SENATE BILL NO. 218 "An Act relating to the Alaska Municipal Bond Bank Authority; and providing for an effective date." 5:02:58 PM Ms. Armstrong presented an analysis of the legislation. The bill would allow for continued operation of the Alaska Municipal Bond Bank by increasing the borrowing limit of the Bond Bank from $1 billion to $1.5 billion. The legislation would provide an opportunity for the Bond Bank to assist the University of Alaska with financing a heating or energy capital project and would expand the list of Bond Bank activity to include the university for an amount not to exceed $150 million. 5:04:04 PM Co-Chair Meyer understood that the program had popular and had been in place for a while, which had prompted the request that the ceiling be raised. Mr. Mitchell said that the Bond Bank currently had bonds outstanding of approximately $905 million. He shared that the Bond Bank was a program that provided lower cost funds to Alaskan municipalities and certain other entities within the state. The program would result in Alaskan's paying less interest expense to third party lenders. He explained that the Bond Bank was an AA plus rated bank for bonds primarily in the tax exempt markets. He relayed that the Bond Bank had approximately $95 million left of capacity and $80 million of applications for the program; without additional authority from the legislature the Bond Bank would not be able to continue work in cost reduction for municipalities. He noted that the state was not paying the debt service on the bonds directly and that the core of the repayment of the funds came from the municipalities. He highlighted that in the 40 year history of the program there had not been a single case of payment default. He continued to expound on the merits of the program. 5:08:16 PM Co-Chair Meyer asked whether there was concern that municipalities might not be able to pay back a loan. Mr. Mitchell responded that the Bond Bank program had a financial advisor and a board of directors. He said that the advisor would independently analyze a loan application submitted by a community to study trends in the community, changes in revenue generation, change in population, economic activity and assessed value. The advisor would also consider the essentiality of the project. The board of directors would review the advisors recommendation and deliver a decision on the loan application. He said that in an effort to direct communities to success strong applications that were likely to be approved were typically brought to the board. 5:11:07 PM Co-Chair Meyer understood that the university had the option of using a different program to acquire funding for the power plant. He believed that the university would receive a lower interest rate through the program rather than bonding themselves. Mr. Mitchell said yes. He added that there were other allowances in statute for the Bond Bank to participate in loans. He noted that it provided a financial option but was not a requirement. Vice-Chair Fairclough asked how much was paid off in loans each year. Mr. Mitchell responded that the state paid off approximately $35 million each year. He added that the state had a mature portfolio; each year the state had declining debt service and not level debt service because the bonds were all staggered into the past. Vice-Chair Fairclough queried the expectation of the additional $350 million in bonding authority. Mr. Mitchell said that the program was going to be within the next 12 to 18 months, in a position where the statutory limit to borrow would be reached. He added that the distribution of the $350 million would depend on future projects being developed at the local level that made fiscal sense and could be repaid. 5:14:43 PM Vice-Chair Fairclough wondered how the Bond Bank's credit rating interacted with the state's credit rating. Mr. Mitchell replied that both were closely aligned. The Bond Bank had a moral obligation structure established in statute; additionally, the bank had an annual appropriation in the operating budget that automatically replenished the reserve fund in the event of borrower default. 5:16:35 PM Vice-Chair Fairclough queried the division of loans in urban and rural communities. Mr. Mitchell responded that there were policies, regulations and statutory reference to prioritization of the type of projects that would be funded, but that there was no regional differentiation. He said that smaller municipalities were more difficult to lend to because they tended to have a limited ability to repay the state. 5:18:29 PM Vice-Chair Fairclough asked if the bank considered the state's credit rating when issuing bonds. Mr. Mitchell said that the concept of moral obligation debt was part of the conversation around debt capacity and credit ratings. The program's history as a credit enhancement did not play a large role in the debt capacity analysis. He discussed the bond program and how it could relate to Public Employees' Retirement System (PERS) liability. 5:21:31 PM AT EASE 5:22:08 PM RECONVENED Co-Chair Meyer discussed housekeeping. 5:23:03 PM Co-Chair Meyer CLOSED public testimony. SB 218 was HEARD and HELD in committee for further consideration.