Legislature(2003 - 2004)

04/02/2003 03:18 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 203-AIDEA DIVIDENDS TO STATE                                                                                               
Number 0560                                                                                                                     
CHAIR ANDERSON  announced that the  next order of  business would                                                               
be HOUSE  BILL NO. 203,  "An Act  relating to the  definitions of                                                               
'net  income'  and  'unrestricted  net income'  for  purposes  of                                                               
calculating the dividends  to be paid to the state  by the Alaska                                                               
Industrial Development  and Export  Authority; and  providing for                                                               
an effective date."                                                                                                             
Number 0605                                                                                                                     
REPRESENTATIVE MIKE  HAWKER, Alaska State  Legislature, presented                                                               
HB  203 on  behalf of  the House  Finance Committee,  sponsor, of                                                               
which he is a member.  He  explained that the bill would give the                                                               
finance  committee  a  tool  to  use  in  this  year's  budgeting                                                               
process.  The Alaska Industrial  Development and Export Authority                                                               
(AIDEA)  has a  statutory requirement  to pay  a dividend  to the                                                               
state each year.                                                                                                                
REPRESENTATIVE HAWKER  explained that last year,  AIDEA's statute                                                               
was revised  to reflect changes  by the accounting  profession in                                                               
preparation  of financial  statements and  reports.   However, he                                                               
said,  one issue  was not  addressed -  the accounting  for asset                                                               
impairments.  Per its policy, AIDEA  must pay the State of Alaska                                                               
a dividend that  is between 25 and 50 percent  of its net income.                                                               
That  dividend may  not exceed  AIDEA's unrestricted  net income.                                                               
He explained  that the legislature  clarified the  definitions of                                                               
"net  income"   and  "unrestricted   net  income,"   setting  the                                                               
parameters  for the  dividend.   At  that  time, the  legislature                                                               
defined income to  exclude those items that were not  part of the                                                               
authority's  actual operating  income, such  as intergovernmental                                                               
transfers,  capital   contributions,  and  grant  income.     For                                                               
example, AIDEA's  dividend to the  state is  an intergovernmental                                                               
transfer; [a past  dividend] should not be  [calculated into] the                                                               
net income for determining the [future] dividend.                                                                               
REPRESENTATIVE  HAWKER said  the  goal of  last year's  statutory                                                               
change was  to make the  accountant's presentation of  net income                                                               
for  the purposes  of calculating  the dividend  the same  as the                                                               
authority's operating  income.  He  said the legislature  did not                                                               
want to  distribute more  of the operating  income than  would be                                                               
appropriate or that  would invade the restricted  portions of the                                                               
funds, either capital or income.                                                                                                
Number 0831                                                                                                                     
REPRESENTATIVE  HAWKER explained  that HB  203 further  clarifies                                                               
the definition  of income.   When determining net income,  HB 203                                                               
would exclude  expenses already reported on  financial statements                                                               
that  resulted  from  impairment losses  on  AIDEA's  development                                                               
projects.   He explained  that an  impairment loss  is a  loss in                                                               
value of  an asset that was  purchased in prior years.   Unlike a                                                               
current  expense  that  takes  cash  out  of  the  authority,  an                                                               
impairment loss  is a noncash  entry in the books.   Professional                                                               
accounting policy requires that  impairment losses be recognized.                                                               
He said  that because the  recognition of impairment  losses have                                                               
no  effect on  AIDEA's  cash  balance or  on  its true  operating                                                               
income  for  a given  year,  the  House Finance  Committee  wants                                                               
impairment losses  excluded from the AIDEA's  income for purposes                                                               
of determining the dividend.                                                                                                    
Number 0922                                                                                                                     
REPRESENTATIVE HAWKER testified that  the House Finance Committee                                                               
is sponsoring  HB 203  because under  the current  statute, AIDEA                                                               
will not  have any  statutory or defined  income available  for a                                                               
dividend for  FY 04.  In  the past, this dividend  has been about                                                               
$20  million a  year -  a substantial  amount, given  the current                                                               
financial situation.   During the base year on  which the state's                                                               
FY  04  dividend  is  calculated,  AIDEA  recognized  significant                                                               
impairment losses on  the Healy Clean Coal Project  and on Alaska                                                               
Seafood  International.   The accountants  and managers  of AIDEA                                                               
analyzed these projects and decided  they're not worth what AIDEA                                                               
paid  for them,  and the  managers  recognized that  loss in  the                                                               
financial  statements.   Again, he  emphasized, this  process did                                                               
not take cash or liquid assets.                                                                                                 
Number 1030                                                                                                                     
REPRESENTATIVE  HAWKER explained  that excluding  impairment loss                                                               
from the  calculation of income  would make  a $9 to  $18 million                                                               
dividend available  for use in  the FY  04 budget.   According to                                                               
the  agency's annual  report dated  June 30,  2002, which  is the                                                               
base year for  calculating the FY 04 dividend,  AIDEA has roughly                                                               
$789 million in unrestricted net assets.   It has $356 million of                                                               
unrestricted cash and investments on  hand, from which a dividend                                                               
to the  state could be  paid, he said.   Had the  legislature not                                                               
adopted the  accounting changes last  year, AIDEA would  have had                                                               
income to pay a dividend in FY 04,  he said.  He asked members to                                                               
pass  HB  203  on  to  the House  Finance  Committee,  which  can                                                               
determine whether  to use this tool  as part of the  FY 04 budget                                                               
Number 1110                                                                                                                     
REPRESENTATIVE  HAWKER noted  that the  committee will  hear from                                                               
AIDEA that  its board voted  100 percent  against this bill.   He                                                               
recalled that  when the dividend  legislation itself  was passed,                                                               
the  board was  concerned about  whether the  dividend would  rob                                                               
AIDEA  of its  ability to  carry out  its mission.   He  said the                                                               
state has a  modest dividend formula in place, and  it works.  He                                                               
said it's  good policy  for AIDEA  to be able  to write  down bad                                                               
investments  made years  ago,  but it  should  not sacrifice  the                                                               
statutory  dividend  to  the  state.    He  said  AIDEA  has  the                                                               
operating income and cash available to pay the dividend.                                                                        
Number 1191                                                                                                                     
REPRESENTATIVE GATTO  asked what happened  to the money  that was                                                               
written off for bad investments.  Does it exist anymore?                                                                        
REPRESENTATIVE HAWKER  said he can't  pass judgment on  how AIDEA                                                               
manages  its investments.    He  said this  bill  creates a  fair                                                               
dividend policy.                                                                                                                
REPRESENTATIVE  GATTO  clarified  that  he wasn't  asking  for  a                                                               
judgment on  the investment; he  was asking what happens  when an                                                               
investment is written down.                                                                                                     
Number 1270                                                                                                                     
REPRESENTATIVE HAWKER  replied that when managers  determine that                                                               
the  fair value  of  an asset  is no  longer  represented by  the                                                               
amount invested,  then the amount of  the asset is lowered.   But                                                               
to keep the books balance, the  transaction is shown as a loss or                                                               
a reduction in AIDEA's net assets.                                                                                              
REPRESENTATIVE GATTO  asked whether the  purpose of HB 203  is to                                                               
make that definition.                                                                                                           
Number 1322                                                                                                                     
REPRESENTATIVE  HAWKER explained  that HB  203 states  that those                                                               
impairment  losses, those  write-downs of  money spent  long ago,                                                               
are not included in the  determination of net income for purposes                                                               
of  the dividend.    He referred  to a  spreadsheet  in the  bill                                                               
packet  entitled  "House  Bill  203, AIDEA  Dividends  to  State,                                                               
Calculations  for  Committee Presentation."    The  net loss  for                                                               
AIDEA  for the  year ended  June  30, 2003,  was $72,506,000,  he                                                               
explained.    Included in  the  $72-million  loss is  $91,346,000                                                               
associated with  valuation adjustments  for the Healy  Clean Coal                                                               
Project and the  Alaska Seafood International.   He said existing                                                               
statute  looks  at the  decrease  in  net  assets and  bases  the                                                               
dividend  on that.   The  result  is a  negative number;  there's                                                               
nothing to distribute.                                                                                                          
REPRESENTATIVE HAWKER  noted that  HB 203  looks at  those write-                                                               
offs of impaired  assets that didn't take any cash  out of AIDEA.                                                               
Adding  that number  back  results  in $18  million.   Under  the                                                               
current statute,  the previous year's dividend  of $17,500,000 is                                                               
added back in for  a net income under HB 203  of $36,340,000.  He                                                               
said  this  figure of  $36  million  represents how  AIDEA  truly                                                               
operated  last year.    Based on  the $36  million  figure, a  25                                                               
percent  dividend  would  equal  $9 million,  and  a  50  percent                                                               
dividend would equal $18 million.                                                                                               
Number 1467                                                                                                                     
REPRESENTATIVE GUTTENBERG  asked whether AIDEA is  still bound by                                                               
bonding  authority,  federal  requirements,  and  other  agencies                                                               
outside state government.                                                                                                       
REPRESENTATIVE HAWKER reiterated that  AIDEA must adhere to sound                                                               
accounting  principles,  including  the reporting  of  accounting                                                               
losses.   But,  he said,  these losses  are not  relevant to  the                                                               
current capacity of AIDEA to pay a dividend to the state.                                                                       
Number 1596                                                                                                                     
REPRESENTATIVE HAWKER stated that  he discussed these issues with                                                               
a  bond counsel,  who  said that  consistency  is the  overriding                                                               
issue in  maintaining AIDEA's bond rating.   He said he  was told                                                               
that  a stable  business environment  and consistent  regulations                                                               
are  critical.   Representative   Hawker  agreed that  this is  a                                                               
change  in  law,   but  it  is  a  clean  up   from  last  year's                                                               
legislation.   He  said  the  rating agencies  in  New York  have                                                               
probably   asked  many   questions  about   the  Alaska   Seafood                                                               
International  and  the ongoing  value  of  these assets.    That                                                               
factor (the  discrepancy between  value on  the books  and actual                                                               
worth) was inherent in the  analysis performed by the bonding and                                                               
rating  agencies prior  to AIDEA  writing it  down.   Bond rating                                                               
agencies are  particularly thorough when they  analyze companies,                                                               
he said.                                                                                                                        
REPRESENTATIVE HAWKER said he did  not believe HB 203 would alarm                                                               
AIDEA's bond rating agencies.   He said he anticipates a detailed                                                               
presentation by  the bonding agencies  to the  finance committee.                                                               
AIDEA wrote  off $91 million,  and it won't  pay a dividend  as a                                                               
result of  that write-down.  He  reported that he was  told AIDEA                                                               
may write  off additional money  on Alaska  Seafood International                                                               
next year, and may not pay a dividend in the following year.                                                                    
Number 1722                                                                                                                     
REPRESENTATIVE  CRAWFORD noted  that AIDEA  had funded  Mark Air,                                                               
which went bankrupt.   He asked if AIDEA  treated both companies'                                                               
assets the same.                                                                                                                
REPRESENTATIVE HAWKER said he wasn't able to answer that.                                                                       
Number 1750                                                                                                                     
REPRESENTATIVE  ROKEBERG asked  about the  residual value  of the                                                               
Alaska Seafood International.                                                                                                   
REPRESENTATIVE  HAWKER suggested  the  question  be addressed  to                                                               
AIDEA staff at the meeting.                                                                                                     
REPRESENTATIVE ROKEBERG  noted that the AIDEA  [Balance Sheet for                                                               
June  30, 2002]  shows the  current  assets of  $121 million  and                                                               
current liabilities  of $14 million  for a ratio of  9 to 1.   He                                                               
asked if this is a healthy ratio.                                                                                               
Number 1813                                                                                                                     
REPRESENTATIVE HAWKER clarified that  he is appearing before this                                                               
committee not  as an  accounting official,  but as  a legislator.                                                               
He  said he  is pleased  with  the overall  financial health  and                                                               
condition of AIDEA.   He said it's a strong,  vibrant, vital part                                                               
of investing in business in Alaska.                                                                                             
Number 1835                                                                                                                     
REPRESENTATIVE  ROKEBERG  asked  about AIDEA's  unrestricted  net                                                               
assets of $789 million on the HB 203 spreadsheet.                                                                               
REPRESENTATIVE  HAWKER   described  that   figure  as   the  true                                                               
unrestricted  net  assets.    He   said  AIDEA  has  some  assets                                                               
restricted for  debt service; the  aggregate net assets  are $792                                                               
REPRESENTATIVE  ROKEBERG   asked  if   the  cash   available  was                                                               
REPRESENTATIVE HAWKER referred to  the spreadsheet and noted that                                                               
the $356,589,000  figure consists  of cash and  cash equivalents,                                                               
investment  securities -  current,  and  investment securities  -                                                               
non-current.   He  confirmed  Representative Rokeberg's  estimate                                                               
that $96 million of the $356 million are truly liquid assets.                                                                   
Number 1901                                                                                                                     
REPRESENTATIVE ROKEBERG  said the  intent of  the law  allows the                                                               
legislature to receive income from  AIDEA.  He said it's apparent                                                               
from AIDEA's  financial statements  that it can  afford to  pay a                                                               
dividend now.  But, he asked, what if there are further write-                                                                  
downs on some  of these assets; will AIDEA be  unable to pay this                                                               
dividend  in the  future?    He asked  if  the  problem is  self-                                                               
righting  because the  statutory formula  for dividends  is still                                                               
dependent  on  the  net  income,  and HB  203  only  changes  the                                                               
description of net income.                                                                                                      
REPRESENTATIVE  HAWKER  said  it  is  clearly  the  latter.    He                                                               
theorized that  if AIDEA  wrote off the  entire balance  of those                                                               
two assets,  it would not affect  last year's net income.   AIDEA                                                               
still has  the ongoing  cash flow  from other  productive assets;                                                               
the more successful investments  within AIDEA continue to produce                                                               
Number 1954                                                                                                                     
REPRESENTATIVE ROKEBERG  said HB 203  makes an adjustment  in the                                                               
balance sheet, but it doesn't  affect AIDEA's ability to make the                                                               
dividend  payment  or to  be  a  viable  entity.   He  summarized                                                               
Representative Hawker's position that  HB 203 does not jeopardize                                                               
the  ability  of the  corporation  to  operate or  its  financial                                                               
REPRESENTATIVE HAWKER agreed to both points.                                                                                    
Number 2004                                                                                                                     
MIKE BARRY, Chairman of the  Board, Alaska Industrial Development                                                               
and  Export   Authority,  Department  of  Community   &  Economic                                                               
Development,  said  he  disagreed  with  some  of  Representative                                                               
Hawker's characterizations  about the  board.  He  explained that                                                               
none of  the current members were  on the board in  1996 when the                                                               
legislature  passed the  dividend legislation.   He  said he  has                                                               
been  told  that the  board  went  on  record as  supporting  the                                                               
dividend at that time.                                                                                                          
MR.  BARRY  told  members  that his  board  favors  the  dividend                                                               
policy.   He  said  AIDEA  needs to  represent  to its  financial                                                               
constituents -  the bonding, business, and  banking communities -                                                               
that it will  be viable on the  long-term basis.  As  he wrote in                                                               
his  [April  1, 2003]  letter  [to  the  co-chairs of  the  House                                                               
Finance Committee], a  lot of thought and dialogue  went into the                                                               
dividend legislation.  Until this  year, it has worked very well,                                                               
he said.                                                                                                                        
Number 2060                                                                                                                     
MR.  BARRY   said  he  disagreed  with   Representative  Hawker's                                                               
interpretation  of the  accounting  changes that  were made  last                                                               
year.   These  accounting changes  took  AIDEA from  one type  of                                                               
government  accounting  to  another   type,  but  both  of  these                                                               
required a  write-down of an  asset when that loss  is recognized                                                               
by the authority.   He said there were no  changes made last year                                                               
that would  have affected  the change  proposed in  HB 203.   The                                                               
difference   between   AIDEA   and   a   tax-paying,   for-profit                                                               
corporation  is that  AIDEA  is  owned by  the  State of  Alaska.                                                               
AIDEA  officials   occasionally  raise   funds  in   the  bonding                                                               
community, not as  a full faith and credit bonding  agency of the                                                               
state,  but  as an  agency  that  makes  promises which  must  be                                                               
carried out  based on  AIDEA's assets, not  based on  other state                                                               
funds, other state assets, or the power of taxation.                                                                            
Number 2119                                                                                                                     
MR. BARRY  described the anxiety  of a bond  purchaser interested                                                               
in a  25-year investment who  looks at the state's  fiscal policy                                                               
and says,  "They're running  out of  oil revenues.   They  have a                                                               
serious  need for  funds.   Perhaps the  legislature is  going to                                                               
raid  AIDEA  for  funds."    He  said  that's  why  the  dividend                                                               
legislation  of 1996  is  a  proper and  logical  answer to  that                                                               
anxiety.   The proposed change [in  HB 203] does not  assure this                                                               
constituency  that  this  is  the  final  change,  and  the  bill                                                               
demonstrates that the state needs  money and that AIDEA can't pay                                                               
the dividend.   Thus this changes the rules so  the state can get                                                               
the money.                                                                                                                      
MR. BARRY agreed with Representative  Hawker that HB 203 does not                                                               
damage  AIDEA's health  as a  financial  entity today.   What  it                                                               
does, he  said, is raise the  uncertainty that no one  can answer                                                               
because the  legislature always has  the right and  the authority                                                               
to appropriate  funds from AIDEA.   He implored the  committee to                                                               
not  [raise that  uncertainty] for  a  $9 to  $18 million  dollar                                                               
dividend, when  it could seriously  damage the  long-term program                                                               
of AIDEA.                                                                                                                       
Number 2218                                                                                                                     
REPRESENTATIVE  ROKEBERG  asked  whether Mr.  Barry  agreed  that                                                               
HB 203 doesn't jeopardize financial  ability to conduct financial                                                               
operation, but might  raise the level of uncertainty  in the bond                                                               
MR. BARRY said yes.                                                                                                             
REPRESENTATIVE ROKEBERG  asked what  AIDEA's current  bond rating                                                               
Number 2250                                                                                                                     
SARA  FISHER-GOAD,  Alaska   Industrial  Development  and  Export                                                               
Authority, Department  of Community & Economic  Development, said                                                               
she would  provide the rating information  in writing.  It  is an                                                               
"A" rating, with some differences between the rating agencies.                                                                  
CHAIR ANDERSON  suggested that since  the AIDEA  argument focused                                                               
on the  long-term effects of this  change in the bond  market, it                                                               
would  have  been   useful  for  AIDEA  to   come  prepared  with                                                               
information on AIDEA's current bond rating.                                                                                     
REPRESENTATIVE ROKEBERG  asked Mr.  Barry to provide  an analysis                                                               
of  what the  net  income figures  would be  under  old the  GASB                                                               
[Government Accounting Standards Board] rules.                                                                                  
Number 2295                                                                                                                     
MR. BARRY replied  that the impairment charges would  be the same                                                               
under either set of rules.                                                                                                      
REPRESENTATIVE ROKEBERG asked  if the net income  available for a                                                               
dividend would be similarly impaired.                                                                                           
MR. BARRY agreed that there would  be no change to the impairment                                                               
[of assets] by adopting the GASB changes.                                                                                       
REPRESENTATIVE ROKEBERG  clarified that [HB 203]  allows an AIDEA                                                               
dividend payment  to be made  by changing the definitions  of net                                                               
income and restricted net income.                                                                                               
Number 2316                                                                                                                     
MR.  BARRY agreed.    He clarified  that it  is  not the  board's                                                               
contention that the payment of the  dividend of $9 million to $18                                                               
million would  in any  way impair  AIDEA's bond  rating.   But he                                                               
said  it will  raise uncertainty  as  to future  bond sales  that                                                               
AIDEA may  want to  undertake.  Because  AIDEA officials  are not                                                               
contemplating  a bond  sale tomorrow  or  next week,  he said  he                                                               
didn't think there would be any impact in the very near future.                                                                 
MR.  BARRY  confirmed  Representative Rokeberg's  statement  that                                                               
AIDEA has  no plans  to sell new  bonds in the  next six  to nine                                                               
months.   He said  AIDEA was  able to take  advantage of  the low                                                               
interest rate last year.                                                                                                        
TAPE 03-27, SIDE B                                                                                                            
Number 2381                                                                                                                     
REPRESENTATIVE ROKEBERG asked about the two impairment losses.                                                                  
MR. BARRY  said the Healy Clean  Coal Project has a  [fair value]                                                               
of  $56   million.    As   of  June  30,  2002,   Alaska  Seafood                                                               
International  has  a  [residual  value]  of  $22,400,000,  which                                                               
consists of the land and one of two buildings.                                                                                  
REPRESENTATIVE ROKEBERG  asked about  the $85-million  bond issue                                                               
on the Healy Clean Coal Project.                                                                                                
Number 2336                                                                                                                     
MR. BARRY  clarified that the  Healy Clean Coal Project  has been                                                               
shut  down  since 1999.    The  write-down occurred  because  the                                                               
original investment  of $120  million in  state funds  and almost                                                               
$180 in  federal funds was  not producing  any income and  had no                                                               
prospect of  doing so in the  near future.  He  acknowledged that                                                               
the recognition of that loss did  not affect the cash earnings of                                                               
the rest of  AIDEA's assets.  In AIDEA's case,  between the state                                                               
and  the federal  government,  nearly $300  million  in cash  was                                                               
invested, and it is gone.                                                                                                       
REPRESENTATIVE ROKEBERG  asked if there  are any other  assets on                                                               
the books that AIDEA may be writing down in the near term.                                                                      
MR.  BARRY replied  that AIDEA  is currently  demolishing an  ore                                                               
concentrate  building in  Skagway.    He said  it's  not a  major                                                               
asset; it's valued on the books  at $2 million.  The building has                                                               
become a life-safety  factor to the local community.   AIDEA will                                                               
take a write-down on some aspect  of it; some assets will remain.                                                               
He  said the  answer is  yes,  but he  is not  aware of  anything                                                               
significant at this time.                                                                                                       
Number 2243                                                                                                                     
REPRESENTATIVE HAWKER  said he  believes AIDEA's  testimony lends                                                               
credibility  to   the  House  Finance  Committee's   interest  in                                                               
establishing  a comprehensive  dividend  formula for  AIDEA.   He                                                               
urged the committee to pass HB 203 on to that committee.                                                                        
Number 2191                                                                                                                     
CHAIR ANDERSON,  noting that no  other people wished  to testify,                                                               
closed public testimony.                                                                                                        
Number 2189                                                                                                                     
REPRESENTATIVE  GATTO moved  to report  HB 203  out of  committee                                                               
with  individual  recommendations  and  the  accompanying  fiscal                                                               
note.   There being no  objection, HB  203 was reported  from the                                                               
House Labor and Commerce Standing Committee.                                                                                    

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