Legislature(2005 - 2006)HOUSE FINANCE 519
03/08/2006 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB278 | |
| SB210 | |
| SB172 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 278 | TELECONFERENCED | |
| + | SB 172 | TELECONFERENCED | |
| + | SB 210 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 278
An Act relating to the Alaska Municipal Bond Bank
Authority; permitting the Alaska Municipal Bond Bank
Authority or a subsidiary of the authority to assist
state and municipal governmental employers by issuing
bonds and other commercial paper to enable the
governmental employers to prepay all or a portion of
the governmental employers' shares of the unfunded
accrued actuarial liabilities of retirement systems and
authorizing governmental employers to contract with and
to issue bonds, notes, or commercial paper to the
authority or its subsidiary corporation for that
purpose; and providing for an effective date.
REPRESENTATIVE MIKE HAWKER, SPONSOR, stated that one of the
biggest issues facing the State of Alaska is the unfunded
pension liability. It has become a growing issue the last
several years; last year, a determination was made on how to
best address it. HB 278 recommends a way to address that
liability.
Representative Hawker stated there is a $6 billion dollar
deficit. He knew that the State could not come up with that
amount of money, however, the amount could be amortized over
time. The issue before the Committee is how to pay it off,
understanding the compound growth rate of 8%.
HB 278 provides a tool within the financial market to help
pay off the obligation with the least possible cost to tax
payers. The idea is to borrow from an entity, asking a less
amount of interest and the difference would be a net savings
over time for the State.
1:50:59 PM
Representative Hawker suggested a possible savings close to
$1.5 billion dollars over the time of the loan if the debt
is bonded out. He reiterated that this savings would be to
the taxpayers of the State of Alaska.
Representative Hawker acknowledged that borrowing the funds
would create a profound constitutional change and that such
a mechanism was available within the international markets.
The bill was brought forward because it addresses the
capital market; municipalities would like to have the
consideration of that option and the statutory authority to
pursue it. He noted that the Municipality of Anchorage
supports the concept. The Alaska Municipal League (AML) has
passed a resolution indicating that they would like the
statutory authority to consider the option. The bill would
provide statutory authority to municipalities to pursue
pension obligation bond transactions.
1:55:08 PM
Representative Hawker stressed the simplicity of the bill.
The most complicated aspect of the legislation is
understanding what pension obligation bonds are and the
associated benefits and risks. He recommended that staff
and legislators carefully read the back up materials
regarding the transactions. Two firms interested in
pursuing the transactions are on line for testimony &
questions.
1:58:31 PM
Representative Hawker said pension bonds would be better
than the alternatives to solving the pension fund concern.
Most municipalities do not have the ability to write a check
to solve their pension fund issues. The annual required
payment into the Teacher Retirement System (TRS) amounts to
50% of the teacher's gross pay. A pension bond obligation
would allow the State to reduce their matching requirement.
The local taxpayers end up paying most of the cost for the
local school districts.
Representative Hawker summarized significant points of
opposition:
· Too risky - risk that the State would not be able to
invest at 8% and borrow at 5%. The spread between what
can be borrowed and what can be invested is called
arbitrage. Arbitrage has been illegal since 1986.
There is a specifically allowed federal provision for
pension obligations. Representative Hawker was
comfortable that investors would be able to continue
the 8% profit on investments.
· The mechanism of the bill is to grant the authority to
the Alaska Municipal Bond Bank to execute the
transactions on behalf of the municipalities, in order
to facilitate reaching all capital markets in the
country. The risk becomes obligated to the State if
that authority faults. There is a moral obligation to
the State, if the municipality defaults.
· Some say that Wall Street would "frown on the benefit"
of issuing obligation to the municipalities. The
current pension obligation is a moral obligation to the
State of Alaska.
· There is fear that the municipalities would not "pay
up". Representative Hawker did not agree.
Representative Hawker urged support for HB 278, believing
that capital markets are extremely self-governing and the
investors would not take a high risk with those accounts,
given the high degree of self-regulation.
2:09:46 PM
Representative Hawker urged that the fiscal note be changed
to indeterminate.
2:11:04 PM
Co-Chair Meyer pointed out that representatives from
Northwest Securities Corporation were present to testify on
line.
Representative Hawker advised that several firms had taken
an interest in the State of Alaska. No one firm is
authorizing a transaction, only providing educational
backup.
2:12:26 PM
Representative Kelly noted support for the legislation and
asked if Fairbanks had indicated support for the option.
2:13:39 PM
Representative Hawker replied that the bill does not address
specific concerns.
2:14:28 PM
CAROL SAMUELS, (TESTIFIED VIA TELECONFERENCE), NORTHWEST
SECURITIES CORPORATION, SEATTLE WASHINGTON, provided an
overview of a power point presentation included in the file.
(Copy on File). She testified in favor of the bill.
2:16:46 PM
Ms. Samuels referred to Page 1, the pension obligation bond
description. A pension obligation bond is a financing used
to defray unfunded pension costs. It is a replacement
financing rather than a new obligation. Many jurisdictions
have used pension obligation bonds to refinance the system
loans at rates lower than the amortization rate.
Ms. Samuels referred to Page 2, addressing why pension
obligation bonds might be useful in Alaska.
· According to the recently released 2004 valuation,
assuming above average growth in population, Public
Employees Retirement System (PERS) rates rise to
32% of payroll beginning in 2011 and do not decline
until 2029 and the Teachers Retirement System (TRS)
rates rise to 50% of payroll in 2011 and continue
increasing to 56% by 2028 before declining.
· Pension obligation bonds can be an effective tool
for immediately reducing payroll rates and
producing long-term savings for jurisdiction.
· In Oregon, jurisdictions are projected to save over
$1.3 billion dollars from use of that technique.
Ms. Samuels continued, Page 3 provides a graph indicating
the Alaska Pension system, asset base, covered employees,
*average employer rate, funded ratio and the Unfunded
Accrued Actuarial Liability (UAAL) as of 2003 valuation.
2:23:11 PM
Page 4 provides a graph of the bonding used as a popular
tool. Many jurisdictions throughout the country have chosen
to finance their PERS liability with bonds. In Oregon:
· A total of 133 school districts, cities, counties and
the State have issued $5.4 billion dollars of pension
bonds.
· Savings projected at $1.3 billion overall, assuming an
8% rate of return.
· Original statutory authority provided to local
governments and school districts in 2001 for issuance
of "full faith and credit obligations".
· School districts also granted authority to enter into
an intercept agreement with the State, whereby,
operating funds were additionally pledged. The
approach resulted in "State" credit rating.
· State constitutional amendment approved by voters in
2003 authorizing the State to issue General Obligation
(GO) bonds for its share of the liability. Voter
approval margin was 55.25%.
2:25:05 PM
Page 5 highlights the arbitrage issue. Issuing a pension
bond is not like refinancing a mortgage. The success from
borrowing depends on the market returning more than the cost
of the bond.
2:27:47 PM
Ms. Samuels continued, Page 6 indicates the Alaska Public
Retirement System (PERS) history of investment results. She
pointed out that in Oregon, PERS has a long history of
strong investment performance:
· 10 year average: 12.38%
· 15 year average: 12.69%
· 56 year average: 10.84%
2:29:44 PM
Page 9 demonstrates the Alaska PERS system-wide refinancing
analysis. A refinancing of the $3.4 billion PERS could
result in net present value savings of over $1 billion
dollars.
2:31:40 PM
Page 10 examines the savings available in refinancing the
Teachers Retirement System (TRS). She estimated a $37
million dollar savings, which might be redirected back into
the classroom.
2:32:15 PM
Page 11 summarizes the lessons learned over the past.
1. Payment to PERS does not guarantee UAAL will be paid
off in full.
2. What happens if UAAL is subsequently reduced or
increased - reduction and lump sum payment would put
jurisdiction in surplus. Funds would not be
returned to jurisdiction, but surplus would be used
to reduce payroll rates further.
3. Structure of the financing matters - inappropriate
to use unrealistic assumptions about rates of
return; amortization structure of bonds should match
amortization of UAAL that the PERS system uses; it
is not prudent to have back weighted structures
where all savings are produced in early years.
2:34:04 PM
Ms. Samuels noted several examples of debt financing, which
had been accomplished in inappropriate ways. She noted that
8% was used as a reasonable rate of return, whereas 9% was
not appropriate in their opinion.
2:34:58 PM
Page 12 continues outlining the "house keeping" issues. She
noted that regulations would need to be drafted to ensure
that funds were accounted for and payroll rates were reduced
in a rational manner. She opined that work would need to be
done on the system to ensure funds were protected.
2:38:19 PM
Ms. Samuels noted Page 13 summarizes the intent of HB 278.
The bill authorizes access to capital markets for the
purpose of financing pension liabilities. It provides
express authorization for all types of jurisdictions to
issue obligations for that purpose either individually or
thorough another entity. It also provides authorization for
individual jurisdictions to pool together through a state
entity such as Bond Bank to achieve economics of scale.
Additionally, it will allow for credit support to enhance
access to the market such as, intercept of funding, bond
reserves and bond insurance.
2:38:59 PM
Vice Chair Stoltze questioned the number of agencies that
sell this type of bond. Ms. Samuels replied that there are
multiple firms eager to help with selling the bonds.
Representative Hawker added that any capital market would be
available to pursue such a transaction.
2:39:54 PM
Representative Kelly referred to the mechanism used to
determine a credit rating, inquiring if that would be
available and/or useful. Representative Hawker commented
that was being researched and there would be a forthcoming
amendment.
Representative Kelly followed up with queries about the
taxation structure of bonds. Representative Hawker
responded that in a 1986 federal statutory change, in order
to take advantage of arbitrage, the bonds become executed on
a taxable basis.
ERIC WHALEY, (TESTIFIED VIA TELECONFERENCE), MERRIL LYNCH,
noted questions that many municipalities raised regarding
how the legislation would impact either the municipality or
the State's bond rating. Mr. Whaley pointed out that an
unfunded liability already exists. One unfunded liability
would be replaced by another.
A question was asked if the risk was not positive over a 20-
30 year time period, would the State have been better off if
the pension bond had not been issued. Mr. Whaley provided
historical examples since 1926 of when portfolios had a
return less than the bond rates and the only time that
happened was just before the Great Depression. He
acknowledged risk, commenting it is minimal.
Mr. Whaley offered to answer questions of the Committee.
2:45:04 PM
KEVIN RITCHIE, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL LEAGUE
(AML), JUNEAU, testified in favor of the legislation. AML
supports the State to allow employers the option of
refinancing the PERS & TRS debt to avoid the 8.25% rate
imposed by the system. He emphasized that it would be a
tool for only some municipalities; it is not a fix for all.
He added that the relationship between the State and the
schools are important.
2:46:58 PM
Mr. Ritchie pointed out that the municipalities currently
are asking, given the funding provided last year to reduce
the 5% increase, questioning what that meant for the long-
term health of the system. He maintained that these are
important policy questions that must be addressed.
Representative Kelly referred to previous discussion
regarding the refinancing a portion of the fund. Mr.
Ritchie deferred to the finance specialists to better answer
that question.
2:48:30 PM
Mr. Ritchie reiterated that the municipalities do support
the legislation.
2:48:58 PM
Representative Hawker concurred that the legislation would
be more beneficial if it refinanced the entire fund,
however, knew that some municipalities might not be
comfortable with that risk. It would be best to let them
each decide.
2:49:53 PM
Vice Chair Stoltze asked if each municipality's level of
debt would affect their ability to participate.
Representative Hawker responded that indeed,
municipalities would have to consider their own debt load
and rating circumstances. It represents a substantial
obligation and noted that each circumstance would need to be
considered on an individual basis.
Vice Chair Stoltze thought that net-caps for the
municipalities could be considered and wondered if that
potential exists.
Representative Hawker acknowledged that caps could affect
the municipality's ability to participate or prohibit
financing options.
2:51:56 PM
Representative Kerttula asked how a municipality could go
about obtaining authorization for financing. Representative
Hawker responded, it would happen through the same process
used for current financial obligations incurred by
municipalities. He referred to AS 29, regarding authority
of municipal debt and outlined the methods to obtain
authorization for municipal debt.
2:53:35 PM
CARL ROSE, ALASKA ASSOCIATION OF ALASKA SCHOOL BOARDS,
th
JUNEAU, noted that on February 12, 2006, Ms. Samuels had
addressed their Board. He advised that the numbers
impressing him was the projected 50% anticipated increase
rate in payroll by 2011; increasing again to 56% by 2028.
AASB supports the option for municipalities to refinance to
reduce the high rates affecting payroll. He noted
appreciation for all the work done on the bill.
2:56:17 PM
BILL BYORK, PRESIDENT, NATIONAL EDUCATION ASSOCIATION (NEA),
ALASKA, expressed the organization's desire to explore the
proposed refinancing options. It is a critical tool for
addressing the State's unfunded liability and that HB 278 is
essential.
2:57:30 PM
Representative Hawker summarized, noting that both the
financial and educational communities view the bill as a
viable tool but not supported by the Administration.
Amendments will be forthcoming to address concerns. He
disagreed that the risks outweigh the benefit.
Co-Chair Meyer stated that the Administration could testify
when the bill incorporated the amendments, making it more
supportable.
2:58:55 PM
HB 278 was HELD in Committee for further consideration.
3:00:22 PM
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