Legislature(1995 - 1996)

04/16/1996 03:55 PM TRA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= 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)           
 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                
 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            
 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                 
 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                
 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                
 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              
 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.                                            

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