SENATE TRANSPORTATION COMMITTEE April 23, 1996 3:50 p.m. MEMBERS PRESENT Senator Steve Rieger, Chairman Senator Robin Taylor, Vice Chair Senator Lyda Green Senator Al Adams MEMBERS ABSENT Senator Georgianna Lincoln COMMITTEE CALENDAR -- CONFIRMATION HEARING - BOARD OF MARINE PILOTS CS FOR HOUSE BILL NO. 526(FIN) am "An Act relating to the financing authority, programs, operations, and projects of the Alaska Industrial Development and Export Authority; providing an exemption from the procurement code for certain projects of the authority; and providing for an effective date." PREVIOUS SENATE ACTION HB 526 - See Senate Transportation minutes dated 4/16/96. WITNESS REGISTER Dan Hensley 211 H Street Anchorage, AK 99501 John C. Klepper P.O. Box 3065 Valdez, AK 99686 Michael C. Spence P.O. Box 7981 Ketchikan, AK 99901 Bernie Smith P.O. Box 3369 Kenai, AK 99611 Jan Sieberts National Bank of Alaska 301 W. Northern Lights Blvd. Anchorage, AK 99512 POSITION STATEMENT: Has concerns with SCS CSHB 526(TRA) Randy Simmons Alaska Industrial Development & Export Authority 480 W. Tudor Road Anchorage, AK 99503 POSITION STATEMENT: Responded to changes in SCS CSHB 526(TRA) Keith Laufer, Assistant Attorney General Governmental Affairs Section Department of Law 1031 W. 4th Ave., Suite 200 Anchorage, AK 99501-1994 POSITION STATEMENT: Responded to changes in SCS CSHB 526(TRA) Representative Mike Navarre State Capitol Juneau, AK 99801-1182 POSITION STATEMENT: Explained proposed amendment to SCS CSHB 526(TRA) George Dozier, Committee Aide House Labor & Commerce Committee State Capitol Juneau, AK 99801-1182 POSITION STATEMENT: Testified against proposed amendment to SCS CSHB 526 (TRA) ACTION NARRATIVE TAPE 96-18, SIDE A Number 001 CHAIRMAN RIEGER called the Senate Transportation Committee meeting to order at 3:50 p.m. He stated the first order of business would be confirmation hearings on Governor Knowles' appointees to the Board of Marine Pilots. Number 022 DAN HENSLEY, testifying from Anchorage, said he has practiced law in Anchorage for 20 years, which has included experience in maritime law, environmental law and industrial safety law. He stated he has no conflicts with either the pilots or the industry aspects of the board, and his particular interests in serving on the board are public safety and protection of the marine environment. Number 040 JOHN KLEPPER, testifying from Valdez, said he is a reappointment to the board. He is a mariner with 27 years of experience, as well as an environmental engineer. He noted he was on the Board of Marine Pilots in California when that group was formed and a training program was started. He stated he is a citizen appointee to the board and he has no conflicts. Number 057 MICHAEL SPENCE, testifying from Ketchikan, related he started out as a seaman and graduated from the U.S. Merchant Marine Academy in 1975. He came to Alaska in 1976 to work for the Alaska Marine Highway System. He has held a federal piloting license in Alaska since 1976 and a statewide marine piloting license since 1980. He has served in office in both pilot organizations in Southeastern Alaska during the past 15 years, and he has been appointed as a pilot member of the board. Number 096 BERNIE SMITH, testifying from Kenai, stated he has been associated with the Southwest Pilot Association since 1990 in negotiations for the shippers in Cook Inlet. He has been attending meetings of the Board of Marine Pilots on a routine basis for the last five years. He has also served on the executive committee of the Alaska Steamship Association representing the shippers in Prince William Sound and Cook Inlet waters. Number 110 CHAIRMAN RIEGER thanked the participants for their presentations, and he then closed the confirmation hearing on the Board of Marine Pilots. Number 120 CSHB 526(FIN) am AIDEA OPERATIONS/PROJECTS/LOANS  CHAIRMAN RIEGER brought CSHB 526(FIN) am before the committee. He requested a motion to adopt a proposed SCS CSHB 526(TRA) as a working document. SENATOR GREEN moved SCS CSHB 526(TRA), version "K," be adopted. SENATOR ADAMS stated he was objecting to its adoption until the committee has gone through the changes and received a response from AIDEA. Number 130 CHAIRMAN RIEGER outlined the following changes in SCS CSHB 526(TRA): (1) Section 1 of the House version contained language which said that contracts of AIDEA related to an integrated transportation and port facility, which was intended to apply to those contracts made with the developer of the Red Dog Project. The words "related to" were deleted and replaced with "made with the developer of." The reason for the proposed change is so that the language is not overly broad so that it could apply to any contract, even theoretically, remotely related to the port facility. (2) Section 4: Testimony showed that the statutes are fairly clear on the interest rate charged on loan participations which were financed through bonds, but they were silent on the interest rate on loan participations made directly out of the assets of the authority. Language was added on page 2, lines 15 through 18, which provides that the interest rate on a loan participation purchased from assets of the authority may not be less than the rate for treasury bonds that mature at the same time as the loan participation, plus 150 basis points. (3) Section 9: The House version referred to guarantees of 80 percent of a loan. The new language changes it to guarantees of up to 80 percent of a loan. Also, subsection (c) of the House version, which referred to guarantees of interest, was deleted. (4) Section 12: On page 5, line 23, language was added clarifying that protection of the authority's interest is in a loan or a loan guarantee. (5) Section 13: Existing law refers to prime rate as the lowest money center prime rate. The new language clarifies that it is the lowest domestic money center prime rate. (6) Section 17: The House version contained a repealer of a sunset. In the Senate version, instead of a complete repealer of the sunset, the sunset is extended until July 1, 1998. (7) Section 18: The House version contained a repealer of AS 44.88.500(b), which referred to the limit on the extent to which the assets of AIDEA pledged to a project or guarantee would actually be at risk. That repealer is deleted so that existing language, which restricts the recourse to the specific items pledged, would be the existing law with the passage of the bill. (8) Section 20: This is transition language which was inserted in Senate State Affairs and was not in the House version of the bill. (9) Section 21: This is a new section which would reinstate the ability for AIDEA to issue bonds in a amount not to exceed $10 million without legislative approval. (10) Section 22: Language was added that is in large part borrowed from the original Red Dog authorization act. However, in the original act the definition of "reasonable return" was 5 percent and that has been changed to 6.5 percent. Number 216 SENATOR ADAMS asked if the rate of return at 6.5 percent will also affect any future investments that AIDEA will make, or does it just pertain to Red Dog. CHAIRMAN RIEGER responded that it only refers to the Delong Mountain transportation system. Number 227 CHAIRMAN RIEGER noted the members' packets also contained a proposed amendment relating to a bulk commodity loading and shipping terminal in Cook Inlet, which would be addressed later in the meeting. CHAIRMAN RIEGER asked if Senator Adams maintained his objection to the adoption of SCS CSHB 526(TRA), version "K." SENATOR ADAMS stated his objection was maintained. A hand vote was taken which resulted in a 2-2 vote. The Chairman stated the motion to adopt the committee substitute failed. CHAIRMAN RIEGER opened the hearing to public testimony. Number 245 JAN SIEBERTS, representing the National Bank of Alaska and testifying from Anchorage, stated their interest in the bill is primarily because of the interest guarantee portion of the legislation. Mr. Sieberts pointed out that in other guarantee programs like the Small Business Assistance program (SBA), the SBA guarantees the payment of interest and also will pay off the bank the guaranteed portion of the loan and liquidate the loan. Under the AIDEA law, the bank keeps the entire balance of the loan on its bank books and liquidates the loan transaction at AIDEA's instruction, which can take a long period of time. There is absolutely no interest guarantee by AIDEA. He added that if AIDEA paid the bank 90 days worth of interest on the loan transaction, it probably would be inconsequential in most cases. He said it should be an obligation of the authority to pay the guarantee if something goes wrong. AIDEA has the ability through its board of directors to limit the amount of guarantees or to expand or contract the programs. Mr. Sieberts referred to the new language relating to the interest rate on loan participations purchased from assets of the authority not being less than the rate for treasury bonds, plus 150 basis points. He said originally, most of these transactions were tax exempt transactions, and the interest rates were generally down and often below the treasury rate. There is still federal law to do certain types of tax exempt loans. He said in those transactions, if you are minimizing the rate at 150 basis points above the treasury, it would effectively substantially increase the interest rates above what the customers are able to obtain or whether from a practical point of view is reasonable. Mr. Sieberts stated NBA is supportive of the original AIDEA bill. Number 318 CHAIRMAN RIEGER requested that Randy Simmons and Keith Laufer present their response to the changes made in the Transportation SCS. RANDY SIMMONS, representing the Alaska Industrial Development and Export Authority, stated AIDEA does not have a problem with the change made on the procurement portion of Section 1. The change in Section 2 does not give them a problem for the loans that are taxable, but they are not sure how they would do it for the tax exempt portions. Number 350 CHAIRMAN RIEGER asked how the tax exemption applies when AIDEA is using its own assets. KEITH LAUFER of the Department of Law explained it is the bank's portion of the interest that would be tax exempt, but it is all part of one loan transaction so there is the ability for AIDEA to issue loans out of their assets that would qualify for tax exempt interest. CHAIRMAN RIEGER commented that he is not sure he is comfortable with AIDEA lending its own hard assets at tax exempt rates when they could invest those assets elsewhere. RANDY SIMMONS added that the reason they would look at doing that is because their mission is economic development, creating jobs. It is not necessarily getting the highest return on their dollars from a dollar standpoint. However, it is hard to say; it depends on what the project is and what the amount of financing is. Number 365 Continuing his response to the changes in the Transportation SCS, RANDY SIMMONS said AIDEA agrees with the addition of the "up to" language in Section 9. Also, he believes it is important to the financial community that AIDEA be able to guarantee the 90 days of interest. AIDEA agrees with the addition of the "loan or loan guarantee" language in Section 12. AIDEA also agrees with the addition of "United States" to the definition of "prime rate." Referring to the sunset provision in Section 17, Mr. Simmons said AIDEA would be happy not to have a sunset provision, but they can understand some of the concerns; however, he suggested the possibility of adding another year to the provision. Number 383 KEITH LAUFER, addressing the removal of the repealer in Section 18, said as it stands now, the authority would have to designate certain assets that would be available for loan guarantees under the fund. That would allow the authority to segregate funds for that purpose. He added it doesn't cause a problem to leave that language in, but he thinks the position of the authority would be that it would have to designate sufficient assets in that reserve to cover all the guarantees anyway. Speaking in support of the transition provision in Section 20, Mr. Laufer said he believes it just clarifies what he believes would happen anyway, which is that the assets currently in the Business Assistance Fund would roll back into the revolving fund. Number 400 RANDY SIMMONS, addressing Section 21, said they do not have a problem with giving the authority the $10 million authorization under the development finance program. However, AIDEA does have concern that by changing the language that was in the original bill they have no authorization to do revenue conduit financings and they have no authorization to do loan participation financings using bonds. From AIDEA's perspective, that is probably as important or more important than the development finance program. They believe it is an important provision that does not obligate the authority's assets in any way. Speaking to the Section 22 language, which is putting into statute some minimum requirements for Cominco on the Red Dog project, Mr. Simmons said AIDEA agrees with the idea that they should try to maximize their investment, but they think that as they are going into negotiations this will tie their hands somewhat as to how they get the best deal for the state. He said they agree with the concept, but they are uncomfortable with having it tied in statute. Number 495 CHAIRMAN RIEGER said his recollection of the evolution of AIDEA, in particular, and the original evolution of AHFC as a major corporation was that these corporations were structured in a way to try to keep the transactions on a financial basis. That was the reason for the participation, the reason for requirements of minimum interest rates. His concern is that when they stray from the strict financial considerations to, in essence, marking down the rates of return on a project or on a deal for the sake of other benefits, other public good type benefits, they are really taking away the power to appropriate from the legislature. He is not sure that he would be comfortable with trying to let this become an agency where their mandate is that mixed, where they have to weigh jobs against financial return and against taxes to a municipality. He is a little concerned that the approach in AIDEA, or elsewhere in the Executive Branch, is to try to mix financial returns and other goods. SENATOR TAYLOR said he shares the Chairman's concern. Projects that he has some sincere concern about are not advancing or moving because of the economic viability of those concepts, and, yet, if they were to focus just on the jobs, they would probably be seen as very worthwhile investments. Number 541 SENATOR ADAMS said the majority would like to revert $21 million to the general fund, and he asked if that has any effect on any onging projects or any future projects. RANDY SIMMONS responded that the way the majority plan has put forward to take a dividend out of AIDEA does have an effect at the current time, both on projects that they are looking at right now and potential projects in the future. CHAIRMAN RIEGER inquired if AIDEA earned approximately $38 million last year. RANDY SIMMONS responded that he thought their net income figure was approximately $37 million, which is different than their net revenues. CHAIRMAN RIEGER asked if they could propose language which speaks to a percentage of net revenues that gets to the same number and would be in statute. RANDY SIMMONS replied that the governor has made it clear that he opposes any amounts coming out of AIDEA in a dividend and that he would veto any of those amounts. TAPE 96-18, SIDE B Number 001 CHAIRMAN RIEGER invited Representative Navarre to address the proposed amendment (K.1) contained in the members' packets. REPRESENTATIVE MIKE NAVARRE explained he was offering the amendment at the request of the Kenai Economic Development District, as well as the mayor of the Kenai Peninsula Borough, who have been working for a number of years on the Midrex project to be located at Point McKenzie. However, Midrex is not going to do the project, but another group has formed with an iron carbide process, a new process that is cheaper, cleaner and more efficient than existing ore processing. That group is looking at locating two modules somewhere in Cook Inlet. The two modules would cost about $100 million and they are not connected to the authorization provided for in the amendment. This authorization would be for a loading and unloading dock facility that would be part of the development. If the group is able to put the package together, they will be ready to be under construction by the spring of 1997, but nothing would move forward on the dock facility until that $100 million commitment for the modules is made. Number 070 SENATOR TAYLOR asked if this authorization was put on the books, would it still have to go before AIDEA. REPRESENTATIVE NAVARRE responded that ADIEA would have the final say in whether or not the dock portion of the project would go forward. Number 085 GEORGE DOZIER, committee aide to the House Labor & Commerce Committee, stated that Chairman Kott had not had an opportunity to examine the Transportation SCS. However, he did request that Mr. Dozier articulate to the committee his opposition to the proposed amendment being offered by Representative Navarre. His position is that the legislation had two hearings at the House level and this matter could have been brought to his and the committee's attention at any time and it was not. As a consequence, the House essentially has been deprived of an opportunity to engage in debate and consideration of the matter. REPRESENTATIVE NAVARRE pointed out that offering the amendment at this time was a matter of timing and that he would contact Representative Kott and explain why it wasn't offered until now. Number 130 CHAIRMAN RIEGER stated work with AIDEA would continue on SCS CSHB 527(TRA). He then recessed the meeting at 4:46 p.m. to a call of the chair. [THE 4/23 MEETING WAS CALLED BACK TO ORDER BY CHAIRMAN RIEGER AT 2:50 P.M. ON 4/26 AND ADJOURNED AT 2:51 P.M.]