Legislature(1995 - 1996)

03/29/1996 01:50 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
  HOUSE BILL 526                                                               
                                                                               
       "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."                                                        
                                                                               
  GEORGE  DOZIER, STAFF, REPRESENTATIVE PETE KOTT, stated that                 
  the Alaska Industrial Development & Export Authority (AIDEA)                 
  was  created  to  promote  employment  in Alaska  through  a                 
  variety of tools.   Among others,  the tools consist of  the                 
  Development  Assistance  Program,  the   Loan  Participation                 
                                                                               
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  Program  and the  Business  Assistance  Program.    Properly                 
  utilized, these mechanisms  create a  potential of having  a                 
  positive  impact  on  the  economy of  Alaska.    Changes in                 
  economic,  legal,  and  financial  conditions  have  made it                 
  desirable to examine several statutory provisions pertaining                 
  to AIDEA.  The legislation would address a variety of issues                 
  presented by those changed conditions.                                       
                                                                               
  RANDY  SIMMONS,  DEVELOPMENT  AND  FINANCE  MANAGER,  ALASKA                 
  INDUSTRIAL   DEVELOPMENT   &   EXPORT   AUTHORITY   (AIDEA),                 
  ANCHORAGE, noted that  HB 526 would restore  AIDEA's bonding                 
  authority  for projects  greater  than  $10 million  dollars                 
  without coming to  the Legislature for  approval.  June  30,                 
  1995,  a  sunset  provision  was  implemented in  which  all                 
  AIDEA's bonding authority was taken  away.  During this past                 
  year,  a  project  became  available  for participation  but                 
  without the bonding authority, AIDEA was not able to finance                 
  the revenue bonds for the Fort  Knox Gold Mine in Fairbanks.                 
                                                                               
                                                                               
  Mr.  Simmons requested that  the language return  to what it                 
  was prior  to sunset.  The  language would apply to  Page 1,                 
  Lines 11 &  12, deleting  "if those bonds  would affect  the                 
  credit of  the authority"  and inserting  "to assist  in the                 
  financing  of  a development  project  under AS  44.88.172 -                 
  44.88.177".   The language is contained  in Amendment #1, 9-                 
  LS1549\C.1, Cook, 3/28/96.  [Copy on  file].  It would allow                 
  AIDEA  to  perform bonding  for  projects under  $10 million                 
  dollars, which  would re-establish the conduit financing and                 
  bonds tied  to loan  participation programs.   All  projects                 
  over  $10   million  dollars   would  continue   to  require                 
  legislative authority.                                                       
                                                                               
  Representative  Brown  questioned  what "conduit  financing"                 
  was.  Mr. Simmons replied that conduit financing was another                 
  term for revenue  bond financing.  AIDEA's credit  would not                 
  be "on the line" but rather the sponsor's credit would be on                 
  the line.   A  floating bond  could not  be sold unless  the                 
  purchaser was assured  that there  was enough revenue  being                 
  generated from that project to pay for it.                                   
                                                                               
  Mr. Simmons explained that any  limit could occur on revenue                 
  financing, because the State's credit would  not be on line.                 
  For  those bonds less than $10  million dollars, AIDEA could                 
  go without authorization, although, their credit would be on                 
  the line.   All bonds  $10 million dollars or  less would be                 
  the same  and AIDEA's  credit would  be exposed.   In  those                 
  situations, the proposer  of the  project's credit would  be                 
  scrutinized  and  a  feasibility  study   of  the  projected                 
  revenues would be provided.                                                  
                                                                               
  KEITH WALKER, ASSISTANT ATTORNEY GENERAL - AIDEA, DEPARTMENT                 
                                                                               
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  OF LAW, clarified  that none  of the bonds  issued by  AIDEA                 
  affect the credit of the State;  they only affect the assets                 
  of AIDEA.  Representative Brown argued that  the State would                 
  have a moral obligation if there was default.                                
                                                                               
  Co-Chair Foster MOVED to adopt Amendment #1.  There being NO                 
  OBJECTION, it was adopted.                                                   
                                                                               
  Mr. Simmons remarked that the  second change assisting AIDEA                 
  in economic development would be  to the Business Assistance                 
  Program.  At this time, AIDEA  can guarantee up to 80% of  a                 
  bank originated loan  to an  Alaskan business, or  up to  $1                 
  million  dollars  under  the  Business  Assistance  Program.                 
  Maximum interest rate is  Prime plus 2 3/4% fully  floating.                 
  AIDEA  also   offers  a  streamlined  approval  process  for                 
  guarantees on  unsecured loans  of $75  thousand dollars  or                 
  less  aimed  at  assisting  entrepreneurs  in  rural  areas,                 
  although, available to all Alaskans.                                         
                                                                               
  He  noted  that program  is  not  often used.    The federal                 
  government's  Small  Business  Program  (SBA) has  been  the                 
  preferred program used  by most small business.   Provisions                 
  in the AIDEA  package are not  as "friendly" as the  federal                 
  package.   Last year,  the feds  changed the  way that  they                 
  administer  that program.    Consequently, the  program  has                 
  become   "too    expensive"   for   many    small   business                 
  entrepreneurs.     Alaskan  banks  have   approached  AIDEA,                 
  encouraging them to  change their Small Business  Assistance                 
  Program making  it "more useable"  for small business.   The                 
  two changes requested by the banks are:                                      
                                                                               
       1.   Changing  the  provision   which  allows                           
            AIDEA to guarantee that should a loan go                           
            into   default,   they  would   pay  the                           
            interest for a three month period;  that                           
            provision would mirror  the SBA  program                           
            which  allows  the  banks   a  specified                           
            period to liquidate the loan.                                      
                                                                               
       2.   Changing  the  majority  ownership rule,                           
            which  would help  keep the jobs  in the                           
            State.                                                             
                                                                               
  Representative  Brown questioned if  some percentage  of the                 
  business interest  should be  required holding  by Alaskans.                 
  Mr. Simmons advised  that the need was to "employ" Alaskans,                 
  as the provisions are now written.  The mission of AIDEA  is                 
  to increase economic development and  to foster job creation                 
  within Alaska.                                                               
                                                                               
  Mr.  Simmons continued, the  Business Assistance Program can                 
  make  loans  for  working capital  and  equipment  up to  $1                 
                                                                               
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  million dollars.  AIDEA stipulates  that collateral does not                 
  need to be provided for loans up to $100 thousand dollars if                 
  the borrowers credit history is good.                                        
                                                                               
  JAN SIEBERTS, (TESTIFIED VIA TELECONFERENCE), NATIONAL  BANK                 
  OF   ALASKA,   NATIONAL   BANKERS  ASSOCIATION,   ANCHORAGE,                 
  commented  that  NBA  supports HB  526.    He expressed  his                 
  frustration  in working  with  AIDEA  on  specific  projects                 
  because of bonding complications.                                            
                                                                               
  Mr.  Simmons   addressed  authorization  for   two  specific                 
  projects as indicated  in Sections #18  and #19.  The  first                 
  project  would  be a  facility  expansion -  DeLong Mountain                 
  Transportation System.   The  Alaska Industrial  Development                 
  and Export Authority received a request from Cominco Alaska,                 
  Inc.  (CAK)  to  increase  the  bond  authorization  for  an                 
  expansion  of  the  DeLong  Mountain  Transportation  System                 
  (DMTS) from $60 million dollars to $85 million dollars.  The                 
  request  resulted  from an  increased  authorization revised                 
  budget brought about  by a recently  completed re-evaluation                 
  of the ore  grade at that mine.   The scope  of construction                 
  has  been  defined  through   preliminary  engineering,  and                 
  sufficient monetary reserves have been established for AIDEA                 
  to feel comfortable that the  Project could be completed for                 
  the bond authorization requested.                                            
                                                                               
  Co-Chair Hanley pointed out that Amendment #2, 9-LS1549\C.2,                 
  Cook,  3/28/96, was written to  address that request.  [Copy                 
  on file].                                                                    
                                                                               
  Co-Chair Hanley asked  who would own  the facility after  it                 
  was built.  Mr. Simmons replied that the State would own the                 
  port facility and  Cominco Alaska, Inc. (CAK)  would own the                 
  facility at the  mine.  Terms  will be established with  CAK                 
  which will set  user fees to pay  for all the bonds  and for                 
  the reserves on the bonds.  He stressed that AIDEA will  not                 
  be at risk on the project.                                                   
                                                                               
  Representative  Therriault asked  what protection  the State                 
  would  have  if the  price of  ore  decreases.   Mr. Simmons                 
  advised that when the bonds are  issued, a bond debt reserve                 
  would be established to guarantee  that payment continues to                 
  be made; a letter of credit is also issued.                                  
                                                                               
  In response  to Representative Therriault's  query regarding                 
  the  product, Mr.  Walker explained  that the  ore  body was                 
  processed  in  such a  manner  to  produce a  zinc  and lead                 
  concentrate  and  then   both  products  are   shipped  out.                 
  Representative  Brown  asked  why  the  State needed  to  be                 
  involved.  Mr. Simmons replied that for the facilities owned                 
  by the State, the  benefit of AIDEA floating the  bond would                 
  provide  tax  exempt financing,  so that  the cost  would be                 
                                                                               
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  lower.   This  is a  State owned  facility.   Representative                 
  Kohring echoed Representative Brown's concern of the State's                 
  involvement in the project.  He  thought that it appeared as                 
  though the  State was intending to float  cheaper bonds than                 
  the private sector,  placing the  State in competition  with                 
  private industry.                                                            
                                                                               
  Mr. Simmons  replied that  financial institutions in  Alaska                 
  normally do not provide this size  funding long term.  AIDEA                 
  tries to fill  a capital gap; they never try to compete with                 
  the private sector.  He concluded that AIDEA has a very good                 
  relationship with the banks in Alaska and  is often partners                 
  with them in loan packages.                                                  
                                                                               
  Representative  Brown questioned  the risk  of  the project.                 
  Mr. Simmons discussed that the margin  is getting better and                 
  that the price  of zinc is increasing.  He  thought that the                 
  quality and volume of zinc from this mine would be superior.                 
  Mr. Walker added, CAK has an  excellent record in local hire                 
  provisions.    AIDEA closely  monitors  that concern  within                 
  business  projects  funded  through  them.    Representative                 
  Martin agreed that CAK has a very good local hire record.                    
                                                                               
  Mr. Simmons explained that AIDEA  accounts require two types                 
  of feasibility stipulations:                                                 
                                                                               
       1.   Contract  consultants  will determine  if the                      
            mining activities are feasible.                                    
                                                                               
       2.   Financial managers provide a  thorough credit                      
            history check, then  providing an opinion  on                      
            the   credit   worthiness,  as   required  by                      
            statute.                                                           
                                                                               
  (Tape Change, HFC 96-101, Side 2).                                           
                                                                               
  Representative  Brown questioned how  much of AIDEA's credit                 
  worthiness would be  at stake if  this project failed.   Mr.                 
  Simmons replied that today, AIDEA  with their restricted and                 
  unrestricted  assets,  is  close  to  a  $1  billion  dollar                 
  operation.    If this  project  totally collapsed,  it would                 
  definitely affect AIDEA, although, they would continue to be                 
  in business.   That type  of action would  cause the  rating                 
  agencies to more closely scrutinize AIDEA.                                   
                                                                               
  Representative  Therriault  MOVED  to  adopt  Amendment  #2.                 
  There being NO OBJECTION, it was adopted.                                    
                                                                               
  Mr. Simmons provided information on  the moral obligation of                 
  the State for  the purchase of the  Snettisham hydroelectric                 
  project.  He stated that there are market and policy related                 
  reasons for requesting  that the Snettisham bonds  be issued                 
                                                                               
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  as State moral obligation bonds rather than as AIDEA general                 
  obligation bonds.   Originally, it  was intended for  Alaska                 
  Electric Authority (AEA)  to purchase Snettisham.   When the                 
  assets  of  that   authority  were   split  apart  and   the                 
  stewardship was placed under AIDEA, it was agreed that AIDEA                 
  would assume the obligation.                                                 
                                                                               
  The  project would  amount  to $100  million  dollars.   The                 
  benefits would provide  rate stability for the users  of the                 
  area.  If  the State  does not buy  Snettisham, the  federal                 
  government would  look to divest  the power projects.   Most                 
  likely, it would be  sold to the private sector  which would                 
  cause  the  rates to  go  up  immediately.   AIDEA  will not                 
  operate the  facility.   They will  enter into  a long  term                 
  contract  with  the  Juneau  utility,  where they  agree  to                 
  purchase  all  the power  from  Snettisham.   Rates  will be                 
  established for paying back the bond, paying into repair and                 
  maintenance  funds, insurance  funds,  and making  sure that                 
  AIDEA's exposure is limited.                                                 
                                                                               
  Co-Chair  Hanley  asked  the purchase  price.    Mr. Simmons                 
  stated that to determine the purchase price, a formula based                 
  on interest rates is used to  actually float the bonds which                 
  establishes the actual purchase price.   The actual purchase                 
  price  right  now is  estimated to  be $80  million dollars.                 
  High enough bonds have to  be set up to service  reserves in                 
  order to pay off the bonds and to provide a float rate.                      
                                                                               
  Mr. Simmons continued, when bonding occurs, reserves have to                 
  be set up  immediately.  AIDEA  will bond for a  little more                 
  than  the  actual purchase  price  in  order to  set  up the                 
  reserves which is a requirement for selling the bond.                        
                                                                               
  Representative  Martin  asked  if it  would  be  possible to                 
  separate the two proposals.  Mr. Simmons replied that it was                 
  important to AIDEA that both projects be funded.  He pointed                 
  out that  Senator Stevens  and Senator  Murkowski have  been                 
  working  on  the  project  for  ten years.    Representative                 
  Grussendorf spoke in support of the Snettisham project.                      
                                                                               
  Co-Chair  Hanley  asked  why Juneau  was  not  providing the                 
  financing for  the purchase.   Mr. Simmons replied  that the                 
  utility here does not have the "where with all" of the three                 
  combined  utilities in Anchorage, pointing out  that it is a                 
  small,  privately owned utility.  Initially, the only way to                 
  get  federal government  legislation  passed in  matters  of                 
  hydroelectric  power,  was  that a  government  entity  or a                 
  utility coop owned by the people,  purchase the project.  He                 
  stressed that restriction exists in the bill.                                
                                                                               
  Representative Brown referenced the letter from AIDEA to Ms.                 
  Anne  Ringstad, Senate  State  Affairs  Committee, Staff  to                 
                                                                               
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  Senator Bert Sharp, discussing the "moral obligation" of the                 
  purchase.  Representative Brown asked if AIDEA was concerned                 
  with  investing  in  two large  projects,  thus  having that                 
  capability of  consuming the bulk of outstanding  debt.  Mr.                 
  Walker agreed  that there is  concern in having  over 2/3rds                 
  the outstanding bonds  tied up  with two projects,  pointing                 
  out  that  it will  create a  concentration that  the rating                 
  agencies  and  the  financial  institutions  would  look  at                 
  closely.                                                                     
                                                                               
  Co-Chair Hanley asked  if that  would influence the  State's                 
  capacity.   Mr. Simmons  thought it would  have some effect.                 
  The State only has so much  capacity.  Fortunately, with the                 
  Alaskan reserves,  the capacity  is expanded.   The  State's                 
  moral obligation will be "on line".  The use agreements with                 
  Alaska Electric  Light and  Power (AELP)  will protect  that                 
  concern  having  the  reserves established  and  the  credit                 
  enhancements.                                                                
                                                                               
  Co-Chair Hanley  inquired who  would have  the authority  to                 
  raise the rates.   Mr. Simmons explained  that determination                 
  would be handled through the negotiation process.  Through a                 
  risk analysis, AIDEA  will determine a reasonable  amount to                 
  be  set  aside   each  year  for  repair,   replacement  and                 
  operations.  AELP will be responsible  for any amounts which                 
  fall outside of those predetermined costs.                                   
                                                                               
  Representative Martin asked  if both  projects needed to  be                 
  contained in the  same legislation.   Mr. Simmons  responded                 
  that it was  important to have  both issues addressed in  HB                 
  526.    The  Legislature's  safety  net  is  that  these are                 
  development finance projects which will require all the same                 
  statutory  provisions  including  a feasibility  and  review                 
  study.  If  all concerns are  not adequately addressed,  the                 
  projects will not go through.                                                
                                                                               
  Co-Chair  Hanley  voiced  concern  with  the amount  of  the                 
  request.  He asked  if an economic study had  been provided.                 
  Mr. Simmons stated that AIDEA has only done preliminary work                 
  to  date.  Diesel  would be twice as  expensive for the rate                 
  payers, as would building a new hydro-project.  He concluded                 
  that determination of  the fair market value  of the project                 
  was formula driven.                                                          
                                                                               
  In  response to  Representative Grussendorf's  question, Mr.                 
  Simmons  explained  that the  life  expectancy of  a  dam is                 
  normally longer than time  used in the contract.   He added,                 
  consideration of  life expectancy  is  a maintenance  issue,                 
  although, most dams last well over fifty years.                              
                                                                               
  Representative  Brown questioned  how these  purchases would                 
  fit  with  the  State's  policy  to "get-out  of  the  hydro                 
                                                                               
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  business".  Mr.  Simmons stated that this project would need                 
  to be sold at fair market value, indicating that AIDEA would                 
  be happy to sell it to the local utilities.                                  
                                                                               
  (Tape Change, HFC 96-102, Side 1).                                           
                                                                               
  Co-Chair Hanley asked  if this  was the  only AIDEA  project                 
  where the  moral obligation had  been pledged.   Mr.  Walker                 
  stated that  it was the  only one pledged  since 1989.   Mr.                 
  Simmons advised  that currently, the total  AIDEA obligation                 
  was $115 million dollars, also bonds  for Red Dog total $103                 
  million  dollars,  and  $85 million  dollars  for  the Healy                 
  project.                                                                     
                                                                               
  Co-Chair  Foster  MOVED to  report CS  HB  526 (FIN)  out of                 
  Committee  with  individual  recommendations  and  with  the                 
  accompanying fiscal  note.  Representative  Martin suggested                 
  that the question be split.   Co-Chair Hanley stated that an                 
  amendment would need  to be written to address that concern.                 
  Mr. Simmons reminded the Committee  that the legislation has                 
  been  a  priority  to  both   Senator  Stevens  and  Senator                 
  Murkowski for the past ten years.  There being NO OBJECTION,                 
  it was so ordered.                                                           
                                                                               
  CS  HB  526 (FIN)  was reported  out  of Committee  with "no                 
  recommendations"  and  with  a  zero   fiscal  note  by  the                 
  Department  of  Commerce   and  Economic  Development  dated                 
  3/18/96.                                                                     

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