Legislature(1995 - 1996)
03/29/1996 01:50 PM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
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 2 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 3 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 4 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 5 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 6 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 7 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 8 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.