Legislature(2007 - 2008)HOUSE FINANCE 519
04/20/2007 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB159 | |
| HB13 | |
| HB215 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 13 | TELECONFERENCED | |
| + | HB 164 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 45 | TELECONFERENCED | |
| += | HB 88 | TELECONFERENCED | |
| += | HB 215 | TELECONFERENCED | |
| = | HB 159 | ||
HOUSE FINANCE COMMITTEE
April 20, 2007
1:44 p.m.
CALL TO ORDER
Co-Chair Meyer called the House Finance Committee meeting to
order at 1:44:38 PM.
MEMBERS PRESENT
Representative Mike Chenault, Co-Chair
Representative Kevin Meyer, Co-Chair
Representative Harry Crawford
Representative Les Gara
Representative Mike Hawker
Representative Mike Kelly
Representative Mary Nelson
Representative Bill Thomas, Jr.
MEMBERS ABSENT
Representative Richard Foster
Representative Bill Stoltze, Vice-Chair
Representative Reggie Joule
ALSO PRESENT
Representative Anna Fairclough; Brian Andrews, Deputy
Commissioner, Treasury Division, Department of Revenue
PRESENT VIA TELECONFERENCE
Michael O'Leary, CFA, Executive Vice President, Callan
Associates; Jason Ellement, FSA, CFA, Callan Associates
SUMMARY
HB 159 "An Act relating to the issuance of a certificate
of birth resulting in a stillbirth."
CSHB 159 (JUD) was REPORTED out of Committee with
a "do pass" recommendation and with fiscal note #1
by the Department of Health and Social Services.
HB 13 "An Act relating to prepayments of accrued
actuarial liabilities of government retirement
systems; 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, notes,
commercial paper, or other obligations 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; authorizing a governmental
employer to issue obligations to prepay all or a
portion of the governmental employer's shares of
the unfunded accrued actuarial liabilities of
retirement systems and to enter into a lease or
other contractual agreement with a trustee or the
Alaska Municipal Bond Bank Authority or a
subsidiary of the authority in connection with the
issuance of obligations for that purpose, and
relating to those obligations; and providing for
an effective date."
CSHB 13 (FIN) was REPORTED out of Committee with a
"do pass" recommendation and with a new
indeterminate fiscal note by the Department of
Administration and with zero fiscal note #1 by the
Department of Revenue.
HB 215 "An Act relating to the establishment of a task
force to review the Council on Domestic Violence
and Sexual Assault."
CSHB 215 (HES) was REPORTED out of Committee with
a "do pass" recommendation and with zero fiscal
note #1 by the Department of Health and Social
Services, zero fiscal note #2 by the Department of
Law, new zero fiscal note by the Legislature, new
fiscal note by the Department of Corrections, and
new fiscal note by the Department of Public
Safety.
HB 45 "An Act authorizing the Department of Military and
Veterans' Affairs to establish and maintain Alaska
veterans' cemeteries; and establishing the Alaska
veterans' cemetery fund in the general fund."
CSHB 45 (MLV) was scheduled but not heard.
HB 88 "An Act relating to televisions, monitors,
portable computers, and similar devices in motor
vehicles; and providing for an effective date."
CSHB 88 (JUD) was scheduled but not heard.
1:45:08 PM
HOUSE BILL NO. 159
"An Act relating to the issuance of a certificate of
birth resulting in a stillbirth."
Co-Chair Meyer referred to a letter from Jean Mischel from
Legal Services regarding verification of a retroactivity
clause in subsection (f) of the bill (copy on file.)
Co-Chair Chenault MOVED to REPORT CSHB 159 (JUD) out of
committee with individual recommendations and with the
accompanying fiscal note. There being NO OBJECTION, it was
so ordered.
CSHB 159 (JUD) was REPORTED out of Committee with a "do
pass" recommendation and with fiscal note #1 by the
Department of Health and Social Services.
1:46:32 PM
HOUSE BILL NO. 13
"An Act relating to prepayments of accrued actuarial
liabilities of government retirement systems; 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,
notes, commercial paper, or other obligations 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;
authorizing a governmental employer to issue
obligations to prepay all or a portion of the
governmental employer's shares of the unfunded accrued
actuarial liabilities of retirement systems and to
enter into a lease or other contractual agreement with
a trustee or the Alaska Municipal Bond Bank Authority
or a subsidiary of the authority in connection with the
issuance of obligations for that purpose, and relating
to those obligations; and providing for an effective
date."
Co-Chair Chenault MOVED to ADOPT the work draft for HB 13,
labeled 25-LS0084\M, Cook, 4/17/07. There being NO
OBJECTION, it was so ordered.
1:47:47 PM
Representative Hawker, sponsor, explained that HB 13 is a
solutions bill. It has the potential to patch the $42
million general fund hole in the budget. The bill provides
governmental employers in Alaska with a tool that could save
taxpayers money regarding PERS/TRS unfunded liability. He
related that the determination as to how to pay off the
unfunded liability falls upon the legislature.
Representative Hawker described how the bill provides
mechanisms to lower the interest rate on the pension
obligation liability. It allows for an arbitrage interest
differential and sets up several mechanisms for issuing
bonds.
1:50:56 PM
Representative Hawker reported that the bill allows the
Municipal Bond Bank to facilitate transactions on behalf of
individual or multiple communities. It empowers the Alaska
Housing Finance Corporation to participate in such
transactions should it be deemed appropriate, it empowers
the state bond committee to utilize these tools, and most
significantly, the bill creates a public subsidiary
corporation called the Pension Obligation Bond Corporation,
which is managed by the Commissioners of Revenue, Commerce,
Community, and Regional Affairs and Administration. He
termed the bill appropriate and prudent. He emphasized that
the greatest risk is in not acting.
1:52:24 PM
Representative Gara summarized the bill's action: "We issue
a bond for a certain amount and the way we make money off of
pension obligation bonds is then we invest that same amount
of money in the market at a higher rate." Representative
Hawker agreed. The state is able to fix the interest cost
through a debt instrument that allows the state to fund its
obligation to pay. The proceeds from that instrument are
placed in an investment trust.
Representative Gara asked how much can be made from this
investment. Representative Hawker characterized returns of
at least 1.5 percent with a high degree of confidence.
Representative Crawford asked if there is a way to hedge
against a loss. Representative Hawker thought the up-coming
presentation would answer that question. He offered that
time is the best protection against risk and the greatest
asset for a pension obligation bond contract.
Representative Crawford wondered about guarding against the
downside. Representative Hawker thought a hedge mechanism
could be addressed later.
1:56:53 PM
Representative Gara called the bill a double-edged sword,
with a scenario where money could be lost. He suggested
issuing 10-year bonds and investing for the long term.
Representative Hawker replied that it is only one of many
tools, therefore there is less risk. The risk is spread
over several components. The pension liability probably
will be paid off in 60 years. Representative Gara stated
support for the bill.
Co-Chair Meyer noted there is risk with any financial tool.
2:00:09 PM
BRIAN ANDREWS, DEPUTY COMMISSIONER, TREASURY DIVISION,
DEPARTMENT OF REVENUE, referred to a handout entitled
"Pension Obligation Bonds - April 20, 2007" (copy on file.)
Mr. Andrews informed the committee that his presentation
would cover three areas: a description of Pension Obligation
Bonds (POBs), the reasons to consider POBs, what the risks
are, the potential savings achieved, and why POBs are issued
as taxable debt.
Mr. Andrews referred to Slide 1 - Pension Obligation Bond
objectives. He compared issuing POBs to paying off an ever-
increasing credit card debt with the use of a line of credit
on a home. POBs are not new to the marketplace, or to
Alaska.
Mr. Andrews addressed Slide 2 - three reasons to consider
issuing POBS. The three reasons include interest rate
savings, a positive earnings arbitrage, and no reduction in
the state's credit rating. He pointed out that POBs are not
a golden bullet; just a financial tool - Slide 3. He
defined Unfunded Actuarial Accrued Liability (UAAL) - a bill
of $8.6 billion that the pension plan is giving to the State
of Alaska and to local governments - Slide 4.
2:04:42 PM
Mr. Andrews spoke to Slide 5 - how the UAAL bill is paid.
Option A is to use cash to pay the bill off and Option B is
for the pension plans to give a loan of 25 years at 8.25
percent to the state.
Mr. Andrews showed Slide 6 - Interest Rate Savings. He
described how a savings of 2.5 percent on interest cost is
achieved. A reduced interest rate equals savings of $272
million.
Slide 7 - Interest Rate History - shows a graph of ten-year
treasury yields. One of the key factors is to issue debt at
a low interest rate cost.
2:06:57 PM
Mr. Andrews turned to positive earnings arbitrage. Slide 8
- Historical Investment Returns of State Pension Plans
(PERS) - shows the average return over the last 15 years is
9.09 percent.
Slide 9 shows the same type of returns on TRS.
Slide 10 addressed the Long Term Target Asset Allocation,
which are reviewed each year by the ARM Board.
2:08:46 PM
Mr. Andrews turned to credit neutrality and Slide 11 -
Credit Rating Consideration. The issuance of POBs has never
hurt a state's credit rating. Rating agencies talk about
hard and soft dollar liabilities. The unfunded liability is
a soft liability and can be ignored. It becomes a hard
obligation after pension obligation bonds are issued. He
maintained that there is currently a hard obligation to pay
the benefits compared to other states. He suggested by
being pro-active, the state's credit rating would improve.
Mr. Andrews discussed the risks listed on Slide 2 and
Investment Risk Analysis - Slide 13.
Mr. Andrews used the graph in Slide 14 - Investment Risk
(PERS) - to show examples of returns if POBs had been issued
in any given year. The far right column is the estimated
cumulative PERS Net Return to 2006. He speculated what
would have happened if the bonds had been issued previously.
Slide 15 depicts similar data on Investment Risk for TRS.
2:14:08 PM
Mr. Andrews discussed Slide 16 - UAAL vs. POB Financial
Success. As long as bond-funded assets earn more than 5.75
percent, the state is better off for having borrowed. If
assets earn less than 5.75 percent, POBs are undesirable.
If assets earn more than 8.25 percent, the UAAL can increase
due to actuarial and/or accounting changes.
Mr. Andrews informed the committee about Monte Carlo
simulation scenarios as shown in Slide 17 - Investment
Return Forecast - with examples of three portfolios. The
conservative portfolio did better.
Mr. Andrews talked about Slide 18 - Political Risk - Key
Driver of UAAL. Between 1992 and 2003, increasing
liabilities, not poor investment performance, caused the
most damage to the PERS/TRS system. Mr. Andrews continued
to address Political Risk - Slide 19 and Market Risk - Slide
20.
2:18:28 PM
Mr. Andrews described the types of POBs as listed on Slide
21: general obligation bonds, obligations imposed by law,
and annual appropriation bonds. He noted a restriction in
HB 13 that the bonds do not constitute a general obligation
of the state.
Mr. Andrews addressed potential savings by issuing POBs.
Slide 22 suggests the combination of POBs and cash infusion
and Slide 23 depicts four matrices - Case Study (PERS). He
compared and contrasted the four matrices.
2:21:59 PM
Mr. Andrews did a similar analysis on Slide 24 - Case Study
(TRS). He described one of the scenarios and how to attain
a savings.
Mr. Andrews addressed tax issues on Slide 25 - Taxable Bonds
vs. Tax Exempt Bonds and Slide 26 - The Difficulty with Tax
Exempt. He preferred not to go through an IRS audit.
Mr. Andrews highlighted four take-aways on Slide 27.
Mr. Andrews concluded that the administration is in favor of
HB 13.
2:26:06 PM
MICHAEL O'LEARY, CFA, EXECUTIVE VICE PRESIDENT, CALLAN
ASSOCIATES, referred to a handout, "State of Alaska - POB
Issuance Illustrations" (copy on file.) He related the
Overview and Description found on Slide 1. Callan was asked
to illustrate the range of possible outcomes associated with
issuing $2 billion in Pension Obligation Bonds (POBs), using
assumptions of a 5.7 percent interest rate with a mortgage-
like repayment pattern over 25 years. Callan's standard
capital market projections were used and multiple policies
were considered. He cautioned that his objective is to show
the order of magnitude and range of possibilities for
investing POB proceeds. The results do not consider the
effects on annual pension contributions levels or funded
status.
2:28:11 PM
JASON ELLEMENT, FSC, CFA, CALLAN ASSOCIATES, explained that
the study looked at four asset allocations as illustrated on
Slide 2. The pension fund's target mix is close to the
65/35 mix.
Mr. Ellement addressed Slide 3 - Assumed Debt Schedule. The
level annual payments would be $152 million per year, the
total principal repayment would be $2 billion, and the total
interest cost over 25 years would be $1.8 billion.
Mr. Ellement explained that Slide 4 looks at the Probability
of Exceeding 5.70%. There is a 13 percent probability that
the 65/35 mix will not exceed 5.7 percent over 25 years.
There is not a lot of distinction between the more
aggressive portfolios and the 65/35 mix.
2:31:20 PM
Mr. Ellement addressed POB Savings/Cost on Slide 5. He
compared and contrasted the various scenarios. All
projections are in today's dollars.
Mr. Ellement discussed Slide 6 - Distribution of One-Year
Return, Slide 7 - Years to Recovery First Year Return if it
is less than minus 10%, and Slide 8 - Years to Recovery
minus 10% less than First Year Return if it is less than
minus 5%.
2:37:16 PM
Mr. O'Leary concluded by summarizing Slides 9 and 10. He
pointed out that issuing POBs and investing the proceeds in
higher yielding securities is a leveraged investment
strategy. Over the long run, a POB program that is
prudently implemented has a high probability of success,
depending on certain factors. POB programs that have been
unsuccessful in the past have used too much leverage and/or
issued when interest rates were high.
2:41:17 PM
Co-Chair Meyer referred to POB programs that have been
unsuccessful in the past. He wondered if interest rates
would continue to increase or drop down. Mr. O'Leary
replied that the expectation is that interest rates are "at
a level that is fairly reasonable given our inflationary
expectation." He stated he would not be surprised to see
the shorter end of the yield curve decline. The expected
return on an investment grade bond portfolio over five years
is 5.25 percent. He said he does not see interest rates
climbing nor declining.
Mr. Andrews added that the environment has been a flat yield
curve for some time. He thought it would remain flat for
about 6 to 9 months, eventually reverting to a normal curve.
2:44:30 PM
Representative Hawker emphasized that the legislation
empowers the state to pursue such a transaction. The state
would not be committed to continue forward.
Co-Chair Meyer questioned the cost to the state and what the
incentive was for the investment firms. Mr. Andrews
explained that the cost of bond issuance is a half of one
percent. A billion dollar transaction would be $50 million.
He observed that Europeans buy a large percentage of the
bonds.
Representative Hawker noted that Alaska Housing Finance
Corporation is always in the market for such transactions.
There is a free market competition. Mr. Andrews noted that
the 50 basis points cost is spread out over 25 years. The
goal is to earn more than the 5.75 percent. He added that
retirement plans earnings are up around 9 percent.
2:49:31 PM
In response to a question by Representative Crawford, Mr.
Andrews explained that a number of factors would be examined
to make sure the plan is prudent and well thought out, but
that the specifics have not been flushed out.
Representative Hawker pointed to AHFC's success. He
maintained that competent professionals would be empowered
to make the decisions. Oversight for the bonds would be
through the creation of a Pension Obligation Bond
Corporation, which includes the commissioners of
Administration, Revenue, and Commerce, Community, and
Economic Development.
2:53:12 PM
In response to a question by Representative Joule,
Representative Hawker maintained that the professionals are
in the state already and pointed out that Callan has been a
long-time consulting firm with the state. He added that the
state's expertise has been demonstrated over time.
Representative Joule stressed that highly specialized areas
are being challenged, in terms of retention.
Representative Hawker noted that there are dedicated and
competent state workers that could make more as professional
investment managers.
2:57:04 PM
Representative Gara clarified that there would be a 25-year
issuance and noted that investment in the early years can be
more aggressive. Mr. Andrews stressed that it is important
to get positive earnings arbitrage in the first few years by
being conservative and low risk. Investment would be more
aggressive between years 5 - 10.
Representative Gara questioned if the Callan numbers take
into account the conservative/aggressive/conservative
approach. Mr. Andrews explained that Callan examined only
various portfolio allocation mixes.
Mr. O'Leary noted that more complex asset allocation models
can be done. He explained that today's presentation is a
reasonable depiction of the worst case for different broad
levels of risk.
3:01:52 PM
Representative Gara questioned what "best estimate" numbers
would look like. Mr. O'Leary spoke to the 65/35 mix with an
expected return of 7 percent. Mr. Andrews demonstrated that
the PERS/TRS expected return is 8 percent. Mr. O'Leary said
he expects an 8 percent rate of return. Representative Gara
asked if the Callen probability numbers reflect the real
world. Mr. O'Leary replied that "they do with the only
caveat being provided that those shifts from initial
conservatism to more aggressive to final conservatism are
moderate in character."
Representative Hawker related that the numbers are fine-
tuned by professionals. He summarized that the point of the
presentation is that there is a risk in taking a decisive
action, but the professionals will react appropriately and
mitigate that risk. He emphasized that the costs and risks
associated with comfortable inaction far exceed the risks of
empowering competent professionals to take a responsible,
measured, and calculated entry into the markets.
3:07:21 PM
Representative Kelly thought that time was a factor with
this legislation. He also thought the interest rate was a
factor. He maintained that the scrutiny of the issuance is
going to be a lot higher than the scrutiny of the bill. He
wondered what might cause a loss or risk.
Mr. Andrews used New Jersey as an example of a failure where
the proceeds of the bonds were not used to fund the pension
obligation.
Representative Hawker addressed the fiscal note by the
Department of Revenue. He thought it was essentially an
indeterminate note because the bill empowers the state to
pursue a transaction. There will be costs associated when
the transaction takes place. He suggested that the new
fiscal note by the Department of Administration be
indeterminate also.
Representative Gara asked about authorizing an expense for
an auditor. He referred to previous discussion on Section
1, regarding allowing prepayment of TRS unfunded liability.
3:14:00 PM
Representative Hawker said the issue was raised in Ways and
Means as a concern of Representative Seaton's. The question
was answered in the State Affairs Committee. Representative
Hawker pointed out that there are mechanisms in place to
deal with that issue. He described a hypothetical satellite
account as an example.
3:16:54 PM
Co-Chair Chenault MOVED to REPORT CSHB 13 (FIN) out of
Committee with individual recommendations and with the
accompanying fiscal notes.
Representative Kelly asked if indeterminate fiscal notes are
appropriate for the bill. Representative Hawker said yes.
Should a series of transactions be embarked upon, the
Department of Administration could then respond.
Co-Chair Meyer MOVED that the fiscal note from the
Department of Administration, dated 3/21/07, be changed to
an indeterminate note. There being NO OBJECTION, it was so
ordered.
CSHB 13 (FIN) was REPORTED out of Committee with a "do pass"
recommendation and with a new indeterminate fiscal note by
the Department of Administration and with zero fiscal note
#1 by the Department of Revenue.
3:19:46 PM
HOUSE BILL NO. 215
"An Act relating to the establishment of a task force
to review the Council on Domestic Violence and Sexual
Assault."
REPRESENTATIVE ANNA FAIRCLOUGH addressed the reasoning
behind having a task force to review the Council on Domestic
Violence and Sexual Assault. There have been questions
about staff turnover, reports on grant management, debate on
office location, and questions about appointment to the
Council and coordination with other state agencies. A task
force would take each of these points on and provide a
report back to the legislature.
Representative Fairclough reminded the committee that Alaska
ranks number one on many violent issues such as sexual
assault. She pointed out that the Council has done a
fabulous job in providing financial support to a network of
agencies across the state to respond to that issue. She
thought it was time to re-look at what the Council is
focusing on.
3:21:40 PM
Representative Fairclough reviewed the sections of the bill.
Section 1 talks about the findings of the State of Alaska
and quantifies that we do have an issue. Section 2
establishes the actual task force.
Representative Fairclough reported that she has met with the
Council and the Network on Domestic Violence and Sexual
Assault who have agreed to move forward with a task force.
Section 2 describes the composition of the fifteen members.
It includes the legislative body in the process, which is an
important part of finding solutions to the problem of sexual
assault.
3:23:34 PM
Representative Fairclough referred to page 3, lines 8-15,
which outlines audit notations, a menu that provides the
legislature with options to proceed forward with
modifications on mandates and prevention strategies.
Co-Chair Meyer referred to the fiscal notes that primarily
cover travel for the task force for one year.
3:25:55 PM
Representative Hawker MOVED to REPORT CSHB 215 (HES) out of
committee with individual recommendations and with the
accompanying fiscal notes. There being NO OBJECTION, it was
so ordered.
CSHB 215 (HES) was REPORTED out of Committee with a "do
pass" recommendation and with zero fiscal note #1 by the
Department of Health and Social Services, zero fiscal note
#2 by the Department of Law, new zero fiscal note by the
Legislature, new fiscal note by the Department of
Corrections, and new fiscal note by the Department of Public
Safety.
ADJOURNMENT
The meeting was adjourned at 3:27 PM.
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