that are approved under AS 14.07.020(a)(11). Sec. 5. AS 14.11.100 is amended by adding a new subsection to read: (p) The total amount of public school construction projects approved for reimbursement by the department under (a)(10) of this section may not exceed $150,000,000. Senator Adams moved for adoption. Co-Chair Torgerson and Senator Green objected. Senator Adams stated this language would assist school districts in funding their capital projects, including major maintenance items. He explained that the state would reimburse municipalities to retire 70 percent of the bonding debt incurred for specific school capital projects. He stressed that it is important to adopt this amendment so that schools that do not have projects included in the state's bond package would have the ability to issue their own bonds to pay for the necessary projects. Senator Green remarked that she would have to support this amendment. Co-Chair Torgerson pointed out that the amendment adds $150 million to the bond total. A roll call was taken on the motion. IN FAVOR: Senator Adams and Senator Green OPPOSED: Senator Leman, Senator Wilken, Senator Donley, Co- Chair Parnell and Co-Chair Torgerson ABSENT: Senator P. Kelly, Senator Phillips, The motion FAILED (2-5-2) The amendment FAILED to be adopted. Amendment #3: This amendment makes the following changes to the bill. Page 1, line 9, page 2, line 10, page 4, line 3, and page 5,line 9: change the numbers to reflect the additional schools Page 3, after line 27, add the following project: Noorvik K- 12 Improvements 17,528,378 Page 3, line 30, following "Elim": insert: "Bering Strait" Page 3, after line 30 add: Bering Strait-Golovin School 9,609,516 Phase Ill Bering Strait-Koyuk K-12 School 14,059,664 Page 4 after line 1 add the following project: Togiak School Replacement 25,027,049 Yupiit Schools (ED 39) Akiachak Elementary Replacement 14,370,287 & Secondary Renovation Senator Adams moved for adoption. Co-Chair Torgerson and Senator Donley objected. Senator Adams explained the purpose for this amendment is to include the projects identified by the Department of Education and Early Development as the ten most necessary. He feared that by not repairing the schools in greatest need, the entire bond package is jeopardized by threatened lawsuits against the state claiming that rural students are not treated equally. He said that although forty schools are identified as needing improvements, he suggested at least including the first ten. Co-Chair Torgerson pointed that this amendment adds over $80 million to the total bond package. Senator Adams reiterated that by approving the additional projects, the risk to the remainder of the project is minimized. Senator Wilken remarked that his support of the bond package has nothing to do with the Kasayulie vs. State Of Alaska case. This case, he emphasized, would be decided in court. Senator Wilken referred to the process to determine the priority of school capital projects. He stated that the department issues a list each year in December, the latest of which, he said was consulted when drafting this bill. However, he noted, another list was published in March 2000 that had different figures. He wanted the department to answer to the changes. KAREN REHFELD, Director, Education Support Services, Department of Education and Early Development explained the list generated in March is the list that the Board of Education uses to take final action based on the department's negotiated agreements. This latter list she explained contains the final results of any appeals. Other differences, she continued reflected projects initially recommended for phased funding that have since been approved for full construction funding. Senator Adams noted one of the projects has a ten-percent match. Senator Wilken asked if a second project list is issued every year or if the December list is usually the only one generated. Tape: SFC - 00 #91, Side B 10:28 AM Ms. Rehfeld replied that a final agency list is issued following the appeals that are settled during a March or April board meeting. There was conversation between the witness and Senator Wilken establishing the changes and appeals for the Togiak and the Koyuk school projects. A roll call was taken on the motion. IN FAVOR: Senator Adams OPPOSED: Senator Donley, Senator Leman, Senator Wilken, Senator P. Kelly, Senator Green, Senator Phillips, Co-Chair Parnell and Co-Chair Torgerson The motion FAILED (1-8) The amendment FAILED to be adopted. Amendment #4: This amendment makes the following changes to the bill. Page 1, line 9, page 2, line 10, page 4, line 3, and page 5,line 9: change the numbers to reflect the additional schools On page 4 after line 1, add the following project: Akiachak Elementary Replacement 14,370,287 & Secondary Renovation Yupiit Schools (ED 39) Senator Adams moved for adoption. Co-Chair Torgerson objected. Senator Adams noted this project was the tenth highest priority on the department's issued list of critical projects. He said he submitted the request on behalf of the Senator from Bethel. A roll call was taken on the motion. IN FAVOR: Senator Adams OPPOSED: Senator Phillips, Senator Donley, Senator Leman, Senator Wilken, Senator P. Kelly, Senator Green, Co-Chair Parnell and Co-Chair Torgerson The motion FAILED (1-8) The amendment FAILED to be adopted. ANNALEE MCCONNELL, Director, Office of Management and Budget gave Administration's position on the bill, saying she was pleased the effort for the bond package for highest priority items was beginning. Ms. McConnell asserted that the overall amount for the school projects should address more schools than are included in the current proposed bond package. She spoke of considerable needs that have accumulated and the school that have been waiting for attention for several years. She said these projects should be undertaken, not because of the pending litigation, but because it is "the right thing to do." Ms. McConnell had concerns with how the included projects were selected. She stressed that the integrity of the system requires the projects be included down the list in the priority order established through the process in state law and then approved by the Board of Education. Ms. McConnell allowed the first five projects on the priority list are included in the bond package, but that the approved projects skip down to number 24 on the list. Ms. McConnell recommended the legislation avoid the gray area of whether major maintenance projects can be funded under GO bonds by using the financing plan proposed by the Administration. She explained this plan would take care of the problem because other funding methods are not under the same constraints as GO bonds. She told the Committee the plan proposes using Alaska Housing Finance Corporation (AHFC) bonds or tobacco settlement bonds. Ms. McConnell stated the state would have the opportunity to address the insecurity of year-to-year amount or the total payment from the tobacco companies by shifting the risk from the state to the bondholders. Co-Chair Torgerson noted the education projects and the ports and harbors projects would be separated into two new bills that would be introduced at the upcoming Senate floor session. Senator Donley commented that the Administration's position "is all well and good but first of all, begs the question of whether we even bother to have a legislature. If we're going to turn over to a bunch of bureaucrats in Juneau, the authority to appropriate money, the constitution doesn't need to exist. We might as well not have a legislative branch of government to make sure that the people elected to represent the people [indiscernible] some sort of statewide parody when we do things." Senator Donley continued that no mention was made about budget reductions in the Administration's fiscal plan. "We need to continue to reduce state spending to try to close the fiscal gap," he asserted. Senator Adams rebutted that no bureaucrat has stated the Administration is taking away the legislature's appropriation powers. The administration only makes suggestions, he stressed. He expounded that it is hard for the public to understand the fiscal gap when there is $2.6 billion in the Constitutional Budget Reserve that could address problem areas. Co-Chair Torgerson ordered the bill HELD in Committee. ADJOURNED Senator Torgerson adjourned the meeting at 10:37 AM. SFC-00 (16) 04/15/00