28th Legislature(2013-2014)

Committee Minutes

Mar 12, 2013

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	            HB 23-KNIK ARM BRIDGE AND TOLL AUTHORITY                                                                        

1:30:19 PM

CHAIR P. WILSON announced that the final order of business would
be HOUSE BILL NO. 23, "An Act relating to bonds of the Knik Arm
Bridge and Toll Authority; relating to reserve funds of the
authority; relating to taxes and assessments on a person that is
a party to an agreement with the authority; and establishing the
Knik Arm Crossing fund."

1:31:13 PM

REPRESENTATIVE MARK NEUMAN, Alaska State Legislature, stated
that a project such as this one has its share of people on both
sides of the issue. He offered his belief that the decisions
need to be based on the most accurate and credible information
available. He offered to review some aspects of the Knik Arm
Bridge and Toll Authority (KABATA's) credentials and the
project's process as it moves forward. He said that KABATA's
main financial advisor is Citigroup, one of the largest
investment banks doing billions of dollars of finance and
underwriting annually. The Nossaman LLP, which is KABATA's law
firm has represented the public sector in about 90 percent of
the transportation public-private partnerships (P3) in the U.S.
CDM Smith [formerly Wilbur Smith Associates], a traffic and
control consultant, has about 80 percent of the market share of
investment grade traffic in toll revenue studies and has
supported $80 billion in toll road financing over the last fifty
years. Standard and Poors (S&P), a Wall Street credit ratings
company is one of three nationally recognized statistical rating
organizations by the Securities Exchange Commission (SEC). The
S&P has provided an investment grade rating on this project,
which is considered very favorable.

1:33:05 PM

REPRESENTATIVE NEUMAN related the short list includes hundreds
of companies, which was reduced to three world-class
construction teams. The short list for the private partners
will each spend over $10 million to prepare proposals including
performing independent due diligence on this project. The
short-listed companies will review the traffic, the tolls, and
the financing. Thus, this Knik Arm Crossing (KAC) project is
being reviewed by numerous world class organizations and if the
KAC isn't a viable project it won't happen, but the P3
expenditures demonstrates a positive aspect. He characterized
the KAC as a private industry project. He offered his belief
that Citigroup is one of the largest and most recognized
financial groups in the world. Further, Citigroup and S&P are
both supportive of the project and want to partner with the
state, he said. The three short-listed firms are willing to
spend $10 million developing proposals. Citigroup and S&P's
ratings are good indicators on the viability of the project, he
said. Granted, some people won't like the project in their
neighborhood; however, sometimes decisions have to be made based
on the benefits to the majority of the people. Over 30,000
residents of the Matanuska-Susitna valley travel to Anchorage on
the Glenn Highway, which is over-capacity now. It would cost
over $4 billion to bring that road up to capacity. The P3
partnership wants to invest in a project that can reduce the
need for Glenn Highway expenditures considerably, as well as
reducing frequency of rut-rehabilitation, which would also
reduce state funding. He listed other benefits to the KAC,
including that it will save lives - noting he provided the
committee with information on accident rates and road safety.
Further, this project can open opportunities for investment at a
time when the state has struggled with oil revenues.
Additionally, the Eagle River bridge is older bridges and the
KAC could provide safety if an earthquake were to occur. If it
became necessary to fly freight to the Interior it would
increase operating expenditures. He concluded that the
aforementioned reasons demonstrate how the KAC can help secure
Alaska's interests and why the project has statewide support.

1:37:15 PM

REPRESENTATIVE ISAACSON said he supports this project for a
number of reasons, including redundancy and reduction in freight
costs to Interior Alaska; however, the legislature will hear
testimony with respect to the cost projections for the bridge in
the amount of $2.6 billion. He asked how the project will be
evaluated by the Finance Committee and if specific calculations
will be applied.

REPRESENTATIVE NEUMAN answered that the House Finance Committee
will review the project as a whole, as well as the financial
aspects carefully, including any obligations to the state.
Currently the bill has a zero fiscal note. Any evaluations on
HB 23 have been based on the worst case scenario. Additionally,
the private sector is also reviewing the financials so if the
KAC doesn't pass muster the project will not happen. He said he
has viewed this project as a means of finding new revenue
sources for the state. He mentioned the state's deficit, but
recognized that the state will need to fund transportation,
whether it is the ferry system, the Dalton Highway, airports, or
railroads and this project [could generate revenue] to go
towards a proposed transportation fund without using general
fund revenues.

1:41:18 PM

REPRESENTATIVE NEUMAN, in response to a question, said he is a
member of KABATA, but KABATA's experts are available to answer
any questions. He spoke to the credibility of the people
working on the project.

1:42:48 PM

REPRESENTATIVE ISAACSON understood that the KAC project contains
private investment oversight so the state will not incur a
deficit and obligation.

REPRESENTATIVE NEUMAN referred to data collection and related
the bridge should begin to make money and start repayment to the
reserve fund within 7-8 years. This bill has a zero fiscal note
and does not contain any obligation, but would create a
mechanism to move forward to create the public-private
partnership, he said.

1:44:16 PM

CHAIR P. WILSON understood Governor Parnell has put in funds in
the proposed FY 14 capital budget and asked for the proposed
appropriation amount.

REPRESENTATIVE NEUMAN responded the governor's proposal is for
$25 million, with an additional $35 million for each of the next
four years for a total of $150 for the reserve fund. Again, the
reserve fund is a loan that will be repaid to the state, will be
used to make annuity payments, and any excess revenue will be
used to repay the reserve fund.

CHAIR P. WILSON asked about the guidelines that the U.S.-DOT
will use with respect to the TIFFIA loans.

1:46:13 PM

MICHAEL FOSTER, Chair, Knik Arm Bridge and Toll Authority
(KABATA), Department of Transportation & Public Facilities
(DOT&PF), stated that under Moving Ahead for Progress in the
21st Century Act (MAP-21), the Transportation Infrastructure
Finance and Innovation Act of 1998 (TIFIA) program has a
capacity of $17 billion, which equates to $51.5 billion under a
33 percent eligibility model. Currently, 29 projects are on the
list for proposed federal TIFIA funding.

CHAIR P. WILSON asked for clarification.

MR. FOSTER answered that TIFIA has both mechanisms in it: to
fund projects at either 33 percent or 49 percent of the total
funding. He understood that 29 projects are interested in the
$51.5 billion in TIFIA funding, with at least one likely to be
funded at 33 percent. Initially, an option existed for 49
percent funding and subsequently KABATA submitted a letter of
interest at 49 percent; however the KABATA's model has been
based on 33 percent overall funding. The KABATA believes that
the TIFIA loans will likely be at 33 percent, which is
consistent with the prior TIFIA model. Thus, KABATA's letter of
interest was to express interest in approximately $500 million
of TIFIA credit-enhancement, but KABATA's model is built on 33
percent or $350 million, based on the total anticipated capital
outlay for the project which totals $1 billion.

1:48:37 PM

CHAIR P. WILSON asked what would happen if the TIFIA loan is not

MR. FOSTER answered that the KAC's funding mechanism is the
private partner's responsibility since the private partner is
responsible for funding the project. The private partner may
decide not to use TIFIA; however, that is highly unlikely if the
funding is available. Other funding options available to the
private partner would be private activity bonds (PABs) - noting
$600 million is the capacity. This bill actually would raise
the legislative capacity from $500 million to $600 million, he
said. Additionally, the private partner would have private
investment options available, including private capital funds
available elsewhere in the world. Certainly, TIFIA is the most
attractive option due to the lenient repayment schedule and the
delay in the first payment. However, there is not any guarantee
that the TIFIA loan will be approved. He anticipated, based on
the letter in members' packets, meetings with the U.S.-DOT Under
Secretary LaHood, and the major project team that this project
is ripe and is a prime project for this type of program.
However, the U.S.-DOT wants to see the state's commitment
demonstrated before the public-private partnership (P3) funding
will move forward. To date, the KABATA has not been invited to
submit an application for the TIFIA loan. In fact, none of the
29 projects pending in 17 states are in the pre-application
process, but all have submitted letters of interest. Further,
if TIFIA asked the state to submit an application, it would not
do so immediately since a specific timeframe is involved and the
timing is important. The KABATA needs to have certain things in
place prior to submitting an application to ensure everything is
in place. However, the passage of HB 23 would allow KABATA to
move forward and KABATA anticipates being invited to apply once
the request for proposal (RFP) is completed. Again, if the
TIFIA loan is not approved, $600 million in private activity
bonds (PAB) would be another option for the private partner to
consider, he stated.

1:52:01 PM

MR. FOSTER reiterated the state would not be underwriting a loan
or be obligated for the underwriting of the loan or bonds;
instead, the state would be a conduit for both. He reported the
TIFIA loan with an approximate 3 percent interest rate and the
PAB's interest rate at 5 percent. Obviously, the TIFIA loan is
preferable, although the PABs are still attractive. He
estimated the difference between the two loans would be about
$100 million.. He anticipated KABATA would expect to see
reduced proposals if the TIFIA funds are available, but if TIFIA
loans are not approved at that point KABATA will need to review
the model with respect to the affordability curve. He
emphasized the importance of avoiding payments in the initial
years that the state cannot afford until the traffic ramps up.
He characterized it as being a curved financial fee structure.
Again, the PABs and other international private financing could
be considered. He reiterated that the financing choices are up
to the private partner, although KABATA will provide credit
enhancement. He recapped the financing preference order as
being TIFIA, PABs, and finally private financing.

1:53:48 PM

REPRESENTATIVE KREISS-TOMKINS understood that depending on
whether KABATA obtains TIFIA financing the financial liability
would not rest with the state, but the state would act as a
conduit for the financing. He asked whether any increased costs
of financing would inflate the size of the state's contract.

MR. FOSTER answered that the state has financial liability for
the availability payment, but not the financing of the project.
He reiterated that the state or KABATA will be responsible for
making the availability payments. The model KABATA presented in
its overview and discussed at the last committee meeting is
based on a 33 percent TIFIA allocation. If PABs are used the
estimate would add an additional $100 million, which would also
increase the availability payment. He anticipated the impact to
the state would be to increase the reserve fund requirements in
the range of $150-$225 million. However, the state has an
option to make a milestone payment in the beginning, which would
be to provide capital budget funding to Title 23 to pay down the
interest difference between the interest on the TIFIA loan and
the PABs. The state would have some options to neutralize the
additional cost or pass it on and pick it up in future
availability payments.

1:56:09 PM

CHAIR P. WILSON pointed out that the focus of the House
Transportation Committee is on the public policy and whether
this project is good for the state rather than to focus on the
financing. The finance committee will thoroughly consider the
financial aspects of the proposed project. Again, this
committee will consider whether this project is good for the
state, she said.

1:57:29 PM

REPRESENTATIVE KREISS-TOMKINS said he loves infrastructure, but
expressed concerned about financial obligations of the state.
He said the financing is an obligation of the private partner,
but this financing is a back door way of flipping the obligation
to the state. In the event that financing costs for the project
increase, the costs would be reflected in the form of higher
availability payment for the state.

CHAIR P. WILSON remarked this aspect is in the back of our
minds. She appreciated the comments.

1:58:49 PM

REPRESENTATIVE FEIGE characterized the availability payment as a
35-year mortgage. He asked if at some point it would be more
advantageous to take money out of savings to pay the KAC off and
if so, whether the legislature or KABATA would make the

MR. FOSTER responded that the contract contains a provision to
terminate for convenience, which allows the state to pay the
contract off, similar to a home mortgage. He offered his belief
that the KABATA board, the administration, and the legislature
would weigh in on any decision since the KAC is a state
infrastructure project. The actual passage or rules would be
through the KABATA board, noting the KABATA board is comprised
of the commissioners from the Department of Revenue and the
DOT&PF, along with three individuals appointed by the governor.

2:00:43 PM

REPRESENTATIVE FEIGE asked what would happen if the legislature
wants to pay the KAC debt off but KABATA objects.

MR. FOSTER answered that if the legislature wanted to pay for
the bridge today that KABATA would support it. Further, he was
unsure of any reason KABATA or the administration would object
to payment, noting the mechanism [to pay the project in full] is
in place.

2:01:15 PM

STEPHANIE KESSLER asked members to vote against HB 23. She said
that the revenue estimates are based on fallacious information
developed by Wilbur Smith Associates [now CDM Smith]. She
understood Representative Neuman commended the firm's track
record, but offered her belief that Wilbur Smith Associates
(WSA) [now CDM Smith] has a nationally documented track record
of overestimating toll revenues by 118 percent. Specifically,
WSA's estimates for the Matanuska-Susitna population in 2035,
which were used for the Knik Arm Crossing (KAC) "financials" are
20 percent higher than the University of Alaska's Institute of
Social and Economic Research (ISER) and the Department of Labor
(DLWD). Further, the WSA's traffic counts are more than double
CH2M Hill's estimates. She offered her belief that CH2M Hill is
a respected engineering organization and the firm also used
ISER's numbers. The WSA also shows a massive retail space in
the Point Mackenzie area that is more than two and one-half
times the size of the current Anchorage Dimond Center. The
Matanuska-Susitna Borough's (MSB) master plan designates the
Point MacKenzie area as reserved for industrial use by coal and
timber loading. Additionally, KABATA estimates that in 2035,
13,282 jobs will be in the Point MacKenzie area. She wondered
how this compares with reality since currently the entire
Matanuska-Susitna area only has 14,000 jobs, the Kenai-Peninsula
Borough (KPB) has 13,000 jobs, Juneau has 10,000 jobs, and
downtown Anchorage has 18,000 jobs. Thus it seems a stretch to
estimate that the Matanuska-Susitna and Knik area will have
13,282 jobs. She concluded that the toll revenue estimates are
based on inflated numbers and without [sufficient] tolls it will
cost the state billions of dollars, in fact, $2.6 billion or
more. She urged members to vote against HB 23 since the
financial underpinning is a house of cards.

2:04:59 PM

REPRESENTATIVE LYNN asked whether Ms. Kessler is opposed to the
bridge just based solely on the supposed inaccuracy of the
traffic counts. He asked whether she would offer support for
the KAC if she thought the population and traffic counts were

MS. KESSLER answered that she chose to highlight only one of her
concerns in today's testimony; however, there are many, many
flaws. She suggested a long conversation could be held on the
funding structure of the bridge. She recalled the sponsor
mentioned that private industry was investing $1 billion dollars
in the project; however, the fact is the P3 will only invest $73
million towards the total $1 billion in bridge costs. The
remainder of the funding would come from government funding and
PABs, with half of the proposed funding based on a TIFIA loan
that has been turned down five times. She concluded that the
entire financial structure of this project is questionable.

2:06:18 PM

LARRY DEVILBISS, Mayor, stated that all the mayors in the MSB
support the project. The Alaska Municipal League's (AML)
Conference of Mayors voted to support this project since the
organization views this project as being significant to the rest
of the state. He said, "This isn't just about Anchorage and the
Matanuska-Susitna area." Additionally, since this project
started two town sites have subsequently been laid out: one
township located at the road site has been surveyed and monument
and the other townsite lie within ten minutes of the end of the
right-of-way of the project. The project's economic importance
to the MSB is second only to the rail extension. The KAC
project will serve the remainder of the MSB. Further, 47
percent of the Kenai Peninsula Borough (KPB) is located on this
side of Cook Inlet and the KPB is keen on opening up these
natural resources. He also said, "So I won't take your time - I
have looked into - we've heard some of the wild allegations like
we just heard about the TIFIA letter being turned down numerous
times. I was alarmed when I heard that and I think Mr. Foster
can clarify the record on that - that's simply not true." He
appreciated the legislature's efforts and anything that could be
done to remove the gridlock.

2:09:28 PM

AVES THOMPSON, Executive Director, Alaska Trucking Association
(ATA), stated that the ATA is a statewide organization
representing the interests of its nearly 200 member companies
from Barrow to Ketchikan. The ATA would like to go on record
that it stands firmly behind the KAC project and any need
legislation to move the project forward. The ATA believes that
the bridge will provide a vital new link in the state's regional
transportation system. First, would provide an additional route
into and out of Port of Anchorage. Second, it would provide
some congestion relief on the Glenn Highway as well as the Parks
Highway. Finally, it will set up an efficient freight corridor
to serve Interior Alaska and northern Alaska. He reiterated
that the ATA is in support of this project.

2:11:17 PM

VERNE RUPRIGHT, Mayor, City of Wasilla, stated that the City of
Wasilla has been involved with this issue for a long time. The
four mayors in the Matanuska-Susitna city and borough concur
with Mayor DeVilbiss's assessment. In 2009, the City of Wasilla
and the City of Houston brought injunctive relief against
Anchorage's Metropolitan Area Transportation Solutions (AMATS)
to prevent this project from being stalled. Since then the
project has been moving forward. He pointed out that a
significant number of the commuters travel on the Parks Highway
through the middle of the city. He reported that it is
approximately equidistant from the KAC to Wasilla as it is to
use the Glenn Highway. Thus having two accesses would make it a
lot easier for commuters to and from Anchorage to access the
Matanuska-Susitna area. While he understood the disruption
issues for neighborhoods, all of us have had to modify and
accommodate changes in growth, just as Wasilla had done over the
past couple decades. He suggested this project would allow for
greater potential for growth in the MSB area and Interior
Alaska. He related he has held numerous discussions about this
project at AML conferences. This route, [the KAC], is a
strategic route for the U.S. as well as Alaska. He offered his
belief that another route out of Anchorage is long overdue. He
stated that the mayors are mindful of the growth and must
accommodate. In closing, he urged members to pass HB 23.

2:14:21 PM

SUZANNE DI PIETRO, Attorney, said she has followed this project
especially with respect to the legal issues. She asked to speak
to a specific provision in HB 23. She highlighted her focus has
been the reserve account established under the bill. She
emphasized that the authority established in the account is
different than any other authority in Alaska. More
specifically, the reserve fund established in Sections 4 and 5
create an account KABATA will use to pay its legal obligation -
the availability payments - to the private partner. She said
the open nature of the reserve fund is unprecedented.

MS. DI PIETRO referred to page 4, lines 5-9 to paragraph (l),
which read, "(l)The chair of the board shall annually, not later
than December 1, certify in writing to the governor and the
legislature the amount, if any, required to restore a reserve
fund established in (h), of this section to the reserve fund
requirement." She emphasized the importance of this language.
She has researched it and found this language is recognized by
markets and rating agencies as creating something referred to as
"a moral obligation." She said a moral obligation is an
understanding between state government, the markets, and the
rating agencies, such that if the revenues in the fund are
insufficient to cover whatever liability is being paid from the
account, the state government will step in and appropriate to
the reserve fund. Thus this language is understood by the
markets to create a contingent liability to the state up to the
amount necessary to cover the reserve fund. She explained the
reserve fund in HB 23 is open ended so each year KABATA will ask
the state to appropriate to the fund. Thus the markets and
rating agencies understand the legislature in passing this
specific language has pledged to appropriate whatever is

MS. DI PIETRO offered that KABATA could create a reserve fund
and put the $10 million in the governor's budget in the fund, or
deposit $100 million. However, the danger and difficulty with
the language in HB 23 is the specific open-ended language, which
is not necessary to this project. She related that the DOR's
Commissioner Butcher has written a letter, which she could make
available if it is not in members' packets, and she urged
members to read it. In response to a question by Representative
Feige, Ms. Di Pietro said she is an attorney.

2:18:47 PM

BOB FRENCH stated that he has been analyzing the financial
assumptions of the proposed Knik Arm Crossing (KAC) since 2003.
He asked to address some statements made that were errors. He
recalled that Representative Neuman previously discussed the
reliability of the toll revenue forecast; however, he pointed
out the forecast is irrelevant if the shortfalls will be made up
by the state. No matter what toll revenues are generated, the
availability payment is guaranteed, he said. Representative
Neuman also spoke about the private partner's investment of $1
billion for the project. Instead, under the bill, the private
partner would receive a $1 billion loan with state as a cosigner
on the loan. In fact, KABATA's pro formas say the P3 partner
will put in $72.7 million. Representative Neuman also talked
about investment grade ratings; however, the ratings are based
entirely on the good credit rating of Alaska. Additionally, the
sponsor spoke about the need to improve the Eagle River bridges
and based on the money already spent on the project by KABATA,
the state could have upgraded the bridges to current earthquake
standards and also change them to three lanes each way, which
could reduce the critical bottleneck on the Glenn Highway.
Further, Representative Neuman and the ATA discussed reducing
the freight cost to Fairbanks, but according to a letter from
the commissioner of DOT&PF in order for the bridge to be a
faster link to Fairbanks, the legislature would need to spend at
least $95 million to build the Burma Road and the South Big Lake

MR. FRENCH, with respect to the zero fiscal note, said the
caveat on it reads, "The Knik Arm Bridge and Toll Authority's
budget will not be affected by the development of the project as
long as projections for ridership on the bridge and related
financial solvency are fulfilled." He emphasized, "as long as
the projection are true." He related Mayor DeVilbiss is correct
that the project would have a statewide effect. In fact, if a
$55 million to $98 million per year deficit occurs, it will
affect transportation projects statewide, he said. He was glad
to hear Mr. Foster say the reserve fund will need more than $250
million if the [private partner] needs to go to PABs. He
encouraged members not to pass these bills until the independent
reviews from the Department of Revenue (DOR) and the Legislative
[Audit Division's] audit are completed since both audits were
tasked to see if KABATA's assumptions were reasonable. In the
current form these bills would add tremendously to the risk of
the state and will cost billions of dollars when the state finds
KABATA's assumptions are not true.

2:22:16 PM

REPRESENTATIVE KREISS-TOMKINS asked him to identify the audits
he just mentioned.

MR. FRENCH responded that the LB&A audit [requested] is one of
two audits requested. He offered his belief that the draft
legislative audit is completed, but KABATA has been given time
to review it. He understood the final audit might be out by the
end of March. Additionally, the DOR's audit was put out for a
bid in December, but was recently canceled by the DOR. He
concluded that the independent audit may not be available this

CHAIR P. WILSON reported that the LB&A Committee indicated the
legislative audit will be out in about 30 days. She anticipated
the LB&A's audit will be available for the legislature to

2:23:17 PM

LOIS EPSTEIN, Engineer, stated she serves on the Anchorage
Metropolitan Area Transportation Solutions (AMATS) technical
advisory committee; however she is speaking on behalf of herself
today. She said that the KAC is not ready for construction nor
is it a financially sound investment. The KABATA expects to get
a low cost federal loan for $500 million - a TIFIA loan -
however, KABATA has been turned down five times, which is
accurate despite Mayor DeVilBiss's comments, respectfully. She
said there would be an enormous hole in KABATA's budget, as
mentioned today - an extra $100 million, at least. She
indicated the proposed toll is among the highest in the country
so many people would likely take the Glenn Highway to and from
Anchorage. Additionally, KABATA's toll revenue forecasts are
based on the consultant's projections, CDM Smith, formerly
Wilbur Smith Associates, whose projection of population growth
in the Matanuska-Susitna area is far greater than the DLWD and
UA ISER's population projections. To make matters worse, the
consultant's projections put almost all future growth on the
western part of the MSB and not in the Wasilla or Palmer area,
which knowledgeable experts believe is unrealistic.
Unfortunately the state's audit of bridge toll revenue was
cancelled, as just mentioned. According to the paper in
members' packets entitled, "The Real Cost of the Knik Arm
Bridge" substantial costs to the state are unaccounted for by
KABATA. She urged legislators to ascertain how much the project
will cost the state on an annual basis prior to approving these
bills. She cautioned that inadequate traffic projections
resulted in more than $2 million annually as a subsidy for the
Whittier Tunnel, which is a much smaller toll project. Please
do not support HB 23, which would create a state guarantee to
private investors when inadequate toll revenue to cover bridge
costs arises. She concluded that the KAC bridge project is not
a fiscally conservative investment, which would harm the rest of
Anchorage and Matanuska-Susitna area. She urged members not to
pass HB 23 out of committee.

2:25:40 PM

JAMIE KENWORTHY asked to comment on KABATA's financial plan. He
said if HB 23 passes it really won't matter how much toll
revenue is collected and whether the federal government ever
funds the project. This is since the language, referring to the
Sections [4 and 5] [to AS 19.75.221(h) (1)] of the bill,
contains a "must" before the language and a "shall" after it.
He indicated this [language] represents more than a moral
obligation for the bond since this bill would guarantee
administrative costs. In fact, the key [obligation] would be
the guarantee of the annual availability payment. He emphasized
the legislature's focus should be on the guarantee this bill
will give to the availability payments. He said that KABATA
estimates the availability payments at $2.7 million - this time
- without the $500 million TIFIA loan. The financial statements
prepared by Citigroup included revenue based on a four-lane
[bridge]; however, the [financial statement] is only based on
the construction cost of two lanes [of the bridge]. He offered
his belief the project would cost a minimum of $2.6 billion,
which is $3,500 per Alaskan.

MR. KENWORTHY questioned the necessity of the complicated P3
structure. He pointed out that the developer is only investing
$72 million in equity - per KABATA's sheet - but will be taking
out $737 million in net cash flow. As an aside, he suggested
that KABATA has overestimated this amount, which he estimated
would be closer to ten percent or $150 million less, which is
represented in his $2.6 billion figure. Under the bill, the
[legislature] would guarantee the contract so when toll
shortfalls arise the legislature must annually choose to fund
the availability payment contract or adversely affect the
state's credit rating. He said he has read the proposed draft
agreement for the proposed contractors. He offered his belief
that the contract assures the contractor - who will have won a
$1 billion bid to build the bridge - has imbedded in its
availability contract a guarantee of all the payments based on a
10-12 percent annual return on investment. This is without even
considering the impact of litigation for damages since the
contractor will expect construction costs and a call on their
financing profits when a dispute arises. This leads to the
basic question, which is the difference between the interest
rates on funds the state can borrow and the profits the private
partner will receive under the contractual agreement. More
specifically, he predicted the state can currently borrow at
less than 4 percent interest on long-term investments. However,
per KABATA's estimate, which is based on the Citigroup financial
statement, the contractor will earn 12 percent compounded
annually over 35 years. He concluded that the difference
between the $72 million of equity investment and the $737
million of net cash flow out is $500 million. He questioned the
reason that the project has chosen a structure, which would
allow $500 million of state funds through the guaranteed
[availability payment] to be sent out of state. He concluded
that the only answer [for this structure] is that the form of
the P3 structure allows KABATA to say the bridge is free and
further will allow the project to bypass the capital
[improvement] project process that allows the legislature an
opportunity to review project costs, determine if the state can
afford the project, and make choices [on whether to proceed.]

2:30:11 PM

MR. KENWORTHY said he has a cabinet of KABATA's pro forma
financial statements. The statements all arrive at the minimum
bond cover ratio, which is 1.25 to 1.4, depending on the year.
This basically indicates that KABATA will have about $1.30 to
pay $1 worth of costs, he said. However, he offered his belief
that these statements have all been reverse engineered. In
other words, [KABATA] takes the bond cover ratio, plugs in the
proposed TIFIA loan, and subsequently creates the traffic and
tolls necessary to arrive at the bond cover ratio. He referred
to last year's pro forma financial statement. This statement
was based on a $300 million TIFIA loan and had $600 less in
cumulative toll revenue to 2051 than this year's pro forma
financial statement, which is based a $500 million [TIFIA] loan.
He cautioned when the toll estimates move $600 million in one
year the [legislature] should be Leary, especially since this
bill will guarantee the availability payment. In summary, he
offered his belief that this [project] is a house of cards.
It's a house of cards since the private sector doesn't want to
take the risk and the toll forecast firm isn't taking the risk.
In fact, the [toll revenue forecasting] firm's disclaimer
indicates the forecast can't be used in any financial offering.
This [KAC project] is only held up by the guarantee in this
bill. He asked members to carefully examine [proposed AS
19.75.221 - Section 4 of HB 23] and whether the [legislature]
wants to sign up for the full liability.

2:32:23 PM

REPRESENTATIVE FEIGE asked whether he was referring to page 2,
Section 4, line 24.

MR. KENWORTHY agreed to the reference. He clarified that this
language refers to the reserve fund. He pointed out that he has
conferred with a bond counselor. In fact, there are probably
two reserve funds: one for the bonds and a second reserve fund
for the de facto state guarantee, which covers administration,
overhead, or working capital. He wondered what limit KABATA
would indicate as the amount of working capital it would need
since [the bill requires] the KABATA to annually certify
KABATA's cash needs and ask the legislature for the reserve fund
to be replenished. Specifically, he cautioned that last year's
TIFIA application, which was also rejected, had a footnote which
indicated that whenever the reserve fund drops below $50
million, KABATA would ask the legislature to refund it. Of
course, if you ask any bond counselor, these are the magic words
of a moral obligation and there is not any limit to it, he said.

2:34:00 PM

BERNADETTE RUPRIGHT said she is married to Mayor Verne Rupright,
City of Wasilla, but she has previously worked as a surveyor and
has worked in the field of transportation. She spoke in support
of HB 23, due to the earlier testimony that highlighted the
safety issues, access, and growth aspects. She also recalled
earlier testimony given in opposition to the bill based on toll
and population projections. She commented that studies are
normally performed on projects since these projections are done
to provide companies with information since companies want to
move in areas in which they perceive growth.

MS. RUPRIGHT said she would like the growth in the Matanuska-
Susitna area to be 18,000 jobs. Additionally, she would like
Anchorage and the Matanuska-Susitna valley to grow, too, since
this will be an indicator that the state's economy is strong and
people are living well. She predicted this project will bring
money to the economy on the front end and in the long term. She
urged members to please move HB 23 along and let the finance
committee consider the bill. She suggested that everyone would
like to see the state invest a finite amount into the project.

2:36:21 PM

MR. FOSTER deferred some questions to the Department of Law
(DOL) and to KABATA's Chief financial officer. In response to
recurring comments that KABATA has applied for and been turned
down five times by TIFIA, he responded that KABATA has submitted
letters of interest to indicate an interest in the TIFIA
program. At the time these letters have been submitted, KABATA
has been fairly certain that it was unlikely the TIFIA loans
would be granted or that KABATA would be asked to apply for the
loan. He clarified that the process is that a letter of
interest is submitted and are asked to submit an application.
He explained that KABATA has been vetting the process for the
past five applications, and has met with the U.S.-Department of
Transportation (U.S.-DOT) Secretary LaHood in Washington D.C.
about the project. He suggested by submitting the letter of
interest to the Federal Highway Administration will keep them
involved and engaged. He recalled that two weeks ago FHWA staff
attended a hearing, which shows their interest in this project.
Additionally, he met with in June he met with the Under
Secretary [LaHood] and requested a letter to better understand
what KABATA would need to be invited [to submit a letter of
interest.] At that time he responded the project is a good
project and is ready and he sent the aforementioned letter in
response. As far as the timing, he offered his belief that this
is the year for TIFIA. The project has not been turned down
five times. Instead, the KABATA has submitted letters of
interest and have not been asked to make an application;
however, the KABATA had not expected to be asked to make an
application. This year, KABATA submitted a letter of interest
and KABATA hopes to be asked to apply, which would be the first
"true" effort at the TIFIA program. He asked to defer to the
Department of Law to discuss the moral obligation aspect.

2:39:27 PM

JEFF STARK, Assistant Attorney General, Chief, Transportation,
Department of Law (DOL), stated that the discussion on has
language, in proposed Section 4, AS 19.75.221, that creates a
reserve fund and requires KABATA to request replenishment for
the fund when it is depleted. That language is intentionally in
the bill, he said. He explained that basically a legislature
cannot bind future legislatures by creating an obligation that
future legislatures must fund. This creates issues in credit
markets since it's difficult for anyone do business with the
state without a guarantee of payment. Thus the moral obligation
is an accommodation that is worked out in financial markets,
which signals the state does intend to fund the obligations
going forward. By sending this signal, the financial markets
can rely upon the fact that funding will be available, which
therefore reduces the risks and the costs. In fact, this is the
reason the provision is in the bill, which is to reduce the
overall cost of the project.

2:41:28 PM

MR. STARK said prior to 2008, the [KABATA] transaction could be
structured very differently and the developer would have gladly
taken on the revenue or toll risk. However, after the big
financial meltdown that is simply no longer an option for a
project such as this, without a proven record. Thus in order
for this [KAC] project to work, there must be a back stop to the
toll revenues, which is why the moral obligation language is in
bill. It makes the project feasible and will lower the overall
cost to the state; however, from a legal standpoint, "Does
legislature have to fund it in the future?" He answered no. He
acknowledged that one could not assume there won't be any toll
revenues. However, if toll revenues don't meet the expectation,
some obligation exists to continue to make the appropriations to
fund the project, but there is a limit to the appropriations,
which will be in the request for proposal (RFP). He explained
that the RFP will have an affordability curve that will limit
the amount of those payments and if proposals don't come in
within the affordability curve they will be rejected. If none
of the proposals comes in within the affordability curve, there
will be no project, he said. He recalled Representative Feige
asked whether the state could cut off the project and the answer
is yes; that the state could do so. He stated that KABATA will
always have the power to terminate for convenience. He
indicated that figure has been analyzed and if it were to happen
at the absolute worst time, the cost to terminate for
convenience would be $1.4 billion.

2:44:19 PM

CHAIR P. WILSON asked if the state terminates the project,
whether it would affect the state's credit rating. He
acknowledged that if the legislature passes [HB 23 containing]
the moral obligation and did not make the appropriation to
replenish the reverse fund would impact the state's credit
rating. He deferred to the Department of Revenue to more fully
answer; however, he agreed it would have an adverse effect on
the state.

2:44:58 PM

REPRESENTATIVE KREISS-TOMKINS said it seems a little bit of a
ruse to indicate the state could choose to stop payment since it
seems as though the state would either have to pay or would
sacrifice its credit rating.

MR. STARK clarified that the state could terminate from a legal
standpoint. He maintained that the point of the moral
obligation is that the state would decide that this is a project
it wants to undertake and it will fund going into the future.

MR. FOSTER interjected that the asset will belong to the state.
He said the state needs to ask the fundamental question, which
is if an investor or private partner is investing and building
whether the state owes it to them to make the payments. In
terms of determining the convenient clause is to allow the state
an option to buy out the contract. He pointed out the worst
case point would be after the four-lane upgrade to the bridge,
with a 95 percent probability of not making the base traffic
count, 33 percent TIFIA, and if that were to happen it would
cost $1.14 billion to exit the contract.

2:46:45 PM

REPRESENTATIVE FEIGE said the bridge is one thing and he
understood the desire to finance the project. If the state were
to take money from savings and write a check to build the bridge
it would cost significantly less, but the state would also take
on the risk of construction. However, the bridge is only one
part of the transportation system. While Representative Neuman
outlined benefits and time savings of getting trucks to
Fairbanks, it presupposes that one can drive directly to Willow.
Currently, a road to Willow to connect to the KAB doesn't exist.
Although a rail line exists and it is possible to build a road,
perhaps along the rail line, the costs to build a road and the
supporting infrastructure to get vehicles to the west end of the
KAC is not known.

MR. FOSTER responded that under KABATA, the financial model
includes the 14,000 crossing, the A/C Coupler improvements, the
Ingra-Gambell connection, which is basically 18 miles of road.
He reported the DOT&PF has two studies in progress; one is for
the north access and a right-of-way assessment to connect to
Beluga roads. The second study will consider the northbound
from Parks Highway to Big Lake. He related that on a scale of
comparisons, the growth in the Matanuska-Susitna Borough - no
matter whether it is KABATA's model, ISER's model, or the DLWD's
model, the KABATA model differs by only a few percent once the
2010 Census correction is made. In fact, the MSB is growing so
the infrastructure and amount of STIP is already occurring. The
state is building expansion for growth. He didn't think it
mattered whether the growth is at Point MacKenzie upgrades to
Knik-Goose Bay road or from the Big Lake connection north since
the state is already paying for that infrastructure. In fact,
this bridge would defer the Glenn and Parks Highway expansion,
which in 2008 was estimated at $3 billion. He reiterated that
KABATA has not looked at area outside the scope of the project,
but the DOT&PF has been conducting some planning studies.

2:49:56 PM

REPRESENTATIVE FEIGE asked how much the expansions will cost.

MR. FOSTER answered that he did not have the information with
him, but offered to follow up with Mr. Ottesen and present it to
the committee.

2:50:17 PM

REPRESENTATIVE FEIGE expressed his concern about the Wilbur
Smith reported population figures. He said the projections
ranged from 135,000-200,000, which leads him to question the
ability to predict the future population growth. He remarked
that he has not seen anything in the past three years with
respect to the Wilbur Smith report that would identify where the
population growth will occur. He asked for a copy of the entire
report to make his own determination from the raw data.

MR. FOSTER offered to provide this to the committee.

The committee took an at-ease from 2:51 p.m. to 2:53 p.m.

2:53:00 PM

CHAIR P. WILSON referred to an earlier concern that the
projected costs were based on traffic for four lanes of bridge,
but the costs only considered the cost to construct two lanes.
She asked for an explanation.

2:54:16 PM

KEVIN HEMENWAY, Chief Executive Officer (CEO), Knik Arm Bridge
and Toll Authority (KABATA) Department of Transportation &
Public Facilities (DOT&PF), pointed out that the base case
financial models is based on 33 percent TIFIA and building the
capacity improvements and project extensions when the traffic
and revenue consultants believe they will need to be done to
maintain a level of service of C or better. Depending on the
type of road, such as bridge with no on-off ramps, wide
shoulders, 70 mile per hour geometry can carry a lot of through
traffic versus a road with on and off ramps or even at-grade
intersections. Thus all of these things affect the
calculations. He said he is not a traffic and revenue
consultant, which is why the experts are hired. However, in the
financial models, the points in time indicate when the
construction needs to occur to maintain a C or higher level of
service, which he characterized as a high level of service. He
said that means traffic flows freely. Further, in the base case
model upgrades to the Point MacKenzie Road section and the
project extensions to bring a second connection to Ingra-Gamble
are planned for 2025.

MR. HEMENWAY said the sections on roadway behind the Port of
Anchorage will be built to a four-lane foundation up front, but
the lanes would be added in 2030 to meet the level of service of
C in the base-case financial model. However, if traffic
develops faster, these improvements would be built sooner, but
if traffic develops slower the projects could be deferred since
these are not contractually committed to upfront. Thus the
project has maintained considerable flexibility in the way the
transaction is structured; however, the financial models do take
those into account as well as considering a range of potential
traffic and revenue outcomes outlined analyzed through Monte
Carlo simulations that KABATA will discuss with the finance
committee. In response to Chair Wilson, Mr. Hemenway said it is
KABATA's responsibility as agents of the state to look at the
total life-cycle cost of owning this project, but the
contractual commitment up front is just for the facility for the
two-lanes with methods to add in the additional lanes later, at
KABATA's option, but it is not contractually committed.

CHAIR P. WILSON reiterated she wanted to be sure the House
Finance Committee is aware of the amount requested for the next
ten years; however down the line this is the potential return.

MR. FOSTER related that information from last year's testimony
Jeff Ottesen Department of Transportation & Public Facilities
(DOT&PF) reported that Anchorage would need about $69 million
for upgrades in Anchorage related to the KAC; and the Matanuska-
Susitna Borough would need approximately $20 million until 2035
for the road improvements. These figures do not consider the
FHWA funding as part of the project, that it would be the state

2:59:01 PM

REPRESENTATIVE FEIGE asked what category of road this would be
for the state.

MR. FOSTER answered that he only reported the dollar amounts
that DOT&PF reported in terms of the highway funding, but he was
unsure which connectors would be funded that connect to the KAB
project boundaries.

[HB 23 was held over.]

3:00:15 PM