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
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= bill was previously heard/scheduled
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 secured?" 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 obligation. 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.