Legislature(1995 - 1996)
04/27/1995 02:05 PM HES
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 281 - AHFC TRANSFERS TO GENERAL FUND; BONDS HB 282 - FINANCING REPAIR/REHAB OF UA BUILDINGS CO-CHAIR BUNDE announced that since many of the bills being heard today were being heard for the first time, if it appears to be in the best interest of the committee, the bills will be held until a HESS Committee meeting on Tuesday, May 2, 1995. Number 1024 WENDY REDMAN, Vice President, Statewide University System, University of Alaska, said HB 281 and HB 282 are bills introduced by the Governor to begin to try and deal with the University of Alaska's deferred maintenance problem. HESS Committee members are well aware of the problem the university is facing in this area. Deferred maintenance is a problem that faces the entire state of Alaska. However, the university just happens to be the "biggest player." MS. REDMAN said about 50 percent of all state facilities are University of Alaska facilities. Over 80 percent of all the state facilities over 40 years old belong to the university. The university is therefore a very large part of the state's problem. The university currently has a backlog of deferred maintenance close to $157 million. MS. REDMAN asked to clarify a misperception that somehow this deferred maintenance problem has been created through gross mismanagement on the part of the university. Although there may have been mismanagement at the university over the last few decades in one area or another, this problem was clearly not created through taking money from maintenance and moving it to other problems. Number 1100 MS. REDMAN stated that in 1986, the university had a 20 percent reduction, a mid-year "recision" of 12 percent in August of that year, and the university took $1 million from maintenance at the Fairbanks campus to keep the semester going. That $1 million was then replaced the next year. MS. REDMAN said since that time the Board of Regents have mandated a program. The university has about a $12 million in underfunding for the operating maintenance budgets throughout the system. Because there has never been a formula created over the years, the board mandated all of those funds be reallocated from existing resources to bring the maintenance budgets back up over the next three years. MS. REDMAN said the university knows it cannot depend on new state money to do that, it must be done internally. The Board of Regents is absolutely committed to getting the deferred maintenance backlog fixed, and assuring the university will never get into that situation again. If that means, which it does, that the university is going to have to reallocate money by shrinking programs and campuses, then that is what it will do. That is what the university is doing over the course of the next three years to bring the budgets back up to par. Number 1174 MS. REDMAN stated the problem has been complicated for the legislature as well. Ms. Redman said this is her 18th session of working with the legislature. She noted that it is "not much fun" to appropriate money to buy paint and fix things. It is much more fun to build new buildings. Even though the university has not been building many new buildings over the last decade, it has been almost impossible to get money to fix old buildings. MS. REDMAN continued that the Governor has come up with a plan to begin addressing these problems. The plan relies on the use of the Alaska Housing Finance Corporation (AHFC). HB 281 appropriates $30 million to deal with the student housing deferred maintenance. The university has approximately $30 million worth of problems in university housing at the present time. It is within the purview of the AHFC to deal with the housing issue, and HB 281 would authorize the issuance of bonds to begin the repair and rehabilitation of those facilities. MS. REDMAN noted that everyone would prefer cash. However, it does not appear that cash is available this year or in the future. This bill therefore provides the university with an option that is probably the best one at this point to solve the problem. Number 1247 MS. REDMAN said the second bill, HB 282, goes together with HB 281. HB 282 has a delayed effective date because Governor Knowles is still trying to figure out how to get cash in the future. HB 282 says that if neither the Governor nor the legislature can come up with at least $20 million for the university for next year, the university would then authorize the AHFC, with a delayed effective date, to again let $45 million worth of deferred maintenance bonds with an effective date of July 1, 1996. MS. REDMAN said the Governor feels that would give him time. He is planning to work during the interim with a group of people to try and figure out a long-term plan for the deferred maintenance with a cash approach. That is always the university's first priority. In case that does not happen, the university needs to have a plan so it can begin laying out a bid plan to get these projects under way. The university is facing some crucial health and safety issues at this point. MS. REDMAN warned that soon, some buildings will have to be closed down, particularly on the Fairbanks campus. That is the oldest campus. However, the Anchorage campus also has a total of $35 million worth of deferred maintenance accrued on that campus alone. As HESS Committee members know from their own homes, when a problem is not taken care of, it accelerates very quickly. Therefore, within a couple of years, the newer Anchorage campus will be in as bad shape as the Fairbanks campus. MS. REDMAN concluded by saying that it is essential that these problems be addressed. These bills are the best way to approach those problems at this point in time, and the university asked the support of the HESS Committee members. Number 1340 CO-CHAIR BUNDE stipulated that although there may not have been gross mismanagement at the university, there may have been mismanagement. REPRESENTATIVE NORMAN ROKEBERG took exception, he felt that the mismanagement was gross mismanagement. He asked to summarize the two bills. He understood that HB 281 is a request for $30 million and the authority to use the AHFC for maintenance of existing residential housing. He asked if this has anything to do with the new housing for Anchorage, Ketchikan and Juneau campuses as provided for in HB 309 and HCR 18; he also asked how much money the university asked for in that legislation. MS. REDMAN answered that Representative Rokeberg was correct, the two are separate issues. HB 309 and HCR 18 would provide the university with about $30 million for new housing. REPRESENTATIVE ROKEBERG asked if that $30 million was also from AHFC, and Ms. Redman answered "yes." Number 1444 REPRESENTATIVE ROKEBERG noted that HB 281 asks for $30 million, and HB 282 asks for $45 million. Therefore, Ms. Redman was asking for $75 million. Representative Rokeberg realized there was a "tripwire" in HB 282, which made it contingent upon whether the Governor could come up with $20 million. He asked if the university knew what the money would be spent on. MS. REDMAN said the university has a detailed list of deferred maintenance needs. The "tripwire" is that if next year the Governor comes up with $20 million in cash, HB 282 would not go into effect. The bill has a delayed effective date of one year from the coming July. REPRESENTATIVE ROKEBERG asked for testimony from the AHFC. He asked about the budget for the university over the last ten years, such as in 1986, the year of the real estate and oil crash in Alaska. He also asked what percentage of the university budget has been allocated to repair and conduct operational maintenance. He specified he was referring to the maintenance portion of the physical plant. MS. REDMAN said she did not have that information handy, although she could get that information for Representative Rokeberg and would do so presently. She said it is based on a formula approach, which is a nationally recognized formula for what is done for maintenance. Number 1476 REPRESENTATIVE ROKEBERG asked if the university has been spending according to that formula over the last ten years. MS. REDMAN answered that the university has not been spending that amount over the last decade. The university is bringing its budget up to that level. The general fund of the university for the current year, 1996, is exactly the same as it was in 1986. REPRESENTATIVE ROKEBERG asked if the problem with spending money on maintenance is that the legislature has not given the university enough money. MS. REDMAN answered that was part of the problem. The university certainly could have made choices during the last decade as enrollment has gone up about 35 percent. The university could have made choices to not serve students, but that choice was not made. That perhaps is where the "mismanagement" of funds that Co-Chair Bunde spoke of occurred. The university has been trying to respond to enormous growth and need with a budget that has not kept up with that need. Number 1525 REPRESENTATIVE ROKEBERG felt it was unfortunate that the university built new structures while not looking after the existing physical plant as well as it could have. Representative Rokeberg understood that there were needs for new buildings. But it is unfortunate because state buildings other than those of the university have not been properly maintained. That is a serious situation. Number 1557 REPRESENTATIVE ROBINSON asked if it was not also true that many new facilities have been built to bring the university into compliance so other federal dollars could be gained. MS. REDMAN said in fact, the university has only built two new facilities in the recent past. Fairbanks has a new natural sciences facility, which is the first new facility on that campus in 20 years. The Anchorage campus has a new business building, built about four years ago, which is their first new building in about 12 years. The university has not been building new buildings. Ms. Redman noted that the library on the Juneau campus was the last facility built. CO-CHAIR BUNDE said the buildings have received blame for being where all the money went, however, money has been spent on programs on which reasonable people can disagree as to whether the money was well spent. Number 1603 REPRESENTATIVE GARY DAVIS assumed the university has a list of what needs to be done first, second, etc. MS. REDMAN said the university has a detailed list on file with the Office of Management and Budget. Ms. Redman offered to provide it to HESS Committee members. CO-CHAIR TOOHEY agreed that the university has probably taken in more students than it has room for. She asked if the university was going to begin levelling off enrollment and accept the fact that it can no longer keep expanding enrollment. She asked if the university was ever going to catch up to its enrollment. MS. REDMAN said that the university has hit that point, particularly in Anchorage. The Anchorage campus has simply topped out, and it topped out in the fall semester of 1994. Without additional operating funds for faculty, the university simply cannot take anymore students. Four hundred classes close out at the Anchorage campus each semester within the first day of registration. The university is overbooked. MS. REDMAN said that is a sad situation to be in, and the university must tell Alaskan residents, "Sorry, there just is no room for you." Number 1669 CO-CHAIR TOOHEY did not feel that was a sad situation. Every university has a capacity, and the university has been ignoring that capacity. The buildings are going to crumble and the university is going to close. Then the university will be spread out with little campuses here and there. The university must cut back, and begin looking at using grade schools and facilities that are already built. MS. REDMAN said the Anchorage campus uses every available classroom in the city of Anchorage. Every night, except Friday night, the university is using over 150 classrooms in schools. The university uses many classrooms. All of the community colleges use community facilities. CO-CHAIR BUNDE said the one step that has not been made is weekend classes. There are some weekend classes, but not many. A choice has to be made between no classes and weekend classes. MS. REDMAN said Co-Chair Bunde will be pleased to hear that the Anchorage campus is now moving to a Monday-Wednesday-Friday sequence. Chancellor Gorsuch is also investigating the Tuesday- Thursday-Saturday model. For some programs, that will work. However, some students just simply do not show up. MS. REDMAN also noted that the Anchorage campus is the only one that has not scheduled Friday classes. Number 1772 BILL HOWE, Deputy Commissioner, Treasury Division, Department of Revenue, noted that HB 281 references a plan to be worked out by the commissioner of revenue and the AHFC for an orderly transfer of excess capital at the AHFC to the general fund. This morning, the AHFC board met and adopted the plan that Mr. Howe distributed to HESS Committee members. MR. HOWE discussed the plan in an attempt to tie it to HB 281. He said page 2, lines 9 through 13 of HB 281 references the transfer agreement, which is now before the HESS Committee members. The agreement is supported by a financial schedule, in which Mr. Howe highlighted some key numbers that will put his remarks in context. The number he highlighted in the upper left-hand column shows that at the end of the 1995 fiscal year (FY 95), AHFC will have about $615 million in unrestricted cash on its books. MR. HOWE said the Governor's plan that has been adopted by the AHFC board is to transfer $270 million over the next five fiscal years to the general fund. Beginning in FY 96, $70 million will be transferred, with $50 million being transferred in each of the following four years. In addition to that, the AHFC will maintain its capital projects and grants at the $50 million level through this whole period of time. MR. HOWE added that of course, the capital budget is submitted to the legislature for review. There is no assumption that all $50 million will be granted. There may be some play between the unfunded in the capital grant line and what would be transferred to the general fund. MR. HOWE explained that HB 281 says that the AHFC has $1 million a year available for spending. The recommendation from the AHFC board which the HESS Committee members were just given states that after this year, $50 million of that will be transferred every year to the general fund. The balance will be used to fund housing- related capital projects such as new public housing. MR. HOWE said those capital projects will be submitted to the legislature for review. Most importantly, this schedule was reviewed by the bond rating agencies in New York. Those agencies have issued a press release saying if this bill and this program is adopted, even though it means taking (in one form or another) $100 million out of AHFC every year, the credit rating agencies will take the AHFC off its current credit watch status and will re- establish it with an "A plus" bond rating. MR. HOWE mentioned that because there are competing proposals. Some are from the university and some are from other places on how to use the AHFC cash. When SB 40 was introduced, it called for a withdrawal of $350 million in cash over the next two years, and no commitments whatsoever as to how much would be taken out in future years. The immediate result of that was the bond rating agencies put the AHFC on the credit watch list with a negative rating. MR. HOWE said if the legislature continues with proposals like SB 40, the AHFC bonds will be junk bonds. They will not be worth the rating. This is why it is so significant that the current plan was approved by the rating agencies. Number 1993 MR. HOWE was asked while giving testimony previously if this $100 million a year is some kind of magic number. He was also asked if more could be retrieved from the AHFC and still maintain the current rating. In the judgement of Mr. Howe, the reason the rating agencies agree to HB 281 is because it is equivalent to what the AHFC earns each year. Therefore, as long as the AHFC basically does not cut into the capital base that essentially secured the outstanding bonds, the credit agencies will go along with this program. Number 2030 MR. HOWE said part B of the bill is about issuing the $30 million in bonds and basically giving that money to the university to rehabilitate the student housing primarily at the Fairbanks campus, where most of the residential housing is. The AHFC will issue and service the bonds, and will basically be part of the university's capital budget. The AHFC will be subsidizing the university in that regard. MR. HOWE said when HB 309, which had to do with new student housing, was discussed in the HESS Committee, the amount asked for was $36.5 million. The AHFC would issue $36.5 million of new bonds and subsidize the interest rate. That would be in addition to the amount of money asked for in HB 281. Mr. Howe reiterated that all bills dealing with the AHFC in some manner must be looked at together and within the context of the overall program. MR. HOWE said HB 281 is the Governor's and the Commissioner of Revenue's overall program for the AHFC for an orderly transfer of assets that will maintain itself as a business entity. Number 2089 CO-CHAIR TOOHEY asked if she could summarize what Mr. Howe just said for the information of the committee. The $270 million is to do deferred maintenance, etc., in Fairbanks, and again Anchorage is being thrown to the wolves. MR. HOWE disagreed. He said the $270 million goes to the general fund, and is appropriated as the legislature sees fit. Part B of the bill says that the AHFC will issue $30 million in bonds. If this program is approved, the AHFC will still have a bond rating, and will again be able to issue A plus bonds at attractive rates, raise the $30 million, and have that $30 million to use in the Governor's highest priority program. That is to rehabilitate existing buildings that are not usable. MR. HOWE said that is the Governor's program as encompassed in HB 281. The Anchorage housing program is a separate issue. HB 309 stated that the AHFC would raise $36.5 million of additional bonds. The bond proceeds would be utilized by the university to build new student housing, as opposed to rehabilitating old housing, in Anchorage, Juneau and Ketchikan. The only further involvement that AHFC would have, in addition to raising the bonds, would be to subsidize the interest rate by a factor of about 3 percent a year. Three percent a year on $36 million in bonds is approximately a million a year. That would be a continuing subsidy on the part of the AHFC. Number 2177 REPRESENTATIVE ROKEBERG asked if the Governor has another bill before the body to implement the transfer agreement as found in Section 2 of HB 281. MR. HOWE answered that HB 281 is the only bill that the Governor has introduced in this area. REPRESENTATIVE ROKEBERG asked if Mr. Howe knew why the Governor chose to tie the bond authorization with the transfer act. CO-CHAIR BUNDE noted that companion bills have been introduced into the Senate. Senate bills 143 and 144 are the same as Hbs 281 and 282. Those bills are currently in Senate Finance. REPRESENTATIVE ROKEBERG concluded that there is not another bill that accomplishes the Alaska Housing transfer of the $270 million to the general fund. HB 281 is the only bill. CO-CHAIR BUNDE corrected him by saying that SB 143 is a companion bill, similar to HB 281. REPRESENTATIVE ROKEBERG said the reason he asked is because there are two different things going on in HB 281. Money is transferred from the equity of the AHFC to the state general fund; and there is also authorization for the AHFC to pay for and service a debt of an additional new bond issue. Those two elements are not even related. CO-CHAIR BUNDE suggested that the elements are related because they both aim to take money from the AHFC. REPRESENTATIVE ROKEBERG agreed. He said it is clear in HB 281 that the entire debt service of both the principal and interest of the $30 million is going to be paid for by the AHFC. Mr. Howe also mentioned that, regarding the $270 million transfer, that the bond rating would not be severely impacted because this was the perceived net profits throw-off of the AHFC on an annual basis. But there is another situation in which the annual debt service is about $1.8 million on this particular bond issue. This will be an additional drain on the equity and the balance sheet of the AHFC. That is in addition to anything else that may come around. MR. HOWE responded that the additional debt service, both principal and interest over a 20-year period of time, related to the $30 million worth of bonds for rehab housing is included in the capital expenditure line on the schedule passed out to HESS Committee members. The additional debt service is part of the $50 million. In fact, that is the reason the AHFC moved from $50 million a period to $53,974,000. The $3,974,000 represents the debt service on the bonds that HESS Committee members are discussing. MR. HOWE noted that he was referring to the handout and had highlighted the numbers under the Family Housing Programs. That would be considered as student housing within the concept. To the degree that all these other bills that come before the HESS Committee utilize AHFC's cash assets or debt service ability, the $53 million is being counted against. REPRESENTATIVE ROKEBERG asked to clarify. He used FY 97 as an example. Under the Family Housing Program line item, as seen in the handout, the amount is $53,974,000. He asked if that amount was in addition to the $50 million, or if that was the totality of all the housing programs and debt service. Number 2344 MR. HOWE said that was the totality of the grants. TAPE 95-43, SIDE B Number 000 MR. HOWE continued that for the 1996 capital budget, the capital request is approximately $50 million, of which $20 million is used for federal matching. Whether or not the legislature fully appropriates or allows the AHFC to use corporate receipts for that purpose is problematic at this point. Therefore, to answer Representative Rokeberg's question about where does the university housing funding come from, that is part of the $53 million on the handout schedule. MR. HOWE continued that to the degree that these amounts are appropriated by the legislature means that there is less money for other programs. REPRESENTATIVE ROKEBERG said therefore, the $50 million, using FY 97 as an example, goes into the general fund unencumbered. Then $53 million is for other programs. He asked if the programs were new programs brought forward by the Governor. He asked what makes up the $53 million. Number 094 MR. HOWE answered that approximately $20 million of the $50 million are state matching funds for federal loans such as Housing and Urban Development (HUD) programs through regional housing authorities. There is another $20 million related to the old Alaska State Housing Authority (ASHA) activities that the AHFC two years ago was asked to absorb. There are a number of projects in that area that need to be totally renovated. MR. HOWE said old age housing is also an element, taking another $20 million. The balance is comprised of various programs that are heavily supported by the Alaska Builders' Association. There are credits applied for weatherization that assist people in both urban and rural areas to improve heat efficiencies in that program. MR. HOWE said that each of those programs each year is reviewed by the legislature and either adopted or not. Number 207 REPRESENTATIVE ROKEBERG said he was not trying to hold up the discussion, he was just trying to clarify exactly what the bill was going to do. The various programs just described by Mr. Howe, along with any new legislation that may be adopted is covered under this line item, which is a cost on an annualized basis to the AHFC. Therefore, it has an impact on the AHFC balance sheet and profitability. REPRESENTATIVE ROKEBERG referred again to the example of FY 97. He asked if the cash flow requirement for the one $30 million bond issue, which is approximately $1.8 million, is in the line item. MR. HOWE answered yes. REPRESENTATIVE ROKEBERG asked if Mr. Howe was aware of any other requests of the AHFC this year of which perhaps the HESS Committee members are not aware. Number 240 MR. HOWE said his understanding of the current state of the capital budget of the AHFC as submitted totals approximately $53 million. It is highly problematic whether or not the legislature will fund all of that. He would expect that the legislature would fund something less than that. REPRESENTATIVE ROKEBERG said most of the funding is already committed money, it is already annualized. MR. HOWE said that was not correct. Other than the type of program that would be adopted in the bill, where a specific bond issue was authorized and the AHFC was directed to service that issue over a period of time, that would be a "carry-forward commitment." But the other elements in that $53 million number are subject to annual appropriations. Number 300 CO-CHAIR BUNDE asked if Representative Rokeberg could perhaps explore the AHFC further at another time. He brought up another issue that may necessitate the holding of the bills until the next week. Co-Chair Bunde said he was not trying to close the previous conversation completely, he just wanted to bring up another point to discuss. REPRESENTATIVE ROBINSON interjected that unfortunately the House State Affairs Committee was meeting presently to close out the rest of the bills for the rest of the session. She was needed for a quorum in about two minutes, and they asked her to stay for about 15 minutes. CO-CHAIR BUNDE asked her to wait until he presented an amendment, and then HB 281 and HB 282 would be held until Tuesday, May 2. Number 396 CO-CHAIR BUNDE proposed an amendment. He called Section 3 of HB 281 a "blackmail clause." It essentially says, if the provisions of the bill are followed, the AHFC's financial assets are off the table to any other legislative action. Many times in the last few days comments have been made that nothing this legislature does can bind a future legislature. HB 281, Section 3 is an attempt to bind a future legislature. Perhaps it is also making pledges and promises that future legislatures may not want to fulfill. Should oil prices crash, Co-Chair Bunde doubted that the state would want to honor that pledge. CO-CHAIR BUNDE said perhaps the state will want to cash out the AHFC in its entirety, and operate with that money instead of using the constitutional budget reserve. CO-CHAIR BUNDE said he would like HESS Committee members to peruse the proposed amendment, and hold Hbs 281 and 282 until the following Tuesday. REPRESENTATIVE ROBINSON left the meeting at 3 p.m.