Legislature(2017 - 2018)HOUSE FINANCE 519
04/19/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB97 | |
| HB150 | |
| HB167 | |
| HB90 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 74 | TELECONFERENCED | |
| + | SB 34 | TELECONFERENCED | |
| + | SB 97 | TELECONFERENCED | |
| + | HB 150 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 90 | TELECONFERENCED | |
| += | HB 167 | TELECONFERENCED | |
SENATE BILL NO. 97
"An Act relating to pension obligation bonds."
1:39:24 PM
SENATOR ANNA MACKINNON, SPONSOR, explained that the bill
took the current statutory $5 billion pension bonding
authority and reduced the amount to $2.5 billion. In
addition, the legislation required the administration to
submit a proposal to the Legislative Budget and Audit
Committee (LBA) within 45 days of issuing any pension
obligation bonds (POBs). She noted that the procedure was
the same as any RPL (request per legislature). She pointed
out that the process included the legislature in the
process and allowed for time to respond if necessary. She
believed the administration supported the legislation. She
recounted that in the prior year when the administration
proposed the POB plan, her constituents requested the bill
and questioned whether any amount of the authorization
should be spent on POBs due to the inherent risks. She
thought that the administration had proposed a very
conservative approach to POB's. She detailed that unlike
other cities or states, the administration's plan "did not
take all of the benefits upfront." Other states that had
defaults with POB's "took all of the benefits when they
were most at risk." The state's approach deferred the
smaller payments until the end of the loan proposition. She
reiterated that the administration's approach was
conservative. She informed the committee that if the state
had issued POB's in 2007 the results would have been
positive. Had the Walker administration issued POB's last
year positive gains were also anticipated. She qualified
that the "positive influences" needed 20 to 30 years to
come to fruition which prompted her to introduce SB 97. She
believed that the legislation did not tie the hands of the
administration, invited engagement with the legislature,
and added a layer of transparency to the process. She
offered to review the sectional analysis.
1:43:16 PM
LAURA CRAMER, STAFF, SENATOR ANNA MACKINNON, read the
sectional analysis:
*Section 1: Requires a subsidiary created under the
Alaska Housing Finance Corporation to submit a
proposal to the Legislative Budget and Audit (LB&A)
Committee prior to borrowing money and issuing bonds
for the purpose of financing or facilitating financing
of a governmental employer's share of unfunded accrued
actuarial liability of retirement systems
*Section 2: Creates a new subsection outlining the
process for submitting a proposal to the LB&A
Committee
*Section 3: Requires the State Bond Committee to
submit a proposal to the LB&A Committee prior to
issuance and sales of bonds for the purpose of
financing or facilitating financing of a governmental
employer's share of unfunded accrued actuarial
liability of retirement systems, including the costs
of issuance and administration
*Section 4: Creates a new subsection outlining the
process for submitting a proposal to the LB&A
Committee
*Section 5: Amends the pension obligation bond limit
from $5,000,000,000 to $2,500,000,000
*Section 6: Requires the Pension Obligation Bond
Corporation to submit a proposal to the LB&A Committee
prior to issuance and sales of bonds for the purpose
of financing or facilitating financing of a
governmental employer's share of unfunded accrued
actuarial liability of retirement systems, including
the costs of issuance and administration
*Section 7: Creates a new subsection outlining the
process for submitting a proposal to the LB&A
Committee
*Section 8: Requires the Alaska Municipal Bond Bank
Authority to submit a proposal to the LB&A Committee
prior to issuance of bonds, notes, commercial paper,
or other obligations for the purpose of assisting
employers to prepay all or a portion of their share of
unfunded accrued actuarial liabilities of retirement
systems in an effort to reduce their costs
*Section 9: Requires a subsidiary created under the
Alaska Municipal Bond Bank Authority to submit a
proposal to the LB&A Committee prior to borrowing
money and issuing bonds for the purpose of financing
or facilitating financing of a governmental employer's
share of unfunded accrued actuarial liability of
retirement systems
*Section 10: Creates a new subsection outlining the
process for submitting a proposal to the LB&A
Committee
*Section 11: Conforming language for the powers of a
subsidiary corporation created under the Alaska
Municipal Bond Bank Authority
*Section 13: Conforming language for the issuance of
bonds and notes by the Alaska Municipal Bond Bank
Authority
1:45:06 PM
Vice-Chair Gara recalled that in 2007 he was supportive of
investing in POB's. He noted the unpredictable nature of
the stock market. He wondered why the current investment
climate with rising interest rates was a good time to
invest in POB's. Senator MacKinnon explained that in 2007
the state was facing a $10 billion to $12 billion pension
liability of which, the $5 billion figure was roughly 50
percent of the liability but did not factor in the unfunded
liability for healthcare costs. When the legislature issued
a cap of $5 billion it was less than 50 percent yet still
considered a significant amount. Currently, the state's
unfunded liability was $6.1 billion. The $2.5 billion
number was less of a ratio but still reduced the liability
and was close to the amount the administration deemed
reasonable to sell in the market at one time. The unfunded
liability was only as accurate as the performance of the
assumptions of the rate of the return. She clarified that
the $$6.1 billion figure was as reliable as the credit
rating agencies reports that contained the numbers and were
based on assumptions that the state's actuaries calculated.
She reminded the committee that the legislature contributed
$3 billion in FY 15 in order to reduce the debt load.
Co-Chair Foster noted Representative Pruitt had joined the
meeting.
Vice-Chair Gara commented that he understood the risk and
ascertained that in hind sight, he wished the state issued
the POB's in 2007. He asked why POB"s were authorized in
the past but never issued. Senator MacKinnon confirmed that
POB's were issued in 2007 but no proposal was ever issued
until the current governor believed that the market was
"timed right." She related that the public opposed the bond
issue because of the risk and the proposal was "met with
resistance."
1:50:22 PM
Representative Grenn cited the sponsor statement and read
the following:
Credit rating agencies continue to monitor our
activities and the policy measures we pass to improve
our financial foundation.
Representative Grenn inquired whether lowering the bonding
authority contributed to improving the state's fiscal
foundation or was a "prudent" change to protect our credit
rating. Senator MacKinnon believed that lowering the
authority would be positively viewed by the market and the
agencies.
Representative Ortiz asked about any potential downsides of
the action. Senator MacKinnon responded that she did not
see any. She indicated that she always attempted to balance
both sides of the issue with any legislation. She
acknowledged that many thought POB's were too risky and
should be avoided. She agreed that the bonds required 30
years of returns to work and were risky. She thought the
legislation was a compromise and was a "nod" to the credit
rating agencies that sent the message that the state was
not relying on debt to solve the problem. She added that
utilizing debt might be a component but not the entire
approach. Representative Ortiz asked what the negatives
were of taking the liability down to zero. Senator
MacKinnon pondered whether the legislature could "sustain a
legislative override" for a governor's veto. She had
confidence that both legislative bodies endorsed a
reasonable approach to alert credit agencies that they took
the state's financial situation seriously by not totally
relying on debt to solve the problem. She mentioned the $3
billion pension liability payment as proof.
1:54:15 PM
Co-Chair Seaton mentioned the idea of taking the unfunded
liability to zero. He wondered at what point the state was
required to pay post-retirement pension adjustments the
state was required to pay to the retired employees. Senator
MacKinnon reported that when the state hit 100 percent [no
liability] the retirees could ask for additional benefits.
When the $3 billion payment was made in FY 15 the
legislature's goal was to achieve 80 percent funding of the
state's liability and was the point debt could be repaid
with "positive investment returns." She had voted with many
of her colleagues in favor of much of the money paying for
the Teaching Retirement System (TRS) instead of Public
Employees' Retirement System (PERS). She delineated that
the TRS debt was entirely the state's debt but PERS was
shared with the municipalities at a 60 percent to 40
percent split. The House and Senate came together to pay
the state's 100 percent debt and attempted to achieve an
overall 80 percent ratio. She cautioned against achieving a
90 percent ratio because if the state over-contributed than
retirees could ask for more. She believed in being
cognizant of how much the state could fund the liability.
She thought that the state's estimated unfunded liability
was understated due to the current rate of return. Co-Chair
Seaton recapped that Senator MacKinnon discussed that the
state owned 100 percent of the TRS liability and only 60
percent of the PERS. He queried whether the state would be
better off funding its 100 percent liability versus the
PERS system. He indicated that if the state funded PERS at
100 percent liability, the state would pay the
municipalities' retirement reimbursement and end up paying
for their debt. He asked whether she objected directing
POB's to the TRS system.
1:58:47 PM
Senator MacKinnon responded that the bill was in the
committee's possession and she would trust the judgement of
the committee. She detailed that when the state established
the 22 and 12 percent ceilings on municipal contributions
the numbers were a compromise. The municipalities asked the
state of Alaska to help fund the liabilities. The state
chose to help by extending the years on the debt and
thereby lowering the payments. She did not think the state
should turn away from the municipalities struggle with
meeting the payment obligations and avoid burdening the
local communities further by not providing more than 60
percent. She advocated working together in the best
financial interest of all and not exclude helping the
municipalities. She hoped that the administration would
talk with the legislature regarding the municipalities when
considering POB's. She remembered that the legislature
directed the administration to deposit much of the $3
billion to TRS but still wanted to make a deposit into the
PERS system to help local communities and the state. She
remarked that the cap set at 22 percent meant that the
state was paying the portion above 22 percent.
Representative Pruitt questioned the role of LBA in the
bill. He noted that ultimately the administration could
make its own decisions regarding RPL's. He asked whether
the sponsor considered granting LBA the ability to
ultimately veto an issuance of POB's. Senator MacKinnon
responded that last year the administration had responded
to concerns raised by the House and Senate Finance
Committees regarding the proposed POB plan. She revealed
that any issues raised against POB's could cause "the
buyers to increase the cost of debt through risk." "The
minute the legislature starts talking in a negative way the
administration had to include the documentation in the bond
packets." She concluded that LBA was the appropriate place
to decide on the issuance because if the administration
decided to proceed regardless, all that was needed to stop
the process was for the legislature to write a letter and
the credit rating would increase. She relayed that the
Senate Finance Committee had written a letter without prior
knowledge of the consequences. She felt that the
administration was sensitive to the issue and the reaction
of the legislature. In addition, the state's debt manager
was required to relay any issues to the purchaser of the
bonds. Representative Pruitt acknowledged that the
administration had consulted with the legislature over
whether to proceed with the POB's. He surmised that Senator
MacKinnon was comfortable with LBA's role due to the
increased costs of bonding signaled by any resistance from
the legislature. Senator MacKinnon replied in the
affirmative. She discerned that even a dialog raising
concerns about POB's in the LBA committee process could
trigger a rate increase based on borrower's discomfort. She
felt comfortable with the language but deferred to the
committee.
2:07:20 PM
Representative Guttenberg reminded members to refer to
Mayor Navarre's comments on the debt liability and its
origins in previous testimony. [Mayor Mike Navarre, Kenai
Peninsula Borough, Presentation to the House Finance
Committee on March 28, 2017] He surmised that last year
when the governor announced the POB issuance and received
strong opposition resulting in his decision not to proceed
indicated that the "process did work." He thought that the
LBA provision in the bill in favor or against held
"significant" sway over whether to proceed or not. He felt
that the state already had a system that appeared to work.
He wondered why the process needed to change. Senator
MacKinnon relayed that the debt to bonding authority ratio
was presently a significantly larger portion of potential
indebtedness that carried great risk. The bill offered a
similar ratio as the situation in 2007. She qualified that
the state was underestimating the liability but did not
think the ratio should be above 50 percent especially
without approval of the legislature. She revealed that the
administration was supportive of the lower authority. She
maintained that SB 97 was a positive move for the states
bond rating and offered a positive ratio. She believed that
the LBA provisions created a formal process to include the
legislature in the decision. Representative Guttenberg was
wondering what the state was trying to fix. He reiterated
his belief that the system worked last fall. He suggested
that merely not using the $5 billion authority was an asset
and had a value. He felt that the authority and its best
use was "a tool in the state's coffer." He believed that
the administration's acceptance of the lower bonding
authority was its "standard answer" for "making do" with
less.
2:13:58 PM
Representative Thompson was sensitive to the issues
regarding the local contribution. He spoke to his
experience as the previous mayor of Fairbanks. He recapped
that when he was mayor the city had requested its PERS
balance from the state actuarial. He reported that the city
was told it had an excess of $35 million and three years
later the state claimed the city owed $130 million. He
noted that the 22 percent cap was imposed in response to
the situation. Senator MacKinnon replied that the bill did
not alter the contribution rate. She countered that credit
rating agencies were aware that Alaska could utilize its
unissued debt and further indebt the state. The situation
jeopardized the state's bond rating. She commented that the
by reducing the bonding authority the legislation put the
state in the right direction. She advocated taking the
state's pension obligation "very seriously." She spoke to
the current fiscal crisis and funding the $2.8 billion
budget deficit as a priority and considered the $6.1
billion pension obligation and future indebtedness as a
"background issue" that needed to be addressed.
Representative Pruitt referenced the discussion regarding
the credit rating. He wondered whether lowering the bonding
authority thereby lowered "the potential opportunity for
debt" and the ratio.
DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL BOND
BANK AUTHORITY, DEPARTMENT OF REVENUE, replied that he
agreed with Senator MacKinnon that an outstanding
authorization impacted credit. He relayed that in the
current situation, the authority was for a liability the
state already had "and was a little different." He
recounted that last fall the $2.3 billion to $3.3 billion
POB's issuance proposal received ratings in line with
current ratings except for Standard and Poor's decrease of
a "notch" from AA+ to AA flat. He likened predicting the
credit rating agencies was similar "to reading tea leaves."
He understood the legislature's point of view. He offered
that as an "issuer of debt" he perceived that "greater
flexibility resulted in better execution" of debt but
recognized the need for a balanced approach. He concluded
that "at the end of the day he could not think of any
objection to reducing the current authorization."
Representative Guttenberg clarified that bonds were
prohibited from any other type of use besides pension
obligations. Mr. Mitchell responded in the affirmative. He
qualified that when the initial authorization was
established the legislation included a "couple" of
different types of authorization based on the financial
situation at the time that would not be utilized in the
"current construct of the retirement system." He noted that
one provision granted the municipalities use of the bond
bank to cover the unfunded liability. He revealed that the
option was not viable because the bonding would only
benefit the state and not the municipality. He informed the
committee that the current PERS actuarially assumed
contribution rate was over 26 percent, the municipalities
paid 22 percent and the state paid the remainder. He added
that funding the debt service was based on a commitment by
the legislature and the administration; no collateral or
taxing pledge was committed to the debt service. The
state's commitment to the debt service was a "lesser
pledge" than what was typical in "other instances."
Representative Guttenberg asked whether the POB credit
rating "stood alone or was built into the state's credit
rating as a whole." Mr. Mitchell answered that the POB
credit rating relied on the state's credit rating and was
one notch under the state's overall credit rating. He
elucidated that the legislation required a credit rating of
at least AA minus. Representative Guttenberg clarified that
the $3 billion payment was a cash infusion and not a bond
issue. Mr. Mitchell responded that he was correct.
2:25:52 PM
Vice-Chair Gara mentioned the provision that a bond
issuance was predicated on consent by LBA within 45 days.
He wondered whether the time lag would have "a potential or
material imperial" on the issuance. Mr. Mitchell answered
in the negative. He related that last year the state
engaged in 79 meetings with institutional investors in
order to sell the bonds and the day before the pricing and
commitment the state reneged on the sale. He revealed that
as a result the banking community would only purchase
future POB's from the state with some type of formal
approval from the legislature. He indicated that the LBA
provisions formalized the current "ad hoc process." He
determined that there was "a lack of clarity" on how to
obtain the appropriate approval from the legislature that
the bill provided.
Co-Chair Seaton asked Mr. Mitchell to explain the
difference between soft and hard obligations for unfunded
liability payments. Mr. Mitchell explained that the state
could choose not to fund the annual actuarially determined
funding requirements without "negative ramification." When
debt was issued making it a hard liability, missing
payments resulted in consequences such as rating downgrades
and lost access to the capital markets. He ascertained that
recently "an evolution of pension liability was underway"
and was elevated in the considerations of the credit rating
agencies. He detailed that a failure to pay POB liability
resulted in a similar rating downgrade as a debt service
payment. Co-Chair Seaton had expressed concerns about the
pension adjustments when the liability was paid at 105
percent. He wondered whether the state was statutorily or
contractually obligated to pay the post-retirement pension
obligations in addition to cost-of-living increases. Mr.
Mitchell deferred the question to the Division of
Retirement and Benefits. He thought that the payments only
applied to Tier 1 retirees.
2:31:09 PM
Co-Chair Seaton referenced the state's split obligations
between PRS and TRS. He questioned whether the state could
issue POB's to the percentage of liability where the
municipality would not need to pay its contribution at 22
percent. He wondered whether the 18 percent obligation
would apply or could POB's be structured in a way to
maintain the 22 percent split. Mr. Mitchell answered that
the 22 percent was statutorily set in SB 125 (Pers/Trs
Contribut'ns;Unfunded Liability) [CHAPTER 13 SLA 08 -
04/08/2008] and did not fluctuate. He learned last fall
that the way the actuarial math worked, any significant
cash payment into PERS over $500 million diminished the
percentage of payroll requirement in the short term. He
discovered that the 22 percent was a "hard payment
requirement" set in statute. Last year's $3.3 billion POB
transaction proposal would have funded TRS at 90 percent
and the portion that the state paid would have been
refinanced if the bonds were issued. Co-Chair Seaton asked
whether there was any downside to limiting the pension
liability to 85 percent through use of POB's. He wanted to
avoid any situation where the state was overfunded. Mr.
Mitchell responded that the administration was looking at
funding the liability at 90 percent. He observed that "if
the state was borrowing at one rate and expected to
reinvest at a higher rate than the larger the issue the
greater the potential benefit." He deduced that for TRS the
85 percent limit "could restrict the potential of an
issuance" but seemed satisfactory for PERS.
2:36:21 PM
Representative Guttenberg asked if the state reached 105
percent what the state's liability to increase benefits
was. Mr. Mitchell deferred the question to the Division of
Retirement and Benefits. Representative Guttenberg
referenced other state's lower credit rating and reported
that the states were still able to borrow money. He
wondered whether a credit rating could be disregarded and
money could be borrowed at a reasonable rate. Mr. Mitchell
answered that California had experienced a volatile and
tumultuous period with its credit rating. He commented that
borrowing depended on the type of credit and market
conditions that determined how expensive the credit rating
differential was. He observed that there was a lot of
anxiety with the market and rating agencies regarding
Alaska due to the budget situation.
Co-Chair Foster OPEND Public Testimony.
2:40:18 PM
Co-Chair Foster CLOSED Public Testimony.
SB 97 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| REAL ID Act - Transmittal Letter - Rep. Edgmon.pdf |
HFIN 4/19/2017 1:30:00 PM |
HB 74 |
| CS HB 74 (STA) Sectional Analysis.pdf |
HFIN 4/19/2017 1:30:00 PM |
HB 74 |
| SB97 Sponsor Statement 04.08.2017.pdf |
HFIN 4/19/2017 1:30:00 PM |
SB 97 |
| SB97 Sectional Analysis ver D 04.08.2017.pdf |
HFIN 4/19/2017 1:30:00 PM |
SB 97 |
| HB150 Additional Document - 2017 Military Pay Chart 3.14.17.pdf |
HFIN 4/19/2017 1:30:00 PM |
HB 150 |
| HB150 Additional Document-Sockeye Fire Spreadsheet from DMVA 3.14.17.pdf |
HFIN 4/19/2017 1:30:00 PM |
HB 150 |
| HB150 Sponsor Statement 3.14.17.pdf |
HFIN 4/19/2017 1:30:00 PM |
HB 150 |
| HB150 Supporting Document-Letter DMVA 3.14.17.pdf |
HFIN 4/19/2017 1:30:00 PM |
HB 150 |
| HB 74 HFIN DPS Regarding REAL ID -signed.pdf |
HFIN 4/19/2017 1:30:00 PM |
HB 74 |
| CSHB 74 House Finance REAL ID Presentation 4.19 FINAL v2.pdf |
HFIN 4/19/2017 1:30:00 PM |
HB 74 |
| HB 90 - Amendment #1.pdf |
HFIN 4/19/2017 1:30:00 PM |
HB 90 |
| HB 90 Testimony Letter.pdf |
HFIN 4/19/2017 1:30:00 PM |
HB 90 |