Legislature(2003 - 2004)
02/26/2004 08:03 AM House STA
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* first hearing in first committee of referral
+ teleconferenced
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+ teleconferenced
= bill was previously heard/scheduled
HB 422-BUDGET RESERVE FUND INVESTMENT Number 0495 CHAIR WEYHRAUCH announced that the next order of business would be HOUSE BILL NO. 422, "An Act repealing the special subaccount established in the constitutional budget reserve fund; relating to the powers of the Department of Revenue for the investment of amounts in the constitutional budget reserve fund; and providing for an effective date." Number 0411 JAMES ARMSTRONG, Staff to Representative William K. Williams, presented HB 422 on behalf of the House Finance Committee, which Representative Williams co-chairs. He explained that HB 422 was sponsored by the House Finance Committee at the request of the Department of Revenue to repeal the subaccount in the constitutional budget reserve fund (CBRF) created in the year 2000. Number 0296 REPRESENTATIVE BERKOWITZ stated that it would be more helpful for the committee to have the backup information, particularly about the rates of return for the different accounts. He reminded the committee that then-Senator Torgerson had introduced this legislation initially with the intent of increasing the rate of return for the CBRF portions that weren't likely to be used to fund the government on a regular basis. REPRESENTATIVE BERKOWITZ pointed out that this is an opportunity for the House State Affairs Standing Committee to address the minimum balance of money that [the state] needs to keep in the CBRF. He noted that Governor Murkowski prefers a $1-billion minimum. Representative Berkowitz shared that he thought $1- billion was too low. He followed that up with his beliefs that a $1-billion minimum jeopardizes bond ratings and [the state] risks losing the interest income that comes from the CBRF as a way to bridge the fiscal gap. He asked what the expectations from [the Department of Revenue] are by drawing down the CBRF. TAPE 04-24, SIDE A Number 0001 TOMAS H. BOUTIN, Deputy Commissioner, Department of Revenue, explained the derivation of HB 422, stating that the CBRF isn't being replenished, it is being drawn down regularly, and now some $7 billion is owed to it. He added that investing equities for a time horizon of five years isn't an appropriate investment and [the Department of Revenue] feels that it is better fiscally to repeal the subaccount in the CBRF and thus had requested introduction of HB 422 to do so. Number 0148 CHAIR WEYHRAUCH asked for clarification on the amount of money owed to the CBRF, and how much money the CBRF currently has in it. MR. BOUTIN stated that $7 billion has been taken from the CBRF and the current balance of the CBRF is $1.89 billion, including the subaccount that is involved in HB 422. Number 0202 CHAIR WEYHRAUCH asked why the sum of the money owed to the CBRF is $7 billion. MR. BOUTIN replied that the money hasn't been replenished, and if it had been replenished, then he believes another look at the range of investments would be in order. But the way the CBRF is being used now, it doesn't suggest that a five-year time horizon is financially responsible. Number 0306 REPRESENTATIVE HOLM asked if he was correct in thinking that right now [the state] borrows the money [from the CBRF], and never pays it back. MR. BOUTIN stated it was his understanding that is what happens. He qualified the borrowing from the CBRF by explaining that the Department of Revenue, Treasury Division, borrows from the CBRF regularly for cash flow reasons. He went on to explain that because of the mismatch in cash flow throughout the year, it is often necessary to draw from the CBRF early in the fiscal year and then reimburse it when they collect the money from the federal government or the other sources of revenue. He added that within the last six weeks $100 million was paid back to the CBRF from the general fund for cash flow purposes, and it doesn't look as though there will be another draw from the CBRF this fiscal year. Number 0466 MR. BOUTIN further explained that his previous comments didn't really relate to HB 422. He stated that HB 422 was directed towards eliminating the five-year investment subaccount that is currently in effect because it isn't good fundamental investment policy and it should be a part of the main CBRF account. REPRESENTATIVE BERKOWITZ asked Mr. Boutin to contrast the rate of return on the subaccount with the rate of return on the main CBRF. MR. BOUTIN, referring to the "CBR subaccount" graph, noted that the subaccount has had a "rollercoaster" ride and has just recently gotten back to the original amount that it had in the year 2000. He added that the most recent numbers that he has for the subaccount are from the second quarter for fiscal year 2003 and that the rate of return is at 7.81 percent. He stated that the main CBRF's rate of return for fiscal year 2004, to date, is at 0.78 percent. Number 0711 REPRESENTATIVE BERKOWITZ asked for clarification on the request to move money from the subaccount that is yielding almost 8 percent to an account that is yielding less than 1 percent. MR. BOUTIN stated that [the Department of Revenue employees] are not "market timers"; they just use the best investment methodologies that they adopt in the quarterly meetings. He said that it wouldn't be appropriate for [the Department of Revenue] to be market timers. He added that the long-term investment horizon that is in effect with the subaccount isn't appropriate for the way that the CBRF is used by the state. He explained that the Department of Revenue, on behalf of the [Alaska State] Pension Investment Board, has investments in private equity and real estate, and major investments in equities. He continued that the way the CBRF is used, from a fundamental standpoint, doesn't suggest that anything besides a fixed income should be used. He said that if the CBRF were used differently later, then the investment strategy should be revisited. But the way it is used now, it isn't financially sound to have the five-year horizon. Number 0876 REPRESENTATIVE BERKOWITZ pointed out that the 7-percent difference that would exist if the $400 million was shifted from the subaccount to the main CBRF account would yield $28 million less per year, which is substantially in excess of most of the revenue-raising measures that the current legislature has passed. He voiced his concern that the Department of Revenue's proposal portrays a real pessimism about [the legislature's] ability to solve the fiscal gap. He stated his opinion that he wasn't sure if HB 422 is the prudent course for [the legislature] to take at this point. Number 0937 REPRESENTATIVE GRUENBERG stated that the amendment in Section 1 wasn't really necessary because if the management of responsibility is not transferred to the Alaska Permanent Fund Corporation, then automatically the commissioner of the Department of Revenue would invest the money in the CBRF. REPRESENTATIVE BERKOWITZ asked if the managerial function proposed in Section 1 of the bill would be something that could be done by executive order. Number 1042 MR. BOUTIN answered that he wasn't really sure if that could happen. REPRESENTATIVE BERKOWITZ asked about the impact on the state's bond rating if the change proposed in HB 422 is put in effect. MR. BOUTIN said that there would be no bond-rating impact by changing from one investment to another. He explained that the CBRF is used by the state as a cash flow buffer, and commented on the importance of a cash flow buffer to the credit-rating agencies. He added that he doesn't believe the choice in investments that money managers can decide from is a credit- rating issue. He went on to explain that if the cash flow buffer is invested in something other than liquid assets, like real estate, then it may be an issue. Number 1158 REPRESENTATIVE BERKOWITZ asked if the Department of Revenue had checked with any of the bond-rating entities. He said he feels that removing one of the bulwarks of protection from the CBRF could have some adverse consequences. He stated that due diligence would require the Department of Revenue to at least ask the credit-rating agencies before proceeding. MR. BOUTIN said that the Department of Revenue is in touch with all three major credit-rating agencies, and moving the subaccount from equities into fixed income does not pose any concern. Number 1211 REPRESENTATIVE BERKOWITZ asked if the Department of Revenue has been affirmatively told by a credit-rating agency that it would have no effect, or if Mr. Boutin was pulling from his experience dealing with the credit-rating agencies. MR. BOUTIN said that this issue doesn't rise to the level that would require direct input from the credit-rating agencies. He explained it was an investment management move and that they need the authority to do it. He added that if the Department of Revenue was proposing to eliminate the CBRF, then that would be a credit-rating issue, but shifting a $400-million subaccount over time from equities to a fixed-income account has no credit- rating issues. Number 1281 REPRESENTATIVE BERKOWITZ asked if the Department of Revenue was signaling to the credit-rating agencies that something was wrong by raiding this $400 million dollar subaccount to balance the state budget. He added that it seems like a very strong signal to Wall Street. MR. BOUTIN explained that the Department of Revenue is not spending any money from the CBRF with HB 422; it is merely moving investments from one account to another. He added that if this were an expenditure of $400 million, it may be a credit issue. Mr. Boutin clarified that HB 422 would just allow the Department of Revenue to transfer investments to a different account that it feels is a more prudent type of investment, given the way the CBRF is currently used. Number 1382 CHAIR WEYHRAUCH summarized the questions that he felt needed to be answered by the Department of Revenue the next time the House State Affairs Standing Committee heard HB 422. He explained that some of the concerns are somewhat philosophical in terms, relating to long-term versus short-term investments and the relationship to the creditor bond rating, since HB 422 would remove the money from a long-term account. [HB 422 was held over.]
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