Legislature(2005 - 2006)HOUSE FINANCE 519
03/24/2006 01:30 PM FINANCE
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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 Authority. 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 transaction. 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 funds. 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 favorable. 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 prudence. 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 note. 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 change. 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.