HOUSE SPECIAL COMMITTEE ON INTERNATIONAL TRADE AND TOURISM February 25, 1998 5:10 p.m. MEMBERS PRESENT Representative John Cowdery, Chairman Representative Eldon Mulder Representative Gail Phillips Representative Joe Ryan Representative Kim Elton Representative Reggie Joule MEMBERS ABSENT Representative Pete Kott COMMITTEE CALENDAR HOUSE BILL NO. 432 "An Act relating to the bond authorization for international airports revenue bonds; and providing for an effective date." - HEARD AND HELD * HOUSE BILL NO. 382 "An Act relating to international airports revenue bonds; and providing for an effective date." - BILL HEARING CANCELLED (* First public hearing) PREVIOUS ACTION BILL: HB 432 SHORT TITLE: AIRPORT REVENUE BONDS SPONSOR(S): REPRESENTATIVES(S) COWDERY Jrn-Date Jrn-Page Action 02/18/98 2353 (H) READ THE FIRST TIME - REFERRAL(S) 02/18/98 2353 (H) ITT, TRANSPORTATION, FINANCE 02/24/98 (H) ITT AT 5:00 PM BUTROVICH RM 205 02/24/98 (H) MINUTE(ITT) 02/25/98 (H) ITT AT 5:00 PM BELTZ ROOM 211 WITNESS REGISTER JOE SPRAGUE, Marketing Director ERA Aviation 6160 Carl Brady Drive Anchorage, Alaska 99502 Telephone: (907) 248-4422 POSITION STATEMENT: Testified on HB 432. GEORGE KING, Airport Financial Consultant and Bond Issue Advisor Hudson AIPF 730 Fifth Avenue, Ninth Floor New York, New York 10019 Telephone: (212) 333-8684 POSITION STATEMENT: Answered questions on HB 432. KURT PARKAN, Deputy Commissioner Department of Transportation & Public Facilities 3132 Channel Drive Juneau, Alaska 99801 Telephone: (907) 6977 POSITION STATEMENT: Commented on HB 432. DON HARRIS Box 49 McGrath, Alaska Telephone: Not Provided POSITION STATEMENT: Testified on HB 432. BILL ELANDER, President and Chief Executive Officer Anchorage Convention and Visitors Bureau 524 West 4th Avenue Anchorage, Alaska 99501 Telephone: (907) 276-4118 POSITION STATEMENT: Testified on HB 432. MORT PLUMB, Director Anchorage International Airport P.O. Box 196960 Anchorage, Alaska 99519 Telephone: (907) 266-2525 POSITION STATEMENT: Testified on HB 432. JOHN UNGER, Controller Anchorage International Airport P.O. Box 196960 Anchorage, Alaska 99519 Telephone: (907) 266-2541 POSITION STATEMENT: Testified on HB 432. DONN KETNER, Architect CCS 3884 Caravell Drive Anchorage, Alaska 99502 Telephone: (907) 266-1693 POSITION STATEMENT: Testified on HB 432. DAVID EBERLE, Director Construction & Operation, Central Region Department of Transportation & Public Facilities P.O. Box 196960 Anchorage, Alaska 99519 Telephone: (907) 269-0780 POSITION STATEMENT: Testified on HB 432. ACTION NARRATIVE TAPE 98-3, SIDE A Number 0001 CHAIRMAN JOHN COWDERY called the House Special Committee on International Trade and Tourism meeting to order at 5:10 p.m. Members present at the call to order were Representatives Cowdery, Mulder, Phillips, Elton and Joule. Representative Ryan arrived at 5:17 p.m. Representative Kott was absent. HB 432 - AIRPORT REVENUE BONDS Number 0033 CHAIRMAN COWDERY said the committee would be considering HB 432, "An Act relating to the bond authorization for international airports revenue bonds; and providing for an effective date." It was the intention of the committee to take public testimony and ask questions of the airport administration. He said that HB 432 would provide authorization for the state to issue up to $280 million in revenue bonds to fund improvements at the Anchorage International Airport (AIA). The amount of the bonding authorization may change depending on what the committee learns in the legislative process. Chairman Cowdery said he sponsored HB 432 because he supports development and improvements of the airport, but it is the committee's responsibility to develop a complete and accurate record. Number 0056 CHAIRMAN COWDERY called an at-ease at 5:13 p.m. due to a teleconference malfunction. CHAIRMAN COWDERY called the meeting back to order at 5:18 p.m. He asked Joe Sprague from ERA Aviation to present his testimony at this time. Number 0081 JOE SPRAGUE, Marketing Director, ERA Aviation, testified via teleconference from Anchorage. He was representing Charles Johnson, President of ERA Aviation and was testifying on behalf of ERA to present their views on the Administration's Anchorage Airport Terminal Expansion 2005 Project. He said, "First and foremost, allow me to make one point very clear. ERA supports terminal renovation and expansion at Anchorage. We always have and we believe the time has come to embark on a businesslike plan for renovation and expansion that is appropriate to legitimate needs. We believe that the Administration's proposed project could serve as a broad concept for long-range planning for future needs if and when they arise." Number 0101 MR. SPRAGUE continued, "From what position does ERA share its views? ERA enplanes approximately 10 percent of the domestic passengers using Anchorage International Airport. We spend much of the year as the second busiest carrier at the airport, behind only Alaska Airlines in terms of enplanements. Many of the nearly 450,000 passengers carried annually by ERA are not visitors, but residents of the state. Additionally, we employ over 250 Alaskans at the airport. This past November we voted against the terminal expansion 2005 project as presented by the Administration on the signatory airline ballot. A copy of our cover letter and ballot have been distributed to you and in our letter attached to the ballot, we stated that the ballot does not include alternatives to the massive and costly project that we can be comfortable with. We are limited to one source of funds and a minimum size and price for the project. In that vote, a total of 12 signatory airlines voted against the project. Only 10 voted for it and 3 did not vote - 12 airlines voted against it, 10 for it." Number 0120 MR. SPRAGUE further stated, "Today, as then, the Administration freely admits that the project, as proposed, still remains only a concept. This concept is still in its infancy and the estimated costs can only be best guesses, to be changed later by yet a merging design concept. Therefore, in view of our commitments to our customers, our fellow citizens, our employees and our shareholders we have no choice but to continue opposing the project as presented by the Administration. In the letter accompanying our vote, we also encouraged and offered to participate in a cooperative effort involving representatives from all the terminal users to establish terminal renovation and expansion plans that might better meet the needs of all concerned. We stand by that offer." Number 0133 MR. SPRAGUE continued, "We agree that the airport is a tremendous economic benefit to the citizens of Anchorage and the entire state. We also agree we should plan and build for the future. We must all keep in mind, however, that the cost of these improvements will ultimately be borne in large measure by the citizens of our state. These costs should be thoroughly and rigorously justified. There are questions surrounding this project. How good are the analysis offered in support of this project? For example, although passenger traffic at Anchorage has increased over the last ten years, it has remained essentially flat since May of 1997. What will continued failure to meet growth projections do to the cost that all of us must bear. There are abundant examples, both within Alaska and across the nation, of how quickly airline passenger traffic levels can change and what happens to business at airports when costs skyrocket due to over-building. Additionally, the Administration's plan proposes to increase airline lease space by 75 percent and concession space by 100 percent but has gathered no commitments for any of this additional space." MR. SPRAGUE said, "As I mentioned earlier we do believe the concept being presented by the Administration has some merit as a potential long-term master plan. Last June in fact, all participating airlines including United, Delta, Alaska Airlines, Northwest, ERA, PennAir and Northern Air Cargo favored an incremental approach to terminal renovation and expansion. We were on a course to establish priorities and do the most important things first. In July, the airport administration proposed a $33 million incremental approach. However, by October, the number was $191 million; in November, it was reduced to $164.5 million; last month it was $235 million; and now the legislature is finally being asked to authorize bonding for $204 million. Whatever the final cost, this is a major investment. Again, one that merits careful consideration and reasoned discussion among airport users, airport staff, legislators and other community leaders. We all want a modern, efficient airport terminal. The needs of our present facility are readily apparent. C Concourse was built in the early 1950s and renovation studies have been ongoing for at least the last ten years. There are legitimate needs in the main terminal baggage handling areas and ticket lobby areas." Number 0175 MR. SPRAGUE stressed, "Before rushing forward however, we must develop a sound business plan that prioritizes problem areas and identifies cost effective solutions. We must learn from the experiences of others, also. There are examples around the country of airports that overexpanded; places like San Jose and Denver, where high terminal costs resulted in downturns in airline activity. We must consider this possibility in Anchorage. The Administration has done a good job attracting cargo carriers to Anchorage. These carriers employ many hundreds of Alaskans and there are good prospects for more cargo carriers to come. These carriers, however, will pay a substantial portion of the terminal expansion costs; perhaps as much as 30 to 40 percent for the next 25 years. How will this affect the decisions of potential new cargo carriers, or for that matter, the existing ones." Number 0188 MR. SPRAGUE concluded, "In closing, we believe the Administration's Terminal Expansion 2005 concept merits serious and careful consideration. We have the expertise right here in Alaska to evaluate and prioritize the legitimate needs at the Anchorage International Airport and to come up with sound, fiscally responsible plans to meet those needs. This is an opportunity that we cannot afford to miss and we should do it right." Number 0197 REPRESENTATIVE JOE RYAN asked if he was correct in assuming that FedEx and UPS don't do any breakdown of loads or redistribution but they use the Anchorage International Airport for a local fuel stop and for whatever local freight comes into Anchorage. MR. SPRAGUE said he would defer that question to the airport administration since he is no expert on the plans of FedEx and UPS. Number 0212 CHAIRMAN COWDERY asked what percentage does ERA contribute to airport revenues. MR. SPRAGUE replied he didn't have that figure, but the larger airlines - Alaska, United, Delta - contribute in total about 85 percent, so obviously ERA would be in the smaller percentage. He added that ERA does, however, carry a significant portion of the traffic. Often times throughout the year, ERA is the number 2 carrier in terms of the number of passengers boarded at the airport. CHAIRMAN COWDERY noted that Mr. Sprague's earlier testimony indicated that more carriers voted against this project than for it. He asked how the voting process was set up so the majority doesn't rule. MR. SPRAGUE said that question would perhaps be more appropriately directed to the airport administration or Mr. Argue who addressed the committee the previous evening. It was his understanding that it takes a two-thirds majority vote to disapprove a project, so in this case even though the majority number did vote to disapprove, it was not a two-thirds majority, therefore, the vote carried to approve the project. CHAIRMAN COWDERY inquired if this was a common way of doing things in other airports. MR. SPRAGUE was not aware of how it's done at other airports. CHAIRMAN COWDERY asked if ERA's landing fees had increased or decreased in the last two or three years. MR. SPRAGUE said there had been some fluctuation in the landing fees; both increases and decreases, but he wasn't sure exactly what they had been. He added that ERA has been presented with cost estimates that landing fees would certainly increase with this project over the next few years. Number 0239 REPRESENTATIVE GAIL PHILLIPS asked if it was Mr. Sprague's understanding that several of the carriers voting in the affirmative based their votes on the institution of the passenger facility charge. MR. SPRAGUE said that was his understanding. REPRESENTATIVE PHILLIPS asked of the 10 carriers voting to approve the project, how many voted with that stipulation on their vote. MR. SPRAGUE responded there were multiples, but he didn't have the exact number. REPRESENTATIVE PHILLIPS asked if those votes were counted as straight "yes" votes. MR. SPRAGUE responded in the affirmative. REPRESENTATIVE PHILLIPS asked if this project were to go into place, and several of the carriers that voted for this project decided to cease doing business in Anchorage, what would the impact be on ERA. MR. SPRAGUE explained the airline operation of ERA only operates within the state of Alaska with Anchorage being the only hub. Therefore, if there were fewer carriers paying for the overall cost of this project, ERA doesn't have a choice of going elsewhere; therefore, ERA would pick up additional costs. Number 0260 REPRESENTATIVE RYAN asked if ERA paid landing fees and rental fees for the ticket counter and gate space. MR. SPRAGUE responded affirmatively. Number 0264 REPRESENTATIVE ELDON MULDER asked Mr. Sprague if he thought the airport needed to be expanded or renovated. MR. SPRAGUE said, "Yes, we certainly do." REPRESENTATIVE MULDER inquired if the C Concourse and ticket counter space occupied by ERA was sufficient. MR. SPRAGUE responded that in terms of sufficient, the available space ERA has on the C Concourse is certainly sufficient; they are not seeking additional space in a renovated C Concourse. However, the other discrepancies with C Concourse in terms of age and condition are well known and ERA would not argue there certainly needs to be some improvements. REPRESENTATIVE MULDER asked if ERA would be looking for additional ticket counter space if the renovation were to occur. MR. SPRAGUE respond that ERA would not be seeking any additional space. Number 0278 REPRESENTATIVE PHILLIPS said, "I'd like to put something on the record. One of my first jobs in Anchorage, quite a few years ago, was working at the ticket counter as a ticket agent for Western Airlines in the basement of C Concourse, so that's been a lot of years." CHAIRMAN COWDERY asked if there were further questions of Mr. Sprague. There being none, he asked George King if he had any remarks. Number 0286 GEORGE KING, Airport Financial Consultant and Bond Issue Advisor, Hudson AIPF, said he had presented his testimony at the previous meeting and was available to answer questions. In answer to the question that had been raised at the previous meeting; specifically, what is the impact in dollars of a 100 basis point move, he had looked at that question from two perspectives. First, if the $179 million issue had a 100 basis point move, the total additional interest paid over the life of the transaction would be about $33 million and if the $25 million portion had a 100 basis point move, the additional interest paid over the life of the transaction for just that $25 million portion would be about $4.6 million. Number 0306 CHAIRMAN COWDERY questioned if, in fact, the 100 basis points came in existence before the bonds were sold, was it Mr. King's opinion, the project would have to be scaled back. MR. KING said no, actually in the financial model used in calculating the rates and charges estimates that were given to the airlines, they used interest rates at that time which are quite close to the rates which are in effect today with a 100 basis point cushion. So, a 100 basis point move would be about at the same point when the model was run back in October with that assumption. He added, "And if we were able to finance at today's rates, our rates and charges would be lower than the estimates that were in the financial model. When we ran the financial model, we thought it was only fair to include a bit of a cushion in that assumption." Number 0325 CHAIRMAN COWDERY asked what percentage of the package is for contingencies of that nature? MR. KING said he didn't have that exact number, but he would be happy to furnish the committee with that information. CHAIRMAN COWDERY questioned how much of the finance plan would be used to pay the investment brokers, bankers, or bond counselors. MR. KING responded the cost of issuance, which is the aggregate amount of the investment bankers and lawyers, will be fees that are negotiated by the state bond committee which is the entity that authorizes the actual issuance of the bonds. He presumed those fees would be consistent with the going rates for those services at the time the services are engaged. Number 0339 CHAIRMAN COWDERY asked if Mr. King had a ballpark estimate of those fees. MR. KING estimated that for an issue of this size, it would be a little more than 1 percent of the aggregate transaction when all the costs are taken into consideration as a whole. He added that it would be the correct purview of the state bond committee to negotiate those prices with the firms chosen to do the work because there are quality considerations, as well as price considerations that enter into those selections. Number 0351 CHAIRMAN COWDERY asked how much Mr. King was being paid and does the amount increase or decrease with the size of the project. MR. KING stated his rate is approximately $145 per hour and his compensation does not increase or decrease with the size of the project. He further stated his job is to give the airport good information so the airport can make good decisions in terms of what to do. CHAIRMAN COWDERY asked if Mr. King's job came about by the competitive bid process? MR. KING replied yes, it did. He is a subconsultant to the RISE Alaska team which is headed by Leif Selkregg, and that team was selected in a competitive bid process. Number 0362 REPRESENTATIVE PHILLIPS remarked that in November the financing plan showed a bonding requirement of $177 million and today it has increased to $204 million. She asked Mr. King to explain the difference in the package. MR. KING responded the package has not changed. He said, "I think one of the comments I would have is, as I was listening to the testimony before about the reference to the numbers -- some of the numbers given out -- 191, 164, 235, 204, 177 et cetera, is that these numbers are all the same project, they're just taking different definitions. It's sort of like saying apples and oranges and bananas. They're all numbers that relate to the project, but they're all taken in a different context." REPRESENTATIVE PHILLIPS asked if the committee could use the $177 million figure to work with? MR. KING asked for the citation from which the $177 million was taken. REPRESENTATIVE PHILLIPS responded it was from November's plan. Number 0379 KURT PARKAN, Deputy Commissioner, Department of Transportation & Public Facilities, said he believed Representative Phillips was referring to the bottom of the third column on page 2 of the Plan of Finance dated November 5, 1997, which indicates $176.6 million. MR. KING explained that number is the result of about six different things. He said, "The total cost of the project in 1997 dollars is and always has been in these numbers that we've been running, $190,800,000 or $191 million if people are rounding. That is the starting point. There is an entry next to that, $26.3 million which represents the federal highway allocation by the state and that gets you to the airport cost of the project in 1997 dollars of $164,500,000. So, those are three numbers which are talked about a lot - the 191, the 26.3 and the 164.5, but they all are consistent and they all are just different ways of expressing the same project." REPRESENTATIVE PHILLIPS interjected she was trying to arrive at the difference between the $176.6 million which is shown as the needed financing in November versus the $204 million that's shown today. MR. KING said the $176.6 million shown in November is the end result of starting with the total project cost and making several assumptions about how the actual financing plan would play out. For example, there's an assumption of 24 months of capitalized interest and what that would cost. That 24 months of capitalized interest assumption is based upon the assumed interest rates that were in the financial model back in November. The next line item, the credit construction fund earnings, is a number that's based on a couple of assumptions. First, that a single bond issue would be done, which as he explained in the previous meeting, would require the approval of the Internal Revenue Service to allow for a single bond issue. It's based on the assumption of an interest rate for the construction fund earnings over that five year period and it's based on the assumed drawdown schedule of the funds during that five years because all of those considerations impact the earnings. He further explained the next assumption, line item financing costs including bond insurance is an aggregate number which includes the underwriters compensation, the attorneys' compensation and the predominant number is the cost of the municipal bond insurance policy, which is what would be used to get the triple A rating and the lowest cost in the market. Number 0427 MR. KING said the important thing about all those assumptions is they add up to the $230 million of total all in costs and there are a number of assumptions he refers to as subtotal subtractions, that yield the $176.6 million. He noted the $176.6 million is basically calculated as an estimate of what the real actual financing would cost if all the described assumptions came into play. Number 0432 MR. KING continued to explain the $204 million was submitted because when an authorization is done, an outside parameter is set which cannot be exceeded and it's important in that sort of a context to have the outside parameter of what could possibly happen. The outside parameter of what could possibly happen would be if, for example, the IRS said we could not finance as one bond issue and if it had to be broken up into two bond issues, there would not be the construction fund earnings for the period of time which was originally assumed, so the construction fund earnings would drop substantially and the capitalized interest would not necessarily be the same as assumed. Also, the financing costs would increase because there would be two transactions instead of one. He said all of those are examples of how things could change from the estimate of what we could do back in November. He said, "So taking that into consideration and taking into consideration that we're setting an outside limit that we cannot under any circumstances exceed because it is laid out in the legislation, the decision was made to take the total financing costs all in of $230 million and subtract a round number of $26 million representing the highway money from the $230 million to get to the $204 million." He apologized for the technical nature of the description, but the subject itself is somewhat technical. Number 0456 REPRESENTATIVE MULDER said, "I've got a question in relation to the security of this debt in relation to the fact that you've done the modeling for this plan and it's based upon the assumption that there's going to be a percentage of growth in airport traffic -- I don't know, something maybe in the 5 or 6 percentage range or something like that -- and consequently, there's projection of new gates, new ticketing, new baggage claim, new retail. How secure is this debt in the sense of what happens if the growth slows, stagnants, some of these new gates aren't purchased -- how much flexibility is in this plan, in your modeling?" MR. KING said first the model uses the assumptions which he was given in areas where he does not generate the assumptions himself. In short, he used the activity levels in terms of the enplanement growth which was generated by the consultants that were hired who specialize in that area. Those consultants are TAMS consultants and Joel Hirsh (ph), both of whom are recognized experts. In addition, those enplanement growth assumptions generated by those experts, were consistent with the enplanement assumptions the Federal Aviation Administration (FAA) has. In answer to the first part of Representative Mulder's question, he used enplanement assumptions given to him, but he was comfortable with the assumptions because they had been developed with a great degree of care by people who were qualified to make those assumptions. To the second part of Representative Mulder's question, he said if the assumptions are correct, the financial model shows that the 2002 rates and charges at Anchorage after the completion of this project would be competitive with the triple AE, which is a national study, averages on a national level for the 1995/1996 rates and charges, which is the most recent national study. If the enplanement numbers were wrong and the charges were higher, he believed there is still a comfortable amount of room to have rates and charges which are higher than the model projects, but still equal to or less than what the national averages will be for similar sized airports in the year 2002. Number 0492 REPRESENTATIVE MULDER asked if the model was predicated on having all the retail space 100 percent occupied and all the gates 100 percent filled and utilized in order to meet the forecast. MR. KING said, "No, and in fact that's a very good question because in some earlier considerations internally within the group at the airport, we had talked about that and we ended up using what we consider to be some fairly conservative assumptions that relate to, I think, approximately 80 percent occupancy in the beginning that increases and we have those numbers, I believe they're in the back of one of the gray books -- bear with me one second, I can give that to you -- we assumed that the occupancy in the year 2002 would be 80 percent; 2003 80 percent; 2004 83 percent; 2005 and thereafter 89 percent. And the total vacant square footage that's assumed for the long term, 2005 and thereafter, is 27,000 square feet. There was a lot of discussion about these numbers because you could say that they are conservative or you could say that they're overly conservative, depending on your point of view, but they certainly are conservative numbers and we're not assuming 100 percent occupancy for the model. I would say, however, that when the consultants were designing the facility, they interviewed the airlines that used the airport and had extensive discussions with them about what their space needs would be and the facility was designed in response to the feedback that the consultants got from those discussions. So, again while I don't generate those numbers that go in the model, I do review the information that's given to me and as in the case of the enplanement, I felt comfortable that the numbers were legitimate and were done carefully by people that are experts in that business." Number 0519 CHAIRMAN COWDERY asked Mr. King to stand by for additional questions later on. He asked Don Harris from Anchorage to present his comments. Number 0521 DON HARRIS testified via teleconference and said he had been the commissioner of the Department of Transportation & Public Facilities from 1974 - 1979. When he left the administration, the north/south runway at AIA was under construction, the international terminal building was in the design phase and the A Concourse extension had been built. The north/south runways, associated taxiways and the international terminal building were completed with surpluses in cashflow. At that time, the bond debt of the airport was paid down to just under a half million dollars. He believed those were the three most significant capital improvement projects that have taken place at AIA in the last 20 years. He said, "Yet, I was somewhat chagrined and within about four years of time on the international terminal building expansion because at the time we were contemplating it, I'd asked several times for people to look ahead and see what we were faced in technology that might have aircraft bypassing Alaska and the response I got was that they didn't see anything in the future. The airlines, the latest thing they were operating in long range capability, was the SP model of the 747 but within four years they'd repowered the 747s and they were able to overfly Anchorage and Alaska." Number 0549 MR. HARRIS suggested to the legislature that what's being proposed in this plan is probably excessive and it's been promoted with a considerable amount of hype. It's his understanding that up until July all the carriers were in agreement on the replacement of the C Concourse project. Some of the carriers have indicated to him they had no input beyond that time and now they're faced with the project before the committee. He encouraged the legislature to take some time to thoroughly evaluate how the space is being used in the present terminal complex and other considerations before giving the go ahead. Number 0578 REPRESENTATIVE PHILLIPS asked Mr. Harris what his opinion was of passenger facility charges. TAPE 98-3, SIDE B Number 0001 MR. HARRIS responded it appears to him that perhaps the Anchorage facility either isn't being utilized to the extent that is desirable, or perhaps the charges are too low. With the amount of capital that's been put into the Anchorage airport, he felt it should generate enough fees to take care of the future capital improvement program. Number 0009 CHAIRMAN COWDERY asked Mr. Harris if he thought there was a need for the project and if so, should it be downsized. MR. HARRIS responded it's his belief that if a program is agreed to by all the carriers, it's worthy of going ahead with. He added, "But to go into a financing -- I think I heard last night that we had roughly $33 million of current debt -- and to authorize that for another $175 million to go into the kind of a program that's contemplated here, I think that would be a mistake. I think that you should review all of the possibilities and I really believe that you can do a terminal expansion and related improvements with the surpluses, the cashflow, that include the funds that come from the FAA through the Airport Improvement Program (AIP) and the discretionary funds from FAA." Number 0036 REPRESENTATIVE RYAN shared some of his experiences from time spent working in the aviation industry. He noted the proposal is based on passengers not freight, which is where the revenue is. Inasmuch as the entire proposal is predicated on expansion for passengers, he asked where the revenue was going to come from. Number 0061 BILL ELANDER, President and Chief Executive Officer, Anchorage Convention and Visitors Bureau (ACVB), testified on behalf of the board of directors of the Anchorage Convention and Visitors Bureau which represents 1360 businesses, most of which are in Southcentral. He said the board of directors had reviewed the airport expansion project and unanimously supported not only the 2005 project, but would like to see consideration given to the 2015 project for future development. He said the ACVB looked at it primarily from the passenger standpoint, and it was somewhat their mistake in belief that it was ultimately the passengers that would pay for the terminal, but now it appears that's not the case. He noted that some carriers are being added while others are dropping out. Reno Air is strong, Southwest Airlines left, TWA is back in, Northwest is coming in on international flights direct from Tokyo, which indicates a very strong growth pattern. MR. ELANDER said the world is in an age of travel. The deregulation of airlines has given a lot of freedom to airlines to go where the demand is. It is for this purpose, the ACVB believes the expansion is essential; the demand is growing and will continue to be there, so immediate action should be taken to try to bring Anchorage International Airport up to beyond the 40 percent capability it should have for the future. He said that travel is here to stay; it is the largest business in the world today. International travel will begin to again appear into the Anchorage airport for the right reasons; not for refueling, but because passengers will want to get off in Anchorage. Number 0098 CHAIRMAN COWDERY asked Mr. Elander what his position was on passenger facility charges. MR. ELANDER said the passenger service charges in Anchorage are probably far less than most airports he has flown into around the country. Airport personnel outside of Alaska he has talked with have indicated that passengers are willing to pay for a proper terminal. It's frustrating for individuals coming into Anchorage to face the congestion of the baggage claim area as it is for outbound passengers in the ticketing area. He maintained that as long as there's competition, there will be good air fares in Anchorage. CHAIRMAN COWDERY thanked Mr. Elander for his testimony and asked if Mort Plumb was available to comment. Number 0119 MORT PLUMB, Director, Anchorage International Airport, clarified his statement from the previous meeting regarding an incorrect figure. He said the correct figure is, as a gauge approximately $1 million per 1,000 linear feet of taxiway, not square feet. Number 0127 REPRESENTATIVE PHILLIPS said it was her understanding the Anchorage International Airport has collected over $14 million in prior years for terminal design and related improvement projects. She asked if that money was taken into consideration to reduce the $204 million bond request. If not, what happened to the money, how much is left and why wasn't it considered? MR. PLUMB recalled that about $6.1 million was transferred and included in Mr. King's calculation in the model. He asked John Unger to further comment. Number 0138 JOHN UNGER, System Controller, Anchorage and Fairbanks Airports, said there had been three separate appropriations, adding up to $14.5 million. The first appropriation was for $3 million which was to study C Concourse and determine if it could be repaired, replaced or what other options were available. There was a $4.5 million appropriation for a needs assessment study. A $7.2 million appropriation a couple years ago was based on C Concourse being torn down and included funds to build a warehouse for the building maintenance people so they could begin to vacate C Concourse; it was money to relocate tenants. He said basically out of the $14.5 million, $6.1 million would be available to go on with the construction and design of the terminal, and the $6.1 million has been reduced from the total cost of the bond package. REPRESENTATIVE PHILLIPS asked if the $14 million wasn't just for terminal design, but it was for general maintenance as well? MR. UNGER said the first $3 million was to actually start the studies on the existing problems with C Concourse and to make determinations whether it was feasible to repair it and if not, start taking steps to replace it. He knew that part of the money was for studies and part of it was used to tear down a chimney on C Concourse. He suggested that Donn Ketner could better address the scope of those projects. Number 0158 DONN KETNER, Architect, CCS, explained that he is the project manager for the terminal portion of the terminal redevelopment project. He said the status of the funds are as follows: The original $3 million that was appropriated quite some time ago went into a number of studies to evaluate the structural capacity of Concourse C. A number of dangerous conditions that existed were identified and some of the funds were used for construction to correct some of those conditions, such as the masonry chimney alluded to by Mr. Unger. Also, a program was put together to vacate and demolish Concourse C independent of the terminal expansion program. That was the $7.2 million that was requested, and of that $7.2 million a new 20,000 square foot warehouse and maintenance facility was constructed to move that function out of Concourse C. He explained that administrative offices were in the design process to replace offices and other tenant relocations and at that time, it began apparent through some of the early studies on the terminal expansion program that it would be prudent to hold off on those improvements until such time as they could see where the master plan for the terminal expansion was going. Number 0179 MR. KETNER said some of those monies remain on the books. He said, "We have also received approval by the Airlines Affairs Committee, (indisc.) million of the original $7.2 million into the terminal expansion program, so that represents part of the $6.1 million that you see in the financial plan." He suggested that a financial statement could be made available to the committee that would identify when the funds were appropriated, what the funds were used for, what funds remain, and the current amount in the terminal expansion program. UNIDENTIFIED SPEAKER: "I believe the first appropriation came on the books in 1993 or 94." Number 0193 REPRESENTATIVE MULDER commented that more than $3 million had been spent studying potentials and opportunities and it appears to him that it's Mr. Plumb's task to gain control of the money that is being spent. A lot of money has been spent doing nothing to have eight pieces of paper put before the committee in relation to a work product, which didn't seem to be a very good return on the investment thus far. MR. PLUMB accepted the challenge. Number 0206 REPRESENTATIVE PHILLIPS understood the airport system currently holds over $36 million in unencumbered and unspent old capital improvement project funds from prior years. If this is the case, is this cash in the bank, was it collected from the airlines and other airport users and why isn't it being used for this project. Number 0213 MR. UNGER responded it is true the airport is holding $36 million or $37 million of capital money that's been collected over the years from the airlines for projects that have been appropriated previously. He added, "Both airports went through an extensive review this summer, because this was a big sticking point with the airlines, WE went through project by project, came up with about $5 million or $6 million of money that they felt these projects had either been completed or weren't going to be started and the money was lapsed and basically refunded back to the carriers through this year's landing fees. The remaining $36 million is projects that both airport managers feel are ongoing and that these projects will be completed. The Alaska International Airport System recently adopted a capital project close out policy and basically what it says is that as soon as an appropriation comes on the books, they have five years to complete that project and the money will then be closed out and any project older than five years that for some reason hasn't been completed that the airport managers still feel that they need cash, has to be presented to the commissioner's office for their approval in order to keep that project alive longer than five years." REPRESENTATIVE PHILLIPS asked if there is $36 million in the bank for ongoing renovation projects in the airport, why wasn't that $36 million applied to the expansion project being worked on now. MR. UNGER said the reason was because these are totally separate projects and have nothing to do with the terminal expansion. REPRESENTATIVE PHILLIPS asked Mr. Unger to furnish the committee with a list of those projects. She said, "With the scope of the project that you have in front of us today, I can't imagine that there is anything at the airport under the scope of the project that you have presented, that wouldn't be covered. MR. UNGER said the list would be made available for the committee. He noted that quite a few of the projects are airfield improvements and some are terminal improvement projects. Number 0245 REPRESENTATIVE RYAN referred to the "Terminal Expansion 2005 Projects" document which indicates that in June 1997, the Administration's preliminary construction costs estimates include over 50 percent contingency which he believed to be excessive. He asked if that was still correct. MR. KETNER responded there are two contingencies built into the program in the current estimate. One contingency is a 10 percent change order contingency on construction. For new construction there is a 20 percent change order contingency built in to the estimate only for the portions of the terminal that are to be renovated and there is an overall program contingency on the project of 10 percent. So collectively, there is a 20 percent contingency, including change order contingency. Number 0261 REPRESENTATIVE RYAN, referring to the same document, said the operating agreements with the airlines expire in two years and will need to be renegotiated about the time the project comes on line. He wondered what kind of guarantees that the same agreement or better could be negotiated with the airlines; i.e., letters of intent or signatory agreements? MR. PLUMB said he believed the answer would be no. Number 0275 REPRESENTATIVE NORM ROKEBERG said, "A follow up on the -- in terms of the contingency amount, I'd like to get that clarified and perhaps you could provide the committee with your calculations because it's been my experience in the construction industry and business, that you usually are doing contingency in line item budget estimates which actually start compounding. So when you talk about that component of the construction that's new construction having a 10 percent change order there, and then with a separate column, I take it, you'd have a 20 percent change order for the renovation portion. But then you take that all together and then you have 10 percent of that in your project contingency, so somewhere there's a blended rate that comes out there and we'd like to see the calculations." Number 0288 DAVID EBERLE, Director, Construction & Operation, Central Region, Department of Transportation & Public Facilities, said the 10 percent contingency relative to change orders is really a contingency on the engineer's estimate of the estimated construction costs for a given contract. There's a limit to the accuracies of the engineer's ability to estimate, so on his estimate, he adds 10 percent for that contract, not knowing what the bid is going to come in at. He said that is a reasonable amount to apply to a construction estimate. Above and beyond that, there needs to an overall program contingency to be prudent and go forward with the project. He stated, "You don't want to go into a project with a zero overall program contingency because you may have some unidentified needs that will come up during the actual final development of the plan for the overall program." The other estimates are basically known quantities, either Concourse C, known ramp requirements. That's were the initial 10 percent comes in. To a certain extent there is a compounding of those contingencies, but it's not unusual and it's certainly is prudent to have contingencies in both of those spots. In his opinion, the amount of those contingencies is also a very prudent level, in his experience. REPRESENTATIVE ROKEBERG appreciated Mr. Eberle's explanation and said the committee would like to review how the calculations were made and to see the impacts of those numbers on the gross project costs. He asked if the plans for this project gone beyond what he called a "block planning architectural stage" and into a (indisc.) preliminary design and engineering stages for cost estimation or how was the cost estimation derived for various parts of the project. MR. EBERLE responded the cost estimates are basically based on conceptual level plans, square footage and known portions of the project that can be readily identified based on historical costs for things like apron construction, et cetera. He said, "We're not anywhere near final design; we have just started schematic designs which is the preliminary stages of a final design. Until we get well into design, it's going to be difficult to refine those numbers. But anytime you go into a project, you need to go into a project with your eyes open and have adequate funds set aside to take care of the unknowns that might occur. Yes, we might be able to tighten up this number as we get through the final design phase but right now it would be very risky to go in with much less in the way .... REPRESENTATIVE ROKEBERG commented this project is analogous to a project called the Trans Alaska Gas Pipeline Project which has a floating number of $15 billion and the hope is that that particular project once it gets into preliminary engineering and design and gets through conceptual engineering into more harder drawings, may be able to be reduced to about $12 billion. He said, "I guess I'm very concerned right now that we've reached this point where we have a conceptual design and a block plan in the rendering and we've go some really extraordinary high numbers here. We haven't even reached the stage where even concepts like valuation engineering come into play .... I'm kind of concerned right now that the net gate jetway gate increase in the whole project is perhaps four, maximum five, and that may not be entirely true depending on where the regional carrier parking apron is and the traffic flow in certain areas of the parking apron. There's been one analysis that said we're going to get two new jetways and so it's going to cost us $100 million for a new jetway. Can you respond to that?" MR. PLUMB said he would ask Mr. Ketner to respond to the details of what the improvements are in the overall project, and added that it's certainly not just the gates; the gates are a very small part of this. Number 0353 MR. KETNER pointed out the total cost involves airside development, roadside development with an extension of an elevated curbside road as well as surface roads, expanded parking, landscaping, and then a portion of it, of course, is the terminal. He added, "In terms of gate requirements, the way that the gate requirements were determined was by a programmer by the name of Joel Hirsh who took TAMS numbers, did a considerable amount of study on airline schedules and overall enplanement projections and based gate requirements on an average peak hour situation for the summer at Anchorage International. The result of the needs assessment indicated that we, by the year 2005 with roughly three million enplanements, would require an additional five jet positions and seven additional regional parking positions. What we have done in terms of an overall design is to look at how we could, as efficiently as possible, use the apron around the existing terminal building and the new terminal. In an effort to reduce the number of total gates that we had to build, what we have done is relied on a cross-utilization of three jet gate positions to be cross used with regional parking. The schedules that we have on some of the jet carriers that only come in during the night allow that same apron space to be available for regional operations during the day. I think that part of our concern here is that when we look at our overall program, we do in fact increase the structural gate capacity of the terminal by five gates for a total of 24, and we do increase the number of regional parking positions to a total of 20. Now what that means in the future is that if we are able to maintain the cross-utilization of those spaces that we anticipate we can do, that's good but if the schedules of the airlines change with time such that that cross-utilization becomes less, then what that does is drive us to a larger gate requirement." He offered to give the committee a breakdown on the various component of the project and the cost of each component. CHAIRMAN COWDERY asked Mr. Ketner to submit that in writing for the committee. Number 0405 REPRESENTATIVE MULDER said he was concerned that the committee was being asked to authorize $204 million approval of a "concept." He asked if this was typical in terms of the way Anchorage International Airport has operated in the past and is it typical of the way other airports have operated. MR. EBERLE said, "Let me speak to some projects other than airports. My involvement in other major projects of this size and larger, were really projects that the legislature appropriated capital monies for initially to do much of the preliminary engineering and design work to bring it up to a higher level of confidence when the entire project is then scoped and brought back as a total package. In this particular case however, all of these costs are being paid for through airport revenue funds in one form or another and in order to launch into the depth of the design that you would need to go in to (indisc.) number, it's going to take a considerable investment with respect to the design and it's only prudent to address the whole project before one spends millions and millions of dollars trying to refine a design. What we're doing basically here is putting before you the whole program so that you see the whole program and not just piecemealing monies for preliminary design followed by final design without really knowing where this whole thing is headed and what the overall target plan is." REPRESENTATIVE MULDER said that everyone recognizes there are needs at the Anchorage International Airport and that upgrades and expansions are necessary. However, in his experience, he found it unusual for a concept to be approved as opposed to funding a study or engineering and design, and then bringing back a more concrete assessment of the project. He said, "Right now what you're basically asking us is -- give us the money and trust us and no offense, but in past experience - if the $14.5 million that we authorized in the past is any indication, I don't have a whole lot of confidence." He reiterated his concern with authorizing a concept without having some assurance that the project will not end up costing more than originally projected. MR. EBERLE replied, "Well, we're into a bit of the chicken and the egg as far as being able to bring monies to the table and develop these things to a full fledged design so that you can refine the numbers. It's not uncommon to bond a project of this nature and George King can certainly speak to that; he's been involved in a lot of airport projects of this nature, and I don't think what we're asking for is unusual from that standpoint. We can certainly come back with refined numbers as we progress into this." Number 0465 MR. KING said there are two different issues. One is the issue of what is the most economic, efficient, low cost, low risk and flexible approach to doing the funding in order to deliver the money that' needed at the right time and the right amount to do the project. That's a financial planning efficiency question and there are techniques for doing just that, and those techniques have been employed in this financial plan. The separate question is the actual expenditure of the money and the program and project management system that's used in order to make sure that the money is spent efficiency, that the construction bids are done in the most economical way to get the right size of the bid and the right drawdown schedules, making sure that projects are done in the right sequence, et cetera. All of those implementation issues in terms of how to spend money well are a separate question than the questions related to how to raise money well. He felt those should be viewed as two separate questions and as to whether the financial plan approaches the issue of raising the money well, the answer is yes. On the issue of spending the money well, Mr. Eberle was speaking to the approaches that will be used in order to ensure the money is spent well. Number 0508 REPRESENTATIVE PHILLIPS noted that Chairman Cowdery had requested that airport officials respond in writing to the issues that had been raised. She had two issues to add to the list; i.e., what are the exact plans and proposals for expansion and improvement of the baggage claim system and what are the plans for designated glycol disposal areas and recycling centers for the glycol. Number 0520 REPRESENTATIVE RYAN asked if passenger facility fee were included in the projections. If so, what are the projected revenues from that fee and the importance of those fees to this project. He asked the response be submitted in writing. Number 0532 REPRESENTATIVE ROKEBERG noted he was particularly interested in the PERT chart or implementation schedule, which outlines the timing of the various elements of the projected. He was concerned with "what is called out as the design point for what underneath in the year 2000, 2001 and also 2001 and going into 2002, whether it appears as if you're using a fast track method of design on something that's been funded like several years prior to that, and I'm kind of curious about why those design elements are called for at that particular point in time. Additionally, Mr. Chairman, I think this goes with what the Speaker is getting at too, it seems as if we're going to spend $40 million to extend what's called, I believe, the west terminal five feet out (indisc.-mumbling) that includes the entire amount of core and shell costs and finish work and the other conveyance systems and things of that nature. I'm kind of wondering what we're getting into. Also, Mr. Chairman, my final thing is that I'd like to know if in their cost per square foot numbers, what those are for the various components - I'd like to see that. I'd also like to know if they include the finish work elements, not just the -- they should be broken out between and core and shell and the finish work element of the project." CHAIRMAN COWDERY said he'd like to have the responses in writing before the next meeting. He had several questions he would like to have addressed as well: Are there any firm commitments from the airlines or others to rent the approximate 717,000 square feet being proposed for the new terminal; what about the concessaires; how much will the rent increase per square foot; will the existing tenants be given preference; and how much will be used for executive or other airport offices. TAPE 98-4, SIDE A Number 0001 MR. HARRIS advised committee members that Concourse A was built for about $7.5 million without the loading bridges and the international terminal building for about $17 million. He believed the finished product with the fueling stands and loading bridges came to about $23 million total. ADJOURNMENT Number 0021 CHAIRMAN COWDERY recessed the House Special Committee on International Trade and Tourism AT 6:48 p.m. to the call of the Chair.