Legislature(2015 - 2016)HOUSE FINANCE 519

03/17/2015 01:30 PM House FINANCE

* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 140                                                                                                            
     "An Act authorizing the  Alaska Railroad Corporation to                                                                    
     issue  revenue  bonds  to   finance  a  positive  train                                                                    
     control   rail  transportation   safety  project   that                                                                    
     qualifies  for  federal  financial  participation;  and                                                                    
     providing for an effective date."                                                                                          
Co-Chair Thompson reviewed the meeting agenda and indicated                                                                     
he would not be moving either of the scheduled bills out of                                                                     
1:33:51 PM                                                                                                                    
JANE   PIERSON,  CHIEF   OF   STAFF,  REPRESENTATIVE   STEVE                                                                    
THOMPSON,  introduced  herself  and told  a  personal  story                                                                    
about  riding   on  the  Alaska  railroad   from  Seward  to                                                                    
Anchorage. She read the sponsor statement:                                                                                      
     HB 140  will authorize the Alaska  Railroad Corporation                                                                    
     (ARRC) to issue  up to $37 million  in tax-exempt bonds                                                                    
     backed by Federal  Transit Administration (FTA) formula                                                                    
     funds received annually by ARRC.  Bond proceeds will be                                                                    
     used to finance Positive  Train Control (PTC): a safety                                                                    
     program mandated by the  federal government without any                                                                    
     correlating funding,  which is  estimated to  cost ARRC                                                                    
     approximately $158 million.                                                                                                
     ARRC  proposes to  refinance  $66  million in  existing                                                                    
     bonds and extend  the repayment date in  order to issue                                                                    
     an additional $37  million in bonds to pay  for a major                                                                    
    portion of the remaining $55 million in PTC costs.                                                                          
     Under   AS.42.40.285  ARRC   is  required   to  receive                                                                    
     legislative approval  to issue bonds. In  no event will                                                                    
     the general  credit of the  State of Alaska or  ARRC be                                                                    
     pledged for the repayment  of these bonds. AS.42.40.500                                                                    
     requires that  all liabilities  incurred by  ARRC shall                                                                    
     be satisfied  "exclusively" from the assets  or revenue                                                                    
     of ARRC and not the State.                                                                                                 
     Debt payment for the bonds  will come from a portion of                                                                    
     Federal  Transit  Administration  (FTA)  formula  funds                                                                    
     which  are  statutorily  mandated by  Federal  law  and                                                                    
     received annually  by ARRC. Issuing debt  backed by FTA                                                                    
     formula funds is authorized  through FTA regulation and                                                                    
     has already been used by ARRC to issue bonds.                                                                              
     PTC  is technology  designed to  stop or  slow a  train                                                                    
     before  human-error causes  an  accident  to occur.  In                                                                    
     2008, the federal Rail  Safety Improvement Act required                                                                    
     certain  railroads to  install a  fully functional  PTC                                                                    
     system by the  end of 2015; by virtue  of its passenger                                                                    
     service,  ARRC  is  subject   to  this  requirement.  A                                                                    
     failure to  implement PTC will  force ARRC  to severely                                                                    
     curtail  or  eliminate  passenger service  and/or  face                                                                    
     severe fines for non-compliance.                                                                                           
     Estimates  for  this  large  research  and  development                                                                    
     project indicate  that it will cost  approximately $158                                                                    
     million  to implement.  Since 1997,  ARRC has  invested                                                                    
     $68.9  million to  develop a  PTC system.  In 2013  and                                                                    
     2014,  ARRC received  an additional  $19.1 million  and                                                                    
     $15 million  respectively from the  State of  Alaska to                                                                    
     continue  work  on  PTC.  Between  2016  and  2018,  an                                                                    
     additional  $55 million  will be  required for  ARRC to                                                                    
     complete  the development  and installation  of PTC  by                                                                    
     2018.  This figure  does not  include the  estimated $5                                                                    
     million  to  $7  million  per  year  of  operating  and                                                                    
     capital maintenance  costs related  to the  system that                                                                    
     ARRC will fund after PTC is installed.                                                                                     
She added that the bond  issuance would leave the additional                                                                    
$18  million  to  complete  the   project  for  the  funding                                                                    
package. She  noted that if  ARRC did  not show that  it was                                                                    
making  a good-faith  effort to  implement PTC,  the Federal                                                                    
Railroad  Administration could  implement fines  up to  $100                                                                    
thousand  per day.  She concluded  her  introduction of  the                                                                    
bill and  mentioned that Bill O'Leary,  ARRC's President and                                                                    
Chief  Executive  Officer,  and Linda  Leary,  ARRC's  Board                                                                    
Chair  were in  the  audience available  for questions.  She                                                                    
also indicated Barbara Amy,  ARRC's Chief Financial Officer,                                                                    
was online and available for questions.                                                                                         
1:38:37 PM                                                                                                                    
Co-Chair   Thompson  relayed   that   Co-Chair  Neuman   and                                                                    
Representative Gattis  had joined  the meeting and  asked if                                                                    
any committee members had questions.                                                                                            
Vice-Chair Saddler wondered  if anyone had any  ideas on how                                                                    
to increase revenue to pay  for the additional $5 million to                                                                    
$7 million per  year for the operational expense  of the PTC                                                                    
WILLIAM  G.  O'LEARY,  PRESIDENT AND  CEO,  ALASKA  RAILROAD                                                                    
CORPORATION,  responded that  the $5  million to  $7 million                                                                    
would  be the  ongoing  costs to  maintain  the system  once                                                                    
installed.  He anticipated  taking  the maintenance  funding                                                                    
from  the  railroad's  operating and  capital  budgets.  The                                                                    
railroad had been in a series  of flux with the drops in key                                                                    
revenue streams  including federal  monies. He  thought that                                                                    
funding would be a challenge starting in 2019.                                                                                  
Co-Chair  Thompson asked  about how  much gross  revenue the                                                                    
state received from passenger service.                                                                                          
Mr.  O'Leary estimated  that the  annual  gross revenue  for                                                                    
passenger services  was between $26 million  to $27 million.                                                                    
He reported  that passenger activity  had grown  over recent                                                                    
Vice-Chair Saddler asked Mr. O'Leary  if the cost of the PTC                                                                    
was paid  for through passenger fees.  Mr. O'Leary responded                                                                    
in the negative.  He signified that ARRC  would be exploring                                                                    
different revenue  options. He opined that  the railroad was                                                                    
operating  in a  competitive market  place and  raising fees                                                                    
could  lead to  more competition.  He assured  the committee                                                                    
that ARRC would be reevaluating its entire fee structure.                                                                       
1:41:44 PM                                                                                                                    
Representative  Gara  commented  that  over  the  years  the                                                                    
railroad had not made a  consistent net revenue. He wondered                                                                    
about the railroad's net revenue  in real estate operations,                                                                    
for  example,  over the  previous  five  years. Mr.  O'Leary                                                                    
responded that the  revenue bonds would not be  a credit for                                                                    
ARRC. He  continued that the only  supporting revenue stream                                                                    
for the  bonds would  be the Federal  Transit Administration                                                                    
(FTA) formula  monies, federal monies the  railroad received                                                                    
annually. He relayed  that over the previous  ten years ARRC                                                                    
had received between $29 million  to $36 million per year in                                                                    
FTA  funds. The  funds came  as  a result  of ARRC  offering                                                                    
year-round  scheduled  passenger  service.  The  corporation                                                                    
itself had a  net income of $11 million to  $14 million over                                                                    
the previous five years.                                                                                                        
Representative   Gara  asked   if  Mr.   O'Leary  had   full                                                                    
confidence  that the  railroad would  be able  to repay  the                                                                    
revenue bonds.                                                                                                                  
Mr. O'Leary responded that since  the credit of the railroad                                                                    
would not  be supporting  the bonds,  the only  revenue that                                                                    
would  be applied  were FTA  monies. He  furthered that  FTA                                                                    
funds were  up for  reauthorization in  congress as  part of                                                                    
the  national transportation  reauthorization. He  explained                                                                    
that  the funding  that ARRC  received was  part of  formula                                                                    
monies that  supported many other passenger  train lines all                                                                    
over the country.  He expressed his confidence  in the funds                                                                    
continuing  into the  future. Otherwise,  he surmised  there                                                                    
would be too great an impact on the populous of the states.                                                                     
Representative Gara commented that  the bill seemed fine. He                                                                    
expressed concern that  the railroad would come  back to the                                                                    
state for  funds to  pay for  the bonds  in the  future. For                                                                    
example, if ARRC  received $30 million in  federal funds but                                                                    
began to  lose more  than that as  a railroad  operation, he                                                                    
wondered  if ARRC  would come  to the  state for  additional                                                                    
funds. He wanted  to know whether Mr.  O'Leary was confident                                                                    
that ARRC  had enough  internal revenue  to avoid  coming to                                                                    
the state for help with the bond repayment.                                                                                     
Mr.  O'Leary responded,  "Yes." He  explained that  the bond                                                                    
indenture  was  written such  that  the  bond holders'  debt                                                                    
service payments were made before  the federal revenue could                                                                    
be used for any other purpose.                                                                                                  
Representative  Gara suggested  that  ARRC  had been  making                                                                    
approximately $11 million to $14  million in net revenue. He                                                                    
wondered if it included the  $29 million to $36 million from                                                                    
the  federal government.  Otherwise,  he  surmised ARRC  was                                                                    
losing money.                                                                                                                   
Mr.  O'Leary  responded  positively  that  the  net  revenue                                                                    
included the  federal funds. However,  the monies  that came                                                                    
in did  not flow into  net income.  The funds were  used for                                                                    
capital  activities. He  continued that  the FTA  funds were                                                                    
used   for  debt   service  first   and  then   for  capital                                                                    
1:46:17 PM                                                                                                                    
Representative  Gara wanted  to confirm  that ARRC  would be                                                                    
revenue positive even without FTA  funding. He asked that if                                                                    
ARRC was  using the FTA  money for capital expenses  and the                                                                    
funds  were now  pledged to  pay for  the revenue  bond, was                                                                    
there any foreseeable circumstance  in which ARRC would have                                                                    
to come  to the state  for additional money. He  wondered if                                                                    
ARRC would always have a positive net revenue.                                                                                  
Mr.  O'Leary  stated  that  in   his  view  there  would  be                                                                    
sufficient revenue and that ARRC  would not be coming to the                                                                    
state for any kind of operating subsidy.                                                                                        
Representative Wilson  asked about funding for  the previous                                                                    
two years.                                                                                                                      
Mr. O'Leary  responded that in  the past two years  ARRC had                                                                    
received  state  general  fund   (GF)  monies  totaling  $34                                                                    
million.  Prior  to  that, since  1997,  AARC  used  federal                                                                    
monies including  ear marks and  formula funds,  and revenue                                                                    
generated from internal railroad operations.                                                                                    
Representative Wilson asked  why ARRC was not  asking for GF                                                                    
Mr. O'Leary  replied that  ARRC started  out looking  for GF                                                                    
monies,  but was  quickly disabused  of  the notion.  Alaska                                                                    
Railroad  Corporation (ARRC)  was challenged  by members  of                                                                    
the  [Finance] committee  to think  creatively about  how to                                                                    
move the project forward without $55 million in GF funding.                                                                     
Representative Wilson thanked Mr. O'Leary for his efforts.                                                                      
Vice-Chair Saddler asked if other  states had used their FTA                                                                    
revenue  stream to  pay  for PTC.  He  wondered if  Alaska's                                                                    
approach had been used previously.                                                                                              
Mr. O'Leary  confirmed that  the approach  had been  used in                                                                    
other states. He  furthered that ARRC had  used the approach                                                                    
in 2006 when the railroad issued its first bonds.                                                                               
Vice-Chair Saddler asked how it  had worked for the state in                                                                    
the past and for other railroads.                                                                                               
Mr. O'Leary  believed that it  had worked well for  ARRC and                                                                    
for other  railroads to leverage  FTA funds. The  funds were                                                                    
consistent, coming  from FTA,  and provided  the opportunity                                                                    
to  finish projects  that would  have  otherwise taken  much                                                                    
longer to complete.                                                                                                             
Vice-Chair Saddler  asked about the federal  funding stream.                                                                    
He wondered if it stemmed from  a freight surcharge or if it                                                                    
was a full faith in  credit with the federal government. Mr.                                                                    
O'Leary relayed that  the monies came from  the mass transit                                                                    
account in the highway trust fund.                                                                                              
Vice-Chair  Saddler asked  how  the highway  trust fund  was                                                                    
fueled. Mr.  O'Leary responded that  the fund  was augmented                                                                    
by a federal gas tax.                                                                                                           
Representative   Kawasaki   suggested   that   in   previous                                                                    
committee  meetings with  Department  of Transportation  and                                                                    
Public Facilities  it was reported that  the federal highway                                                                    
trust  fund was  shrinking. He  wondered how  ARRC would  be                                                                    
Mr. O'Leary  indicated that  there was  risk in  the federal                                                                    
reauthorization concerning how the  highway trust fund would                                                                    
be  funded  and  at  what   levels.  However,  congress  was                                                                    
investigating different  approaches alternate to a  flat gas                                                                    
tax. He  noted the possibility of  a mileage-based approach.                                                                    
Alaska Railroad  Corporation believed the outflows  from the                                                                    
federal government would continue in a similar form.                                                                            
Co-Chair Thompson signified that  his understanding was that                                                                    
the  bond holders  were aware  of  the risk  of FTA  dollars                                                                    
going away.                                                                                                                     
Mr. O'Leary responded affirmatively.  He reported that there                                                                    
were very  explicit disclosures on all  of the bond-offering                                                                    
documents that showed  there was no pledge of  full faith in                                                                    
credit  of the  state,  nor  of ARRC,  but  rather the  only                                                                    
security  for the  bonds  was the  formula  money that  ARRC                                                                    
received from FTA.                                                                                                              
1:51:00 PM                                                                                                                    
Co-Chair Thompson asked if the  timing was critical for ARRC                                                                    
to secure the bonds in the current year.                                                                                        
Mr.  O'Leary   responded  that  the  timing   was  extremely                                                                    
critical. The  railroad was  not quite  living hand-to-mouth                                                                    
on the  project but explained  that ARRC would need  to have                                                                    
an infusion of cash by June 2015 or July 2015.                                                                                  
Vice-Chair   Saddler   wonder   about  the   interest   rate                                                                    
associated  with the  bonds. Mr.  O'Leary reported  that the                                                                    
modeling ARRC was  doing with a financial  advisor was based                                                                    
on an interest rate below 2.5 percent.                                                                                          
Co-Chair Thompson commented that if  the state waited a year                                                                    
the interest rate  could jump to 5 percent or  7 percent. He                                                                    
added that an interest rate of 2.5 percent was a good rate.                                                                     
Vice-Chair Saddler  asked about what would  happened if ARRC                                                                    
did  not  receive  authority from  the  legislature  in  the                                                                    
current year.                                                                                                                   
Mr.  O'Leary  stated  that ARRC  would  have  a  significant                                                                    
problem. He elaborated  that the railroad would  not be able                                                                    
to  enter into  any  further contracts  or spend  additional                                                                    
funds  which  would  result  in  the  project  coming  to  a                                                                    
complete  halt. Alaska  Railroad  Corporation  would not  be                                                                    
acting in  good faith  in the eyes  of the  Federal Railroad                                                                    
Administration, the railroad  regulator. The consequences of                                                                    
not implementing  PTC within  the designated  timeline could                                                                    
lead to fines of up to  $100 thousand per day and eventually                                                                    
the inability  to provide passenger  service. He  noted that                                                                    
not  only would  ARRC lose  $26  million to  $27 million  in                                                                    
gross revenues  for passenger service, ARRC  would no longer                                                                    
be eligible  to receive FTA  funding. There would be  a very                                                                    
different model  for ARRC going  forward. He referred  to it                                                                    
as a, "death spiral."                                                                                                           
Vice-Chair Saddler followed up by  asking if it was possible                                                                    
that  the   Federal  Railroad  Administration   would  issue                                                                    
waivers for the PTC requirement.                                                                                                
Mr. O'Leary  responded in the  negative. He relayed  that he                                                                    
had recently been in Washington  D.C. the prior week to meet                                                                    
with  Alaska's  congressional  delegation and  with  federal                                                                    
regulators. He  cited that the  consistent message  from all                                                                    
parties was  that there was  no way for  ARRC to get  out of                                                                    
meeting the PTC requirement.                                                                                                    
HB  140  was  HEARD  and   HELD  in  committee  for  further                                                                    
Co-Chair  Thompson  relayed  a   personal  story  about  Mr.                                                                    
O'Leary's mom.                                                                                                                  
Representative  Gara interjected  that  he  knew that  Linda                                                                    
Leary was a good fisherman.                                                                                                     
LINDA  LEARY,  BOARD  CHAIR,   BOARD  OF  DIRECTORS,  ALASKA                                                                    
RAILROAD CORPORATION,  thanked the committee for  hearing HB
140 and admitted to loving to fish.                                                                                             
Co-Chair  Thompson   acknowledged  Sharon  Kelly   from  the                                                                    
Speaker's  office  and  wished  her  a  happy  birthday.  He                                                                    
followed by bringing up the next agenda item, HB 30.                                                                            
1:56:12 PM                                                                                                                    

Document Name Date/Time Subjects
HB 30 AK Ed Stand History.pdf HFIN 3/17/2015 1:30:00 PM
HB 30
HB 30 AK Ed Standards (no print).pdf HFIN 3/17/2015 1:30:00 PM
HB 30
HB 30 AML ltr.pdf HFIN 3/17/2015 1:30:00 PM
HB 30
HB 30 Civics Board Timeline.pdf HFIN 3/17/2015 1:30:00 PM
HB 30
HB 30 Civic's Dunces.pdf HFIN 3/17/2015 1:30:00 PM
HB 30
HB 30 Constitutionalism.pdf HFIN 3/17/2015 1:30:00 PM
HB 30
HB 30 H Fin hear request.pdf HFIN 3/17/2015 1:30:00 PM
HB 30
HB 30 Keefer eltr.pdf HFIN 3/17/2015 1:30:00 PM
HB 30
HB 30 Thompson comments.pdf HFIN 3/17/2015 1:30:00 PM
HB 30
HB 30 US Senate S 504 summary and co spons.pdf HFIN 3/17/2015 1:30:00 PM
HB 30
HB 140 - Sponsor Statement.pdf HFIN 3/17/2015 1:30:00 PM
STRA 4/7/2015 1:00:00 PM
HB 140
HB 140 FN - AK Railroad.pdf HFIN 3/17/2015 1:30:00 PM
HB 140
HB 140 Supporting Document - 2015 PTC Two Pager.pdf HFIN 3/17/2015 1:30:00 PM
STRA 4/7/2015 1:00:00 PM
HB 140
CSHB 30 Sponsor.pdf HFIN 3/17/2015 1:30:00 PM
HB 30
CSHB 30 Sectional.pdf HFIN 3/17/2015 1:30:00 PM
HB 30
HB 30 Support.pdf HFIN 3/17/2015 1:30:00 PM
HB 30