Legislature(2021 - 2022)ADAMS 519
04/16/2021 09:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB100 | |
| HB92 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 100 | TELECONFERENCED | |
| *+ | HB 92 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 92
"An Act relating to borrowing in anticipation of
revenues; relating to revenue anticipation notes;
relating to line of credit agreements; and providing
for an effective date."
9:32:54 AM
LUCINDA MAHONEY, COMMISSIONER, DEPARTMENT OF REVENUE,
provided a PowerPoint presentation titled "State of Alaska
Department of Revenue: HB 92 Revenue Volatility Tools,"
dated April 16, 2021 (copy on file). She explained that the
bill modernized the states cash management tools in order
to increase the investment income from treasury funds and
the Alaska Permanent Fund Corporation (APFC). The last time
the statute was updated was in the 1960s. She believed the
update was necessary to leverage investment income and
bring maximum returns on investments. She emphasized that
the reason for HB 92 was to better manage intra-year funds.
Currently, when the state borrowed from the Constitutional
Budget Reserve (CBR) it resulted in cash flow mismatches.
The bill provided access to more modern short-term
financing tools that allowed the state to borrow externally
on a short-term basis and leveraged funds internally by
keeping them invested.
9:35:29 AM
Commissioner Mahoney turned to slide 2 titled Agenda and
reviewed the presentation agenda:
Goal
Limitations of current statutes (AS 43.08)
Cash Flow Mismatches
Access/Harm to Other Funds if needed for cash
management
Benefits of modernizing financing tools
Mechanics of the Bill
Questions
Commissioner Mahoney delineated that AS 43.08 allowed the
Commissioner of the Department of Revenue (DOR) to issue
Revenue Anticipation Notes. However, there were many more
modern tools the state lacked access to. The proposed tools
allowed for lower interest rates on debt and to manage and
leverage the cash in the cash pool. She offered that
mismatches occurred when expenditures were due before the
revenues needed were received within the same fiscal year.
She elaborated that access to a line of credit or other
financing tools enabled short-term borrowing earning a
higher rate of return than the cost of the debt, which was
called arbitrage. It also delivered more investment
income to the bottom line.
Co-Chair Merrick requested that the commissioner keep the
topic at a high level overview.
9:37:41 AM
Commissioner Mahoney turned to slide 3 titled Goal of HB
92: Improve Cash Flow Management:
Addresses cash flow MISMATCHES, not deficits.
Current statute AS 43.08 allows for "Revenue
Anticipation Notices" (gold circles) which is
only one of short term borrowing structures, and not
always the best fit
Bill enables access to short term debt management
tools available in the market i.e.
Commissioner Mahoney stressed that the bill addressed cash
flow mismatches, not deficits. She indicated that the slide
also provided a visual of the cash management tools
available and pointed to the gold circles that named the
types of Revenue Anticipation Notes and the other colored
circles represented only some of the tools currently
available. She maintained that the world of public finance
was constantly changing. She pointed to the left side of
the slide that represented Capital Market Products and the
right showed products directly from banks or Bank Market
Funded Products. The bank products offered more
flexibility. It was impossible to anticipate every
circumstance where it was beneficial to employ the short-
term financing tools, which was why the state needed access
to every tool available.
9:39:30 AM
Commissioner Mahoney advanced to slide 4 titled Cash Flow
Mismatches:
$400M is minimum balance needed to manage cash
flow
Expenditures can occur prior to receipt of
revenue, resulting in cash flow timing
mismatches:
? Federal programs require expenditures
before reimbursement - Medicaid,
Transportation, etc.
? Beginning of the year appropriation
transfers and cash flow needs State
pension payments, transfers to subfunds,
construction peak season in summer.
Cash flows may be impacted by external events:
? Spike in Medicaid expenditures.
? Federal Shutdown.
Commissioner Mahoney communicated that $400 million
represented two days' worth of high cash needs for the
state. At the point where it was anticipated to need 5
days' worth of revenue, the department turned to the CBR
for borrowing. She commented that mismatches were
experienced throughout the year. She exemplified that
Medicaid caused DOR to spend money in advance of receiving
federal reimbursement and in those situations, she borrowed
from the CBR. Because the CBR was depleted, the department
had to adjust the asset allocation in the CBR, so its funds
were placed in cash equivalent investments which was
earning 1.7 percent instead of a higher interest rate. She
reiterated that the legislation was about borrowing at
lower rates and reinvesting at a higher rate to generate
more net income.
9:41:28 AM
Commissioner Mahoney reviewed a line graph on slide 5
titled Cash Flow Mismatches. The graph depicted
Cumulative Revenues and Expenditures by Week, Excluding
CBR Borrowing in 2019. The gold line represented revenues
and the silver line showed expenditures. She explained that
during the first six weeks of the year the expenditures
were significantly more than revenues due to many upfront
payments during that time. As a result, DOR may have to
borrow from the CBR in such situations, however the graph
was merely intended to provide a visual.
9:42:26 AM
Representative Rasmussen asked if slide 5 was based on
fiscal year or calendar year. Commissioner Mahoney replied
the graph reflected a fiscal year.
Commissioner Mahoney advanced to slide 6 titled Current
Access to Other Funds. The slide contained a chart of some
state funds, their balances and interest earnings. She
pointed to the CBR and reiterated the change to a cash
equivalent investment strategy earning .17 percent. If the
CBR was depleted, she had to look to other high interest
earning funds to help manage cash. She stated that the
scenario was not wise finance management.
Representative Josephson looked at slide 6 showing the
Permanent Fund Earnings Reserve Account, Power Cost
Equalization (PCE), and the Higher Education Fund. He asked
if the funds could statutorily be accessed in a pinch.
Commissioner Mahoney deferred to her colleague.
9:44:17 AM
PAM LEARY, DIRECTOR, TREASURY DIVISION, DEPARTMENT OF
REVENUE (via teleconference), replied that two funds were
not statutorily prohibited to be borrowed from. They were
included in the sweepable funds that were swept into the
CBR and could be accessed if there was a need for
borrowing. Representative Josephson wondered if the CBR was
reverse swept before July 1 and the Treasury could not make
its payments whether the Treasury was allowed to borrow
from PCE or the ERA above the 5 percent draw for some
length of time. Ms. Leary answered that currently the way
the General Fund (GF) was managed was money was taken from
the ERA and CBR as needed. She explicated that the bill
allowed the department to take funds from the CBR, the 5
percent ERA draw was used to manage state funds.
Representative Josephson expressed confusion because the
slide was titled "current access to other funds." He had
thought they were talking about something different.
Representative Wool stated his understanding that the
minimum advisable balance for the CBR was $400 million to
$500 million. He wondered why the entire amount of the CBR
was in a cash access fund. He deduced that $1 billion was a
lot to have invested in cash.
9:47:38 AM
Commissioner Mahoney answered that until six months prior
the CBR was invested farther out on the yield curve, but
until the recent increase in oil prices the department had
been unsure of the amount of deficit and needed revenue and
had adjusted the asset allocation. She wanted to ensure
necessary cash flow was available throughout the year.
Currently, the price of oil increased and she was
considering adjusting the CBR back out on the yield curve.
She stated that the situation reflected that the department
was doing its job managing cash flow. The bill was about
having other tools versus only adjusting for asset
allocation. She would rather have the CBR allocation
farther out on the yield curve for a longer period of time
then managing it so closely for the short-term knowing they
could make arbitrage.
9:48:54 AM
Commissioner Mahoney advanced to slide 7 titled "Benefits:
Enables the Treasury and APFC to maximize returns
and income
? Takes advantage of low short term interest
rates. Today's cost for $100 million 12
months:
? Commercial paper - .8% (.2% interest plus.2%
cost of issuing and liquidity cost of .4%)
? Line of Credit .55% (75% fixed rate of .4%
plus .2% interest when drawing down and .15%
costs of issuing)
? Weekly VRDN - .74% (.04% interest plus .2% cost
of issuing, .1% remarketing and .4% liquidity
cost)
? RANS - .36% (.16% interest plus .2% cost of
issuing)
? Enables current funds to remain in longer lived
higher interest-bearing accounts (APFC, CBR,
PCE, Higher Ed, etc.) earning more income
? Scheduling of POMV payments
? Improved liquidity management
? Enables quick access to funds in case of
emergency
Commissioner Mahoney reiterated that the short-term notes
would enable DOR to better manage the states money. She
elucidated that the legislation would also help the APFC by
offering better tools to manage the POMV payments to the
state. She furthered that currently, the POMV was managed
over 10 months at $300 million per month based on the $3
billion payout. She relayed that there was currently a
large commitment of $8 billion to $9 billion for capital
calls to invest in a private equity fund. The APFC had to
manage the liquidity of the Permanent Fund (PF) and managed
for the monthly $300 million payment. If the department had
access to more financing tools the department could allow
APFC to push out the POMV payments farther towards the end
of the year within the same fiscal year or at a better time
when the APFC could liquidate investments. The department
could take out a short-term note to cover payouts until it
received the funds from the APFC. The scenario increased
the investment income in the PF.
9:51:45 AM
Commissioner Mahoney turned to slide 8 titled hypothetical
example of potential benefit. She related that the slide
depicted the cost of borrowing for various financing tools:
Revenue Anticipation Note, Variable Rate Note, Commercial
Paper, and a Line of Credit. The chart included cost of
borrowing, low and high earning potentials, and the income
generated from borrowing using short-term notes.
9:53:08 AM
Commissioner Mahoney concluded with slide 9 titled HB 92
Mechanics:
Funds borrowed would be repaid no later than the
fiscal year following issuance
Repayment of funds would be made from revenues
anticipated within the fiscal year in which funds
are borrowed
The borrowing pledges the full faith, credit,
resources, and taxing power of the State of
Alaska (identical to general obligation bonds)
Due to the size of Permanent Fund earnings tax-
exemption may not be available for the borrowing
Provides structural alternatives to the currently
authorized revenue anticipation notes that are
available in today's short-term market
Representative Edgmon stated that it all seemed so obvious
he wondered why it had not been done before. He asked about
risk and rewards. He deduced that it basically ring-
fenced the CBR at a certain level. He spoke to the risk
versus reward tradeoffs. He thought that there was a bigger
picture regarding risk and rewards.
9:55:19 AM
Commissioner Mahoney answered that she did not really know
why it had not been done before. She recognized that there
had been a much larger balance in the CBR so there was
likely not attention to the level of revenue generation.
She voiced that regarding the risk versus reward there was
always risk in an arbitrage play. She shared that she had
engaged in arbitrage for 5 years for the Municipality of
Anchorage and always had a positive outcome. She spoke to
the need to be careful but believed that the employees in
the Treasury and DOR could easily deliver. Representative
Edgmon believed it would be helpful to hear from the
director of the Alaska Permanent Fund Corporation (APFC).
Commissioner Mahoney had spoken to Angela Rodell, Executive
Director, Alaska Permanent Fund Corporation to provide
testimony during the hearing but she was unavailable.
Representative Rasmussen asked what the commissioner
believed her roll was in terms of what she owed to Alaskans
as overseer of the states assets. Commissioner Mahoney
answered that it was her responsibility as fiduciary to
oversee all funds in compliance with the laws and to manage
the department. She believed it was also her duty to
maximize investment income and modernize the ways of
investing.
9:58:28 AM
Representative Rasmussen thought the commissioner should
have all the tools allowing the department to execute what
was in the best financial interest to the state. She found
it shocking the statute had not been updated since the
1960s. She supported the bill.
Representative LeBon thanked Commissioner Mahoney for her
presentation. He strongly supported the bill. He thanked
the commissioner for meeting with him in person the
previous day about the bill. He thought the tools should
have always been available to DOR and he believed it was
long overdue. In the world of short-term financing, the
timing was critical for passage of the bill sooner rather
than later to allow the commissioner rapid access to the
tools.
10:00:55 AM
Representative Edgmon supported the bill and believed he
needed to learn more about it. He determined that the
necessary minimum amount of what should be in the CBR was a
gray area and unanswerable question. He considered the
CBR a checking account of sorts. He believed that if the
CBR maintained a $1 billion balance the investment tools
were a no brainer. However, if the CBR was depleted to
$400 or $500 million he was interested in knowing more
about the tradeoffs. He strongly believed $400 million was
the bare minimum that should be in the account and would
like to learn more about the bill.
Representative Wool stated that the legislature kept
hearing that $400 million to $500 million was the bare
minimum balance that should be in the CBR. He referenced
Commissioner Mahoney's testimony stating because the price
of oil decreased the CBR balance needed to increase and if
the financial tools were available more of the CBR could be
kept in a higher earning account. He had not previously
heard that analysis. He deduced that if money could be
borrowed on the short-term then it could be argued that an
even smaller balance could be kept in the CBR. He reasoned
that the CBR was a political and fiscal account, and it was
beyond a simple cash account. He asked if linking the CBR
balance to the price of oil or having additional financing
tools changed the number the legislature was told was the
minimum needed in the CBR.
10:05:09 AM
Commissioner Mahoney viewed reserves differently. She
reasoned that there was a cash flow mismatch reserve and
there was also the potential for deficits. She determined
that cash flow management reserves were different than a
deficit reserve situation. She elaborated that when she had
referred to a price of oil decline, she considered it a
deficit situation therefore she would want the CBR balance
to be higher, because the future was unknown. She stated
the complexity of the issue and shared that the department
had staff exclusively dedicated to work on cash flow
management.
HB 92 was HEARD and HELD in committee for further
consideration.
Co-Chair Merrick reviewed the schedule for the following
Monday.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 92 Transmittal Letter 02.04.21 .pdf |
HFIN 4/16/2021 9:00:00 AM |
HB 92 |
| HB 92 Sectional.pdf |
HFIN 4/16/2021 9:00:00 AM |
HB 92 |
| HB92 presentation FINAL.pdf |
HFIN 4/16/2021 9:00:00 AM |
HB 92 |