Certificates of Participation appropriate for new buildings

Posted: Wednesday, March 24, 2010

Gov. Sean Parnell's proposal to pay for the University of Alaska Fairbanks Life Sciences Classroom and Lab Facility and the Anchorage Crime Lab with Certificates of Participation is the right funding mechanism considering today's fiscal climate.

The governor has steadfastly focused state investments on jobs and this strategy stays true to that goal. Specific to the university facility, the governor's strategy addresses immediate construction jobs, sustains growth in jobs created by competitive federal and privately funded research important to Alaskans, and provides the undergraduate and graduate education for Alaska's students to become wildlife biologists, natural resource managers, doctors, veterinarians, scientists and a host of other occupations.

COPs create a tax-exempt, lease-to-own financing mechanism for capital improvement projects. Using strictly cash, or state general funds, is a viable approach as well. However, the market interest rates are as low as they have been in our generation, which adds to the attractiveness of COPs. COP financing has been used in the recent past to fund the state Department of Health and Social Services Public Health Lab and Medical Examiner's facility, the Department of Environmental Conservation Seafood and Food Safety Lab, and the DHSS Virology Lab. There is abundant, successful and sound precedent for this financing approach.

COPs are more cost effective for the state than a large General Obligation bond, which typically includes many different projects across the state (i.e., "something for everybody" in order to gain votes). The earliest a GO bond would be issued is December 2010, and it would have to include many more projects than the targeted COP approach, with just two high-priority projects.

Market conditions by December 2010 are not predicted to be as good as they are now. Financial market experts believe rates will rise in the near term and, nationwide, to take advantage of Build America Bonds there will be a large volume of government issue bonds sold in late 2010, driving up borrowing costs. These two conditions are major disadvantages to a GO bond approach.

Building the Life Sciences project in phases also has been discussed. But delaying today's construction costs means adding to the overall bottom line, because of inflation. A phased approach wouldn't allow the state to take advantage of today's very competitive market conditions and could even hurt the university's opportunity to use its own $20.6 million in Build America Bonds for the project. It makes no sense to delay a project that has been a priority of the University of Alaska Board of Regents, the statewide governing board for the entire UA system, for the last 10 years.

Building the UAF Life Science Facility will employ 370 workers who will earn an estimated $80 million payroll over the construction period; 220 direct construction jobs and an additional 150 related and indirect jobs. The new facility allows for growth in externally funded university research, an enterprise that leverages $6 from external sources for every $1 of state investment.

UA research is a silent giant in Alaska's economy, bringing $150 million to the state each year, employing nearly 2,400 people who earn, directly and indirectly, a $92 million annual payroll.

Parnell's approach to financing both the Life Sciences project and the Crime Lab with COPs is thoughtful and maximizes the state's investment. We encourage the Legislature's full consideration.

• Tim Brady is vice-chair of the University of Alaska Board of Regents and is president of Ken Brady Construction Co. of Anchorage. John MacKinnon is executive director of the AGC and former deputy commissioner of the state Department of Transportation.

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