Agency OKs bonds for Mat-Su prison sewer project

Posted: Monday, December 06, 2010

ANCHORAGE - A state loan agency agreed to a complex deal Friday to sell up to $20 million in bonds to finance the troubled private sewer project at the new Mat-Su prison in the Goose Bay area.

Board members and staff of the Alaska Industrial Development and Export Authority said the deal was so unusual they had to bypass two state laws governing their loans, something they are allowed to do only under special circumstances. One board member complained the deal was being rushed through on short notice despite its complexity.

The deal relies on the state agency's credit, would make the agency the 100 percent owner of the wastewater plant and takes advantage of an expiring tax break in the Obama administration's economic stimulus package.

The public financing package bails out a nagging issue that has persisted since early spring in one of the biggest projects of the Palin administration, the $240 million, 1,536-bed Goose Bay Correctional Center. The medium-security prison is about three-fourths complete and is supposed to open in early 2012.

With then-Gov. Sarah Palin's backing, the Mat-Su Borough administration decided to build the project in a remote area of the borough across Knik Arm from Anchorage and lease it back to the state Department of Corrections, which would operate it. The project creates what is essentially a brand-new town in the middle of nowhere.

But how to pay for the water and sewer utilities in an area where there had mainly been residential and agricultural wells, septic systems and outhouses has been unresolved since early spring. Borough officials promoted the prison project as a benefit for borough residents with neither cost nor risk to local taxpayers, and refused to develop government utilities there that could have been financed with municipal bonds.

Instead, they sought proposals from private developers who could provide the water/sewer package under a "design-build-operate-finance" scheme. A new company owned by four Valley businessmen, Valley Utilities LLC, won the bid, worth about $28 million.

One of the partners, Howard Nugent, said at the AIDEA meeting Friday that the water utility component was close to completion and was already delivering treated water to the prison so its plumbing could be tested. The wastewater plant, however, is a masonry shell with a partial roof and equipment on order.

Construction of the sewer plant is being financed through a bank loan, but the loan is only short term. Nugent sought AIDEA financing as long-term solution for paying off the bank loan. There was enough money in the Goose Bay prison construction budget to finance the smaller freshwater project, said borough purchasing official Rustin Krafft.

Last spring, state Revenue Department officials objected to proposed financing for the utilities using tax-free bonds because they said the proposal, as structured then, would have put the state's top credit rating at risk, resulting in higher interest rates for all borrowing. To keep utility construction in phase with prison construction, Mat-Su Borough officials proceeded with the Valley Utilities proposal even though long-term financing remained in limbo.

Ted Leonard, AIDEA's executive director, said Valley Utilities could have gotten a loan through a bank, but would pay between 7 and 7.5 percent interest. That wasn't a problem for the owners of Valley Utilities - they'd make their expenses and profit regardless under their cost-plus contract. Instead, the interest would be paid by the state through utility fees billed to the Corrections Department, Leonard said.

But if AIDEA financed the project through tax-free bonds, interest would be less than 5 percent, he said. That would amount to a savings of millions of dollars in interest over the life of the 20-year loan, a direct benefit to the state treasury.

Earlier this year, Krafft, the borough purchasing official, told the borough Assembly that the state would be paying a daily charge of about $5.35 for each inmate for water and sewer if financed with tax-exempt bonds. A bank loan would require even higher rates, Krafft said.

The comparable daily charge per inmate at the Hiland Mountain Correctional Center near Anchorage was about 53 cents, Krafft said.

Leonard told the board it had to act quickly.

Because the loan was going to be used to pay back the construction loans of a private company, IRS rules say the state bonds would be tax-free for only some taxpayers - those not subject to the alternative minimum tax. That tax was created to ensure that the wealthy paid taxes despite loopholes they could find.

The Obama stimulus package removed that restriction, but only until Dec. 31, said AIDEA consultant Pat Clancy. The state could save another half-percent of interest if it could market bonds to taxpayers normally subject to the alternate minimum tax, he said, but only if the AIDEA board approved the package Friday.

That brought a complaint by board member Robert Sheldon, a private financial manager.

"This is one of the most complex arrangements I've ever seen," Sheldon said. "I spent 2 1/2 hours working through this and still have a number of questions."

Ultimately, though not all his questions were answered, Sheldon voted with the other four members in favor of the deal, accepting the argument of board chairman Pat Galvin, the outgoing state Revenue commissioner.

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