SENATE BILL NO. 216 "An Act relating to international airports revenue bonds; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. AT EASE 9:36 AM / 9:37 AM Co-Chair Wilken stated that this bill introduced by the Senate Rules Committee at the request of the Governor "increases the authorization for international airport revenue bonds by $70.6 million for capital improvements for the Anchorage and Fairbanks international airports." MIKE BARTON, Commissioner, Department of Transportation and Public Facilities, testified this bill would provide the necessary bonding authorization to complete the C Concourse of the Terminal Redevelopment Project begun in 1999. He emphasized the revenue bonds would be repaid from revenues generated by the airport facilities and would not be an obligation of the State. He informed that in the event of a default insurance would become the "ultimate payer" to the bondholders. Mr. Barton have a history of the projects, noting that the Ted Stephens Anchorage International Airport and the Fairbanks International Airport are included in the State's international airport system (AIAS) and operated together, with costs and revenues polled. He stated that the Airport Operating Agreement governs the two facilities and he defined the Agreement as a contract between the airports and airlines that establishes the business relationship and obligates the airlines to pay the costs of operating and maintaining the airports, including capital projects and bonded indebtedness. He furthered that the Agreement obligates the airport to secure agreement on costs for operating the airports, including capital projects. He continued that in 1997, the airlines agreed to finance the terminal redevelopment project and that two previous bond issues have occurred in 1999 and 2002. He stated that the proposed issuance "follows the same format" as the earlier issuances. He told of the agreement with the airlines that Terminal C must be completed, which this bond issuance would allow. Mr. Barton cited the bond issuance amount at $76.6 million, with approximately $50 million of the amount for actual construction costs. He stated that $13.5 million would be used to secure federal funds and the remaining funds would be utilized for bond financing costs. Mr. Barton warned that the cash supply would be depleted by September 2003 without this authorization. He stated the project's expected completion date is approximately one year from the current date. Senator Taylor clarified this legislation does not relate to additional construction, but rather to "clean up cost overruns" of an existing project undertaken during the previous gubernatorial administration. Commissioner Barton responded that the additional costs result from three sources, $33 million in "design problems and differences in interpretation of seismic codes", $20 million resulting from the Transportation Safety Administration (TSA) security requirements resulting from the events of September 11, 2001, and the reminder for additional space requested "post design". He stated that the additional space request was agreed upon with the intent that it would be financed with interest from the bonds. Senator Hoffman asked the total cost of the project including the amount included in this legislation. Commissioner Barton gave the estimated cost of Concourse C at $308 million. Senator Hoffman asked the total cost of "all retrofitting" and modification to the airport building. Commissioner Barton replied that a definitive figure would not be known until the design is completed, although he estimated the amount to be approximately $110 million. Senator Hoffman asked the likelihood that the Department would request additional funds given that a definitive amount is not available. Commissioner Barton clarified any request would be for additional bonding authority. Co-Chair Wilken understood $418 million would fund the completion of Concourse C. Commissioner Barton detailed that $308 million would fund the completion of Concourse C and that $110 in bonding authority would be requested in the future to upgrade Concourse A and Concourse B. Co-Chair Wilken asked the amount of funds authorized in this legislation would be allocated to the Anchorage project and the amount allocated to the Fairbanks project. Commissioner Barton replied that the majority of the funds would be appropriated to the Concourse C project in Anchorage and that $3.5 million would be utilized as matching funds to secure federal funds for use in Fairbanks. KEN SURA, Landrum and Brown, testified via teleconference from an offnet location that he had prepared a presentation. Co-Chair Wilken requested a brief overview. Mr. Sura informed that the firm prepared a feasibility study in the year 2002 based on key statistics: enplanements or passenger activity and operations of aircraft and airline schedules. He stated that passenger activity and cargo tonnage are the "two most important drivers at Anchorage" and is two-percent higher than forecast in 2002. As a result, he surmised the debt capacity for the additional bond issuance is sufficient. Senator Olson commented on the "impressive amount of work" invested in the project. He asked if the projections were accurate. Mr. Sura affirmed. Senator Olson asked if therefore the cost overruns are the result of unforeseen obstacles. He noted declining passenger revenues and subsequent employee layoffs and reduced flight schedules, as well as the inability for airlines to fund airport improvements. He asked how the economic difficulties were affecting the airport projects. Mr. Sura assured that the projects are "conservative by design" given the "potential investors". He noted that other airports are undergoing improvements and expansions and that airport funding comprises only five to six percent of airlines' operating expenses. He acquiesced that some airlines had made adjustments in certain markets; however, "in a market as strong as Anchorage and Fairbanks" future scheduling does not indicate significant reductions in flight frequency and number of seats. Senator Taylor understood the Ted Stevens Anchorage International Airport is the single largest economic driving faction in Anchorage, much of which is derived from Asian cargo. He supported the expansion efforts. He indicated other communities would benefit from funding to construct roads throughout the State. Mr. Barton expressed he would welcome such funding for roads, although no general funds are involved in the airport projects, which are instead paid by the airlines through rates and fees. Co-Chair Wilken informed of the proposed $2.5 billion funding for roads under consideration at the congressional level. Senator Bunde pointed out airline passengers, not the airlines themselves pay the airport construction costs and that if extra roads were constructed the "people of Alaska" would pay those expenses as well. Senator Hoffman stated he had concerns when the Anchorage airport project was first proposed. He requested from the Department, passenger forecasts as well as the commitments made by each affected carrier. Co-Chair Wilken referenced a handout provided by the Department titled, "Alaska International Airports System Business Planning Information, Presentation to State of Alaska Legislature, May 9, 2003" [copy on file] that includes the information requested by Senator Hoffman. He noted this handout was prepared for a presentation to the House Finance Committee and he suggested the Department make a presentation on the matter to the joint finance committees in January 2004. Co-Chair Wilken then corrected that cargo carriers pay the majority of the construction costs rather than the passengers. He was concerned that advancing airline technology allowing planes to fly farther, as well as the opening of airport facilities in Russia could result in lesser revenues to the airports in Alaska with which to repay the bonds. He emphasized the need to have the bonds paid before this time to ensure the costs are not transferred to passengers. Co-Chair Wilken further referenced the handout as detailing the projected traffic and landing fees in conjunction with the bonding debt. SFC 03 # 88, Side B 10:00 AM Co-Chair Wilken commented to the importance to adequately understand this issue, although he pointed out the amount of time remaining in the legislative session is insufficient to do so. Senator Hoffman requested supporting documentation for the information contained in the handout. He wanted to know the date the data was last updated to reflect changes incurred relating to the events of September 11, 2001. KIP KNUDSON, Deputy Commissioner of Aviation, Department of Transportation and Public Facilities, testified via teleconference from an offnet location that this information would be provided to the Committee. Senator Olson asked the amount of outstanding bonds and the effect the proposed bonds would have on the existing balance. Mr. Sura noted this information is included in the handout and he listed the total amount of outstanding bonds for the AIAS at $379 million, $368 million of which is outstanding principal remaining on those bonds. He informed that rating agencies and potential investors request future forecasts of other projects contemplated for the system. Senator Olson asked if the debt repayment is on schedule, ahead of schedule or behind schedule. Mr. Sura replied that the schedule is set when the bonds are sold with a prescribed schedule for each series of bonds. He qualified that it has been advantageous to refinance some of the debt to realize economic savings. He furthered that airlines and airports would sometimes agree to retire a particular series of bonds in the event of an ability to make a "lump sum payment"; however, he noted that airlines prefer to debt finance airport capital projects due to the relation of repayment to the useful life of the facility. Senator Olson again asked if the debt repayment is progressing as scheduled. Mr. Sura affirmed and noted funds are transferred monthly to the trustee. TOM BOUTIN, Deputy Commissioner, Department of Revenue, told of the "refunding opportunity" that the bond committee would undertake concurrently if this bill passes into law. Senator Olson calculated that this legislation would result in doubling amount of bond debt. He was concerned that the proposal contains no assurances that the current situation would not result again. He referenced Co-Chair Wilken's emphasis on the need for business plans. Senator Olson challenged that with the exception of "some verbal nods", a business plan has not been presented to his satisfaction. He spoke to recent rental increases imposed on airlines that had invested in hangers. Co-Chair Wilken requested the Department address the business plan, specifically the involvement of user groups. Mr. Barton told of the process of the "signatory airlines" for the airport operating agreement that occurs every five years. He explained the process involves negotiations and discussions with the airlines about necessary capital projects and identification of potential sources of revenue to finance the cost of projects. He stated this agreement operates as the business plan. Co-Chair Wilken understood that all parties of the airport operating agreement must agree to support the revenue bonds. Mr. Barton affirmed and furthered on the formal process involving a balloting system. Co-Chair Wilken asked the extent that terminal lessees participate in the agreement. Mr. Knudson replied that most of the lessees, those that occupy the majority of terminal space are the signatory airlines. He informed that the few concessionaires who also lease space comprise a small portion. Senator Hoffman referenced the landing fees data cited in the handout and asked when the initial feasibility study was conducted and the reason for the variance between it and the revised forecast. Mr. Sura replied that the initial detailed study was conducted in April 2002 and the revised forecast was prepared specifically for this legislation approximately two weeks ago. He pointed out the initial study was completed approximately six months after September 11, 2001 and reflected a conservative approach, as the recovery cycle of cargo and passenger activity was unknown. He stated that the primary difference between the two forecasts is that the earlier study did not include the bond issuance requested in this legislation. Senator Hoffman was concerned that the figures differ by over 40 percent for the year 2010 and remarked that a difference of as little as two percent would have a significant impact on a project of this magnitude. Co-Chair Wilken calculated the landing fees of a loaded Boeing 747 aircraft to be $1,300. Senator Bunde commented that although this project is necessary, he has "never met State projects that couldn't go over budget." Co-Chair Green offered a motion to report SB 216 from Committee with individual recommendations and accompanying fiscal note. Co-Chair Wilken stated that Senator Bunde's concerns are currently under scrutiny. There was no objection and SB 216 with accompanying fiscal note #1 for $7,813,000 from the Department of Revenue MOVED from Committee.