Legislature(2003 - 2004)

03/11/2003 09:05 AM CRA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
SB  51-BONDS OF BOND BANK AUTHORITY                                                                                           
VICE CHAIR WOLF  announced that the only order  of business would                                                               
be SENATE BILL  NO. 51, "An Act relating to  revenue bonds issued                                                               
by the Alaska Municipal Bond  Bank Authority and the total amount                                                               
of bonds and  notes outstanding of that  authority; and providing                                                               
for an effective date."                                                                                                         
Number 0125                                                                                                                     
DEVEN MITCHELL,  Executive Director,  Alaska Municipal  Bond Bank                                                               
Authority (AMBBA), Department of  Revenue; Debt Manager, Treasury                                                               
Division, Department  of Revenue, explained that  SB 51 increases                                                               
the statutory cap  on total borrowing of AMBBA  from $300 million                                                               
to  $500 million.   Additionally,  the annual  limitation on  the                                                               
ability to issue  revenue bonds is increased from  $50 million to                                                               
$75 million.  Both changes were  requested in light of the use of                                                               
AMBBA by  municipalities to finance capital  projects and receive                                                               
some of  the advantages available  through the  structure offered                                                               
by AMBBA.                                                                                                                       
MR.  MITCHELL  informed  the  committee   that  AMBBA,  which  is                                                               
basically a  conduit borrower, is  a public corporation  that was                                                               
created in  1975.  He explained  that AMBBA, which has  A credit,                                                               
borrows  money on  the capital  market.   Due  to AMBBA's  credit                                                               
structure, its reserves,  and its ability to  provide security to                                                               
bond  holders, AMBBA  is able  to issue  bonds efficiently.   The                                                               
bond insurers  provide a  means for becoming  a triple  A credit,                                                               
then  the  bonds can  be  insured  such  that an  insurance  firm                                                               
guarantees  the bond  holders will  be paid  triple A  rated.   A                                                               
premium  is charged  to do  the  aforementioned.   He noted  that                                                               
AMBBA  receives  very  competitive   bids.    Therefore,  AMBBA's                                                               
efficiencies and strong credit rating  allow it to obtain capital                                                               
for projects at a lower cost.                                                                                                   
Number 0361                                                                                                                     
MR. MITCHELL related that this  year the revenue program has done                                                               
a  loan  to the  following  entities  for the  amount  specified:                                                               
Ketchikan  Public  Utility for  $6  million,  City &  Borough  of                                                               
Juneau  for  a port  project  and  a  hospital expansion,  and  a                                                               
hospital in  Valdez.  The  combination of these  revenue projects                                                               
exceed  the $50  million cap.    Therefore, the  request for  the                                                               
increase from  $50 million to  $75 million.  He  highlighted that                                                               
the savings  the City  & Borough of  Juneau will  experience with                                                               
the  hospital expansion  is calculated  to  be $7  million.   Mr.                                                               
Mitchell explained, "So,  it's not taking money  from the general                                                               
fund and giving it to them  [rather] it's taking money out of the                                                               
pocket  of investors  that would  otherwise they  would charge  a                                                               
higher premium or higher interest  rate on their money because of                                                               
perceived risk."  The AMBBA is  able to lower that perceived risk                                                               
and  pass on  savings to  the  local communities.   Mr.  Mitchell                                                               
noted that  AMBBA also has  general obligation  loan applications                                                               
from  the  Lake  and  Peninsula   Borough,  the  Kenai  Peninsula                                                               
Borough,  and  the  Ketchikan  Gateway Borough.    He  noted  his                                                               
expectation that there will be other loan applications coming.                                                                  
MR. MITCHELL  turned to  the need  for the  increase in  the $300                                                               
million cap.   He explained that  at the beginning of  the fiscal                                                               
year AMBBA has  about $220 million in outstanding bonds.   If all                                                               
of AMBBA's bonds were issued  immediately, AMBBA would exceed the                                                               
$50 million cap as well as  the $300 million cap.  He highlighted                                                               
that  the bonds  are  project  driven and  have  no  cost to  the                                                               
general  fund because  it's a  pledge of  resources that  already                                                               
exist at  AMBBA.  Mr. Mitchell  said this is worth  the review of                                                               
the committee  because these  are moral  obligation bonds  of the                                                               
state and thus in  the event of a default, there  would be a draw                                                               
from the reserve  fund and the state would be  asked to replenish                                                               
that reserve fund.                                                                                                              
Number 0640                                                                                                                     
REPRESENTATIVE  CISSNA asked  whether now  is a  good time  to do                                                               
MR.  MITCHELL  answered  that  the   bond  market  is  especially                                                               
attractive due to the interest rates.   He related that in review                                                               
of the last 40 years, 98  percent of the time interest rates were                                                               
higher than currently.                                                                                                          
REPRESENTATIVE  SAMUELS asked  if this  legislation would  impact                                                               
the state's bond rating.                                                                                                        
MR. MITCHELL clarified  that the state's bond  rating impacts the                                                               
bond  rating of  the public  corporations of  the state,  whether                                                               
it's  AMBBA,   the  Alaska  Industrial  Development   and  Export                                                               
Authority  (AIDEA), or  the  Alaska  Housing Finance  Corporation                                                               
(AHFC).   He  related his  belief that  AMBBA couldn't  as easily                                                               
influence the state's rating.                                                                                                   
MR.  MITCHELL returned  to his  earlier mention  that AMBBA  will                                                               
save  money  for  municipalities  as  well  as  the  state.    He                                                               
explained  that   many  of  the  loans   are  for  municipalities                                                               
participating  in the  school debt  reimbursement program.   When                                                               
that [reimbursement] happens, 60-70  percent of the funding under                                                               
the  current  authorization can  be  paid  by the  state  through                                                               
reimbursement.   For  example, the  Northwest Arctic  Borough has                                                               
the ability  to issue  $100 million  in general  obligation bonds                                                               
for school construction while only  $48 million have been issued.                                                               
He pointed out  that as far as an  outsider's credit perspective,                                                               
the  Northwest   Arctic  Borough  is   the  Red  Dog   Mine,  the                                                               
community's only  source of revenue.   Therefore, the community's                                                               
economy isn't diversified and is  based on mining, which analysts                                                               
tend to not  like, and furthermore it's very  remote.  Therefore,                                                               
going  from  a noninvestment  grade  credit  to  an A  credit  is                                                               
significant on $48 million.   Mr. Mitchell estimated that savings                                                               
to  the state  has  been $5-$6  million over  the  life of  those                                                               
Number 1016                                                                                                                     
REPRESENTATIVE  ANDERSON  inquired  as  to  which  municipalities                                                               
would  benefit  the  most  from  this  [legislation].    He  also                                                               
inquired as to the consequences were SB 51 not to pass.                                                                         
MR.  MITCHELL noted  that  Valdez is  very  concerned about  [the                                                               
passage of  this legislation] for  the short-term  because Valdez                                                               
has a  revenue bond project that  it would like to  move forward.                                                               
If AMBBA doesn't have the ability  to issue more than $50 million                                                               
in revenue  bonds this  fiscal year, Valdez  would be  looking at                                                               
two series  of bonds which would  result in an increased  cost to                                                               
AMBBA  and  Valdez.   Mr.  Mitchell  said  he didn't  know  which                                                               
community would benefit from the  overall cap increase.  However,                                                               
those communities  that would benefit  the most are those  in the                                                               
weakest credit  position.  He  pointed out that AMBBA  works with                                                               
communities as strong  as the Kenai Peninsula  Borough when there                                                               
is a transaction  of a size that doesn't  necessarily warrant the                                                               
process of issuing bonds independently.                                                                                         
MR. MITCHELL turned to the question  of the consequences if SB 51                                                               
didn't  pass and  stated that  AMBBA  wouldn't be  able to  issue                                                               
bonds after reaching  the cap.  He noted that  the cap is rolling                                                               
and much of  the debt is only 10-year debt  and thus AMBBA's debt                                                               
declines  fairly quickly.   However,  [recently] there  have been                                                               
high growth  years.  For  example, in  1990 AMBBA had  about $180                                                               
million in  outstanding bonds  which has  risen to  $220 million,                                                               
and this year there will be about seven deals.                                                                                  
Number 1243                                                                                                                     
VICE CHAIR  WOLF asked if a  default on one of  these bonds would                                                               
place the  state's assets, such  as the permanent  fund dividend,                                                               
at risk.                                                                                                                        
MR. MITCHELL replied  no because with a  public corporation there                                                               
is no broad-reaching authority; the  pledges given are limited to                                                               
that  public corporation  other  than the  state guaranteed  AHFC                                                               
bonds for which there vote [is required].                                                                                       
VICE CHAIR WOLF asked if  municipalities can partner with private                                                               
enterprise in order to use bonds to fund projects.                                                                              
MR.   MITCHELL  responded   yes,   but  noted   that  there   are                                                               
limitations; it depends upon whether  tax exempt or taxable bonds                                                               
are used, he  said.  If there  is a situation in  which a private                                                               
entity benefits  from a  project, then  there are  limitations on                                                               
their  ability to  use  tax  exempt bonding.    He  noted that  a                                                               
private activity  cap allocation can  be used for  certain things                                                               
such as  ports and  harbors that are  exempted.   Therefore, such                                                               
bonds could be used without  [applying] to the cap.  Furthermore,                                                               
AIDEA  and AHFC  can  do things  along  that line  as  well.   He                                                               
mentioned that the City &  Borough of Juneau's hospital expansion                                                               
involves private management firms, although  it's not going to be                                                               
privately  owned.   As  long as  it's a  public  project for  the                                                               
general public to use, [the loan]  is basically in the tax exempt                                                               
arena.  Mr. Mitchell noted that  there has been discussion of tax                                                               
increment financing  transactions in  Anchorage.  He  likened the                                                               
tax increment financing to a limited improvement district (LID).                                                                
Number 1503                                                                                                                     
REPRESENTATIVE SAMUELS  moved to  report SB  51 out  of committee                                                               
with individual recommendations and  the accompanying zero fiscal                                                               
note.   There being  no objection,  SB 51  was reported  from the                                                               
House Community and Regional Affairs Standing Committee.                                                                        

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