Legislature(2009 - 2010)BELTZ 211

04/02/2009 09:00 AM Senate STATE AFFAIRS

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved SB 157 Out of Committee
Bills Previously Heard/Scheduled
Moved CSSB 126(STA) Out of Committee
        SB 157-CERTIFICATES OF PARTICIPATION FOR SUBPORT                                                                    
9:02:59 AM                                                                                                                    
CHAIR MENARD announced the consideration of SB 157.                                                                             
DENISE  LICCIOLI,  Staff to  Senator  Donny  Olson, Alaska  State                                                               
Legislature,  sponsor, said  the  Department of  Labor needs  new                                                               
office space  in Juneau. The lease  on the current space  will be                                                               
up in June  of 2012, and no  other space in Juneau  will hold the                                                               
300 employees who work in  the department. Other space is needed,                                                               
and it  will likely  need to be  built because of  the lack  of a                                                               
suitable  building   in  Juneau.   SB  157  will   authorize  the                                                               
certificates  of  participation  "for  one of  the  options  that                                                               
exists  for taking  care  of that  need for  space."  Even if  it                                                               
doesn't pass there will need to  be an RFP [request for proposal]                                                               
issued for  space, and that is  a fairly long process.  Given the                                                               
timing, it  is important to  move on  this. There are  two state-                                                               
owned office  buildings that house  three state  departments that                                                               
are  in bad  need of  significant renovation.  The Department  of                                                               
Administration approached the Mental Health  Trust to look into a                                                               
joint  project  to satisfy  some  of  those  needs. It  would  be                                                               
mutually beneficial.                                                                                                            
9:06:21 AM                                                                                                                    
MS. LICCIOLI  said the core  mission of  the trust is  to develop                                                               
and  manage trust  assets for  mental  health beneficiaries.  The                                                               
trust  owns  this  land,  and  it is  in  the  top  priority  for                                                               
development. SB  157 will  enable the trust  to develop  the much                                                               
needed office and retail space on  land it owns. The offices that                                                               
are  in need  of better  facilities would  benefit. The  proposed                                                               
building  will  use  modern  construction  standards  and  energy                                                               
efficiency.  This new  facility  will save  the  state money  and                                                               
provide a  steady revenue to  the trust.  SB 157 will  enable the                                                               
trust to move forward with the construction.                                                                                    
CHAIR MENARD asked how old the buildings are.                                                                                   
MS. LICCIOLI  said the  Department of  Public Safety  building is                                                               
about 40 years old.                                                                                                             
9:08:58 AM                                                                                                                    
REPRESENTATIVE CATHY  MUNOZ, Alaska  State Legislature,  said the                                                               
public safety building  was supposed to be temporary  when it was                                                               
built in 1970.  The state will have to  invest considerable funds                                                               
to bring it up  to standard or replace it. The  other site is the                                                               
Department of  Fish and Game  building in Douglas that  was built                                                               
in  the 1950s.  It  needs major  rehabilitation. Both  facilities                                                               
would require  about $8.5 million of  renovation. The legislation                                                               
is to allow the Mental Health  Trust to develop the land, and the                                                               
parcel in  the bill has  been a  priority for development  by the                                                               
trust for  many years.  The trust  holds land  throughout Alaska.                                                               
Its mission is  to develop these lands to the  maximum benefit of                                                               
its  beneficiaries. The  timing  of the  legislation is  critical                                                               
because the old  buildings are in dire need of  repair. The lease                                                               
is  soon to  expire for  the labor  department building,  and the                                                               
state  doesn't want  to remain  in that  space. There  will be  a                                                               
savings  to the  state  of $13  million over  the  course of  the                                                               
lease.  The trust  will receive  revenue for  the next  20 to  30                                                               
years. As the landowner, the trust  provides the land and half of                                                               
the construction costs.  The bill will allow the  trust to access                                                               
$22.7  million in  trust funds.  The state  will meet  a critical                                                               
need for space. The bonds will  be paid back with the revenues of                                                               
the leases. This is a win-win proposal.                                                                                         
9:13:24 AM                                                                                                                    
SENATOR KOOKESH asked what the revenue will be to the trust.                                                                    
REPRESENTATIVE MUÑOZ said  trust funds are managed  by the Alaska                                                               
Permanent  Fund. The  rate  of  return will  start  out as  being                                                               
similar to its current investments,  but over time the revenue to                                                               
the trust will increase greatly.                                                                                                
SENATOR KOOKESH said  the money earns interest now, and  if it is                                                               
spent, there has to be some sort of income.                                                                                     
9:15:07 AM                                                                                                                    
SENATOR MEYER  said a  big concern  is the  loss of  property tax                                                               
when a state entity builds a building.                                                                                          
REPRESENTATIVE MUÑOZ said the City of Juneau supports this.                                                                     
SENATOR MEYER  said it  will raise  property taxes  for everybody                                                               
else [in Juneau]. It won't go on the private tax roles.                                                                         
REPRESENTATIVE MUÑOZ  said the city  recognizes the need  for the                                                               
employees  to be  in a  space that  meets the  requirements of  a                                                               
state lease. Those requirements are not being met.                                                                              
SENATOR MEYER  said those same  needs could  be met by  a private                                                               
developer without losing property taxes.                                                                                        
REPRESENTATIVE MUÑOZ said  there are a lot  of financial benefits                                                               
to working  with the trust.  The property tax situation  could be                                                               
discussed by the city. The city sees this as positive.                                                                          
9:16:56 AM                                                                                                                    
SENATOR MEYER asked what rent the state is currently paying.                                                                    
REPRESENTATIVE MUÑOZ  said the state  is paying $2.33  per square                                                               
foot. Renovations  are needed, so when  the lease is up  the rate                                                               
will  likely change.  The rent  on  the proposed  facility has  a                                                               
negotiated  ceiling of  $3.50 per  square foot.  That rate  is in                                                               
line with Class B space around  the state. The state often has to                                                               
invest  funds beyond  the square  footage rate  in order  to meet                                                               
state standards with lighting and technology.                                                                                   
9:18:09 AM                                                                                                                    
SENATOR MEYER asked about adequate parking.                                                                                     
REPRESENTATIVE MUÑOZ  said the  site is 4.5  acres, and  there is                                                               
sufficient land for parking.                                                                                                    
HARRY NOAH, Executive Director,  Land Trust Office, Mental Health                                                               
Trust,  Department  of Natural  Resources,  said  the trust  will                                                               
invest  $22.7 million,  and  "we're asking  7.5  percent on  that                                                               
money, which basically is on par  with what we would get for that                                                               
money in the  permanent fund under normal  conditions. We're also                                                               
asking for 8  percent of the value  of the land as  per the lease                                                               
of the land." Ultimately the building  will be paid for, and then                                                               
there will be a cash flow.  There are still negotiations with the                                                               
state on  what that number will  be. This bill will  set an upper                                                               
limit, but there will be some negotiating after the bill passes.                                                                
9:20:46 AM                                                                                                                    
VERN  JONES,  Chief  Procurement Officer,  Alaska  Department  of                                                               
Administration, said  the state has  been working with  the trust                                                               
and he  believes that  the building will  provide the  state with                                                               
savings and  solve several problems.  The Department of  Labor is                                                               
housed in a  large building and the lease is  ending. There is no                                                               
vacant  space  in   Juneau,  and  a  new  building   will  be  an                                                               
improvement. There  have been issues  with the  current facility.                                                               
The bill  solves other problems  for his division,  which manages                                                               
several  state  office  buildings, including  the  Public  Safety                                                               
building  that was  built in  1970 as  a temporary  structure. It                                                               
needs a  lot of work. The  Fish and Game building  in Douglas has                                                               
numerous problems.  Wind, rain, and  snow comes through  the gaps                                                               
in the walls  and windows. The state is very  reluctant to invest                                                               
millions  into  facilities  that  are well  beyond  their  usable                                                               
lives. It  would be throwing  good money  after bad. SB  157 will                                                               
get the state  into energy efficient buildings  that are suitable                                                               
for state employees.  His division provided the  analysis, and it                                                               
shows  a  substantial  savings  over  the  years.  It  is  fairly                                                               
conservative  because  it  only  includes  the  current  list  of                                                               
deferred maintenance, and who knows  how much more work will need                                                               
to  be done.  In fact,  the buildings  will probably  need to  be                                                               
replaced. Even though the state  still has to negotiate the lease                                                               
rate, the bill is in the state's best interest.                                                                                 
9:24:44 AM                                                                                                                    
JEFF JESSE, Alaska  Mental Health Trust Authority,  said Mr. Noah                                                               
and  Representative  Muñoz  explained  the  bill  well.  The  DOA                                                               
approached the  trust and the trust  land office did a  great job                                                               
of  assessing options  and potential  returns. This  will benefit                                                               
the trust.                                                                                                                      
JEFF BUSH,  Deputy Mayor,  City and Borough  of Juneau,  said the                                                               
assembly took up an ordinance to  change the zoning to allow this                                                               
project to proceed. The city is fully supportive.                                                                               
9:26:58 AM                                                                                                                    
WAYNE  JENSEN,  Architect,  Juneau,  said his  company  has  been                                                               
working on this project and can answer questions.                                                                               
SENATOR KOOKESH asked how much parking is required.                                                                             
MR. JENSON  said there are  two requirements. The city  has land-                                                               
use requirements,  and the lease will  have parking requirements.                                                               
Both  will  be  an  obligation of  the  trust.  The  requirements                                                               
generally depend on  the size of the building.  There is adequate                                                               
parking space.                                                                                                                  
9:29:25 AM                                                                                                                    
DEVEN MITCHELL,  Investment Manager, Department of  Revenue, said                                                               
the project  is a convergence  of a  variety of missions  for the                                                               
trust  and   the  state   of  Alaska.   The  practice   of  using                                                               
certificates  has been  used  a number  of  times throughout  the                                                               
state. It is a means  of borrowing money for specific facilities.                                                               
It was  used recently  for a  virology lab  at the  university in                                                               
Fairbanks. It was used for  the replacement of the "API" facility                                                               
in Anchorage, which was a  similar partnership for something that                                                               
was  badly needed.  The  certificates that  he  would sell  would                                                               
receive ratings  in the  low double-a  category. "The  state sold                                                               
general  obligation  bonds  today,  which is  a  slightly  better                                                               
credit than  a subject-to-appropriation  credit, but  the 20-year                                                               
bonds  -  and  these  were  approved  in  November  of  2008  for                                                               
transportation projects throughout the  state - the true interest                                                               
cost  was 4.04  percent." The  fiscal note  assumes 5.5  percent,                                                               
which is  obviously conservative in today's  market. Today's rate                                                               
is indicative of what might be possible.                                                                                        
SENATOR MEYER  asked, "We've already  got the money at  5 percent                                                               
MR. MITCHELL  said no,  the fiscal note  provided an  estimate of                                                               
what might  be possible.  There has been  a wide  distribution of                                                               
available interest rates over the  last six months because of the                                                               
dislocation seen  in October, in  particular. There  were certain                                                               
days  you  couldn't  sell  bonds.  "A  credit  like  this  is  an                                                               
extremely  strong credit  that's recognized  in the  market. But,                                                               
still, if  you have Merrill  Lynch and Lehman Brothers  ... being                                                               
purchased  or   going  out  of   business,  then  that   type  of                                                               
dislocation  is  difficult  to overcome."  The  Matanuska-Susitna                                                               
borough  lease revenue  bonds are  supported  by the  state on  a                                                               
subject-to-appropriation  basis, "and  that is  the credit  - the                                                               
borough  pledges the  lease payments  that it  receives from  the                                                               
state,  so it's  called something  different, but  it's the  same                                                               
credit."  Those  achieved  an  interest  rate  of  just  under  6                                                               
percent,  versus 4.04  today.  "The  state's [general  obligation                                                               
bonds]  would have  priced better  than the  lease revenue  bonds                                                               
back on December 22, but maybe 50 basis points better, not 200."                                                                
9:33:54 AM                                                                                                                    
SENATOR MEYER said his concern  is the state's overall debt load.                                                               
Are you comfortable that we can  take on this additional debt and                                                               
still maintain a good credit rating?                                                                                            
MR. MITCHELL  said that is  one of Alaska's strengths.  The state                                                               
has  a relatively  low debt  burden, not  necessarily in  a ratio                                                               
perspective because  of Alaska's  small population,  but relative                                                               
to the  high oil revenue.  "We're well within the  parameters ...                                                               
we typically  use 5 to 8  percent as a threshold  of unrestricted                                                               
revenue as being  an acceptable level of debt  service." With the                                                               
updated  revenue   forecast,  Alaska  is  in   the  5-ish  range,                                                               
including  the Mat-Su  bonds and  the [general  obligation bonds]                                                               
that were just issued.                                                                                                          
9:35:19 AM                                                                                                                    
SENATOR  MEYER said  Alaska's  revenue is  based  on one  source,                                                               
which isn't doing well. Oil price and production are declining.                                                                 
MR.  MITCHELL  said  Alaska's   reserve  position  is  incredible                                                               
relative to  other states. He mentioned  the CBRF [constitutional                                                               
budget  reserve fund],  SBR [statutory  budget reserve],  and the                                                               
forward-funding  of education.  Those  allow Alaska  to retain  a                                                               
high rating  despite the  volatility of  the revenue  stream. The                                                               
state  has  protected its  position.  It  is a  relatively  small                                                               
CHAIR MENARD asked if the note is for 30 years.                                                                                 
MR. MITCHELL said it is 20  years. There are two things. "There's                                                               
COPs, which are 20, and there's a lease for the facility."                                                                      
9:36:42 AM                                                                                                                    
SENATOR MEYER said he is convinced  that this is needed. He moved                                                               
to report  SB 157 from committee  with individual recommendations                                                               
and attached  fiscal note(s).  There being  no objection,  SB 157                                                               
moved out of committee.                                                                                                         

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