HOUSE JUDICIARY STANDING COMMITTEE February 18, 2000 1:12 p.m. MEMBERS PRESENT Representative Joe Green Representative Norman Rokeberg Representative Jeannette James Representative Eric Croft Representative Beth Kerttula MEMBERS ABSENT Representative Pete Kott, Chairman Representative Lisa Murkowski COMMITTEE CALENDAR HOUSE BILL NO. 304 "An Act relating to issuance and sale of revenue bonds to fund drinking water projects, to creation of an Alaska clean water administrative fund and an Alaska drinking water administrative fund, to fees to be charged in connection with loans made from the Alaska clean water fund and the Alaska drinking water fund, and to clarification of the character and permissible uses of the Alaska drinking water fund; amending Rule 3, Alaska Rules of Civil Procedure; and providing for an effective date." - HEARD AND HELD HOUSE BILL NO. 233 "An Act granting authority to each municipality to be a debtor under 11 U.S.C. (Federal Bankruptcy Act) and to take any appropriate action authorized by federal law relating to bankruptcy of a municipality." - HEARD AND HELD PREVIOUS ACTION BILL: HB 304 SHORT TITLE: CLEAN WATER FUND/DRINKING WATER FUND Jrn-Date Jrn-Page Action 1/21/00 1969 (H) READ THE FIRST TIME - REFERRALS 1/21/00 1969 (H) CRA, JUD, FIN 1/21/00 1969 (H) FISCAL NOTE (DEC) 1/21/00 1969 (H) ZERO FISCAL NOTE (REV) 1/21/00 1969 (H) GOVERNOR'S TRANSMITTAL LETTER 2/08/00 (H) CRA AT 8:00 AM CAPITOL 124 2/08/00 (H) Moved Out of Committee 2/08/00 (H) MINUTE(CRA) 2/09/00 2142 (H) CRA RPT 1DP 2NR 1AM 2/09/00 2142 (H) DP: HARRIS; NR: MURKOWSKI, HALCRO; 2/09/00 2142 (H) AM: DYSON 2/09/00 2142 (H) FISCAL NOTE (DEC) 1/21/00 2/09/00 2142 (H) ZERO FISCAL NOTE (REV) 1/21/00 2/09/00 2142 (H) REFERRED TO JUDICIARY 2/18/00 (H) JUD AT 1:00 PM CAPITOL 120 BILL: HB 233 SHORT TITLE: MUNICIPAL BANKRUPTCY Jrn-Date Jrn-Page Action 5/12/99 1340 (H) READ THE FIRST TIME - REFERRAL(S) 5/12/99 1340 (H) CRA, JUD 2/01/00 (H) CRA AT 8:00 AM CAPITOL 124 2/01/00 (H) Heard & Held 2/01/00 (H) MINUTE(CRA) 2/03/00 (H) CRA AT 8:00 AM CAPITOL 124 2/03/00 (H) Moved CSHB 233(CRA) Out of Committee 2/03/00 (H) MINUTE(CRA) 2/04/00 2086 (H) CRA RPT CS(CRA) NT 5DP 1NR 2/04/00 2087 (H) DP: MURKOWSKI, HALCRO, JOULE, 2/04/00 2087 (H) HARRIS, KOOKESH; NR: DYSON 2/04/00 2087 (H) ZERO FISCAL NOTE (H.CRA) 2/04/00 2087 (H) REFERRED TO JUDICIARY 2/18/00 (H) JUD AT 1:00 PM CAPITOL 120 WITNESS REGISTER DAN EASTON, Director Division of Facility Construction & Operation Department of Environmental Conservation 410 Willoughby Avenue, Suite 105 Juneau, Alaska 99801-1795 POSITION STATEMENT: Presented HB 304 on behalf of the Administration. CHESTER JOHNSON Government Finance Associates 63 Wall Street, 16th Floor New York City, New York POSITION STATEMENT: Answered questions on HB 304. MIKE BURNS, Program Manager Municipal Grants & Loans Division of Facility Construction & Operation Department of Environmental Conservation 555 Cordova Street Anchorage, Alaska 99501-2617 POSITION STATEMENT: Answered questions relating to HB 304. DIANA BENNETT, Finance Manager Anchorage Water and Wastewater Utility Municipality of Anchorage P.O. Box 196650 Anchorage, Alaska 99519 POSITION STATEMENT: Testified in support of HB 304 (and its companion bill, SB 210); did not want any amendments. DEVEN MITCHELL, Debt Manager Treasury Division Department of Revenue P.O. Box 110405 Juneau, Alaska 99811-0405 POSITION STATEMENT: Testified briefly on HB 304, pointing out that interest rates are below market rates. ERNIE MUELLER, Director of Public Works City & Borough of Juneau 155 South Seward Street Juneau, Alaska 99801 POSITION STATEMENT: Testified on HB 304 in support of whatever can be done to make these programs more stable and to decrease dependence on state general funds. GEORGE E. GORDON, President and CEO Utility Services of Alaska, Inc. P.O. Box 80370 Fairbanks, Alaska 99708 POSITION STATEMENT: Testified in favor of HB 304 and amendment that would open loan programs to private utilities. CRAIG TILLERY, Assistant Attorney General Environmental Section Civil Division (Anchorage) Department of Law 1031 West 4th Avenue, Suite 200 Anchorage, Alaska 99501-1994 POSITION STATEMENT: Testified on HB 304 regarding reason for change to Rule 3 of the Alaska Rules of Civil Procedure. JONATHON LACK, Legislative Assistant to Representative Andrew Halcro Alaska State Legislature Capitol Building, Room 418 Juneau, Alaska 99801 POSITION STATEMENT: As staff to the former co-chairman of the House Community and Regional Affairs Standing Committee, sponsor, presented HB 233. ACTION NARRATIVE TAPE 00-15, SIDE A Number 0001 REPRESENTATIVE JOE GREEN called the House Judiciary Standing Committee meeting to order at 1:12 p.m. Members present at the call to order were Representatives Green, Rokeberg and Kerttula. Representatives Croft and James arrived as the meeting was in progress. HB 304 - CLEAN WATER FUND/DRINKING WATER FUND Number 0023 REPRESENTATIVE GREEN announced that the first item of business would be HOUSE BILL NO. 304, "An Act relating to issuance and sale of revenue bonds to fund drinking water projects, to creation of an Alaska clean water administrative fund and an Alaska drinking water administrative fund, to fees to be charged in connection with loans made from the Alaska clean water fund and the Alaska drinking water fund, and to clarification of the character and permissible uses of the Alaska drinking water fund; amending Rule 3, Alaska Rules of Civil Procedure; and providing for an effective date." [The bill was sponsored by the House Rules Committee by request of the Governor.] REPRESENTATIVE GREEN acknowledged that there wasn't a quorum yet but said he would begin taking testimony. He called upon Dan Easton to explain HB 304 on behalf of the Administration. Number 0061 DAN EASTON, Director, Division of Facility Construction & Operation, Department of Environmental Conservation (DEC), came forward, noting the presence of Mike Burns, who manages the DEC's municipal grant and loan program, and Deven Mitchell, the state debt manager from the Department of Revenue; he also noted that online were Craig Tillery, assistant attorney general with the Department of Law (DOL), and Chester Johnson, financial advisor under contract to the state. Mr. Easton advised members that the DEC operates two loan programs through which they make loans to communities to build drinking water and wastewater projects. At the heart of those programs are two loan funds: the drinking water fund and the Alaska clean water fund. Number 0189 REPRESENTATIVE GREEN noted Representative Croft's arrival, which resulted in the presence of a quorum. MR. EASTON continued, referring to posters displayed by Mr. Burns. He reported that every year DEC becomes eligible for a federal grant, which DEC matches at a ratio of 5-1. Those monies are deposited by the legislature into both loan funds; the totals for both funds are about $15 million a year and $3 million a year. The department loans this money to communities, which pay it back with interest. The department also earns interest on money waiting to be loaned out, or which has been returned and is waiting to be loaned out again. REPRESENTATIVE GREEN asked whether the current rates being charged and received are about even, around 4.5 percent. MR. EASTON suggested Deven Mitchell could better answer that. He said he believes the DEC makes 5 to 6 percent on its investments, whereas they charge communities about 4.4 percent in interest. Number 0303 MR. EASTON explained that HB 304 has two parts. The first part, Sections 1 through 17, adds the drinking water fund to the legislation that currently gives the DEC bonding authority for the clean water fund. The reason is fairly straightforward, he said, mentioning the Environmental Protection Agency (EPA) and noting that $3 million in state match money comes in as a grant; that is general fund money. Mr. Easton said the DEC doesn't have to do that; another option is to actual sell bonds and use the proceeds as the match. They can then take interest earnings out of the fund and retire that bond debt. This is relatively short-term; the DEC wouldn't incur any debt other than for a relatively short period of time. It is a "shorter bonding mechanism that just basically gets us around having to contribute general funds year after year after year to the fund," Mr. Easton said. "Now, contributing general funds is a good thing," he added. "It makes a fund grow fast. But these funds have grown to a point where we can afford to do that." REPRESENTATIVE GREEN asked whether the federal government allows that to be called the state match. MR. EASTON affirmed that. He pointed out that in the clean water fund, where the DEC has this authority, they are already proposing this in the fiscal year 2001 budget. Last year, roughly $1.5 million in general funds came in. This year, there won't be general funds; rather, bond receipts will come in. However, the DEC lacks bonding authority to do that in the drinking water fund. Number 0481 REPRESENTATIVE GREEN asked whether this is to replace the EPA grant or whether the EPA grant will go up if this is approved. MR. EASTON answered that the EPA grant will keep coming at the same rate it has, until it stops. REPRESENTATIVE GREEN asked whether the DEC knows when that will be. MR. EASTON indicated the EPA has told the DEC the clean water grant will stop in fiscal year 2003, and the drinking water grant will stop in 2008. Currently, he explained, the DEC is allowed to take a little of this EPA grant, which is how they pay for staff. There are no general funds in the DEC's operating budget for this program. When those grants stop, they won't have a way to continue to maintain the program. Therefore, the second part of HB 304 gives the DEC a mechanism to pay for program operating costs. MR. EASTON, still referring to the posters, further explained that HB 304 would allow the DEC to split the repayment stream from communities repaying loans. Instead of returning all the money to the funds, the DEC could use a small percentage to pay for operating costs. That way, when the EPA grant funds stop, the DEC won't have to ask the legislature for general funds. What HB 304 gives the DEC authority to do is done in many other states. It makes an administrative fund for each loan fund, and two accounts. The payments come from the community into an income account. Every year, through the capital budget process, the DEC would request that the legislature appropriate funding from that income account to the operating account. And then, through the operating budget process, the DEC would ask to transfer money from the operating account into its operating budget. Number 0666 MR. EASTON drew attention to the zero fiscal note. He explained that it is zero in terms of operating costs, and it reflects a switch from general funds to revenue bond receipts. REPRESENTATIVE GREEN noted the arrival of Representative James. Number 0714 REPRESENTATIVE ROKEBERG told fellow members he'd had meetings with representatives from private utilities in the Fairbanks area, who had requested that the bill be amended to add public utilities with certificates of need as eligible for this loan program. He asked whether Mr. Easton believes the Administration would have any objections to amending the bill to include private entities that would qualify under federal requirements. MR. EASTON replied that he didn't know, indicating he'd met with the same people but only the day before. There hadn't been time to analyze what it would mean, he said, let alone time to talk with the Governor's office about it. His personal immediate reaction, however, is a desire to understand exactly who the DEC would loan to under such an amendment. Right now, they just loan to municipalities. It is a relatively simple program to administer, with a very low risk. There aren't a large number of clients. It is very easy to do credit checks because the municipalities have established credit ratings and are audited. They are an easy group to loan to. Furthermore, there is a zero default rate. MR. EASTON pointed out that it could be far more complex and time- consuming if the DEC winds up loaning to a lot of privately owned utilities, depending on where the line is drawn. "That doesn't mean it's bad," he added. "It's just something that I would like to understand better." Another concern is increased demand on the loan. A certain size of "pie" already is eaten up entirely by municipalities. It is a question of whether this would take a big slice of pie away from the communities or a small one, and a question of how communities feel about sharing the loan fund. On the positive side, some smaller privately owned [entities] may have wastewater or drinking water problems; perhaps by making them a beneficiary of this program, the DEC could actually go further to improve drinking water and wastewater quality. Number 0892 REPRESENTATIVE ROKEBERG acknowledged that the proposed amendment was brought to him by a larger private entity in the Fairbanks North Star Borough. He said there are significant numbers of small private water systems, however, particularly in Southcentral Alaska, that provide service to a large number of people. Although typically incorporated, they are basically nonprofit entities or small profit making entities - almost homeowners' associations in terms of their formatting sometimes - which have difficulty sometimes obtaining financing through conventional methods. He suggested those may have the same problems with water systems that small villages or communities have. Indicating he would ask the assistant attorney general online a question later, he voiced his own understanding that the federal statutory framework allowing this program does provide for that. Number 0970 REPRESENTATIVE GREEN asked how the DEC would handle the extra requests if this passed. MR. EASTON pointed out that the DEC already has more demand for loans than they give out. They solicit applications; prioritize them, basically, according to need and the health impact; and make loans according to that. Number 1036 CHESTER JOHNSON, Government Finance Associates, testified via teleconference from New York City, specifying that his company acts as financial advisors to the Alaska State Bond Committee and provides some services under contract with the DEC on the both the state revolving funds (SRFs): the clean water and drinking water funds. He informed members that he had been asked to be available for questions. REPRESENTATIVE GREEN asked whether Mr. Johnson had anything to add to Mr. Easton's explanation. MR. JOHNSON commended Mr. Easton for his presentation. He emphasized that this program, characterized as a revolving loan fund, has been successful across the nation. Although it was initially established for clean water, only recently was the drinking water program included in order to expand the ability to provide local units with low-cost funding for drinking water purposes. He pointed out that, as outlined, use of this structure - which allows bond finance to substitute for general fund appropriations in meeting the state match - has both operational and financial efficiencies that should be favorable to the state itself as it goes about deciding on general fund priorities. MR. JOHNSON again referred to the program's implementation in other states. He said the program is noncontroversial and shouldn't create any concerns, either at the rating agencies, with respect to the state's rating, or operationally, with respect to the way that the DEC handles its debt finance program. Number 1237 REPRESENTATIVE CROFT asked what happens if this program is extended to private utilities or very small "almost homeowner" organizations that have water issues. He further asked Mr. Johnson how that would change his job as the bond advisor. MR. JOHNSON answered that obviously it makes it a little more complicated. He specified that he wasn't making a recommendation here. Noting that there have been instances where private water companies have been involved in other states in an SRF program, he said it requires a little more complicated credit analysis. In addition, it may involve the creation of different types of bond programs. In other states, there have been established separate bond contracts, for example, that would involve lower-rated entities, so that the stronger program wouldn't be adversely impacted. He pointed out that HB 304 allows the state bond committee to create bond resolutions with investors, through the use of a trustee, to secure debt financing for the purposes of the legislation. MR. JOHNSON acknowledged it is early in the game, voicing the need to look at credit arrangements for other borrowers that would be included over and above the municipalities. He said it may well be that separate resolutions would have to be created for entities that would not necessarily meet the same credit criteria that a normal borrower would. That issue has been addressed by the rating agencies, which are on record as stating "that it does make some sense ..., for credit entities that do not sort of fit the pool, that it's necessary to create bond resolutions separate and distinct from the normal bond resolution for the normal program." Number 1394 REPRESENTATIVE CROFT expressed his understanding that separate bond resolutions would be needed because otherwise, to the extent there were any defaults in those others, those defaults would affect the bonding of every municipality. Mr. JOHNSON affirmed that, saying that is the primary reason for having that structure in place. He again indicated he wasn't making a recommendation; rather, that is how a number of states have addressed the problem. Number 1413 REPRESENTATIVE ROKEBERG asked whether these are "full faith and credit" pledges of the state or are in the form of a revenue bond. He said his understanding was that this would put pools of different loans into one bond or a group of bonds. MR. JOHNSON said that is correct. He clarified that his comments had dealt with the basic credit integrity of the existing program for the DEC. This particular structure doesn't necessarily affect the state's credit, except to the extent of budgetary relief because general funds won't have to be appropriated for the state match. Regarding the financing structure, that wouldn't impact on the state's credit, with one caveat: the state's debt management operation, as executed through the state bond committee, is viewed as a management issue for the state. Even if programs aren't directly related to the state's credit - that is, direct general funds, security or through a pledge of the general funds - it is highly important, as the state meets with the rating agencies, that they can make it clear that the security and credit strength is sound which supports operationally important programs such as those involving clean water and drinking water. Number 1525 REPRESENTATIVE ROKEBERG asked for confirmation that these are revenue bonds and not general obligation (GO) bonds. MR. JOHNSON agreed that they fall within the general category of revenue bonds; that is, the sources of payment would consist of repayments of loans made to local units, in the larger sense. Admittedly, the funds that would be used for the state match in this instance essentially exist in the form of earnings. The precedent is using earnings that exist to substitute for the borrowings. He said those are considered revenue bonds, as opposed to a general obligation or a general fund obligation of the state. Number 1607 REPRESENTATIVE ROKEBERG said he isn't sure whether the state would pool the loans or whether there is more than one issuance a year. He questioned the necessity of separate resolutions. REPRESENTATIVE CROFT pointed out that even though it isn't a general obligation bond, revenue bonds have a history and are rated because of that. If pooled together, a default on one would raise the default rate from zero to "small." REPRESENTATIVE ROKEBERG asked why they would need separate resolutions, though. Number 1648 REPRESENTATIVE GREEN announced, "We have the answer." He suggested debating this after hearing testimony. Referring to Mr. Easton's testimony that the DEC allocates these [loans] based on need, he asked whether that consideration would include the fact that a group providing service to 50 people, for example, might not be as stable as a community of 100 to 300 people. Number 1715 MIKE BURNS, Program Manager, Municipal Grants & Loans, Division of Facility Construction & Operation, Department of Environmental Conservation (DEC), came forward, answering that the DEC's priority criteria are generally prescribed by the EPA. Among those criteria, credit risk considerations are always a factor. REPRESENTATIVE GREEN pointed out that it might be a consideration of whether this proposed amendment might be acceptable. He surmised that the smaller the entity, the less likely it might be to get a loan because of an inability to repay it. Number 1750 REPRESENTATIVE CROFT said he thinks it is a good point. He requested confirmation that without the amendment, the credit analysis would be relatively easy, because for established municipalities the DEC would just have to look for something out of the ordinary. MR. EASTON and MR. BURNS affirmed that. Number 1770 REPRESENTATIVE JAMES asserted that creditworthiness would be based on the entity and its past history, not its size. REPRESENTATIVE GREEN clarified that he wasn't implying who might have the better rating. However, there is more need for the loan fund than there is availability. His concern is whether adding groups would further adversely impact the availability for municipalities. From testimony, he said, he understands that the probability - though not the certainty - is that municipalities would still come ahead of a new group lacking a track record, for example. Number 1822 REPRESENTATIVE ROKEBERG asked whether the smaller communities now served by the DEC all have a tax base. MR. EASTON affirmed that the beneficiaries of the loan programs are all communities with a tax base, generally the size of Wrangell or Petersburg on up. REPRESENTATIVE ROKEBERG commented that a significant amount of "grant work" involves areas without a tax base in the unorganized borough. He requested confirmation that generally those communities wouldn't be participating and wouldn't have the wherewithal to pay off the loans. MR. EASTON affirmed that. Number 1865 REPRESENTATIVE ROKEBERG said there is a cap of $150 million for each program, and a $15 million annual cap in HB 304. He asked how much the DEC writes annually now. MR. BURNS answered that they haven't actually issued any bonds yet, having just received authority a very few years ago. As for loans, the portfolio of loans to all of communities, for both programs, is $170 million at this time. REPRESENTATIVE ROKEBERG asked whether there is a split between clean water and drinking water. MR. BURNS answered that "drinking water" is a relatively new program. The split now is $135 million through "clean water" and $35 million through "drinking water." Number 1915 REPRESENTATIVE ROKEBERG asked what the average interest rate or the cost of the loans is to the municipalities. MR. BURNS specified that the average interest rate on the entire portfolio is right at 4 percent. REPRESENTATIVE GREEN expressed his understanding that $170 or $175 million is the total fund, which is all out working. Number 1941 REPRESENTATIVE ROKEBERG remarked that he thought he'd seen in HB 304 a $150 cap on each program. MR. BURN replied, "That is the ... bonding limit that we would be limited to, to go out and get extra bond proceeds over and above ... the 'cap' grants, the state match, of which we have chosen, for several reasons, not to ... proceed with at this point in time. ... What we're choosing to do, instead, is to bond for the state match in that method." REPRESENTATIVE ROKEBERG asked whether, with this grant of authority, the DEC would be able to bond more on a stand-alone basis if there were enough demand, going beyond the federal match, particularly after the federal match stopped. He also asked whether, to help meet the demand, the DEC conceivably would go into the marketplace, bond that amount of money, and then turn around and lend it. MR. EASTON answered that it would certainly be an option, but one the DEC hasn't felt the need to utilize. The bonding authority would let the DEC use this mechanism to finance its match. It would also provide the DEC an option for adding cash to the loan funds, if it was ever decided, collectively, to do that. REPRESENTATIVE GREEN noted that Craig Tillery from the Department of Law was online to answer questions. He then called upon Diana Bennett. Number 2038 DIANA BENNETT, Finance Manager, Anchorage Water and Wastewater Utility (AWWU), Municipality of Anchorage, testified via teleconference from Anchorage, noting that she has worked closely with the DEC during her 12 years in that position. She urged passage of HB 304 and its companion bill, SB 210, which authorize the DEC to sell bonds as a means of capitalizing the Alaska drinking water fund and to designate a portion of the interest charged on both the drinking water and clean water loans to help pay for program operations. She stated: Speaking on behalf of AWWU, we declare the state's revolving loan fund programs to be a total success for our community. AWWU has been a participant of the clean water loan program, which funds capital projects for the wastewater utility, since the program's inception in 1989. When the drinking water program was funded in 1998, the utility became one of the first municipalities to submit a loan request for a water capital project. Traditionally, our capital programs are funded through long-term debt, with very little coming from current operations. We use this approach to keep rate increases to a minimum, delaying and deferring any increase in customer rates to the latest possible date. In fact, there has not been a water rate increase at AWWU since 1991, and not since 1992 for wastewater. We owe a great deal to the savings generated through the use of the revolving loan programs for this lack of rate increases. The cost savings resulting from the SRFs, as compared to traditional revenue or general obligation bonds, are there for the ratepayer because [DEC] has worked with communities to develop a program with community benefits as their number one goal. [DEC] has actively solicited input from the program users to help define and enhance benefits while still maintaining the program viability. Savings are generated because the program is simple, flexible and attractive. This utility has initiated 18 loans with the state revolving loan program, with actual loan disbursements at the moment totaling in excess of $21 million. Due to the lower interest rates and the deferred accruals and payment plans, AWWU has realized annual savings of between a half million and one and a half million dollars. This is a very important program for our utility. The proposed program change to allow bonding authority for the drinking water program appears to me to be a safe, reliable, financially sound method of continuing a program that has proven benefits for Alaskan communities. In addition to the bonding authority change, which will save state operating dollars, the proposed legislation will save more state operating dollars by using dollars already in the system to support the program's operating expenses. I have reviewed the state's financial forecasts and can see little downside to this proposal. This change, along with the regulation changes, which decrease the interest rates associated with the loans, will slow the growth of the funds only minimally. The revolving fund concept will remain intact, with funds continuing to be available for communities to finance future projects. These proposals are fiscally sound and add to the strength of an already successful program. It should be noted that since its inception, the state DEC ... has not only not had a default on any loans but there's never even been a late payment. And I think this demonstrates the communities' commitment to support a program with so many benefits to the citizens. ... In summary, AWWU, as a publicly owned utility, part of Municipality of Anchorage, believes this program is very important. It funds a major part of our capital program and helps keep rates low. Privately owned companies, who are profit-oriented, have other financing options not available to public entities. To allow privately owned companies to use government-subsidized funds puts government entities at a disadvantage. We don't want the program to suffer. The need for this program is documented. And we would hope that the same funding level remains available for municipally owned utilities. We encourage you to pass this legislation without amendments or substitutions. Thank you for your time and attention. Number 2250 DEVEN MITCHELL, Debt Manager, Treasury Division, Department of Revenue, came forward to expanded on testimony from the DEC that the interest rates being paid are close to 4 percent. He pointed out that those rates are actually below market rates, resulting in the savings described in Ms. Bennett's testimony from Anchorage. That would hold true across other communities even more so, Mr. Mitchell noted, because utilities in smaller communities wouldn't have the same kind of credit strength that Anchorage has. Number 2288 ERNIE MUELLER, Director of Public Works, City & Borough of Juneau, came forward and testified as follows: We operate the water and wastewater ... utilities here, and we have been recipients of loans from the Department of Environmental Conservation for about the last 10 or 11 years, first with the clean water program, and we now have ... our first loan application in with them for the drinking water program. ... As the folks from Anchorage pointed out, this doesn't just benefit the cities but it benefits our individual ratepayers. We are an enterprise activity, which means that our ratepayers pay all of our expenses including our debt service. Even if we have general obligation bonds, which we do, our ratepayers pay off those general obligation bonds. So, I'd like to mention, in fact, one particular way that we've used this program to ... directly save our ratepayers money, and that is in the use of local improvement districts [LIDs] to expand our service to currently unserved areas. If you're familiar with the local improvement districts, they are a system that's set up by which the property owners that benefit from the extension of the utilities actually pay a portion or all of the cost of extending that utility. What we have done is we have used the state's low-interest money to finance those property owners' LID payments. So they have directly taken advantage of that low- interest loan, and it's saved those property owners, in some cases, probably $1,000 to $2,000 in interest ... that they would have [paid] over the course of their LID payments. So it's really helped them, as individuals, to be able to afford to form an LID and to hook up to, ... in our case, sewer facilities in areas where we'd [have] had a hard sell, to tell people that you've got to pay 10 percent interest for ten years to pay back this thing. And that's the interest rate that we were charging. So, telling them that they could get by with 4 percent was a big selling point for us, in doing this. This bill, in our opinion, provides a lot of long-term stability to this loan program. We anticipate that we'll be borrowing money through this program as long as the state will let us do so. ... It's not only been a good program in terms of the low interest and the ready availability of funds, but it's also been an administratively well managed and simple program to work with. We handle all the paperwork at the city end. We don't have to hire bond counsel. We don't have to hire financial institutions. All that work's done between the state and ourselves, and it's very simple to manage. One of the things that people don't realize is we save a lot of direct money by having this particular program financed by the state, and that is, when we have a project that goes forward - like a water reservoir, for example, that's financed by this operation - DEC's administrative program actually does all the plan review and the supervision ... of those engineering documents. And we don't have to pay for that. That's part of how they administer the program. If we did that with private debt financing, we'd have to pay DEC to do that program plan review for us. So it's really saved us a lot of money. ... As the people in Anchorage say, it helps us keep our rates down for our ratepayers. ... So we're really strongly in support of whatever can be done to not only make this program more stable in the long run, ... but to make it less dependent on state general fund money, which is ... a primary intent of this legislation .... Number 2450 GEORGE E. GORDON, President and CEO, Utility Services of Alaska, Inc., came forward, noting that his company provides administrative and customer services to two regulated private utilities in Fairbanks: College Utilities Corporation and Golden Heart Utilities. He told members there are many small private regulated water and wastewater systems providing a valuable service throughout the state, including the Fairbanks area. He stated that he speaks in favor of both the bill and the amendment which he believes will be offered. TAPE 00-15, SIDE B Number 0001 MR. GORDON expressed his belief that if companies aren't creditworthy, they shouldn't receive loans. He doesn't believe that it would require separate handling, because it isn't the intent to ask for loans to be made to noncreditworthy entities. These are simply smaller water companies - many in the Southcentral area and some in Fairbanks or elsewhere in the state - that simply can't get straight bank financing, which is too expensive and has too short a payback time. MR. GORDON voiced his understanding that the intent of Congress was that Safe Drinking Water Act revolving funds be made available to private utilities. In fact, 34 states have changed their rules, regulations and/or statutes to allow this kind of lending. Mr. Gordon specified that he was speaking in approval of a change that would allow the loans to qualified private water and wastewater utilities which are regulated by the Regulatory Commission of Alaska; that way, the lower rates on these loans could accrue to the ratepayers of the private utilities, especially the smaller ones in the state. Number 0061 REPRESENTATIVE ROKEBERG asked Mr. Gordon how many customers his firm serves. MR. GORDON answered that College Utilities Corporation provides service to "approximately 1,850 customers, about 12-14,000 people," whereas Golden Heart Utilities has "6,000 customers, approximately 35-40,000 population." He said that is 50-55,000 people in the greater Fairbanks area. Number 0086 REPRESENTATIVE KERTTULA asked whether Fairbanks itself gets these types of loans now. MR. GORDON answered that the City of Fairbanks' publicly owned utility no longer exists. It was privatized two and a half years ago, with the water and wastewater services now provided a private utility. They also had privatized electricity and telephone service at the same time. All utilities are handled either by a cooperative or private concerns, which are ineligible for the loan funds in question. This legislation excludes private concerns, and they are seeking to have that changed. REPRESENTATIVE KERTTULA asked Mr. Gordon whether he has any information on the 34 states that have allowed this. For example, how long have they allowed it? How have the programs worked? Are those programs the same as this would be under HB 304? MR. GORDON replied that he thinks some of the states had allowed "private loans" in the beginning, especially in the East, where there are many more private water utilities. The National Association of Water Companies, of which his companies are members, track that; he doesn't believe there have been any problems with making loans to private entities. "You simply use appropriate credit information and don't make loans to people that can't qualify," he restated. "So, I think there's been success. And I think that was the intent of the Congress." Number 0141 REPRESENTATIVE ROKEBERG asked Mr. Gordon whether his company does wastewater management also. MR. GORDON answered, "Water and wastewater, both." REPRESENTATIVE ROKEBERG asked, "Can you give the committee an idea of a ballpark savings, and how many basis points, if you were allowed to participate in this program doing conventional financing and the state subsidized loan program?" MR. GORDON replied that their conventional bank financing is at prime plus 1.5 percent, which currently would be 9.5 or 10 percent. They also have a recent tax-free AIDEA [Alaska Industrial Development and Export Authority] "borrowing" at 6.5 percent. If these loans [under HB 304] are at 4 percent, that is a 2.5 percent difference. He pointed out that lowering interest costs benefits ratepayers, not investors. It flows directly as a pass-through expense to the ratepayers, whether they be municipal or private. REPRESENTATIVE ROKEBERG stated, "Because you're a regulated utility." MR. GORDON affirmed that. Number 0184 REPRESENTATIVE CROFT surmised that it passes through because a regulated utility can only make so much profit, which is regulated by the cost base. MR. GORDON replied, "The profit is based upon an opportunity to make a return on what you have invested, not what you have borrowed." Number 0199 REPRESENTATIVE GREEN thanked Mr. Gordon and asked whether anyone else wished to testify. He then closed public testimony. REPRESENTATIVE ROKEBERG noted that he had two proposed amendments which he would offer to the committee. He explained that there were two amendments because the drafter had said the water and clean water Acts had to be handled separately because of the titles. The intention is to provide that certified and regulated public utilities in Alaska be included in these loan programs. Number 0238 REPRESENTATIVE ROKEBERG made a motion to adopt Amendment 1 (1- GH2031\A.1, Cook, 2/18/00), which read: Page 8, line 23: Following "assistance to": Insert "organizations that provide water service under a certificate of convenience and necessity from the former Alaska Public Utilities Commission or the Regulatory Commission of Alaska and to" Delete "municipal" Page 9, line 18: Delete "A" Insert "An organization that provides water service under a certificate of convenience and necessity or a" REPRESENTATIVE GREEN noted that there was no longer a quorum. REPRESENTATIVE ROKEBERG withdrew his motion. Number 0313 REPRESENTATIVE GREEN noted that there now was a quorum present. REPRESENTATIVE ROKEBERG again made a motion to adopt Amendment 1. Number 0321 REPRESENTATIVE CROFT objected. He referred to testimony and said there is no legal bar to doing these types of subsidies to private business. However, the main question is a fiscal one. This would affect both Juneau and Anchorage, as testimony indicated. For that reason, it seems more appropriate to delay it for a Finance [Committee] discussion. The judicial matter, he pointed out, is that it could be done but doesn't have to be done. The fiscal question is whether it is appropriate. He pointed out that testimony indicates there are other options for private industry that aren't open to government. This would amount, in his opinion, to a government subsidy that isn't directly under the scope of the current committee; more importantly, it is improper. Number 0374 REPRESENTATIVE JAMES disagreed, saying the beneficiaries aren't necessarily the private entities but the ratepayers. Therefore, she believes this is a policy decision and won't cause any different fiscal impact to the state. She urged support of Amendment 1. REPRESENTATIVE GREEN requested a roll call vote. However, members either had already departed or departed after the request for a roll call. Therefore, he canceled the request, as there no longer was a quorum present. Number 0440 REPRESENTATIVE ROKEBERG asked whether the court rule addressed in the bill would need to stay in. REPRESENTATIVE GREEN pointed out to Craig Tillery, who was online, that the bill would require an amendment to Rule 3 of the Alaska Rules of Civil Procedure. He asked whether broadening the scope would affect that. Number 0466 CRAIG TILLERY, Assistant Attorney General, Environmental Section, Civil Division (Anchorage), Department of Law, answered that the rule amendment is required simply because the bill adds drinking water into the clean water statute. It is already a requirement in the clean water statute that actions be brought in the First Judicial District in Juneau. His understanding is that it is being done essentially for the convenience of the court because that is where the parties are likely to be. In bringing drinking water into the clean water statute, necessarily that came under this requirement. "Therefore, we had to call it a change to the court rules," Mr. Tillery explained. "To not do that would set up different venues for the two different types of actions, which, I think, would be somewhat confusing. It wouldn't be impermissible, but it would seem to me that the way it's set up now would be more consistent and easier to apply." Number 0511 REPRESENTATIVE ROKEBERG asked whether the only substantive change is in Section 20 regarding the venue. He recalled that he himself had sponsored a bill a couple of years ago that spoke to this section of law. MR. TILLERY elaborated on his earlier response. He said the important court rule amendment is to Rule 3, regarding change of venue. Section 11 changes AS 37.15.583(a) by adding in AS 46.03.036, regarding drinking water, to the current clean water rule. Subsection (b) of [AS 37.15.]583 states that a proceeding under (a) of this section may be conducted only in the superior court of the State of Alaska, First Judicial District of Juneau. Essentially, adding in drinking water along with clean water in that one statutory section necessarily brings it under subsection (b). The change in court rule is to conform the two. Number 0612 REPRESENTATIVE GREEN announced that HB 304 would be held over. [The motion to adopt Amendment 1 was still pending with an objection having been stated.] HB 233 - MUNICIPAL BANKRUPTCY REPRESENTATIVE GREEN brought before the committee HOUSE BILL NO. 233, "An Act granting authority to each municipality to be a debtor under 11 U.S.C. (Federal Bankruptcy Act) and to take any appropriate action authorized by federal law relating to bankruptcy of a municipality." [Before the committee was CSHB 233(CRA).] Number 0646 JONATHON LACK, Legislative Assistant to Representative Andrew Halcro, Alaska State Legislature, came forward to explain HB 233. He noted that Representative Halcro was a co-chairman at the time of the House Community and Regional Affairs (CRA) Standing Committee, which had sponsored the bill the previous year. Representative Halcro had agreed to continue carrying the bill although he is no longer co-chairman of that committee. MR. LACK informed members that in 1994 the U.S. Congress changed the federal bankruptcy code to require states to give local governments specific authority to seek protection under Chapter 9 of the federal bankruptcy code. Although most states have granted this ability, Alaska has not. This bill will bring Alaska into compliance with those 1994 changes. MR. LACK pointed out that smaller communities are often in a financially tenuous position, meeting expenses on a month-to-month basis. Federal bankruptcy protection might be required by a local community government when there has been mismanagement, for example, or when an accident occurs in a smaller community that is under-insured. In Alaska, many smaller communities have a "strong city manager" form of government. The desire is to not create a situation where creditors would come in and start "cherry-picking" community assets - for example, a fire trucks or ambulance - thereby leaving a community without emergency care or whatever may be necessary. Therefore, HB 233 would allow a community to go into federal bankruptcy court, seek protection and reorganize its debts. Number 0732 REPRESENTATIVE GREEN requested a brief overview of the protections afforded by Chapter 9. MR. LACK explained that Chapter 9 is generally available for individuals to reorganize their debts. For municipalities and local governments, the reorganization does not, in most cases, allow a local government to extinguish its debts. There are four options that a local government would have under Chapter 9 to reorganize its debts and basically force creditors to come to the table to work out a payment plan or reduce the debt. Generally, however, it doesn't allow the discharge of debts unless creditors are participating in bad faith negotiations in front of the bankruptcy court. Number 0783 REPRESENTATIVE ROKEBERG inquired whether the congressional action had resulted from the Orange County "fiscal debacle." MR. LACK answered that ironically the change in federal law occurred in 1994 and then Orange County went bankrupt. The federal court told Orange County that California hadn't provided specific authority, however. In order for Orange County to seek bankruptcy protection, California had to go back in and do what HB 233 does. It exemplifies why HB 233 needs to be passed. Number 0825 REPRESENTATIVE GREEN noted that apparently there were no more testifiers on HB 233; he closed public testimony and indicated there was no quorum present. [HB 233 was held over.] HB 304 - CLEAN WATER FUND/DRINKING WATER FUND Number 0023 REPRESENTATIVE ROKEBERG again briefly brought up HOUSE BILL NO. 304, "An Act relating to issuance and sale of revenue bonds to fund drinking water projects, to creation of an Alaska clean water administrative fund and an Alaska drinking water administrative fund, to fees to be charged in connection with loans made from the Alaska clean water fund and the Alaska drinking water fund, and to clarification of the character and permissible uses of the Alaska drinking water fund; amending Rule 3, Alaska Rules of Civil Procedure; and providing for an effective date." REPRESENTATIVE ROKEBERG asked that committee staff check with the Department of Environmental Conservation about a position on his own proposed amendments [Amendment 1 being the only one formally offered that day, to which an objection had been stated]. He acknowledged that the amendments may have caught the DEC by surprise. REPRESENTATIVE GREEN said that is a good point. He then noted the committee staff's acknowledgment of the request. [HB 304 was held over.] Number 0916 REPRESENTATIVE GREEN adjourned the House Judiciary Standing Committee meeting at 2:22 p.m.