Legislature(2003 - 2004)

01/20/2004 02:31 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Subcommittee on Percent of Market Value
<Meeting will begin immediately following
the House Finance Committee Meeting>
+= HJR 26 CONST. AM: PF APPROPS/INFLATION-PROOFING TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                      January 20, 2004                                                                                          
                          2:31 PM                                                                                               
                                                                                                                                
TAPE HFC 04-7, Side A                                                                                                           
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Harris called  the House Finance Committee meeting                                                                     
to order at 2:31 PM.                                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative John Harris, Co-Chair                                                                                            
Representative Bill Williams, Co-Chair                                                                                          
Representative Kevin Meyer, Vice-Chair                                                                                          
Representative Mike Chenault                                                                                                    
Representative Eric Croft                                                                                                       
Representative Hugh Fate                                                                                                        
Representative Richard Foster                                                                                                   
Representative Mike Hawker                                                                                                      
Representative Bill Stoltze                                                                                                     
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Carl Moses                                                                                                       
Representative Reggie Joule                                                                                                     
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Linda Hall, Director,  Division of Insurance, Department of                                                                     
Community &  Economic Development; Paul Lisankie,  Director,                                                                    
Division  of Workers  Compensation,  Department of  Labor &                                                                     
Workforce Development;  Edward Fisher, Deputy  Commissioner,                                                                    
Department of Labor; Alaska Housing Finance Corporation; Dan                                                                    
Fauske,   Executive   Director,   Alaska   Housing   Finance                                                                    
Corporation, Department of Revenue; Diane Barrans, Executive                                                                    
Officer, Alaska Student Loan Corporation, Alaska  Commission                                                                    
on Postsecondary Education, Department of Education;  Sheila                                                                    
King, Finance Officer, Postsecondary Education Commission.                                                                      
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
None                                                                                                                            
                                                                                                                                
                                                                                                                                
GENERAL SUBJECT(S):                                                                                                           
                                                                                                                                
     OVERVIEW: WORKERS COMPENSATION/INCREASED COSTS/                                                                          
               SALARY ADJUSTMENTS                                                                                             
                                                                                                                              
                                                                                                                              
               BONDING:                                                                                                       
               ALASKA HOUSING FINANCE CORPORATION (AHFC)                                                                      
               ALASKA STUDENT LOAN CORPORATION                                                                                
                                                                                                                                
                                                                                                                                
The following overview was taken in log note format.  Tapes                                                                     
and handouts will be on file with the House Finance                                                                             
Committee through the 23rd Legislative Session, contact 465-                                                                    
2156. After the 23rd Legislative Session they will be                                                                           
available through the Legislative Library at 465-3808.                                                                          
                                                                                                                              
                                                                                                                                
                                                                                                                                
 LOG SPEAKER                DISCUSSION                                                                                      
                                                                                                                              
      TAPE HFC 04-07                                                                                                          
      SIDE A                                                                                                                  
 000 Co-Chair Harris        Convened the House Finance Committee                                                                
                            meeting at 2:31 p.m.                                                                              
                                                                                                                                
                            WORKERS COMPENSATION                                                                            
 0012 LINDA HALL,           Discussed the insurance marketplace, the                                                            
      DIRECTOR,             assigned risk market, profitability of                                                              
      DIVISION OF           insurance companies, the rate increases                                                             
      INSURANCE,            receiving publicity, and the current                                                                
      DEPARTMENT OF         prices in Alaska's guaranty associations.                                                         
      COMMUNITY & ECONOMIC                                                                                                      
      DEVELOPMENT                                                                                                               
 226 Ms. Hall               Stated the assigned risk plan has been                                                              
                            losing money  for about  four years.  The                                                           
                            expenses   become  a   major  burden   to                                                           
                            businesses.                                                                                       
 305 Ms. Hall               Discussed the expense and loss ratios                                                               
                            range  and the  Alaska loss  ratio for  a                                                           
                            six-year period.                                                                                  
 428 Ms. Hall               Reviewed rate increases since 1988 and                                                              
                            stated the cost of claims has gone up.                                                            
 531 Ms. Hall               Discussed the number of claims, and the                                                             
                            cost  of   individual  claims  and   rate                                                           
                            increases  that affect  employers  across                                                           
                            the  state.     Pointed   to  crisis   in                                                           
                            insurance  guaranty  association   formed                                                           
                            under statute as a safety net to minimize                                                           
                            financial    loss   to    claimants    or                                                           
                            policyholders because  of the  insolvency                                                           
                            of the insurer.  Noted that the costs are                                                           
                            passed   on.     Described  the   Fremont                                                           
                            Indemnity Company insolvency. Offered  to                                                           
                            provide a cash flow model.                                                                        
 743 Ms. Hall               Talked about three other insolvent                                                                  
                            insurance carriers whose claims are being                                                           
                            handled through the guaranty association.                                                           
                            Stated that  the claims affect about  700                                                           
                            injured  workers  and  approximately  400                                                           
                            employers.                                                                                        
 828 Ms. Hall               Discussed   the   prorating   of    claim                                                         
                           payments,  "an unacceptable  solution for                                                            
                           everyone   involved."     Explained  that                                                            
                           injured workers receive lower weekly wage                                                            
                           checks  and partial  payment  for medical                                                            
                           expenses.                                                                                          
913 Ms. Hall               Explained that when a carrier becomes                                                                
                           insolvent, claims  are transferred to the                                                            
                           guaranty  fund of  the state,  or to  the                                                            
                           employer.  This additional, unanticipated                                                            
                           cost  could force small companies  out of                                                            
                           business.                                                                                          
1006 Ms. Hall              Continued discussing the Alaska Guaranty                                                             
                           Fund  and  the  potential  for  prorating                                                            
                           claims,  which was  averted  through 2003                                                            
                           and for the next few months.                                                                       
1100 Ms. Hall              Emphasized need for a stable environment                                                             
                           to   attract  new  markets,  and   for  a                                                            
                           solution to the funding crisis.                                                                    
1128 Co-Chair Harris       Asked about forthcoming legislation from                                                             
                           the Administration.                                                                                
1148 Ms. Hall              Described proposed sources of funding                                                                
                           involving  additional  assessments and  a                                                            
                           guaranty   of  loans.  Stated   that  new                                                            
                           legislation will include streamlining the                                                            
                           appeals processes.                                                                                 
1309 Ms. Hall              Continued answering questions relating to                                                            
                           the first substantial rate increase since                                                            
                           1988, the  assumptions that go into rate-                                                            
                           making,  and losses  in the  operation of                                                            
                           the insurance industry.                                                                            
1546 Vice-Chair Meyer      Asked if insurance companies prefer lump                                                             
                           sum  payments rather than paying  for job                                                            
                           rehabilitation of claimants.                                                                       
1604 PAUL LISANKIE,        Offered to research the question and                                                                 
      DIRECTOR, DIVISION   provide a response.                                                                                
      OF WORKERS                                                                                                                
      COMPENSATION,                                                                                                             
      DEPARTMENT OF LABOR                                                                                                       
      & WORKFORCE                                                                                                               
      DEVELOPMENT                                                                                                               
1713 Vice-Chair Meyer      Expressed concern that an insurance                                                                  
                           company  might prefer a lump  sum payment                                                            
                           that  wouldn't help  train the  worker to                                                            
                           reenter the workforce.                                                                             
1757  Co-Chair Williams    Asked the  cost to the state to cover the                                                            
                           loss.                                                                                              
1815 Ms. Hall              Responded that it will not be a general                                                              
                           fund   request   in  the   bills  to   be                                                            
                           introduced this week.                                                                              
1859 Ms. Hall              Continued to answer questions posed by                                                               
                           the members of the Committee.                                                                      
3151  Representative Croft Asked, in  relation to the data presented                                                          
                            from 1997, how much loss  is attributable                                                           
                            to   stock  market   performance   versus                                                           
                            inadequate premium levels.                                                                        
 3241 Ms. Hall              Replied that historically and in the mid-                                                           
                            1990s there  was an ability by  insurance                                                           
                            companies to  offset underwriting  losses                                                           
                            with investment income.                                                                           
 2252                                                                                                                           
                            ALASKA HOUSING FINANCE CORPORATION (AHFC)                                                       
 3508 DAN FAUSKE,           Referenced AHFC's bonding authority and                                                             
      EXECUTIVE DIRECTOR,   capacity  to generate  money.   Explained                                                           
      ALASKA HOUSING        that the State has proposed [in SB 279]                                                             
      FINANCE CORPORATION,  that  AHFC  issue  two   additional  bond                                                           
      DEPARTMENT OF         series to fund state capital projects                                                               
      REVENUE               totaling $45 million.  In the housing                                                               
                            loan fund, $480 million are not currently                                                           
                            leveraged with  debt, and  the equity  in                                                           
                            that  fund  will be  transferred  to  the                                                           
                            general account. The AHFC made a proposal                                                           
                            to long-term bond for $25 million at low-                                                           
                            interest rates for the Village Safe Water                                                           
                            Program. There  is potential use of  AHFC                                                           
                            general obligation for an  additional $20                                                           
                            million, increasing the  total commitment                                                           
                            to $45 million.                                                                                   
 3749 Mr. Fauske            Continued,   the   three   major   rating                                                           
                            agencies  were   agreeable  to  the   $20                                                           
                            million  proposal  but  not   with  going                                                           
                            further until  the State  comes to  terms                                                           
                            with   its  current   fiscal   situation.                                                           
                            Stated  that he  believes the  State  can                                                           
                            maintain its credit rating.                                                                       
 3900 Mr. Fauske            Continued discussing the proposal to                                                                
                            replace the bonds with $45 million in 10-                                                           
                            year serial bonds. Mr. Fauske referred to                                                           
                            HB 256 [Passed in 2003] that arrived at a                                                           
                            formula-driven dividend plan that led  to                                                           
                            the  AHFC being  upgraded.   He  asserted                                                           
                            that AHFC would want to  protect that and                                                           
                            its core  mission in  the housing  market                                                           
                            across the state.                                                                                 
 3952 Mr. Fauske            Explained that the nature of the                                                                    
                            revolving loan  fund program will  remain                                                           
                            the  same and  should be  made  bondable.                                                           
                            The size of the program has grown and now                                                           
                            represents $19-20  million of net  income                                                           
                            to the corporation.  The Corporation must                                                           
                            be able  to sell bonds  to assist in  its                                                           
                            liquidity position from a working capital                                                           
                            position. For  AHFC to function, it  must                                                           
                            have significant  working capital to  buy                                                           
                            the  loans  as  they  come  in  and  then                                                           
                            recycle  them with  loan proceeds  as  it                                                           
                            goes to market.                                                                                   
4039 Mr. Fauske            Continued, AHFC is currently doing well                                                              
                           but it is now even more important to have                                                            
                           an  informative debate  on SB  279, which                                                            
                           will  assist  AHFC  in  generating  these                                                            
                           additional monies.                                                                                 
4107 Representative        Questioned why the rating agencies were                                                              
      Hawker               hesitant to provide good ratings for the                                                             
                           $45  million package  in light  of AHFC's                                                            
                           $278   million  unrestricted   net  asset                                                            
                           balance as of June 30, 2003.                                                                       
4253 Mr. Fauske            Replied that it is due to the rating                                                                 
                           agencies'  concerns that  for years  AHFC                                                            
                           has  been paying out more  than it earns,                                                            
                           as well  as the length of debt service in                                                            
                           conjunction with net income.                                                                       
4327 Mr. Fauske            Further explained that the fund equity                                                               
                           balance that has been maintained at $1.7-                                                            
                           1.8  billion is a key  number examined by                                                            
                           the rating agencies. If the number falls,                                                            
                           the rating agency takes necessary steps.                                                           
4356  JOE DUBLER, DIRECTOR Pointed  out that different  schedules in                                                            
      OF FINANCE, ALASKA   the financial statements have bond issues                                                            
      HOUSING FINANCE      that rely solely on AHFC's general                                                                   
      CORPORATION          obligations   without   specific   assets                                                            
                           pledged to  them.  The fund deficits that                                                            
                           reside  in those  funds would have  to be                                                            
                           made  up by  the  general account of  the                                                            
                           revolving fund.   After backing all those                                                            
                           out,  the  result  is  the  $103  million                                                            
                           dividend for  FY 04 and a balance of $100                                                            
                           million  in unrestricted money.  The AHFC                                                            
                           mortgage  loan  activity  in  FY  03  was                                                            
                           nearly $1 billion. In FY 05, another $100                                                            
                           million will  go out from the Corporation                                                            
                           without  returning.    The rate  agencies                                                            
                           project outward  when cash flows out from                                                            
                           the   Corporation  instead   of  strictly                                                            
                           looking at present balances.                                                                       
4523  Representative Croft  Regarding the two bonding  proposals, he                                                            
                           asked  how  much  would  be  incurred  in                                                            
                           annual  obligation  for  the $45  million                                                            
                           bond  and how much the  dividend would be                                                            
                           reduced.                                                                                           
4602 Mr. Dubler            Replied that the debt service is                                                                     
                           approximately  $5.5 million on  a 10-year                                                            
                           bond.                                                                                              
4631  Representative Croft Asked  about the other proposal involving                                                            
                           buildings and maintenance.                                                                         
4640 Mr. Fauske            Replied that from the perspective of                                                                 
                           AHFC,  purchasing  a working  asset is  a                                                            
                           viable business.                                                                                   
                                                                                                                                
                           TAPE HFC 04-07, Side B                                                                           
4606 Mr. Fauske            Explained that significant capital would                                                           
                            be   raised  for   maintenance   on   the                                                           
                            buildings.  Spoke to the  purchase of the                                                           
                            Atwood Building.                                                                                  
 4543 Representative Croft  Commented that he had understood that the                                                           
                            State had  purchased the Atwood  Building                                                           
                            to save paying rent while, in  fact, AHFC                                                           
                            collects rent on the building.                                                                    
 4509 Representative Croft  Asked if, in effect, these  bonds involve                                                           
                            some  money obligation  now,  and  future                                                           
                            payments over the next 10-20 years.   Mr.                                                           
                            Fauske affirmed.                                                                                  
 4433 Co-Chair Harris       Asked if there is anything in the                                                                   
                            Governor's  proposal [SB  279]  involving                                                           
                            AHFC that they would prefer not to  do in                                                           
                            terms of their portfolio.                                                                         
 4417 Mr. Fauske            Replied that AHFC did not want to go                                                                
                            beyond $45 million.                                                                               
 4332 Mr. Fauske            Continued that AHFC has $1 billion                                                                  
                            dollars of  variable rate debt. The  AHFC                                                           
                            is now  at a point that makes  proceeding                                                           
                            further potentially detrimental.                                                                  
 4238 Mr. Fauske            Commented on making progress in solving                                                             
                            the issues of debt.                                                                               
 4201 Co-Chair Harris       Referred to the anticipated $103 million                                                            
                            dollar dividend  this year and asked  the                                                           
                            amount   that  would   be  available   in                                                           
                            unrestricted general funds.                                                                       
 4141 Mr. Fauske            Replied that of the $103 million, $50                                                               
                            million will go to debt service.  General                                                           
                            Obligation Bonds  were sold, leaving  $53                                                           
                            million of  which $20-25 million went  to                                                           
                            the  Village  Safe  Water   Program  with                                                           
                            another $18-20  million in AHFC  matching                                                           
                            money for federal dollars.                                                                        
                                                                                                                                
                            POSTSECONDARY EDUCATION:  ASLC                                                                  
 3941 DIANE BARRANS,        Stated that over the past ten years, the                                                            
      EXECUTIVE OFFICER,    Legislature has played a key role in                                                                
      ALASKA STUDENT LOAN improving     the   Alaska   Student   Loan                                                           
      CORPORATION;          Corporation's (ASLC) financial health.                                                              
      EXECUTIVE DIRECTOR,                                                                                                       
      ALASKA COMMISSION ON Discussed commitments of the Corporation                                                             
      POSTSECONDARY         and optimizing assets.                                                                              
      EDUCATION,                                                                                                                
      DEPARTMENT OF         Discussed Capital Project Revenue Bonds.                                                            
      EDUCATION                                                                                                                 
                            Referred   to    handout,   "Return    of                                                           
                            Contributed Assets to State," (copy on                                                              
                            file.)                                                                                            
 3606 Ms. Barrans           Explained a new master trust indenture,                                                             
                            the 2002 indenture, in "Recent Management                                                           
                            Enhancements," (copy on file.)                                                                      
                                                                                                                              
3353 Ms. Barrans           Referred to two bar charts, "Cumulative                                                              
                           State  Contributions to ASLC,"  and "ASLC                                                            
                           Fund  Equity by Fiscal Year,"  (copies on                                                            
                           file.)    Explained that these illustrate                                                            
                           that   between  1988-1992  ASLC  received                                                            
                           assets  and cash  just over  $306 million                                                            
                           and  will return some  of the contributed                                                            
                           capital to the State when the Corporation                                                            
                           can  do so without  impairing its ability                                                            
                           to offer low-interest loans.                                                                         
                                                                                                                              
3237  Representative Croft Asked about the $260 million seed fund to                                                            
                           ASLC,  and questioned if there  were also                                                            
                           infusions of  general fund dollars during                                                            
                           the period 1988-1992.                                                                              
3214 Ms. Barrans           Confirmed    that   through    1992,   an                                                            
                           additional   $47  million  in   cash  was                                                            
                           provided.  Stated  that  $260 million  in                                                            
                           loan assets  were transferred at the time                                                            
                           the Corporation was created.                                                                       
3152  Representative Croft Asked if  $307 million can be returned to                                                            
                           the  State  over  time,  or if  the  $260                                                            
                           million  are secured  assets  for student                                                            
                           loans.                                                                                             
3139 Ms. Barrans           Stated that ASLC intends to return                                                                   
                           approximately  $250-260 million  over the                                                            
                           next  three years, including  $75 million                                                            
                           intended  for capital projects in  FY 05.                                                            
                           Discussed   the  continuation  of  annual                                                            
                           dividends,   and  the   restructuring  of                                                            
                           underlying assets in 1994.                                                                           
                                                                                                                              
3038 Ms. Barrans           Discussed federal guaranteed loans and                                                               
                           payment  to ASLC of a  special subsidy by                                                            
                           the federal government as a lender.                                                                
2932  Representative Croft Responded   to   Representative   Croft's                                                            
                           comment regarding a better fiscal outlook                                                            
                           due    to   several   factors   including                                                            
                           elimination  of student loan forgiveness,                                                            
                           better  collection  including  garnishing                                                            
                           Permanent  Fund  dividends,  and  federal                                                            
                           subsidies.  Ms. Barrans agreed and                                                                   
                           also noted  the low rate issuing bonds in                                                            
                           the market in the last few years.                                                                  
2850 Representative Croft Asked if ASLC is under undue pressure.                                                              
2828 Ms. Barrans           Responded that ASLC feels assured it can                                                             
                           continue to offer an attractive education                                                            
                           loan package and also return these assets                                                            
                           to the State.                                                                                      
2817 Ms. Barrans           Discussed the return of $260 million over                                                            
                           the  next  three  years  and  the  annual                                                            
                           dividend.                                                                                          
2720 Representative        Asked    how   the   $306    million   in                                                          
      Hawker                contributions were included and reported                                                            
                            in ASLC financial statements.                                                                     
 2627 SHEILA KING, FINANCE Explained that net equity is on the                                                                  
      OFFICER, ALASKA       balance sheet as net assets, and ASLC is                                                            
      STUDENT LOAN          wrapped in with other programs.  Offered                                                            
      CORPORATION,          to provide financial statements.                                                                  
      POSTSECONDARY                                                                                                             
      EDUCATION COMMISSION                                                                                                      
 2544 Representative        Requested the 2003 annual report.                                                                 
      Hawker                                                                                                                    
 2456 Ms. Barrans           Explained that ASLC created a new                                                                   
                            consolidated   loan   program    allowing                                                           
                            borrowers at 8-9% to consolidate at lower                                                           
                            interest, and the Corporation used assets                                                           
                            through  those  programs  to   issue  and                                                           
                            leverage bonds.                                                                                   
 2339 ADJOURNMENT           The meeting was adjourned at 3:43 PM.                                                             
                                                                                                                                

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