Legislature(2017 - 2018)SENATE FINANCE 532
03/30/2017 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB97 | |
| SB32 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 97 | TELECONFERENCED | |
| + | HB 57 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | SB 32 | TELECONFERENCED | |
SENATE BILL NO. 97
"An Act relating to pension obligation bonds."
9:01:42 AM
LAURA CRAMER, STAFF, SENATOR ANNA MACKINNON, introduced the
legislation. She stated that the bill would reduce the
state's authority to issue pension obligation bonds from $5
billion, to $2.5 billion. The bill also required that the
Department of Revenue (DOR) would submit a proposal to the
Legislative budget and Audit Committee (LB&A) on the plan
for issuing the bonds, the purpose of which as to bring the
item before the legislature for consideration, therefore
involving the legislature in the process.
9:02:22 AM
Ms. Cramer highlighted the Sectional Analysis (copy on
file):
*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
9:05:05 AM
Co-Chair MacKinnon was open to the bill being sponsored by
the Senate Finance Committee. She recalled a past
conversation regarding the riskiness of pension obligation
bonds. She recognized that some legislative members would
prefer the number of bonds be zero, and she was not
endorsing the issuance of pension obligation bonds but
believed that the bill struck a balance with the governor's
office.
9:07:03 AM
Co-Chair Hoffman thought that the legislation reflected the
currently fiscal climate of the state and believed that
committee support would be a strong statement to the
public.
Co-Chair MacKinnon said that she would clean up any
technical details caused by changing the sponsorship.
Vice-Chair Bishop and Senator von Imhof supported the
change in sponsorship.
9:07:53 AM
Senator Olson expressed grave reservations about the future
repercussions of the legislation.
9:08:20 AM
Vice-Chair Bishop opined the possible consequences of
issuing pension obligation bonds.
9:09:08 AM
Senator von Imhof thought that the bill was a good and
reasonable compromise.
9:09:42 AM
Senator Dunleavy appreciated the conversation. He wondered
how the bill would be perceived by Legislative Budget and
Audit (LB&A).
9:10:27 AM
Co-Chair MacKinnon replied that the Pension Obligation Bond
Corporation would take the administration's proposal, which
they would have already approved by resolution, and submit
it to LB&A 45 days prior to the bond issuance. She spoke of
previous attempts by the administration to address the
issue of pension obligation bonds. She noted that the
administration would not be obligated to advance the
legislation, and could still issue pension obligation
bonds, but that a formalized notification would be given to
the legislature.
Senator Dunleavy understood that regardless of the
legislation the administration could issue bonds.
Co-Chair MacKinnon replied in the affirmative, up to $5
billion. The legislation would limit the authorization to
$2.5 billion. She specified that the bill would simply
reduce the borrowing capacity. She directed committee
attention to Page 5, which reflected the $5 billion, she
believed that the bill would allow the administration to
act in the best interest of the state while providing a
checkpoint, so the legislature could all a special session
if necessary. She expounded on the state's unfunded
liability and how the bill would limit the financial risk
to the state by issuing pension obligation bonds. She
relayed that she had met with the governor on the matter.
She hoped that the legislation struck a balance between the
many different schools of thought surrounding the issue.
9:16:43 AM
Senator Dunleavy supported the full committee sponsorship
of the legislation.
9:17:44 AM
Co-Chair MacKinnon explained that the legislation would
provide the opportunity for the legislature to call a
special session in order to formally oppose pension
obligation bonds proposed by the governor. She asserted
that the governor had been receptive in previous talks with
the legislature concerning the issue.
9:18:18 AM
Co-Chair MacKinnon relayed that a new version of the
legislation would be drafted to reflect the full committee
sponsorship.
Co-Chair MacKinnon CLOSED public testimony.
9:20:02 AM
DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL BOND
BANK AUTHORITY, DEPARTMENT OF REVENUE, stated that the
administration supported the proposed legislation. He
believed that collaboration between the administration and
the legislature on issuing bonds would be beneficial to the
state. He felt that the $2.5 billion issuance was in the
"sweet spot" and added that the state did not want to
become overfunded in the retirement trust or there could be
the negative impact of extra benefits being paid to
retirees that people believed already had sufficient
benefits. He said that there were nuances within the
current structure of the state's participation in funding
the retirement system through the payment on behalf of
allowance that was currently established. He expounded on
the size of future payments on the bonds, which could reach
up to $11 billion over 5 years.
9:23:52 AM
Senator von Imhof understood that under the bill the
administration would have the authority to issue bonds up
to $2.5 billion against the wishes of LB&A.
Ms. Cramer replied that he would need legal clarification
to answer the question. He thought that there was a
requirement to provide additional information to LB&A,
which would result in an additional 45 days. He said that
if LB&A did not approve, and the legislature failed to
convene a special session, there would be potential for the
administration to move forward despite the objections of
LB&A.
Ms. Cramer added that the legislature could not delegate
its authority entirely to one committee, which meant that
the LB&A committee could not act on behalf of the entire
legislature. She said that after a 45-day period, if the
legislature did not act, the administration could move
forward with a pension obligation issuance.
9:25:55 AM
Senator von Imhof queried what would happen if the
legislature convened to vote against a proposal.
Ms. Cramer believed that the legislature would introduce a
resolution taking official action against the issuance of
the bond, which would result in the administration no being
able to issue the bonds.
9:26:39 AM
Senator von Imhof understood that the legislature crafting
a resolution that stated they did not support the bonds
would be enough to block the bond sale.
9:26:57 AM
Co-Chair MacKinnon interjected that the bond sale would be
blocked if the legislature raised any flag that they were
non-supportive. She said that the market would then raise
the interest rate on the bond if there was a chance that
the legislature would not back the payments.
9:28:17 AM
Senator von Imhof thought that it could be worth pursuing
whether there was a final legal backstop for the
legislature if the markets did not respond quickly enough
during the 45 to 90-day window.
9:29:01 AM
Co-Chair MacKinnon suggested that an amendment to the bill
could be offered that spoke to Senator von Imhof's
concerns. She hoped to have the bill on the governor's desk
at the end of this session.
9:30:21 AM
Mr. Mitchell imagined that the legislature convening in
special session in objection to the proposed issuance would
have a significant impact on the issuance of the bonds. He
said that the law could be changed during special session
to eliminate the authority to issue bonds altogether.
9:30:35 AM
Co-Chair MacKinnon said that the bill was an attempted to
strike a balance between the legislature and the
administration.
9:31:46 AM
Senator Olson wondered whether the finance committee could
stop the legislation by denying an appropriation for the
bonds that are issued.
Ms. Cramer replied that the committee would not be able to
legally stop the appropriation for the bonds. She
reiterated that the entire legislature would have to vote
against the appropriation.
9:32:26 AM
Mr. Mitchell furthered that the only thing being pledged
with the bonds would be the state's word that it would pay.
He said that if the Senate or House Finance committee, in
isolation, were to put forward a resolution that they were
not going to support payment on the bonds, the state would
lose investors.
9:33:51 AM
Co-Chair MacKinnon queried the ramifications inside the
credit market that if a finance committee failed to pay the
debt.
Mr. Mitchell replied that the ramifications would be very
negative. He said that the state would expect to receive a
significant downgrade of its credit rating and would be
locked out of the capital markets for an extended period of
time.
9:34:41 AM
Senator Dunleavy thought that if LB&A said no to the bond
they should forward a letter to the finance committee
stating their position. he understood that the only way the
system worked was for the governor to get agreement through
LB&A.
Mr. Mitchell thought that the bill would further establish
the partnership that existed between the legislative branch
and the executive branch.
9:36:22 AM
Vice-Chair Bishop appreciated the discussion.
9:37:06 AM
Co-Chair MacKinnon said that if the state had issued
pension obligation bonds in 2007, the arbitrage would have
worked to the benefit of the state. She stated that if the
state had issued the 2016 bonds Alaska would have seen a
positive return. She underscored that there were risks
associated with arbitrage.
9:39:24 AM
AT EASE
9:45:51 AM
RECONVENED
9:46:24 AM
Senator Olson noted that Mr. Mitchell had been in his
position through several administrations. He lamented that
the tension between the administration and the legislature
could be intense. He spoke of the trouble that the State of
Kansas was currently experiencing due to pension obligation
bonds.
Mr. Mitchell said that he could not speak directly to the
situation in Kansas but knew that pension obligation could
be structured and used in a variety of ways. He said that
in come circumstances a short-term expense could become a
long-term liability. He countered that in other instances a
deposit could be put into a trust, obligating the trust to
pay the debt service. He noted that the cost of capital was
one thing that could be controlled, and that he had focused
on getting the lowest cost possible when looking at pension
obligation bonds. He relayed that the state was pursuing a
more conservative structure and the benefits of the
issuance that had been contemplated in Fall 2106 would have
been the most significant in the final year of the
transaction; 23 years from now the actuarily assumed
payment would have be cut in half. He thought that there
could be addition restrictions on the allowed cost of
capital. He warned against being overfunded within the
trust.
9:51:23 AM
Senator Olson understood that the measures that had been
put in place in 2016 had been adequate to keep the state
out of financial trouble.
Mr. Mitchell in the affirmative. He explained that the
state had a cost of capital below 4 percent, as well as a
structure that assured that savings accrued interest.
9:51:46 AM
Senator Olson wondered whether the state had made a mistake
of not issuing bonds when the stock market was stronger.
Mr. Mitchell replied that time would tell. He said that
debt could be controlled.
9:53:27 AM
Senator Olson wondered whether having too many people
scrutinizing the matter could be detrimental to the
process.
Mr. Mitchell responded that nimbleness was a virtue in the
financial market and that being able to act quickly was a
strength, he warned that there had to be a balance in
government. He believed that proper checks and balances
should be practiced.
9:55:40 AM
Senator von Imhof spoke of global trade agreements and
their effects on the global markets. She lamented that
economic trends could be unpredictable.
SB 97 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 97 Sectional Analysis.pdf |
SFIN 3/30/2017 9:00:00 AM |
SB 97 |
| SB 97 Sponsor Statement.pdf |
SFIN 3/30/2017 9:00:00 AM |
SB 97 |
| SB32 Letters of Support.pdf |
HHSS 4/13/2017 3:00:00 PM SFIN 3/30/2017 9:00:00 AM |
SB 32 |
| SB32 Letters of Opposition.pdf |
HHSS 4/13/2017 3:00:00 PM SFIN 3/30/2017 9:00:00 AM |
SB 32 |