Legislature(2005 - 2006)CAPITOL 17
04/20/2006 09:00 AM RULES
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* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 278-RETIREMENT SYSTEM BONDS 9:04:36 AM CHAIR ROKEBERG announced that the first order of business would be 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." 9:04:51 AM REPRESENTATIVE HARRIS moved to adopt CSHB 278, Version 24- LS0883\Y, Cook, 4/11/06, as the working document. There being no objection, Version Y was before the committee. 9:05:12 AM REPRESENTATIVE MIKE HAWKER, Alaska State Legislature, sponsor, explained that HB 278 authorizes government workers in Alaska to engage in "Pension Obligation Bond" (POB) transactions. He said that in a POB transaction money is borrowed at a lower rate of interest than the money earns when invested within pension funds. He stated that the governmental employer profits from the difference, adding that this is a "legal arbitrage mechanism." REPRESENTATIVE HAWKER went on to say that he would go through the sectional analysis of the bill and explain changes made in Version Y. Section 1 applies to the Teachers' Retirement System (TRS), adding a new section which allows employers to pay all or a portion of unfunded pension obligations. He said that Section 2 contains the majority of changes from the House Finance Committee Substitute. He said that this section improved readability by replacing "bonds, notes, commercial paper, or other obligations" with "obligations," and added a definition of "obligations" which includes these instruments. In addition, Version Y removes language that would be covered in the funds diversion agreement. REPRESENTATIVE HAWKER said that Sections 3 and 4 add facilitating language to the accounting statutes for the Public Employees' Retirement System (PERS). Section 5 parallels Section 1 of the bill and applies to PERS. He explained that Section 6 adds to the statutory policies established for the Municipal Bond Bank Authority. He pointed out that the bond bank should provide the lowest rates possible without subsidizing the employers beyond their means. Moving on to Section 7, he said that this section applies to the powers of the bond bank, and allows the bond bank to create a subsidiary organization for the purpose of facilitating municipal POB transactions, if appropriate. REPRESENTATIVE HAWKER continued with Section 8 that adds a new statute defining the powers of the Municipal Bond Bank Authority when handling POB transactions. This includes guidelines such as: providing assistance to employers, performing duties which are necessary, and authorizing the issuance of debt and obligations for these purposes. He said that POBs are substituting a "hard debt" for a "soft debt," and expressed disagreement with this term. He stated that pension obligations are contractual obligations, and are considered a debt. He said that if the debt is transferred to the Municipal Bond Bank, there are limitations on the amount of debt the bond bank may issue. Section 9 exempts POBs from the current limit for revenue bonds. He explained that Section 10 authorizes the Municipal Bond Bank to issue POBs, while Section 11 "raises the cap" on debt other than revenue bonds. REPRESENTATIVE HAWKER said that Section 12 adds a definition for "government employer." He noted that the House State Affairs Committee and the House Finance Committee both held several hearings on the bill. Most of the changes in Version Y, he said, are to make the bill readable. 9:12:21 AM REPRESENTATIVE BERKOWITZ referred to line 1 of the title, which reads "An Act relating to accrued actuarial liabilities of government systems;" and asked Representative Hawker if he would object to removing it. REPRESENTATIVE HAWKER said that he would be amenable to that deletion. CHAIR ROKEBERG opined that a little "wordsmithing" may improve this, as the bill specifically applies to POBs and is not "re- writing the entire pension system." REPRESENTATIVE HAWKER said that the aforementioned section of the title is not "a necessary component." 9:13:44 AM The committee took an at-ease from 9:13 a.m. to 9:14 a.m. REPRESENTATIVE BERKOWITZ moved Conceptual Amendment 1, as follows: Page 1, line 1: Delete "relating to accrued actuarial liabilities of government retirement systems;" REPRESENTATIVE HARRIS objected for discussion purposes. He stated that this language applies to PERS and TERS and reflects the purpose of the bill. REPRESENTATIVE BERKOWITZ replied that page 1, line 6 contains the appropriate information. He said that leaving in the language which he wanted to delete would leave the title open- ended. 9:15:20 AM REPRESENTATIVE HAWKER stated that he concurs with Representative Berkowitz's conclusion. He pointed out that HB 278 specifically authorizes [POB] transactions. Referring to lines 7-10 of the title, he stated that "authorizing a governmental employer to issue obligations to prepay" and "enter into a lease or other contractual agreement with a trustee or the Alaska Municipal Bond Bank Authority or a subsidiary" is the "meat of the bill." He said, "Although [HB 278] is a means to address the accrued actuarial liabilities of government retirement systems, the bill itself really does not relate to those liabilities; it really relates to the ability and power of governments to address the liabilities." REPRESENTATIVE HARRIS withdrew his objection. REPRESENTATIVE ROKEBERG noted that there was no further objection to Conceptual Amendment 1, and therefore Conceptual Amendment 1 was adopted. 9:16:13 AM CHAIR ROKEBERG, in regard to the current limit on revenue bonds, asked if the establishment of a subsidiary avoids the "cap," or if avoiding the "cap" is necessary to establish a subsidiary. REPRESENTATIVE HAWKER replied that the subsidiary is part of the Bond Bank Authority, and its debt is within the Bond Bank Authority's overriding "caps." He said "The intent here was [that] the ... Pension Obligation Bond issues ... would not be charged against the current cap of the ability of the bond bank to service community needs." CHAIR ROKEBERG asked what political subdivisions are authorized to do this. REPRESENTATIVE HAWKER said this is defined on page 11, under Section 12 of Version Y, which reads: (8) "governmental employer" means the State of Alaska or a municipality or other state or municipal governmental entity within the state, including an agency, instrumentality, district, school district, public corporation, department, division, or other subdivision of the state or of a municipality, in its capacity as an employer. REPRESENTATIVE HAWKER relayed that the intent in drafting this was to be as broad as possible in order to encompass all governmental employers participating in either the PERS or TRS systems. Earlier versions, he explained, had included the University of Alaska in that definition as per the university's request. He remarked that this inclusion was removed, however, per the request of Representative Weyhrauch and through the vote of the House Finance Committee. In response to Chair Rokeberg, he said he could not recall the rationale behind this. CHAIR ROKEBERG sought confirmation that the Alaska State Constitution prohibits the state, as a governmental entity, from issuing POBs. REPRESENTATIVE HAWKER related his understanding that the Alaska State Constitution specifically prohibits the issuance of general obligation bonds for any purpose other than capital projects, which still requires a vote of the people. However, he explained that even the people cannot vote on a general obligation bond proposition for the purpose of satisfying the pension obligations. He highlighted that this is fairly typical across the country in different state constitutions. However, the capital markets, he said, have created many other mechanisms that allow [states] to "sidestep" their constitutions on the issuance of debt in the state: certificates of participation, contracts, leases, and other creative financing mechanisms. He informed the committee that the current state administration opposes the use of pension obligation bonds and opposes this bill. He opined that "... just because the administration opposes something, is no reason for us to adopt their policy decision. There has been overwhelming proof that this is a responsible, functional mechanism that can be utilized." This bill, he explained, has been brought forward at the request of municipal employers who want the opportunity to review the options. Additionally, he relayed that the Alaska State Constitution also prohibits municipal entities from issuing general obligation bonds for anything other than capital projects. These entities, he explained, "would have to structure their transactions using one of these alternative debt mechanisms that 'sidesteps' the general obligation bond proposition." REPRESENTATIVE BERKOWITZ asked whether it is Representative Hawker's position that the pension obligation bond isn't "contemplated in the constitution." REPRESENTATIVE HAWKER noted that the concept of POBs was not in existence when the Alaska State Constitution was drafted. REPRESENTATIVE HARRIS opined that regardless of the means used [to pay down the unfunded liability], "the full faith and credit of the State of Alaska has to fall behind the debt that we owe to the employees ... to pay to them at their times of retirement and for healthcare." 9:21:53 AM REPRESENTATIVE HAWKER, upon stating his agreement with Representative Harris, said that the state has a contractual obligation to its employees and that "one way or the other, we owe money to the pension fund." He then clarified that this bill only empowers municipal employers or governmental employers to "pursue transactions" and does not authorize or commit a transaction. Furthermore, he said, there is no consequence to the bill unless a municipal entity "would choose to avail itself of additional clarification of their authorities." 9:23:05 AM CHAIR ROKEBERG closed public testimony of HB 278. 9:23:16 AM REPRESENTATIVE HARRIS asked Representative Hawker if there was opposition to the bill in the House Finance Committee that required it be pared down or simply that more information had been learned to merit a change. REPRESENTATIVE HAWKER clarified that the bill passed out unanimously from the House Finance Committee and recalled that there were several "do passes" from that committee. He then referred to the title change and said that given "municipal governments already have the implied authority to perform these transactions by themselves," it was decided to make a change to "allow a municipality with its own [means to] pursue them on its own." 9:25:15 AM REPRESENTATIVE HARRIS asked whether there was anyone present from the bond bank to testify and, if so, were they opposed. REPRESENTATIVE HAWKER relayed that in the initial conversations with the bond banks he concluded that "they do what they're told." He explained that they were told that the administration would be opposed to [POBs], but never expressed any problems with the way the bill is structured. REPRESENTATIVE GUTTENBERG addressed one of the topics in the bill which is the unfunded liability in addition to the rising health care costs. He opined that addressing these is a significant part of the problem as well as controlling rising costs. REPRESENTATIVE HARRIS expressed his belief that this bill has nothing to do with the rising cost of health care or that it will ever affect it. He said that different legislation as well as the cooperative efforts from the medical community, insurance community, and other entities will need to work together to address this. CHAIR ROKEBERG recommended the committee read the new [Alaska Retirement Management Board's] recommendations to overcome the $6.9 billion obligation. 9:27:40 AM REPRESENTATIVE BERKOWITZ surmised that if they hadn't taken out the first line of the bill's title, they could be speaking about health care costs as a driving component of the accrued actuarial liabilities of the government retirement system; "We could have been talking about all the drivers, here." He added that he likes the bill and although he thinks that they need to address the other components, doing so at this time could create difficulties [in passing the bill]. Thus, he said he would prefer to keep the bill as focused as much as possible. REPRESENTATIVE HARRIS offered his understanding that they have attempted to address this issue, though it has not been easy, and that it is an issue that the whole country has to address as well. REPRESENTATIVE HAWKER remarked that this bill is intended to address just one aspect of the bigger issue, and expressed appreciation that the committee is not seeking to overload the bill. "Universal tools are never really good at doing any single job, we need to have good, point-specific tools, and this is one of them," he opined. 9:29:23 AM REPRESENTATIVE GUTTENBERG noted that he has seven pieces of legislation dealing with prescription drug costs and yet none of those of those bills has had a hearing. He went on to say: "We need to start dialoging, it needs to be happening; it's not only for the unfunded liability but for the citizens of the state of Alaska - it's just something that we're remiss [in] if we're not addressing it whatever the political pressure of it ...." 9:29:52 AM REPRESENTATIVE HARRIS moved to report CSHB 278, Version 24- LS0883\Y, Cook, 4/11/06, as amended, out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, CSHB 278(RLS) was reported from the House Rules Standing Committee.