CS FOR SENATE BILL NO. 218(TRA) am "An Act relating to international airports revenue bonds and requiring that the spending plan for the International Airports Construction Fund include information about the amounts spent during the previous fiscal year for cost overruns on certain projects and the identification of time delays on certain projects; relating to customer facility charges to fund facilities in airports to be constructed without using international airport revenue bonds; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. SENATOR JOHN COWDERY testified that the bill raised the limit of the bonding authority of the airports to $477,900,000. He reminded the Committee of legislation from a few sessions back related to airport bonds, which he said, was on-going. He shared that "all the airlines" support SB 218. He pointed out this legislation requires no tax dollars and instead, the airlines would contribute from their revenues generated from landing fees. Senator Austerman noted that the cost of the project at the Ted Stevens International Airport in Anchorage has continued to "spiral up" and he wanted to know if this legislation would apply to the existing project and related cost overruns or toward a new project. He pointed out that although the revenue for these bonds is not received through taxes, the landing fees are considered a business expense and the cost is passed along to the consumer in the ticket prices. Senator Cowdery answered that this bill does not apply to previous projects, but rather new projects. He noted that the airports in both Fairbanks and Anchorage would qualify for funding under this legislation. He stated that the purpose of this legislation is to utilize the revenues collected from landing fees by the airlines for new projects. Otherwise, he explained, these revenues would be spent on the existing upgrade project. He noted this legislation allows the funds to be received earlier than the fifteen years it would take if not for this legislation. KURT PARKAN, Deputy Commissioner, Department of Transportation and Public Facilities, added that this legislation provides for a bonding package to fund the annual capital improvement project (CIP) at the airport system. He explained this package was agreed upon during the previous year's negotiations between the airlines and the department in which the airlines requested a five-year CIP for their consideration and the authority to issue bonds to fund these improvements rather then the current method of "cash funding" the projects each year. Mr. Parkan detailed the funding for these projects include the costs of environmental procedures, securing taxiways and equipment purchases. He pointed out the general annual CIP is unrelated to the on-going terminal upgrade project with the exception of four projects that are similar to the terminal project but were not part of the original project's "scope". He referred to a letter from the Department of Transportation and Public Facilities to Senator Cowdery that identifies these key projects. Mr. Parkan shared that the agreement upon this debt financing method for CIP projects was reached because the airlines wanted some certainty as to their annual costs. He noted that under the current system, the airlines incur "spikes" in landing fees, which would not happen under the proposed method. He informed this is a method of financing utilized for many airports across the country. Senator Austerman asked the status of the existing five-year terminal upgrade project. Mr. Parkan responded that the proposed bond package in this legislation would fund the first two years of the five-year CIP plan; the first year being FY 01. He explained that approximately $142,000,000 would be added to existing debt to cover these costs. Senator Austerman asked if the legislature would then return to this issue within three years to consider authorizing an increase to the bonding limit for this project. Mr. Parkan affirmed a second request would be made to issue bonds to fund the final three years of the CIP project. Senator Ward asked if any projects contained in this bond proposal replace any of the anticipated bond proposals under the extension of the airport bonds. Mr. Parkan answered a question of Senator Ward, repeating that the proposed bond package contains no projects that are currently part of the on-going airport extension and upgrade project. He relayed testimony he gave to the Senate Transportation Committee stating that there are several proposed projects that relate to the on- going terminal upgrade, but that do not replace a current project. He explained these projects were not included in the original expansion but are planned to coincide with the current terminal projects. He gave an example of hazardous material asbestos abatement, noting the extent of the asbestos found when the upgrade construction began was not anticipated. He said $5 million has been incorporated into the proposed bond package to address asbestos removal. He noted an access control system, a medium voltage project and some furnishings, are other projects related to, but not replacements of, the on-going terminal upgrade project. Senator Ward asked if Senator Cowdery has the same understanding of this legislation as Mr. Parkan testified. Senator Cowdery reminded that he has been working on this matter for several years and had sponsored the legislation authorizing bond issuance for the original terminal expansion and upgrade project. He told that the department had estimated the amount of asbestos that might be present, however much more was found during demolition. He stated it was not his intention to "pay for anything that we'd authorized before" however, there were cost overruns with the on-going project. Senator Ward opined, "That's the heart of the thing." He emphasized the $5 million cost overrun was not due to earthquakes, footings, etc. He qualified he was unsure if the overruns were a result of fast-tracking the project. He stressed he wanted to ensure the proposed bond package is not funding mistakes that were made during the original project. He was concerned if this were so, it would not be possible to identify and rectify those mistakes. Mr. Parkan understood Senator Ward's concerns and noted that this legislation does not cover any of the costs associated with the delays encountered over the permitting and errors in seismic design work. He expressed the intent to provide full disclosure of the four or five proposed projects that are related to the terminal project to the legislature. He assured that the remaining projects in the bond package are unrelated to the terminal upgrade and could not be changed because the bonds would be issued specific to those projects. He informed that the department has relayed the same assurances to the airline companies. Senator Cowdery continued that he understood the problems with the terminal upgrade project are eight to nine months old and are related to delays. He recalled that during legislation authorizing bond issuance for the terminal project, the department assured that $10 million of insurance was purchased to cover any delays. He was uncertain whether $10 million would be adequate to cover all the costs and he did not know where the remaining funds would come from. He surmised that Senator Ward was concerned that funds from the new bond package would be utilized to cover these. Senator Hoffman requested a copy of the list of proposed projects in the bond package. Mr. Parkan distributed a letter the department sent to the Senate Transportation Committee. [Copy on file.] Senator Austerman expressed concern, saying he did not support moving the bill from Committee without documentation that shows the projects funded in the original bond package, and the proposed projects that would be funded through this legislation. Mr. Parkan responded that the letter should address Senator Austerman's concerns. He stated the "whole purpose of this package is as a result of the airlines' request that we use debt financing for the annual CIP." Senator Austerman did not oppose this method of financing, but stressed he did not have enough information to make a decision regarding the bill. Senator Leman questioned the fiscal note from the Department of Revenue. He wanted to know if the sale of these bonds was considered in relationship to a $52,000 request for the FY 02 budget. DEVON MITCHELL, Debt Manager, Treasury Division and Executive Director, Alaska Municipal Bond Bank Authority, Department of Revenue, answered that the $52,000 is a FY 01 Supplemental budget request related to the Alaska Municipal Bond Bank Authority, which he informed is a separate entity. Senator Leman next asked why the travel and contractual services were funded with general funds. Mr. Mitchell replied these expenses are anticipated prior to the issuance of the bonds and are to cover the costs of the efforts to market and sell the bonds. Senator Leman asked if the Department of Revenue recovers these funds after bonds are sold. Mr. Mitchell answered it does not. Co-Chair Donley asked if the Department of Transportation and Public Facilities testimony is that none of the bonding proceeds would be used to pay for corrections to the problems experienced to date with the terminal project. Mr. Parkan referred to material distributed that lists those proposed projects that are related to the terminal upgrade. [Copy on file.] He clarified some of the proposed projects, such as with the hazardous materials are related to the on-going project. Co-Chair Donley asked how the additional costs, related to compliance with building codes, that are part of the terminal project are being paid. DAVID EBERLE, PE, Regional Director, Central Region, Department of Transportation and Public Facilities, testified via teleconference from Anchorage as the project manager on the terminal upgrade project. He stated that the deficiency corrections are being funded from the overall program contingency, which he said is part of the original program. He noted the department has an insurance policy to cover design flaws and that a claim would be filed. He assured of the department's intent of "vigorously pursuing recovery of those costs" but cautioned this would take time. Co-Chair Donley asked if all the legal fees related to the problems with the terminal project were covered under the insurance policy or if there would be a supplemental budget request the next session. Mr. Eberle answered that the legal fees are currently funded from the existing project's budget. He stated that how much of these costs are recovered depends upon the bids submitted for the remaining work on the project and subsequently, whether there is a supplemental budget request. Senator Ward asked for an explanation of the insurance policy and the process of determining the responsible party and recovering expenses from that party. Mr. Eberle detailed that insurance policy was purchased to "cover the entire project" and explained it covers any design errors or omissions related to the engineering work. He shared that the design firms are denying responsibility, which he said is standard. He stated that the insurance company has been notified of the intent to file the claim. He stressed the department intends to pursue the responsible party with assistance from the Attorney General's Office and outside counsel. He estimated it would be two years before the matter is concluded. Senator Ward asked if the department is also accounting for the cost of lost revenue due to delay of the project in its claim. He noted the additional retail and airline space the expansion is to provide. Mr. Eberle responded that those costs could be calculated after the terminal is operational and revenue is earned. Senator Ward requested an estimate of the amount of lost revenue, particularly for the nine months to date that the opening has been delayed. He understood that exact figures could not be calculated but wanted an estimate within $400 to $500. Senator Austerman referenced the letter from the Department of Transportation and Public Facilities listing the $8.7 million for the projects that relate to the terminal upgrade. He noted there is a remaining amount of $134,200,000 and asked if for a detail of the planned expenditures of these funds. Mr. Parkan noted that this item is included in the governor's proposed FY 02 Capital Budget legislation and stated he would provide that information. He noted some projects are partially funded through federal international airport improvement funds, others are bond funded and a few are revenue-funded projects. He pointed out environmental expenses could not be funded with bond revenues because they are not considered an asset. He shared that the bond revenue would be used for state match of the federal funds. Senator Austerman requested identification of this information in relation to the bill. AT EASE 11:14 AM / 11:17 AM Senator Austerman asked why this bill was not introduced earlier in the legislative session since the projects are contained in the capital budget. Mr. Parkan responded this bill, sponsored by the Senate Transportation Committee is similar to one introduced by the governor in January 2001. Co-Chair Kelly noted the governor's bill has been in the Senate Finance Committee since the first two weeks of the legislative session. Senator Ward added that there has been extensive discussion on the matter of funding sources, responsibility for the delays, and whether the terminal expansion project would essentially need to be done twice. He expressed that although it would be at least two years before the responsible party is determined, the citizens would pay the price of the project delays and increased costs. Senator Ward stressed that Senator Cowdery insisted on the new legislation, not the Senate Transportation Committee, which sponsored it. Senator Hoffman noted SB 218 lists the amount of $142.9 million as the bonding authority, but the fiscal note increases this amount by $5 million. He asked for an explanation. Mr. Parkan directed attention to a more current fiscal note dated May 2, 2001. He shared that the airline industry requested $5 million be changed from bond funding to revenue funding, which he said reduces the bond amount. It was determined that this fiscal note was not in possession of the Committee at this time. Mr. Parkan detailed the $5 million in question is for the relocation costs of the airlines and was included in the negotiations between the Department of Transportation and Public Facilities and the airline companies. Co-Chair Donley wanted to know where the funding comes from if it is not bonded. Mr. Parkan responded the monies are from the International Airports Revenue fund. He detailed the list of proposed projects attached to the aforementioned letter, explaining the various funding mechanisms for each. Mr. Eberle established for Co-Chair Donley, that he is not the project manager of the terminal extension project, but rather the overall program director. Co-Chair Donley shared that he has learned that the project manager of the terminal project is the same project manager of the Alaska Center for the Performing Arts in Anchorage. He asked if this were true. Mr. Eberle replied that the project manager for the terminal project is a Department of Transportation and Public Facilities employee. He noted a variety of consultants are working under contract with the state on this project. One of those consultants, he informed is Rise Alaska and the owner of this firm had been involved in construction of the performing arts center under a different company name. Co-Chair Donley asked if the contracts were competitively bid contracts or sole source. Mr. Eberle answered the proposals are all competitively bid. Co-Chair Donley shared concerns with others in Anchorage about the cost overruns incurred during construction of the arts center. These concerns, he said, grow because the same contractor responsible for those delays is involved in the airport project. Mr. Eberle responded that Co-Chair Donley could review the terms of the contract at any time. Co-Chair Donley expressed he also wanted details of the bid criteria and whether any consideration is given to the past performance of a contractor. Mr. Eberle stated he would provide the evaluation criteria and the scores given for these bids. Senator Leman clarified that "contractor" used in this context, applies to professional management, engineers or other technical service providers. Senator Green pointed out that in the future many of these questions would be answered in accordance to the provisions on page 2 of the committee substitute. These, she explained address reporting requirements of expenditures, cost overruns, etc. She stated her support of these provisions. Senator Green offered a motion to move from Committee, CS SB 218 (TRA) with $25,000 fiscal note from the Department of Revenue. There was no objection and the bill MOVED from Committee. AT EASE 11:26 AM / 11:39 AM