Legislature(1995 - 1996)
04/16/1996 03:55 PM TRA
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
CSHB 526(FIN) am AIDEA OPERATIONS/PROJECTS/LOANS CHAIRMAN RIEGER called the Senate Transportation Committee meeting to order at 3:55 p.m., and then opened the hearing on CSHB 526(FIN) am. REPRESENTATIVE PETE KOTT, prime sponsor of HB 526, said the legislation deals with the Alaska Industrial Development & Export Authority (AIDEA), which was created to promote employment in Alaska through a variety of tools. Changes in the economic, legal and financial conditions have made it desirable to examine and reopen a number of areas in AIDEA to make AIDEA more user friendly to those that they service. He said he could go through the sections of the bill, but suggested that he defer to the experts from AIDEA and the Department of Law to explain the bill and respond to questions. Number 060 RANDY SIMMONS, representing the Alaska Industrial Development & Export Authority, came before the committee. He explained there are four major areas of the bill: (1) restoring the bonding authorization; (2) changes to the Business Assistance Program; (3) authorization for the Red Dog Mine project expansion and the purchase of the Snettisham Hydroelectric Project; and (4) repealing authorization for two projects that were financed through other means or that are not going to be built in the specific area for which it was authorized. Under the bonding authorization, the bill restores bonding authorization that AIDEA had up until June 30, 1995. Under previous language AIDEA could bond projects up to $10,000,000 in the Development Finance Program without specific legislative authorization; however, they had to come before the legislature to get authorization for projects over that amount. It also allows AIDEA to do bonds that are tied to their Loan Participation Program. The Fort Knox Mine Project in Fairbanks came up after the bonding authorization expired in 1995, and it is waiting for final financing through AIDEA at this time. Section 9 of the bill makes changes to the Business Assistance Program. Under that program, AIDEA can guarantee up to 80 percent of a loan up to $1 million. The program has been on the books for a number of years, but it hasn't been used extensively because the federal government has a Small Business Assistance program that has been used a lot. However, the SBA program has been changed in a couple of ways that is not making it quite as attractive for small businesses. To make the Business Assistance Program more attractive the section provides a guarantee of interest if a loan were to go into default. The SBA program and programs like it normally have a guarantee period of 90 days, which gives the bank time to liquidate the loan. The section also provides that as long as the loan that AIDEA participates in benefits an Alaskan business, it would qualify. Sections 18 and 19 of the bill provide the project authorizations. The first project is Red Dog II and the section provides authorization to expend up to $85 million for the expansion of the facilities that AIDEA owns at this time at Red Dog. Cominco will probably put another $100 million in their portion of the facilities. It is anticipated that the expansion of the facilities will provide up to 105 new jobs and will also increase the payment in lieu of taxes. It will make Cominco not only the largest zinc mine, but this area of Alaska will be the largest zinc producing area in the world, if the expansion is successful. The second project AIDEA is asking authorization for is the Snettisham Hydroelectric Project located in Juneau. That project, along with the Aklutna project in Anchorage, is owned by the Federal Alaska Power Administration. AIDEA is asking for a $100 million authorization: AIDEA estimates the actual purchase price will be about $78 million; approximately $12 million will be set aside for debt service reserves, as well as underwater cable purchase; and there is approximately $10 million in the authorization that allows some float if the interest rate changes. Purchase of the project will provide rate stability for the rate payers in Juneau. Section 17 will repeal an authorization for $40 million for aircraft refueling facilities at Anchorage International Airport. Those facilities are being built and financed by a consortium of the airlines. The section will also repeal a $50 million authorization for the Midrex facility located in Point McKenzie. That facility will not be built at Point McKenzie, and, if it is built, it will be at another part of the state. Concluding his overview of the legislation, MR. SIMMONS stated he and Mr. Laufer would be happy to respond to questions from the committee. Number 266 CHAIRMAN RIEGER referred to Section 1 and the words "related to" and he asked how broad the exemption "related to" is when it refers to AIDEA. KEITH LAUFER of the Department of Law responded that it would refer to all contracts related to the Red Dog Project that AIDEA would enter into. He said the purpose of that is to allow AIDEA to contract directly with Cominco as their construction manager. AIDEA has adopted a procurement plan for the Red Dog Project, which is substantially the same as the Procurement Code, but it allows for direct contract with Cominco in construction related activities. CHAIRMAN RIEGER expressed his concern that the language was too broad, and he asked if tighter language could be provided. MR. LAUFER explained that the language is drafted that way to avoid the prohibition against local and special legislation. As written, AIDEA only has one integrated transportation and port facility project, which is the Red Dog Project, so the purpose of drafting that way was to avoid those constitutional problems. Number 322 CHAIRMAN RIEGER referred to Section 2, the Fort Knox provision, and inquired if this was a general obligation bond of AIDEA or a pass- through bond. RANDY SIMMONS answered that Fort Knox will be conduit financing pass-through. KEITH LAUFER added that elsewhere in the AIDEA statutes, AIDEA is given general bonding authority, and this provision is a limitation on that bonding authority. CHAIRMAN RIEGER asked if with the new language can AIDEA not only do pass-through bonds but also general obligation bonds up to $10 million without legislative authorization. RANDY SIMMONS responded that was correct. CHAIRMAN RIEGER asked if AIDEA will own the Fort Knox project. RANDY SIMMONS replied it is a project where AIDEA will just do the revenue or conduit financing, and AIDEA will not be obligated under those bonds. Number 404 CHAIRMAN RIEGER referred to Section 5 and commented that the statutes are pretty clear on setting interest rates when there is underlying bond financing; however he wanted to know what the interest rate is on a direct loan out of the assets of the authority. RANDY SIMMONS answered that basically, AIDEA sets its rates whether its under bonds or through their direct assets, and they get those rates every week based on either the long or short- term treasury bonds. Number 417 SENATOR TAYLOR asked if in Section 6 it was taking the board out of the annual review function and putting the executive director in charge of that function. KEITH LAUFER explained the problem in the past has been convening a board meeting in time to submit the report for the legislature's review, particularly in years where the administration has changed. This will allow the executive director to submit the report without the board formally taking it up. RANDY SIMMONS added that the board chairman and other members of the board review the annual report before it is submitted. Number 453 CHAIRMAN RIEGER asked if Section 9 relates to the guarantee of interest if a loan goes into default. RANDY SIMMONS acknowledged that the section permits AIDEA to guarantee interest on the guarantee portion of loans as set forth in regulation. CHAIRMAN RIEGER then inquired as to the fee AIDEA is charging on loan guarantees. RANDY SIMMONS answered that it is 1 percent. The 90- day period will mirror the SBA program, but they will have the flexibility to either reduce on increase that fee if circumstances change. CHAIRMAN RIEGER directed attention to paragraph (1) in Section 9 and noted there is no longer an "up to" clause. He asked if this means that when AIDEA does a guarantee it will be 80 percent. RANDY SIMMONS responded that it should be clarified in the paragraph that it is up to 80 percent. Number 520 CHAIRMAN RIEGER referred to Section 10 and asked if there is a limit on the size of any individual guarantee. KEITH LAUFER acknowledged there is. The authority is only permitted to guarantee up to 80 percent of a loan of $1 million, and it may not guarantee to an individual borrower cumulatively more than $1 million. Number 550 CHAIRMAN RIEGER directed attention to Section 12, lines 23 - 25 on page 5 and said it appears to be a fairly significant expansion of the ability to acquire real or personal property. KEITH LAUFER explained that another section of the bill eliminates the Business Assistance Fund. Previously the authority had conducted the business on loan guarantees in a separate segregated fund that was part of its revolving fund. The only change intended to be made was to remove the reference to the fund and say that as long as the authority was protecting its interest they are only within the loan guarantee program now. CHAIRMAN RIEGER suggested tightening that language to say protect the interest in a loan or a loan guarantee. KEITH LAUFER agreed to the change. Number 566 Responding to a question from Chairman Rieger on Section 13, RANDY SIMMONS said it gives AIDEA the ability to do projects such as Snettisham. TAPE 96-14, SIDE B Number 001 CHAIRMAN RIEGER referred to Section 16 and suggested clarifying in the definition of "prime rate" that it is a domestic money center prime rate. CHAIRMAN RIEGER directed attention to the first repealer in Section 16 (AS 44.88.500(b)). KEITH LAUFER explained that was a reference back to the Business Assistance Fund. When the program was operated within a Business Assistance Fund, the recourse of the beneficiary of the guarantee was only to the assets in the fund. CHAIRMAN RIEGER said as he reads 44.88.500(b), it had nothing to do with that fund, and this would now broaden the amount of assets AIDEA pledged to every individual issue. He suggested checking to see if repealing subsection (b) might be a problem. Number 050 CHAIRMAN RIEGER said there has been kind of a rolling sunset and the last extension was in 1993 going to 1996, and as he reads the next section it would repeal the sunset in its entirety. He suggested the committee might want to keep a sunset out, because if the committee doesn't do it, Senate Finance will. Number 065 CHAIRMAN RIEGER directed attention to Section 18 and asked if AIDEA has a deal with Cominco as to what they will pay back for the amount that they financed. RANDY SIMMONS responded that AIDEA has just started negotiating with Cominco to set out what the perimeters of the Red Dog II financing will be, so there has not been anything, at this point, agreed to as to what the return will be. CHAIRMAN RIEGER then asked what AIDEA anticipates the amount to be financed with bonds and the amount to be financed out of assets of the authority. RANDY SIMMONS replied that at this point in time, they anticipate the full amount to be financed out of bonds. Number 080 Referring to Section 19 and the Snettisham project, CHAIRMAN RIEGER asked the amount AIDEA anticipates to be financed with bonds and the amount to be financed out of assets of the authority for that project. RANDY SIMMONS replied that Snettisham is a little bit different than the Red Dog project. It will be financed totally out of bonds and they will be the moral obligation of the state of Alaska and not AIDEA. By using state moral obligation with the type of project that it is, the financing will be cheaper. Also, AIDEA is attempting to go out right now to do an $85 million financing on the Healy clean coal project, which will be bonding, and if they did that $85 million plus this $100 million, they would have close to 62 percent of their outstanding bonds in two large energy projects. That would probably give some concern with the rating agencies because of the size of the concentration. Normally an entity the size of AIDEA would not do projects such as that. Number 125 Responding to questions from Senator Taylor on the Snettisham project, RANDY SIMMONS explained AIDEA is not 100 percent committed at this point in time because they still have steps they have to go through; they have not done all of their financial feasibility, nor have they had the risk assessment done on the project. Also, they are working with AEL&P right now, and there are going to be provisions in this take or pay contract that basically will commit AEL&P to the maintenance of the project. The way it is set up, AIDEA would be the owner and AEL&P would be the operator. The financing that AIDEA would charge to pay for the bonds would go back into the authority, which the state of Alaska basically owns. SENATOR TAYLOR commented that it seems to him that there is a totally different treatment being applied on the Snettisham project from the treatment that was applied on the Four Dam Pool. RANDY SIMMONS agreed that it is different. He pointed out that the Alaska Energy Authority (AEA) is no longer in the business as it was when back then, and AIDEA is looking at this as a development finance project under this program, so it is a different type of structure. Following further discussion on the Snettisham and Red Dog projects, CHAIRMAN RIEGER said it was his intent to have a committee substitute drafted incorporating the changes that had been discussed during the meeting and that it would be back before the committee for its consideration. There being no further business to come before the committee, the meeting was adjourned at 5:05 p.m.