Legislature(2005 - 2006)HOUSE FINANCE 519

03/24/2006 01:30 PM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved CSHB 190(FIN) Out of Committee
-- Testimony <Invitation Only> --
Moved CSHB 266(FIN) Out of Committee
-- Testimony <Invitation Only> --
Moved CSHB 377(L&C) Out of Committee
-- Testimony <Invitation Only> --
Moved HCS SB 172(FIN) Out of Committee
-- Testimony <Invitation Only> --
Moved CSHB 278(FIN) Out of Committee
-- Testimony <Invitation Only> --
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,  explained that the bill                                                                   
authorizes the  Alaska Municipal  Bond Authority  to consider                                                                   
issuing  pension obligation  bonds (POBs)  at the request  of                                                                   
the State or  a municipal governmental employer.   POBs are a                                                                   
proven   and   acceptable   tool   to   manage   pre-existing                                                                   
liabilities  for  State  and local  pensions.    Bond  market                                                                   
participants are receptive to  POBs, including bond insurers,                                                                   
rating agencies and investors.                                                                                                  
HB 278  would expand  the authority  of the Alaska  Municipal                                                                   
Bond  Authority to  support the  State  or municipality  that                                                                   
wishes to include  POBs in their strategy to  reduce the cost                                                                   
of meeting unfunded  pension liabilities.  The  bill does not                                                                   
authorize any  debt instruments to  be issued.  The  State or                                                                   
municipality would  need to take  a separate specific  action                                                                   
to  utilize  the  new ability  of  the  Municipal  Bond  Bank                                                                   
Co-Chair Meyer  MOVED to ADOPT Amendment #1.   Representative                                                                   
Weyhrauch OBJECTED.                                                                                                             
Representative  Hawker asked  to AMEND  Amendment #1:  Delete                                                                   
lines 28 -  31, Page 4.  That  section is not needed.   There                                                                   
being NO OBJECTION, it was deleted.                                                                                             
Representative Hawker explained  that a title change might be                                                                   
necessary.   He observed  that Amendment  #1 pertains  to the                                                                   
Public  Employees  Retirement   System  (PERS)  and  Teachers                                                                   
Retirement System  (TRS) contributions in place  prior to the                                                                   
passage of legislation last year.   The Department would have                                                                   
the authority to make regulations  to allow that the employer                                                                   
could prepay a portion of the actuarial liability.                                                                              
Representative  Hawker   continued,  Page  1,   Lines  19-22,                                                                   
address  the  provision  that indemnifies  an  employer  that                                                                   
makes a prepayment.                                                                                                             
Section  2, highlights  the State's  statutory authority  for                                                                   
municipal debt  authority.  It  answers questions  brought up                                                                   
in House State Affairs (HSTA)  Committee and clarifies that 2                                                                   
or more  municipalities may come  together to make  that type                                                                   
3:04:08 PM                                                                                                                    
Representative  Hawker pointed  out that  the Municipal  Bond                                                                   
Bank   could  pool   those   activities;   the  language   is                                                                   
permissive.   He  added  that Item  C  was another  provision                                                                   
requested and  would authorize  municipalities to  enter into                                                                   
fund diversion agreements.                                                                                                      
3:04:50 PM                                                                                                                    
Representative Hawker  continued, Sections 3 -  5, recognizes                                                                   
that  the individual  employer  (TRS) contributions  must  be                                                                   
prepaid all unfunded pension for unfunded service costs.                                                                        
3:05:50 PM                                                                                                                    
Page   4  -   Identical  language   relating   to  the   PERS                                                                   
transactions.    Page  1,  Line   10,  provides  a  technical                                                                   
correction.  That section from  Lines 13 - 26, is legislative                                                                   
policy  guiding  the  Alaska   Municipal  Bond  Bank.    That                                                                   
language  was rewritten,  adding a  provision addressing  the                                                                   
authority.  The  Bond Bank must operate as  a self-sufficient                                                                   
operation  with  no expectation  of  subsidization  of  State                                                                   
3:07:56 PM                                                                                                                    
Representative  Hawker  pointed out  that  the University  of                                                                   
Alaska had been included.                                                                                                       
3:08:11 PM                                                                                                                    
Representative  Weyhrauch questioned  what constraints  would                                                                   
be placed upon the University of Alaska.                                                                                        
Representative   Hawker  responded   that  would  be   "empty                                                                   
authority"  and  subject  to   the  internal  accounting  and                                                                   
editing  controls.   The capital  market  would regulate  any                                                                   
such  contemplated  transaction  along with  the  legislative                                                                   
sidebars.  He  felt it would be difficult for  the University                                                                   
to secure such  a transaction without sufficient  legislative                                                                   
support.  He did not believe the  State would be overexposed.                                                                   
Representative  Weyhrauch stressed  the need  to address  the                                                                   
State's unfunded  liability.  He  observed the extent  of the                                                                   
State's current liability @ $6.9 billion dollars.                                                                               
Representative Hawker pointed  out that the legislation would                                                                   
only provide an additional tool  in that toolbox and that the                                                                   
program would be optional for municipalities.                                                                                   
Representative  Kelly pointed out  a technical correction  on                                                                   
Page 4,  Line 25, that the  period after "notes" should  be a                                                                   
comma.  Representative Hawker concurred.                                                                                        
3:13:01 PM                                                                                                                    
Representative Hawker advised  that the Department of Revenue                                                                   
does  not  support the  transactions;  however,  he  reminded                                                                   
members  that the  Legislature is  an independent  body.   He                                                                   
pointed out statewide interest in the legislation.                                                                              
Co-Chair Meyer spoke in support of the bill.                                                                                    
Representative  Weyhrauch  spoke  in  support  of  additional                                                                   
appropriations  to  municipalities,  but  noted that  it  was                                                                   
unlikely that they would receive further State funds.                                                                           
Representative Hawker pointed  out that the State will not be                                                                   
liable;  he  reiterated  the municipality's  desire  for  the                                                                   
transaction.   Co-Chair  Meyer  countered that  the State  is                                                                   
ultimately responsible if the  bonds default.  Representative                                                                   
Hawker  stated it  would  be a  moral  liability,  but not  a                                                                   
direct liability of the State.                                                                                                  
3:16:34 PM                                                                                                                    
In  response  to  a  question  by  Representative  Weyhrauch,                                                                   
Representative  Hawker  explained that  "pooling  provisions"                                                                   
were added to assist the smaller  entities, which are feeling                                                                   
the  largest impact.   The  intent  is to  minimize the  cost                                                                   
associated with the liability.   Smaller communities would be                                                                   
more  likely  to  avail themselves  of  assistance  from  the                                                                   
municipal bond bank.                                                                                                            
3:18:03 PM                                                                                                                    
Representative Kelly spoke in  support of the legislation and                                                                   
noted that  the liability is nearly  $7 billion dollars.   He                                                                   
felt  the problem  is  worse than  anticipated  and that  the                                                                   
legislation could  add an optional tool.  He  felt that there                                                                   
were reasonable protections for the downside.                                                                                   
3:20:13 PM                                                                                                                    
Representative  Kerttula  questioned  why the  University  of                                                                   
Alaska had been included.                                                                                                       
Representative Weyhrauch WITHDREW  his OBJECTION to Amendment                                                                   
#1 as  amended.   There being  NO further OBJECTION,  amended                                                                   
Amendment #1 was adopted.                                                                                                       
Representative  Kerttula  reiterated her  question  regarding                                                                   
inclusion   of  the   University.     Representative   Hawker                                                                   
responded that it resulted from  a request brought forward by                                                                   
the  University.    They have  a  large  outstanding  pension                                                                   
obligation  and it would  provide them  the authority  to use                                                                   
the  professional  services  available   through  the  Alaska                                                                   
Municipal Bond Bank.                                                                                                            
3:22:12 PM                                                                                                                    
Representative    Hawker   reviewed    the   definition    of                                                                   
governmental employer and observed  that the University would                                                                   
fall under that definition.                                                                                                     
3:23:21 PM                                                                                                                    
Representative  Weyhrauch suggested  that  the Department  of                                                                   
Law be included in the definition.                                                                                              
3:23:48 PM                                                                                                                    
Representative  Kelly inquired if  school districts  would be                                                                   
included.   Representative  Hawker  noted that  the bill  was                                                                   
drafted to encompass  school districts, but pointed  out that                                                                   
most have higher regulatory structures.                                                                                         
3:25:00 PM                                                                                                                    
Representative Kelly  observed that the term  intercept funds                                                                   
were used  and/or a fund  diversion, questioning if  that was                                                                   
fair.  Representative  Hawker agreed and acknowledged  that a                                                                   
transaction  would  not occur  if  capital markets  were  not                                                                   
3:25:56 PM                                                                                                                    
Representative  Weyhrauch  advised   that  states  using  the                                                                   
pension obligation  bonds are  currently in serious  trouble.                                                                   
He observed the high risk involved.                                                                                             
Representative Weyhrauch believed  that the legislation could                                                                   
provide a false  sense of security.  He acknowledged  that it                                                                   
could help address  the problem, but emphasized  the need for                                                                   
3:27:07 PM                                                                                                                    
Representative Hawker  agreed that any financial  transaction                                                                   
has  risks.   He  noted  discussions in  previous  committees                                                                   
about the misuse of such transactions  and referred to backup                                                                   
regarding  ratings.   Representative Hawker  noted that  most                                                                   
failures occur  when entities  are not  realistic or  are too                                                                   
aggressive.    He maintained  that  the  State of  Alaska  is                                                                   
operating  in an  atmosphere of  reality.   The  transactions                                                                   
have  exceeded 8  percent with  a  2 -  3 percent  arbitrage.                                                                   
Compound  interest  works  to  the  favor  of  the  employer.                                                                   
Representative  Hawker  emphasized  that lessons  learned  in                                                                   
other jurisdictions have been included into the proposal.                                                                       
3:30:46 PM                                                                                                                    
Co-Chair  Meyer  pointed  out the  new  indeterminate  fiscal                                                                   
Representative Hawker  agreed, explaining there is  no way to                                                                   
know if a transaction would be completed.                                                                                       
3:31:51 PM                                                                                                                    
Representative Kelly  expressed frustration with  the size of                                                                   
the  liability.    He  noted  that  there  are  Alaskans  not                                                                   
invested in solving  the problem, and that employees  must be                                                                   
part of the solution.                                                                                                           
3:33:27 PM                                                                                                                    
Representative Hawker  observed that there are  problems with                                                                   
paying  cash up  front to  cover  the liability.   The  State                                                                   
would  forgo the  ability  to  mitigate its  obligation  with                                                                   
other funding  sources.   There are  no simple solutions  and                                                                   
there is  no silver bullet.   The legislation is one  tool in                                                                   
the toolbox.                                                                                                                    
3:34:22 PM                                                                                                                    
Representative  Weyhrauch  spoke  to the  complexity  of  the                                                                   
PERS/TRS  system  repayment  and   recommended  deleting  the                                                                   
University  of Alaska.   Representative  Hawker accepted  the                                                                   
Representative Weyhrauch  MOVED to delete "the  University of                                                                   
Alaska" on Page 5 of Amendment #1.                                                                                              
Representative  Kelly did  not object,  however, pointed  out                                                                   
that the  University has  a significant  problem, which  also                                                                   
must  be solved.    He  recommended further  deliberation  on                                                                   
inclusion of the University.                                                                                                    
3:37:03 PM                                                                                                                    
Representative Hawker noted that  the issue could be reviewed                                                                   
in the Senate.                                                                                                                  
3:37:24 PM                                                                                                                    
Representative   Weyhrauch  stated   that  not   withstanding                                                                   
significant increases  in K-12 payments that must  be made to                                                                   
the PERS/TRS  system, the  money should not  be taken  out of                                                                   
the  classrooms.  He  warned that  including  the  University                                                                   
would  raise issues  of "finances  and politics".   He  urged                                                                   
distinguishing the University from the school districts.                                                                        
3:38:30 PM                                                                                                                    
There being NO OBJECTION, the University was deleted.                                                                           
Representative Foster MOVED to REPORT CS HB 278 (FIN) out of                                                                    
Committee with individual recommendations and with the                                                                          
accompanying new indeterminate note.                                                                                            
CS  HB  278   (FIN)  was  reported  out  of   Committee  with                                                                   
"individual"  recommendations  and with  a new  indeterminate                                                                   
note by the House Finance Committee  for the Alaska Municipal                                                                   
Bond Bank.                                                                                                                      

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