HOUSE COMMUNITY AND REGIONAL AFFAIRS STANDING COMMITTEE April 13, 2000 8:20 a.m. MEMBERS PRESENT Representative John Harris, Co-Chairman Representative Carl Morgan, Co-Chairman Representative Andrew Halcro Representative Lisa Murkowski Representative Fred Dyson Representative Reggie Joule Representative Albert Kookesh MEMBERS ABSENT All members present COMMITTEE CALENDAR HOUSE BILL NO. 342 "An Act relating to the financing authority, payment in lieu of tax agreements, and tax exemption for assets and projects of the Alaska Industrial Development and Export Authority; relating to renaming and contingently repealing the rural development initiative fund within the Department of Community and Economic Development, and establishing the rural development initiative fund within the Alaska Industrial Development and Export Authority; and providing for an effective date." - MOVED OUT OF COMMITTEE PREVIOUS ACTION BILL: HB 342 SHORT TITLE: AIDEA: BONDS & RURAL DEVELOPMENT Jrn-Date Jrn-Page Action 2/07/00 2115 (H) READ THE FIRST TIME - REFERRALS 2/07/00 2115 (H) CRA, L&C, FIN 2/07/00 2115 (H) ZERO FISCAL NOTE (DCED) 2/07/00 2115 (H) GOVERNOR'S TRANSMITTAL LETTER 2/22/00 (H) CRA AT 8:00 AM CAPITOL 124 2/22/00 (H) Scheduled But Not Heard 4/13/00 (H) CRA AT 8:00 AM CAPITOL 124 WITNESS REGISTER KEITH LAUFER, Financial and Legal Affairs Manager Alaska Industrial Development and Export Authority 480 West Tudor Anchorage, Alaska 99508 POSITION STATEMENT: Presented HB 342. ACTION NARRATIVE TAPE 00-25, SIDE A Number 0001 CO-CHAIRMAN MORGAN called the House Community and Regional Affairs Standing Committee meeting to order at 8:20 a.m. Members present at the call to order were Representatives Morgan, Halcro, Murkowski, Dyson, Joule and Kookesh. Representative Harris arrived as the meeting was in progress. HB 342-AIDEA: BONDS & RURAL DEVELOPMENT CO-CHAIRMAN MORGAN announced that the only order of business would be HOUSE BILL NO. 342, "An Act relating to the financing authority, payment in lieu of tax agreements, and tax exemption for assets and projects of the Alaska Industrial Development and Export Authority; relating to renaming and contingently repealing the rural development initiative fund within the Department of Community and Economic Development, and establishing the rural development initiative fund within the Alaska Industrial Development and Export Authority; and providing for an effective date." Number 0095 KEITH LAUFER, Financial and Legal Affairs Manager, Alaska Industrial Development and Export Authority (AIDEA), informed the committee that there should be a sectional analysis of HB 342 and thus he would only highlight the major portions of the bill. He specified that HB 342 has three main elements. First, HB 342 extends AIDEA's general bonding authority that would otherwise sunset July 1, 2000. Second, HB 342 transfers the Rural Development Initiative Fund Loan Program from the Department of Community & Economic Development (DCED) to AIDEA. Third, HB 342 makes some technical changes to existing provisions which deal with tax exemptions and payment in lieu of tax agreements between local municipalities and the users of AIDEA's development finance projects. MR. LAUFER turned to the bonding sunset. He noted that AIDEA's general bonding authority has been subject to periodic sunsets for many years. The current sunset is effective July 1, 2000, and would prevent AIDEA from issuing all bonds other than refunding bonds, regardless of size without specific legislative approval. The sunset would prevent AIDEA from issuing bonds for development finance projects under $10 million. Bonds greater than $10 million currently require and will continue to require specific legislative authorization. Furthermore, the sunset would prevent AIDEA from issuing conduit revenue bonds. Conduit revenue bonds can be issued by AIDEA and do not obligate AIDEA's assets or the state's assets, but can allow qualified projects to receive low-cost tax exempt financing. He pointed out that HB 342 would extend the sunset to July 2003 and clarify that conduit revenue bonds will not be subject to the sunset. Number 0286 MR. LAUFER turned to the second major portion of the HB 342, which would transfer the Rural Development Initiative Fund Loan Program to AIDEA. This program was formerly in the Department of Community & Regional Affairs (DCRA) and was transferred to the new department, DCED. He explained that this program allows for small loans to businesses and communities of less than 5,000. This program has long been supported by AIDEA as [the program] has utilized AIDEA's loan guarantee program, the business assistance program, in conjunction with the program in order to make both programs more effective. Furthermore, in 1993 and 1996 the legislature authorized AIDEA to purchase loan portfolios from the state and use the proceeds from those purchases to recapitalize the Rural Development Initiative Fund. Therefore, transferring the program to AIDEA would further AIDEA's mission and additionally will allow the program to become self-sustaining without the need of periodic legislative appropriations to recapitalize the fund. He commented that AIDEA will continue to work with the department to administer the program. Mr. Laufer informed the committee that a separate appropriation will be required to authorize AIDEA to purchase the existing loan portfolio, which causes much of the complexity of the bill as the old program will not be repealed until AIDEA has an opportunity to purchase the loan portfolio. MR. LAUFER continued with the final portion of HB 342, which relates to the tax exemption for AIDEA-owned development finance projects. Under existing law, local jurisdictions can exempt users of AIDEA's projects from local property tax or allow for the entry into payment in lieu of tax (PILOT) agreements for these projects. However, current law is not clear on the mechanisms that are to be used for those tax exemptions. Therefore, the bill offers the following two specific corrections. He explained that the existing law speaks to AIDEA entering into payment in lieu of tax agreements with project users. However, in actuality, the payment in lieu of tax agreements would be between the users of the projects and the local jurisdictions. That is corrected by HB 342. With regard to other elements corrected by the bill, he explained that existing law speaks to tax exemptions for these projects, although there is no mechanism in law that provides for a specific exemption that municipalities could grant to these AIDEA-owned projects. The bill corrects that by creating a specific exemption that municipalities can grant for these projects. Number 0515 CO-CHAIRMAN MORGAN inquired as to where rural Alaska would fit in AIDEA with regard to the statewide energy plan. MR. LAUFER explained that AIDEA is working on the statewide energy plan in conjunction with the Denali Commission. There is no specific program that provides for it other than in AIDEA's existing general authority to work cooperatively with other agencies. Mr. Laufer noted that this statewide energy plan has been divided into three regions, of which the rural region is advancing first. He informed the committee that the phase one analysis, which was predominantly an inventory of existing information, has been completed. The [statewide energy plan] is moving into phase two. Phase two will utilize a contractor to help develop a plan that identifies the various options and makes recommendations in regard to the issues surrounding rural Alaska [and energy]. CO-CHAIRMAN MORGAN asked if Mr. Laufer could provide some examples of conduit [revenue] bonds. MR. LAUFER cited the following as examples of conduit [revenue] bonds: a $71 million bond issue for the Fort Knox Gold Mine; a $23 million issued for the Goat Lake Hydroelectric project; a $2.2 million bond for the American Red Cross; and a bond for the Association of Village Council Presidents. MR. LAUFER explained, in response to Representative Dyson, that the bond to the American Red Cross was for a building to house their offices in Anchorage. The American Red Cross is a nonprofit tax exempt entity and thus they qualify for tax exempt financing under the Internal Revenue Code, which requires a governmental issue for which AIDEA qualifies. The bond for the Association of Village Council Presidents was a similar situation in that the bond was for their offices in Bethel. Number 0765 REPRESENTATIVE DYSON asked if either of those entities could have obtained a reasonable commercial loan. MR. LAUFER replied, "Not a tax exempt interest rate without a governmental issuer." He explained that under the Internal Revenue Code the interest is paid to the ultimate buyer of these bonds, which is typically a bank for these small bonds. The interest the bank receives is not subject to federal income tax and thus the bank for the bondholder can charge a lower interest rate than it otherwise would. However, in order to obtain that benefit there has to be a qualified governmental issuer that issues the bond and in this case, AIDEA is the qualifying governmental issuer. REPRESENTATIVE DYSON asked if either of those entities could have qualified for a commercial loan. MR. LAUFER answered yes. He related his belief that in both of these loans, the ultimate lender was a commercial bank. In further response to Representative Dyson, Mr. Laufer said that the delta between the interest rates of a commercial loan and an AIDEA loan would depend upon market conditions. However, [the difference between the interest rates] would typically vary from 1 to 2 percent. He specified that ultimately that would be between the bondholder, the bank, and the borrower. He noted that AIDEA doesn't have any liability for the debt or face any risk if the borrower was to default. Number 0906 REPRESENTATIVE DYSON asked if in these cases, the American Red Cross and the Association of Village Council Presidents, were the recipients of the loan financially strong enough to qualify with a commercial bank. MR. LAUFER responded in the affirmative. He informed the committee that in this case, they went through an underwriting process with the banks and qualified through them. Therefore, it was both the bank and the borrower who came to AIDEA and requested that AIDEA issue the bonds. REPRESENTATIVE DYSON related his understanding, "So what AIDEA is ... doing is ... laundering the loan papers so that they can get to be tax exempt." MR. LAUFER said that he wouldn't use the word "launder." He felt that [AIDEA] is acting in accordance with the Internal Revenue Code in order to provide tax exempt financing. Number 0982 REPRESENTATIVE MURKOWSKI reviewed her understanding. She understood that first there will be an appropriation to authorize AIDEA to purchase the portfolio. Once that is accomplished, DCED's program is repealed, but then AIDEA will contract with DCED to administer the program. MR. LAUFER agreed with her understanding. He pointed out that the existing fund in DCED cannot be repealed while assets remain in that fund. Therefore, the delayed repealor is necessary as well as the provisions that affect that repeal "only upon the purchase of the assets." He specified that it will become an AIDEA-owned program; however, AIDEA intends to work with the department [DCED] to administer the program. The department has been successful in administering the program, but the problem has typically been the flow of assets through the program. Furthermore, once loans were made the department didn't have a true revolving loan fund program that could continue. Therefore, it is [AIDEA's] intent to continue to work with the department in order to administer the program as a program within AIDEA. REPRESENTATIVE MURKOWSKI remarked that it seems awkward to move everything to AIDEA, when the entity that [the program] is being taken from is going to still administer the program. However, she surmised that the purpose being sought is to have the financial accountability within AIDEA. MR. LAUFER agreed with Representative Murkowski's assessment of the intent being sought. He mentioned that has and continues to be an integral part of the loan approval process, even when located in [the Department of] Commerce. He reiterated that AIDEA has been working closely with DCED for many years. He continued by saying "So the mechanism we're using is to reflect the fact that its been AIDEA that's been, through legislative appropriations, ... funding the program and ... by moving the assets within AIDEA, we can make it a true revolving fund program so we don't have this difficulty with not having sufficient funds to meet the needs." In response to Representative Murkowski, Mr. Laufer agreed that [the program] is not really being changed that much. Number 1152 CO-CHAIRMAN HARRIS asked if HB 342 or similar legislation doesn't pass, would AIDEA's bonding authority end. MR. LAUFER replied yes. He explained that AIDEA would need specific legislative authorization for every bond other than refunding bonds, which are basically refinances. [This legislative authorization would be required] regardless of the size or type of bond. CO-CHAIRMAN MORGAN inquired as to whether there are any major projects in the planning or development stages that would be hampered if the legislature failed to act on HB 342. MR. LAUFER related his belief that there are several conduit financing bonds that are in the works, which he believes would be hampered [if the legislature failed to act on HB 342]. Additionally, it is likely that there could be development finance projects that would be hampered. He said that he didn't have the specific information to provide the committee. Mr. Laufer informed the committee that there are other projects, larger development finance projects, that are further along and the legislature has already granted specific approval and thus those projects wouldn't be impacted by the failure to pass HB 342. CO-CHAIRMAN MORGAN turned to the infrastructure for rural Alaska and asked how [AIDEA] would make that more efficient. MR. LAUFER commented that AIDEA has done a number of projects in rural Alaska, with regard to infrastructure. He cited the Red Dog Road and port, the DeLong (ph) Mountain Transportation System as examples. Additionally, AIDEA, under its loan programs, has done a variety of loans in rural Alaska such as the loan for the Alaska Commercial Company. CO-CHAIRMAN MORGAN asked if there were any further questions and if there was anyone else who wished to testify, there were none. Therefore, Co-Chairman Morgan closed public testimony. He noted that there is an amendment that he would like to offer. Number 1400 CO-CHAIRMAN HARRIS moved that the committee adopt Amendment 1, which reads as follows: Page 1, line 6, following ";": Insert "relating to staff of the Alaska Energy Authority;" Page 2, following line 24: Insert new bill sections to read: "* Sec. 5. AS 44.83.040(a) is amended to read: (a) [THE CHAIR AND VICE-CHAIR OF THE ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY SHALL SERVE AS OFFICERS OF THE ALASKA ENERGY AUTHORITY.] The powers of the Alaska Energy Authority are vested in the directors, and three directors of the authority constitute a quorum. Action may be taken and motions and resolutions adopted by the Alaska Energy Authority at a meeting by the affirmative vote of a majority of the directors. The directors of the Alaska Energy Authority serve without compensation, but they shall receive the same travel pay and per diem as provided by law for board members under AS 39.20.180. * Sec. 6. AS 44.83 is amended by adding a new section to article 1 to read: Sec. 44.83.051. Executive director and staff; administration. (a) The authority shall appoint an executive director as the authority's executive officer. The authority shall delegate supervision of the administration of the authority to the executive director of the authority. The executive director is a member of the exempt service under AS 39.25.110, serves at the pleasure of the authority, and receives compensation fixed by the authority. (b) The executive director appoints persons to the staff positions authorized by the authority, and staff compensation is fixed by the authority. Employees of the authority are (c) The authority may contract for legal and bond counsel, consultants, experts, and financial and technical advisors that the authority considers necessary for the conduct of studies, investigations, hearings, or other proceedings." Renumber the following bill sections accordingly. Page 5, line 15: Delete "sec. 10" Insert "sec. 12" Page 5, line 16: Delete "sec. 10" Insert "sec. 12" Page 5, line 19: Delete "sec. 9" Insert "sec. 11" Page 5, line 29: Delete "sec. 10" Insert "sec. 12" Page 5, line 30: Delete "sec. 10" Insert "sec. 12" Page 6, line 1: Delete "sec. 10" Insert "sec. 12" Page 6, following line 2: Insert a new subsection to read: "(e) Employees of the Alaska Industrial Development and Export Authority who are responsible for rural energy programs shall be transferred to the Alaska Energy Authority when the Alaska Energy Authority requests the transfer of those employees." Page 6, line 3: Delete "Section 5" Insert "Section 7" Page 6, line 4: Delete "Sections 10 and 11" Insert "Sections 12 and 13" Page 6, line 8: Delete "secs. 10 and 11" Insert "secs. 12 and 13" Delete "sec. 13" Insert "sec. 15" Page 6, lines 8 - 9: Delete "secs. 10 and 11" Insert "secs. 12 and 13" Page 6, line 14: Delete "secs. 12 - 14" Insert "secs. 14 - 16" REPRESENTATIVE MURKOWSKI objected. CO-CHAIRMAN MORGAN explained that Amendment 1 would create an independent rural energy program under the auspices of the Alaska Energy Authority (AEA); this [program] would be separate from AIDEA's authority. He outlined the following powers of authority: Create separate and clear lines of authority and powers currently established under AS 44.83.020-.995 and HB 40 (Ch 58, SLA 99, Section 66) and the Rural Energy Programs under AS 42.45 for AEA. Establish Executive Director position for AEA, reporting to the AEA Board of Directors. The Executive Director shall answer to the Board and may employ staff, legal and bond counsel, consultants, experts, et cetera, as needed for the operation of the Authority. Transfer employees currently housed under AIDEA to positions to be established under AEA for the administration of the programs. Delete authority of the AIDEA chair and vice-chair as officers of the Alaska Energy Authority (AS 44.83.040). CO-CHAIRMAN MORGAN clarified that Amendment 1 isn't creating another board because "the AIDEA board will just take off their hats and put on their Alaska Energy Authority hats." The same five [members] will be on the AIDEA board as well as the AEA board. Number 1552 REPRESENTATIVE MURKOWSKI asked, "Why are we moving it out of the auspices of AIDEA and into AEA?" CO-CHAIRMAN MORGAN related his belief that AEA deals specifically with rural Alaska and the smaller projects such as tank farms and power upgrades. On the other hand, AIDEA [deals with] larger [projects] that are statewide in scope. Co-Chairman Morgan felt that [the rural areas] are getting lost and rural Alaska is being disenfranchised and losing the only conduits that they had last year. He believes that the Denali Commission was working well up to last year and now the commission is being hampered. He noted that he has letters from the North Slope to Southeast and Western Alaska which indicate this. REPRESENTATIVE MURKOWSKI recalled that it has been under the auspices of AIDEA and separate from AEA for less than year. Therefore, she asked if, in that short time, Co-Chairman Morgan has received concerns from constituents that AIDEA has been less than responsive towards rural needs. She asked if this has been a problem or should we in fact give AIDEA time to pull it together. CO-CHAIRMAN MORGAN answered that he has some correspondence. Number 1694 REPRESENTATIVE KOOKESH commented that he has decided that if [the legislature] doesn't move AEA out of AIDEA this year, that he will do everything he can to do so next year. Representative Kookesh reminded the committee that he was supportive of moving AIDEA from DCRA last year because he thought [the rural areas] would have a direct line of communication through AIDEA. However, that has not been the case. On a personal basis, Representative Kookesh remarked that he has "had a lot of trouble with AIDEA." He noted his observation that it's almost like a turf war and that is more important than the concerns of rural Alaska. He echoed Co-Chairman Morgan's comments with regard to being unhappy with the response from AIDEA. Furthermore, he felt that, in the last few days, the Denali Commission has received negative response from AIDEA, which is unfortunate. He pointed out that the Denali Commission has spent more money on projects through AEA and Mr. Frisby's office than anywhere else in Alaska. It was because Mr. Frisby's involvement with AEA that the Denali Commission spent the money it did [with AEA]. Representative Kookesh commented that this is one of the few areas in the [consolidation of the departments] that he has been unhappy with. Although he was never supportive of combining the departments, he agreed to it eventually because of his belief that it would help rural Alaska, which has been the case in most instances. He related his belief that energy is getting lost in AIDEA, which is unfortunate especially in rural Alaska. He stated that he believes Co-Chairman Morgan's amendment is a good amendment that should go forward. Representative Kookesh concluded by emphasizing the need for a statewide energy policy, which will never happen as long as "we" are lost in the bureaucracy of AIDEA. REPRESENTATIVE HALCRO noted the sunset of AIDEA's bonding authority if HB 342 is not passed. He expressed concern with the possibility of weighing down this bill such that it doesn't go anywhere once the bill is reported out of this committee. However, the Governor has just introduced legislation regarding the sale of the Four Dam Pool and the creation of the PCE Endowment, which he felt would be a better vehicle to attach an energy authority with a funding source. Therefore, there would be a separate authority/power which will oversee the funding source that will fund PCE. Representative Halcro stated that he could support that; however, he expressed concern that without HB 342 AIDEA's bonding authority will sunset until the legislature convenes in January [2001]. REPRESENTATIVE KOOKESH remarked that Representative Halcro's idea is a good idea. He, too, was concerned with the bonding capability of AIDEA in relation to the passage of HB 342. Therefore, Representative Kookesh said that he just wanted to see it happen. Number 1980 REPRESENTATIVE JOULE agreed that Representative Halcro's suggestion is an appropriate solution. He turned to the reason behind Co-Chairman Morgan's amendment. When the Denali Commission was formed, the only reason it could address energy issues was because it was the only place with something on paper that was ready to be implemented. However, since this transfer [combining of the departments] has occurred, the need for the statewide energy plan [may be] getting weighted down by some of the issues that Representative Kookesh referred to. Representative Joule commented that if [the statewide energy plan] doesn't happen soon, there will be missed opportunities. REPRESENTATIVE JOULE turned to the Division of Energy and its importance to rural Alaska. In his experience with that division, that division was very good in responding to the communities in an extremely timely manner. He believes that the communities felt like there was something in state government that was listening and acting. Therefore, to make it stand alone would highlight and illustrate its importance. REPRESENTATIVE JOULE remarked that one of the reasons he didn't support the merger until the final vote was because of the promise that those components serving rural Alaska would not get lost. However, there seems to be a struggle that is hampering that. Representative Joule acknowledged that HB 342 does need to move forward as it does some really good things and perhaps [Co-Chairman Morgan's amendment] should be placed in other legislation. Number 2196 REPRESENTATIVE HALCRO suggested that the committee as a whole present an amendment [regarding AEA] to House Finance [when the Governor's legislation is heard]. He pointed out that when the PCE funding source [materializes] with the sale of the Four Dam Pool, it only makes sense to have an authority to manage the revenue source. REPRESENTATIVE DYSON surmised that Co-Chairman Morgan was losing support for his amendment. He informed the committee that he can't vote on [the amendment] this quickly as it is a significant change. Furthermore, he expressed the need to hear from the Administration on this [change]. CO-CHAIRMAN MORGAN announced that he would proceed with Representative Halcro's suggestion to present this later. CO-CHAIRMAN HARRIS withdrew his motion that the committee adopt the amendment. Number 2285 REPRESENTATIVE DYSON moved to report HB 342 out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, it was so ordered and HB 342 was reported from the House Community & Regional Affairs Standing Committee. REPRESENTATIVE DYSON commented that he hoped AIDEA received the message to be more responsive. ADJOURNMENT There being no further business before the committee, the House Community & Regional Affairs Standing Committee meeting was adjourned at 8:55 a.m.