SB 207 REVENUE BONDS: WATER & WASTE PROJECTS  KEITH KELTON, representing the Department of Environmental Conservation (DEC), summarized the legislation as follows. Congress reauthorized the Clean Water Act (CWA) in 1987. Prior to that time grants were available for municipal construction of wastewater treatment facilities. Since 1987, the grant provision was substituted with a low interest loan program, which has been administered by DEC and expanded to include solid waste landfills. For the first few years of the loan program, state general funds continued to provide grant money, however in the last few years less direct grants have been made, and the demand for loans has increased dramatically. Twenty other states have programs providing low-interest loans financed by revenue bonds. MR. KELTON referred to charts and written material submitted to committee members to explain how the financing program would work. The Alaska Clean Water Fund was created by statute in 1989, and was capitalized by $80 million. The federal government matches the fund with 20 cents per state dollar. Of the $80 million, $50 million has gone to 20 year low interest loans. The remaining $30 million can be used as a corpus that can be used as collateral for revenue bonds. CSSB 207 would set up a bond redemption fund, would draw funds from the ACWF through the state bond committee and their financial trustees, and would allow them to issue bonds to investors. Monetary limits of $15 million per year and $150 million over a ten year period were placed on the fund in the Senate Community and Regional Affairs committee substitute. The advantage to creating the fund this year is that it allows the corpus, which is currently unobligated, to remain large enough to have a better leveraging effect when selling revenue bonds. DEC is currently obligating $12 million to $13 million per year so the $30 million corpus will be decreased substantially if CSSB 207 does not pass this year. Number 450 LEE SHARP, bond counsel, addressed a proposed amendment related to the cap on the issuance of bonds. The bond committee can issue revenue bonds for purposes other than the Clean Water Fund, but the committee substitute appears to limit that authority. The amendment adds references to clarify that the bonds referred to in the cap are only those issued under the Clean Water Act. The amendment also addresses questions about computations on the $150,000,000 cap such as whether the interest owed during this fiscal year or the interest owing to the payoff of the bond was to be included in the computation. Additionally, if a bond was issued with a floating interest rate, there would be no way to accurately compute that amount. The amendment clarifies that the principal amount is used for the computation. Furthermore the principal of a bond can mean two things: the remaining unpaid principal, or the original principal amount of the bond. The amendment clarifies the unpaid principal amount is to be used. It also clarifies whether refunding and refunded bonds are counted in the computations. MARIE SANSONE, Assistant Attorney General, explained three technical amendments: on page 4, line 6, insert the word "such" before the word "money;" on page 5, line 8, following "default to" delete "the" and insert "a;" on page 6, line 23, following "refunding" insert "bonds." SENATOR TAYLOR entertained a motion to adopt amendments one through four. SENATOR GREEN so moved. There being no objection, the amendments were adopted. Number 528 SENATOR TAYLOR noted a concern expressed by Tam Cook, Legal Counsel, that CSSB 207 runs significant constitutional risk in that it may violate art.9, sec. 8 of the Alaska Constitution. That section prohibits any state debt from being contracted unless authorized. MS. SANSONE responded that when drafting the bill with the bond counsel, a good deal of time was spent analyzing the constitutional limitations on debt; specifically whether this would be a general obligation or revenue bond and the necessity of voter approval, and other constitutional issues relating to bonds. The bond counsel prepared a letter which dealt with some of these questions. She and the bond counsel felt these bonds would be construed as a public enterprise of the state and would not fall within the constitutional limitations. SENATOR TAYLOR believed the words "public enterprise" are what Ms. Cook was referring to in her memo. He stated there is something to be said for the constitutional provision requiring voter approval, and noted that is a policy call separate from whether this bill is in compliance with that provision. MS. SANSONE commented under the Clean Water Act, the Clean Water Fund may be leveraged by either general obligation or revenue bonds. When designing the program with input from various agencies, the decision to use revenue bonds was made, and the bill was drafted carefully with full regard for all of the constitutional arguments. That policy decision was made by the Administration when designing this program and requesting legislation. She added there is a question as to whether voter approval would be required at the municipal level. SENATOR TAYLOR stated voter approval at the municipal level was his second question. MS. SANSONE replied it is her understanding that DEC does not currently require voter approval for the loans they are entering into with municipalities. She added that the bond counsel may disagree and feel a change would have to be made if the loans were funded with bond proceeds. SENATOR TAYLOR indicated no one wants to initiate this program only to have it run afoul because of constitutional problems. He believed people in most communities would be willing to vote for such things since they will be called upon to repay. MR. SHARP advised that Section 11 of the finance article of the Constitution provides an exception from the required vote for obligations of the state and municipalities, where the only security for the payment of the bonds is to be the revenues of an enterprise. This typically applies to utility situations. At the local government level, the water or sewer utility revenues would be pledged to pay the municipality's loan from the state, which does not require a municipal vote. One caveat is that there are some home rule municipalities that have charter provisions that require a vote even on a revenue issue, but they would be the only exceptions. On the question of policy, the municipality could put the issue to a vote, but would not be required to. SENATOR TAYLOR remarked the legislature could put a vote requirement in the bill. MR. SHARP stated that is correct. SENATOR TAYLOR asked if the bond committee is a public corporation. MR. SHARP replied it is not, but that does not keep it from being classified as an enterprise. The Municipal Bond Bank is a similar operation and falls under Section 11 as a revenue generating enterprise. It issues bonds and pledges to bondholders that repayment will be made from revenues received from making loans to municipalities. SENATOR TAYLOR asked if there is any case authority to establish what is or is not considered an enterprise. MR. SHARP noted in the early days of statehood when several bond issuing agencies were created their authority was challenged, but he did not recall any cases which focussed on that particular language. SENATOR TAYLOR believed the inclusion of an intent or purposes provision in the legislation that states the legislature finds, as a matter of fact, that the bond committee is an enterprise, would enhance the likelihood of the bill being found constitutional. He asked if it would be further enhanced by requiring a ballot. MR. SHARP replied that generally, a ballot for voter approval of a general obligation bond asks the voter to pledge the full faith and credit and taxing authority. If a municipality fails to make a payment, the bondholders can get judgment forcing the municipality to levy taxes to pay the bond. For a water or sewer system, there is no authority to require a municipality to levy any tax, it can look only to the revenues of the water or sewer system. If a vote was required there may be a question as to whether or not the legislature intends to make the municipalities issue general obligation bonds, or whether the legislature just wants voter approval of ordinary revenue bonds. He knew of only one municipality that requires a vote on revenue bonds. Regarding the inclusion of a policy or findings section, he suggested stating that the legislature views this program as the operation of a revenue generating enterprise. SENATOR TAYLOR asked Ms. Sansone to assist the committee in drafting such language to be considered at the next hearing.