Legislature(2005 - 2006)CAPITOL 106

01/12/2006 08:00 AM STATE AFFAIRS

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HB 278-RETIREMENT SYSTEM BONDS                                                                                                
8:52:41 AM                                                                                                                    
CHAIR SEATON announced that the  next order of business was 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."                                                                                                                
8:52:59 AM                                                                                                                    
REPRESENTATIVE MIKE HAWKER, Alaska  State Legislature, as sponsor                                                               
of HB  278, said  in the  first half  of the  Twenty-Third Alaska                                                               
State  Legislature much  time was  spent  discussing the  state's                                                               
pension  funds, which  are  underfunded.   He  said almost  every                                                               
public entity  in America  is facing  similar circumstances.   He                                                               
said it  is the responsibility of  the legislature to find  a way                                                               
to pay off that obligation in  the most expedient manner and with                                                               
the least possible costs to the  taxpayers of the state.  He told                                                               
the  committee   that  he  is  presenting   a  high-level,  broad                                                               
discussion of  a vehicle that  could allow  the state to  pay off                                                               
that liability.   He  said that  the amount  of the  liability is                                                               
approximately  $6 billion.   All  the public  employers that  pay                                                               
into  those plans  owe that  money, he  explained.   He said  the                                                               
state does not have  a bank account with $6 billion  in it to use                                                               
to pay off that liability.                                                                                                      
8:56:41 AM                                                                                                                    
REPRESENTATIVE  HAWKER  reviewed   that  that  liability  accrues                                                               
interest each  year at about 8.25  percent.  He said  the crux of                                                               
the  bill  is paying  off  the  liability  or a  portion  thereof                                                               
immediately,  getting money  into  the system  to start  [earning                                                               
interest].  He said  if the state could find a  way to borrow the                                                               
money for  5 percent,  for example, the  state would,  over time,                                                               
save 3  percent while  paying off  the debt.   He  indicated that                                                               
that is  what a pension  obligation bond  (POB) would do,  and he                                                               
said HB  278 would be  the vehicle  to allow participants  in the                                                               
retirement  plan to  investigate the  possibility of  using POBs.                                                               
He said  if the state  executes such a transaction  the potential                                                               
exists of saving the taxpayers of Alaska $1.5 billion.                                                                          
8:59:33 AM                                                                                                                    
REPRESENTATIVE  HAWKER  turned  to   the  sponsor  statement  and                                                               
reviewed the three components of  the bill, which read as follows                                                               
[original punctuation provided]:                                                                                                
     HB 278  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                                                                    
     HB 278  expands the  authority of the  Alaska Municipal                                                                    
     Bond Authority  to support the state  or a municipality                                                                    
     that  wishes  to  include POBs  in  their  strategy  to                                                                    
     reduce   the   cost   of   meeting   unfunded   pension                                                                    
     This bill  does not  authorize any debt  instruments to                                                                    
     be issued.   The state or a municipality  would need to                                                                    
     take  a separate  specific action  to utilize  this new                                                                    
     ability of the Municipal Bond Bank Authority.                                                                              
REPRESENTATIVE  HAWKER  referred to  a  handout  included in  the                                                               
committee   packet,  entitled,   "An   Introduction  to   Pension                                                               
Obligation Bonds."   He noted  that the document was  prepared by                                                               
Roger Davis  of Orrick.   He encouraged the committee  members to                                                               
review the document, stating his  belief that doing so would give                                                               
them  a comprehensive  understanding of  the pros  and cons  that                                                               
must  be  considered.     He  said  Orrick   is  an  experienced,                                                               
professional bond counseling firm.   Attached to the same handout                                                               
are two  written "what if"  discussions - one from  Merrill Lynch                                                               
and one  from UBS Financial  Services, Inc.   He noted  that also                                                               
included  in  the paperwork  are  research  papers provided  from                                                               
Standard & Poor's (S&P) - a  bond rating agency, entitled:  "POBs                                                               
surging after brief hiatus";  "Managing State Pension Liabilities                                                               
-  A   Growing  Credit  Concern";  "U.S.   Public  Pensions  Face                                                               
Uncertain Times";  and "Pension  Obligation Bonds  - Were  They A                                                               
Good  Bet?"   The last  item in  the package  of information,  he                                                               
noted, is  a resolution  from the  Alaska Municipal  League (AML)                                                               
asking  that the  authority be  granted for  public employees  in                                                               
Alaska to consider "these financing vehicles."                                                                                  
9:05:20 AM                                                                                                                    
REPRESENTATIVE HAWKER directed attention to  page 8 of the Orrick                                                               
report,  which   shows  that  the   POBs  are  better   than  the                                                               
alternatives, which are:   to pay more into the  pension fund; to                                                               
ask  employees to  pay  more  into the  pension  fund; to  reduce                                                               
benefits; or to do nothing and  hope the gain on investments will                                                               
ultimately solve  the problem.   He noted that  the disadvantages                                                               
are listed  on page 9  of the Orrick report.   He said  the state                                                               
could  write a  check for  $6 billion  out of  the constitutional                                                               
budget reserve  (CBR), the  earnings of  the permanent  fund, and                                                               
this  year's  surplus,  but  he  doesn't see  that  as  a  viable                                                               
alternative.   He said he sees  the mechanism [that HB  278 would                                                               
allow]  as  less  objectionable  as a  means  of  mitigating  the                                                               
state's cost than  writing that check and taking  every penny the                                                               
state has off the table.                                                                                                        
REPRESENTATIVE HAWKER said  some will warn that  POBs will injure                                                               
the state's credit  rating.  He directed attention to  page 13 of                                                               
the  Orrick  report, which  includes  extracts  of rating  agency                                                               
comments about the  concept of using pension  obligation bonds to                                                               
reduce the  ultimate cost of  satisfying the  pension obligation.                                                               
He  said the  rating  agencies essentially  endorse the  concept.                                                               
The   comments  generally   say   that   a  properly   structured                                                               
transaction  is  endorsed  and   would  potentially  enhance  the                                                               
state's  credit  rating,  because   the  state  would  be  taking                                                               
positive,  proactive steps,  recognized  and  acceptable to  Wall                                                               
Street, to address the existing large, unfunded obligation.                                                                     
REPRESENTATIVE  HAWKER  noted  that  Moody's  Investors  Service,                                                               
Standard  & Poor's,  Fitch, Inc.,  and  [Duff &]  Phelps are  the                                                               
major rating  agencies.   He pointed  to the  comment on  page 13                                                               
written by Fitch, Inc., which read as follows:                                                                                  
     Fitch  believes that  POBs, if  used moderately  and in                                                                    
     conjunction with  a prudent  approach to  investing the                                                                    
     proceeds  and other  pension assets,  can  be a  useful                                                                    
     tool in asset-liability management.                                                                                        
REPRESENTATIVE HAWKER said the key  is the word "moderately."  He                                                               
said  anyone who  has  ever  lost money  investing  in the  stock                                                               
market  understands  that it  is  possible  to  lose money  in  a                                                               
financial transaction.                                                                                                          
9:11:02 AM                                                                                                                    
REPRESENTATIVE HAWKER  said some will say  a constitutional issue                                                               
may  exist.   He said,  "Our  constitution has  a provision  that                                                               
basically, on the  surface, says the state can  only borrow money                                                               
for  capital  development  projects."    He  stated  that  it  is                                                               
possible  to   structure  transactions  that  comply   with  that                                                               
constitutional  guideline.   He  said the  Merrill Lynch  company                                                               
addresses  constitutional issues  and a  "legal structuring  that                                                               
would comply with"  the Alaska State Constitution.   He proffered                                                               
that if  the legislature  grants the  authority, there  are smart                                                               
lawyers and  investment bankers  that will be  able to  work with                                                               
the public  employers of  the state  to create  transactions that                                                               
will be  constitutionally sound.   He asked committee  members to                                                               
not  close their  minds to  something that  has the  potential of                                                               
saving the taxpayers of Alaska $1.5 billion or more.                                                                            
9:13:14 AM                                                                                                                    
REPRESENTATIVE  HAWKER   stated  that  the  entire   decision  in                                                               
considering POBs revolves  around the risk and  reward trade off.                                                               
He said  he wants to  empower public employers and  the competent                                                               
professionals they would work with  to propose specific financing                                                               
structures  for consideration  by  the appropriate  authoritative                                                               
body.   That body  would assess  the risks  and find  a structure                                                               
within  a risk  tolerance level.   The  easiest thing  for public                                                               
employees to do, he said, is  to not make a decision that entails                                                               
risk.   The private sector,  on the other hand,  takes calculated                                                               
risks.   Representative Hawker  said the  public sector  needs to                                                               
"take  a lesson"  from and  merge with  the private  sector.   He                                                               
reminded  the committee  that  HB  278 is  not  about making  the                                                               
decision  about what  risk  will be  tolerated  or what  specific                                                               
mechanism  of  approach  to  use;   it  is  simply  a  bill  that                                                               
authorizes  public employers  across  the  state, the  investment                                                               
banks, and the  legal community to get together and  bring to the                                                               
appropriate authority a proposal to evaluate.                                                                                   
9:16:37 AM                                                                                                                    
REPRESENTATIVE  HAWKER stated,  "The ultimate  control is  in the                                                               
evaluation of a  specific transaction, but we can't  even look at                                                               
the specific transaction  until we, as a  legislative body, allow                                                               
people to think out  of the box."  He asked  the committee not to                                                               
get bogged down in the details of any possible transaction.                                                                     
9:17:53 AM                                                                                                                    
CHAIR  SEATON asked  where in  the bill  it is  written that  the                                                               
public entity would come back to the legislature.                                                                               
9:18:26 AM                                                                                                                    
REPRESENTATIVE HAWKER answered that  each entity would go through                                                               
its  particular  authority.   For  example,  the school  district                                                               
would go through the school  board.  He said, "Specifically, this                                                               
grants the ... Bond Bank [the]  authority to set up the structure                                                               
to facilitate these transactions."                                                                                              
CHAIR SEATON responded:                                                                                                         
     Right, I just  want to clarify that,  because I thought                                                                    
     I  heard you  saying that  they would  come back  to us                                                                    
     with  proposals.   But really  ...  this bill  actually                                                                    
     authorizes them to develop and  go through their public                                                                    
     process to issue pension obligation bonds.                                                                                 
REPRESENTATIVE  HAWKER  interjected,  "Or  to  undertake  such  a                                                               
9:19:29 AM                                                                                                                    
REPRESENTATIVE    GARDNER   expressed    her   appreciation    in                                                               
Representative  Hawker's bringing  the  bill forward.   She  said                                                               
that  sometimes  the state's  public  liability  for the  pension                                                               
system is compared to a mortgage.   However, she said if she were                                                               
to buy  a $200,000 house,  she would  know exactly what  the debt                                                               
is, and she would have full use  of the entire value of that home                                                               
during  the time  she  owns it.   The  pension  liability is  not                                                               
concrete,  she noted.    She stated  her  understanding that  the                                                               
state has  enough money  in its accounts  to pay  for "everything                                                               
that falls  due today."   She surmised  that the problem  is "out                                                               
into the future."  She asked if that is correct.                                                                                
9:20:52 AM                                                                                                                    
REPRESENTATIVE  HAWKER  said there  is  a  lot  of money  in  the                                                               
pension funds today.  There is  also an obligation that the funds                                                               
in the  bank today must satisfy  in the future.   The calculation                                                               
shows that, over time, there is  not enough wealth in the fund to                                                               
meet  the  obligations  that  exist today.    Doing  nothing,  he                                                               
explained, would  result in less  money in  the pool to  earn the                                                               
compound  interest  that  is  factored  into  meeting  the  total                                                               
obligations and, thus,  in a "more expensive solution."   Using a                                                               
mortgage analysis,  he said if  a person makes a  large principal                                                               
payment up  front, that payment is  reduced, with less to  pay in                                                               
the long  run.  He said  the situation is similar  for the state.                                                               
He said, "We  would have more money  in the pot to  invest, so we                                                               
get a greater investment return."                                                                                               
9:23:23 AM                                                                                                                    
CHAIR  SEATON stated  as a  reminder that  three quarters  of the                                                               
money paying  those obligations  comes from  investment earnings.                                                               
He said:                                                                                                                        
     For  every dollar  we don't  have in  the bank  now, it                                                                    
     takes  basically $4  in the  future.   ...   You're not                                                                    
     just underfunding  a dollar.   ... The 75  percent that                                                                    
     that  dollar   is  supposed  to   earn  to   pay  those                                                                    
     obligations isn't going to be  there, because it hasn't                                                                    
     been in  there earning from  the present dollar  to the                                                                    
     obligation dollar.                                                                                                         
9:24:31 AM                                                                                                                    
REPRESENTATIVE   GARDNER   concluded   that   that's   a   missed                                                               
opportunity  cost.   She clarified  her previous  question.   She                                                               
noted that an  interest of 8.25 percent had been  mentioned.  She                                                               
asked, "Where does that come in?   Are we already paying interest                                                               
on what we don't have for the future?"                                                                                          
9:24:48 AM                                                                                                                    
REPRESENTATIVE   HAWKER   explained   that  all   the   actuarial                                                               
evaluations are  predicated on:  "We  put money in, and  when the                                                               
money's  there it  makes  8-plus  percent.   If  the money's  not                                                               
there,  it's not  making  the 8-plus  percent  and we're  getting                                                               
deeper in the hole every day."                                                                                                  
9:25:38 AM                                                                                                                    
CHAIR  SEATON remarked  that there  is a  sort of  reverse action                                                               
that exists.   He explained that if the state  calculated that it                                                               
would only  be earning 5  percent, instead of 8.25  percent, then                                                               
the  current  obligation,  instead   of  being  approximately  $6                                                               
billion, would be $10-12 billion.  He offered further details.                                                                  
9:27:03 AM                                                                                                                    
REPRESENTATIVE HAWKER said  the POB solution is  not a short-term                                                               
fix, but works only because of  averages in the market over time.                                                               
He  cited   the  10-year  returns   for  the  following:     PERS                                                               
investments at  8.1 percent; TRS  at 8.2 percent; and  the Alaska                                                               
Permanent Fund Corporation at 8.7 percent.   He said the State of                                                               
Alaska has  had extraordinary amounts  of money to invest  in the                                                               
capital markets of the world  and has developed proven investment                                                               
structures through the use of  successful management.  He said an                                                               
8 percent return  is "achievable, valid, and a  parameter that we                                                               
don't have to question in this analysis."                                                                                       
9:29:43 AM                                                                                                                    
REPRESENTATIVE  GRUENBERG  offered  questions  that  need  to  be                                                               
asked:    The first  question  is  whether  the state  should  do                                                               
anything.   The  next question  is whether  the state  should use                                                               
POBs and, if so, whether the Bond  Bank should be used.  He noted                                                               
that Representative  Hawker has  chosen the Bond  Bank to  be the                                                               
issuing authority.   He  stated his  understanding that  the Bond                                                               
Bank  typically  issues bonds  for  municipalities  and the  bill                                                               
would   significantly   expand   its   authority.      He   asked                                                               
Representative Hawker to comment.                                                                                               
9:31:04 AM                                                                                                                    
REPRESENTATIVE  HAWKER deferred  to representatives  from Merrill                                                               
Lynch.   He proffered that the  use of the Alaska  Municipal Bond                                                               
Bank   Authority  ("Bond   Bank")  as   part  of   structuring  a                                                               
transaction  is constitutionally  acceptable.   It is  a facility                                                               
that  has  a  lot  of   competent,  qualified  professionals  for                                                               
"issuing debt."                                                                                                                 
9:32:14 AM                                                                                                                    
REPRESENTATIVE  GRUENBERG  said  he   would  like  that  question                                                               
answered in  the future.   He noted  that the final  paragraph of                                                               
the sponsor  statement read:   "This bill does not  authorize any                                                               
debt instruments to  be issued."  He said it  appears to him that                                                               
the text of the bill does exactly that.                                                                                         
9:33:12 AM                                                                                                                    
REPRESENTATIVE   HAWKER  clarified   that  the   bill  authorizes                                                               
transactions to  occur, but  it does  not authorize  any specific                                                               
9:34:14 AM                                                                                                                    
REPRESENTATIVE GRUENBERG  said Representative Hawker  has alluded                                                               
to certain  constitutional issues.   Traditionally, if  there are                                                               
constitutional issues in a bill, that  bill is heard by the House                                                               
Judiciary  Standing  Committee.   He  said  he is  interested  in                                                               
solving  those  issues  in  the   House  State  Affairs  Standing                                                               
Committee for the sake of expediency.                                                                                           
9:35:02 AM                                                                                                                    
REPRESENTATIVE  MIKE KELLY,  Alaska State  Legislature, said  the                                                               
bill would offer municipalities some  choice in their own destiny                                                               
and "some level  of acceptance of risk."   Regarding the previous                                                               
comparison  to a  mortgage, he  suggested using  that comparison,                                                               
but  adding  things  into  it  such  as  the  cost  of  fuel  and                                                               
electricity, which  may double  along the  way, and  an uninsured                                                               
risk.   He  explained that  Representative Hawker's  situation is                                                               
that he  is trying to  estimate what the  total cost of  25 years                                                               
paying off  an obligation is,  but there  are a lot  of variables                                                               
along the way.  He stated  that there is a great misunderstanding                                                               
regarding the 8.25 percent.                                                                                                     
9:38:35 AM                                                                                                                    
CHAIR SEATON asked, "Where does the  state come in ... to back up                                                               
that bond  for that  municipality that  we're authorizing  in the                                                               
bill to go forward and issue a debt instrument?"                                                                                
9:39:22 AM                                                                                                                    
REPRESENTATIVE  HAWKER  responded that  the  question  of who  is                                                               
obligated would be determined by  the terms and conditions of the                                                               
bond indenture  itself.  He  emphasized that the state  would not                                                               
accrue  any  new liability;  the  state  would just  be  allowing                                                               
employers to pursue and choose transactions.                                                                                    
9:40:17 AM                                                                                                                    
REPRESENTATIVE KELLY  noted that "last year"  a conversation took                                                               
place with Mr. Boutin regarding  the possibility of involving the                                                               
state "in  some fashion  that would probably  lower the  cost and                                                               
increase  the delta  between 8.25  percent and  some (indisc.  --                                                               
coughing) number,  which is what this  would attempt to do."   He                                                               
asked if the  bill addresses some of what Mr.  Boutin was talking                                                               
9:41:04 AM                                                                                                                    
REPRESENTATIVE HAWKER replied  that he is not  familiar with what                                                               
was discussed, but he remarked that  the less risk on a loan that                                                               
the lender perceives,  the lower the rates that  can be executed.                                                               
He reminded  the committee that that  level of detail is  not the                                                               
focus of  this discussion; the  legislature just needs  to decide                                                               
whether to allow the markets to "go forward and ... work."                                                                      
9:42:27 AM                                                                                                                    
CHAIR SEATON surmised that Representative  Kelly wants to know if                                                               
there is an alternative to  having the state bonding authority do                                                               
the work.   He said there  may be an alternative,  but that would                                                               
require an amendment to the bill.                                                                                               
9:43:01 AM                                                                                                                    
REPRESENTATIVE HAWKER  asked the  committee to remember  that the                                                               
bill would not  force anyone to take a risk,  but would allow all                                                               
the   different  public   employers  to   make  their   own  risk                                                               
9:44:01 AM                                                                                                                    
DEVEN MITCHELL,  Executive Director,  Alaska Municipal  Bond Bank                                                               
Authority  ("Bond Bank"),  disclosed  that he  is  also the  Debt                                                               
Manager  for  the Treasury  Division,  within  the Department  of                                                               
Revenue.   Mr. Mitchell reviewed that  the Bond Bank is  a public                                                               
corporation of the State of Alaska  that was created in 1976.  He                                                               
said  the reason  for  its  creation was  because  at that  time,                                                               
generally  all  communities  in  Alaska  were  penalized  in  the                                                               
capital market  because of  the perception of  Alaska as  a Third                                                               
World country.   He said  there was  "an Alaskan penalty  when we                                                               
went to market,"  and [the Bond Bank] "offered  an opportunity to                                                               
create a  more efficient means  of access in the  capital markets                                                               
for Alaskan  communities."  Over  the last five years,  he noted,                                                               
the Bond  Bank has issued  approximately $4 million in  bonds for                                                               
loans to 52 different projects.  He offered examples.                                                                           
MR. MITCHELL  said he thinks  the reason  that the Bond  Bank was                                                               
selected for inclusion in HB 278  is because of the role the Bond                                                               
Bank  currently plays  with municipal  entities  in helping  them                                                               
finance  their capital  needs in  an efficient  manner.   He said                                                               
there is  a "state support to  the Bond Bank," which  is called a                                                               
moral obligation  of the State of  Alaska.  In the  statutes that                                                               
create the Bond  Bank there are provisions for the  creation of a                                                               
reserve fund.   That reserve  fund, he noted, is  essentially the                                                               
equivalent of one  year's debt service of all of  the Bond Bank's                                                               
bonds.   He explained that when  the Bond Bank borrows  money, it                                                               
issues  bonds in  the capital  markets; it  takes that  money and                                                               
lends  it to  the  communities  at the  same  rates  at which  it                                                               
borrowed the  money.  All  the Bond  Bank's bonds in  its general                                                               
obligation  program,  he said,  are  issued  on a  parity  basis,                                                               
meaning that "they have the same  plane on assets and revenues as                                                               
other bonds in the  reserve fund."  He said the  Bond Bank has an                                                               
approximately $30  million reserve  fund that secures  the bonds.                                                               
Mr. Mitchell  stated that  if there  was a  draw on  that reserve                                                               
fund because  one of  the communities defaulted,  in all  but one                                                               
case  the  reserve would  fully  pay  for that  community's  debt                                                               
service, "and  so that  creates part  of the  credit of  the bond                                                               
bank."   He  added, "But  if there  were a  draw on  that reserve                                                               
because of a  community default, we would be ...  required by the                                                               
statute  to   request  the  legislature   and  the   governor  to                                                               
appropriate money to  replenish that reserve.  That  is the moral                                                               
obligation;  the requirement  that we  request the  replenishment                                                               
implies  that we  would receive  the replenishment  in the  moral                                                               
9:47:39 AM                                                                                                                    
CHAIR  SEATON  asked if  there  is  any distinction  between  the                                                               
security backing a  general obligation bond and the  POBs if they                                                               
were issued through [the Bond Bank].                                                                                            
9:47:54 AM                                                                                                                    
MR. MITCHELL  noted that there is  a revenue bond program  in the                                                               
Bond  Bank that  relies on  specific enterprise  credit strength.                                                               
He said,  "So, this would  maybe be more  similar to that  in the                                                               
structure as proposed."   He noted that there  are some questions                                                               
about the  structure and  "the implementation  of that;  how that                                                               
would  be  managed."    He said  Representative  Hawker,  in  his                                                               
testimony, alluded  to a proposal that  contemplates the possible                                                               
use of a  revenue bond structure, and there  is some disagreement                                                               
in the  legal community  regarding whether or  not that  would be                                                               
allowed.  He advised the committee  of the need for discussion on                                                               
additional issues  to ensure that  the proper structure  would be                                                               
in place to meet certain expectations.                                                                                          
9:49:26 AM                                                                                                                    
CHAIR  SEATON  asked if  Mr.  Mitchell  was suggesting  that  the                                                               
committee  should  resolve  that question  before  it  authorizes                                                               
issuance of the bonds.                                                                                                          
9:49:50 AM                                                                                                                    
MR. MITCHELL  said that  issue should  be resolved  sooner rather                                                               
than later.  He spoke of finding middle ground.  He continued:                                                                  
     ... In Oregon they actually  ... [dealt] with a similar                                                                    
     issue.  I don't know all  the nuances of it, but in the                                                                    
     end they wound up  having a constitutional amendment to                                                                    
     allow  general obligation  pledges  of local  districts                                                                    
     for  this type  of obligation,  which our  constitution                                                                    
     prohibits  at this  point  because  there's no  capital                                                                    
     And the [difficulty] with revenue  bonds is there's not                                                                    
     an enterprise;  it's a contractual promise  to pay that                                                                    
     exists  to  the  pension  system.   If  you  want  your                                                                    
     participants   to  receive   the  pensions   that  were                                                                    
     promised  to them,  you have  to pay.   Whether  or not                                                                    
     that  can be  transferred then  to  a bond  issue is  a                                                                    
     difficult  question to  answer, I  think, even  amongst                                                                    
9:51:18 AM                                                                                                                    
CHAIR SEATON  encouraged Mr.  Mitchell to  continue to  share his                                                               
knowledge with the committee as the hearings on HB 278 progress.                                                                
MR.  MITCHELL,  in  response to  a  request  from  Representative                                                               
Gruenberg,  agreed  to  supply  the  committee  with  a  thorough                                                               
description of who he is and what he does.                                                                                      
9:52:03 AM                                                                                                                    
REPRESENTATIVE GRUENBERG  told Mr.  Mitchell that if  he believes                                                               
there is  a constitutional issue,  he would  like to see  a legal                                                               
opinion and a draft constitutional amendment.                                                                                   
9:53:23 AM                                                                                                                    
MR. MITCHELL said  he has not seen a legal  opinion.  He revealed                                                               
that he is involved in a  transaction that will close in February                                                               
[2006],  involving five  communities and  five bond  councils, in                                                               
addition  to the  bond  council with  which he  works.   He  said                                                               
during  casual  conversations  there   have  been  a  variety  of                                                               
opinions expressed.   He said he  thinks Representative Gruenberg                                                               
is asking for  something much more formal, and  he recommended an                                                               
opinion be obtained from the Office  of the Attorney General.  In                                                               
response to Chair Seaton, he offered to request that opinion.                                                                   
9:54:33 AM                                                                                                                    
REPRESENTATIVE GRUENBERG stated that  he wants the legislature to                                                               
be on good legal ground.                                                                                                        
9:56:04 AM                                                                                                                    
GREG SUNDBERG,  Managing Director,  Merrill Lynch, noted  that he                                                               
had  brought  with  him  a handout  [included  in  the  committee                                                               
packet] entitled, "Presentation  to:  State of  Alaska:  PERS/TRS                                                               
Update Pension Obligation Bonds January  2006."  He said it would                                                               
take 2.5  hours to make  the presentation in depth;  therefore he                                                               
suggested  that  he  could  simply   answer  questions  from  the                                                               
committee.  He also provided  a list entitled, "Municipal Taxable                                                               
Pension  Financings  2001-Present"  [included  in  the  committee                                                               
packet],  which  he said  contains  similar  information to  what                                                               
Representative  Hawker   included  in  his   previously  reviewed                                                               
handout.     In  response  to  a   question  from  Representative                                                               
Gruenberg, he  confirmed that there  is also a  handout entitled,                                                               
"Alaska School  Districts and Municipal  Governments Re:  TRS and                                                               
PERS Liability  Refinancing," which was already  in the committee                                                               
packet from a prior hearing in 2005.                                                                                            
9:59:00 AM                                                                                                                    
MR. SUNDBERG  stated that POBs are  but one piece of  the puzzle.                                                               
He said  the much harder work  is that which the  legislature has                                                               
already  undertaken  to solve  the  systemic  problem.   He  said                                                               
Merrill  Lynch has  addressed the  liability  that has  increased                                                               
over the years and "stands  at an actuarial-assessed number as of                                                               
the  current  day."   He  said  Representative Gardner  indicated                                                               
accurately previously  that that's a  number that can  shift over                                                               
time.   He indicated that the  number will probably never  get to                                                               
zero, but it  could diminish or increase.  He  said the tool that                                                               
is being proposed for consideration is one step in the process.                                                                 
10:00:24 AM                                                                                                                   
CHAIR  SEATON directed  attention to  page 2  of the  update, and                                                               
defined  some  terms used:    "UAL"  means unamortized  actuarial                                                               
liability and  "PV" means present  value.   He turned to  page 1,                                                               
which shows the PERS/TRS unfunded  liability as of June 30, 2004.                                                               
He noted  that the  liability has been  steadily increasing.   By                                                               
July  2005, the  total liability  was $6.0  billion, and  by July                                                               
2006, he said  it will be $6.5 billion.   He said, "Those numbers                                                               
are not changing; those are the  same numbers, but it's just that                                                               
we're a  year later and we  haven't had 8.25 percent  interest on                                                               
that present value deposit, and  so the number's still the same."                                                               
If nothing  happens as  far as contributions  into the  system by                                                               
July 2007, he  warned, that obligation will be $7.1  billion.  He                                                               
added  that  that would  be  without  any changes;  "that's  just                                                               
because  of  not  having  another  year  of  money  in  the  bank                                                               
accumulating interest."                                                                                                         
10:03:27 AM                                                                                                                   
MR. SUNDBERG confirmed that Chair Seaton's statements are                                                                       
absolutely accurate.                                                                                                            
10:03:33 AM                                                                                                                   
CHAIR SEATON, in response to a question from Representative                                                                     
Gruenberg, said the source of the numbers came from the                                                                         
actuarial firm Mercer Human Resource Consulting.                                                                                
10:04:18 AM                                                                                                                   
MR. SUNDBERG said those who work in the debt markets tend not to                                                                
distinguish in terms of the legal framework surrounding debt or                                                                 
contractual obligations.  He continued:                                                                                         
     We  look at  an  obligation that  you're being  charged                                                                    
     8.25 percent  on, based  on an  actuarial determination                                                                    
     of  the  appropriate  rate that  you'll  need  to  both                                                                    
     invest at.   And there's some component  of that that's                                                                    
     going  to be  interest; there's  some component  that's                                                                    
     going  to be  principal -  exactly like  your mortgage.                                                                    
     And that's a rate that's  necessary in order for you to                                                                    
     compound  to satisfy  your  future  obligation of  this                                                                    
     unfunded  liability   So, contrast  that  with a  world                                                                    
     where ...,  instead of  compounding that  8.25 percent,                                                                    
     you could  ... pay a  rate equal  to what your  cost of                                                                    
     borrowing those funds is.                                                                                                  
     Again,  looking  at   one  obligation  versus  another:                                                                    
     whether  you  have  a contractual  obligation  to  make                                                                    
     those payments  on a year-to-year basis  or whether you                                                                    
     have  a contractual  obligation  to  make debt  service                                                                    
     payments,  the  obligation  itself is  in  essence  the                                                                    
     same.   The  result is  markedly different,  because in                                                                    
     the  bond  world -  at  least  as afforded  in  current                                                                    
     markets  and  as  indicated  by  Representative  Hawker                                                                    
     earlier -  the rate  right now falls  somewhere between                                                                    
     probably 5.5 and 6.5 percent.   So, markedly lower than                                                                    
     the actuarial yield you'd be charged.                                                                                      
     The  number  that  Representative  Hawker  referred  to                                                                    
     earlier,  which is  the present  value  or ...  current                                                                    
     dollars,  ...  that  difference  is  roughly  somewhere                                                                    
     around $1  billion ....   That in a nutshell  is really                                                                    
     the simple mechanics of what we're talking about here.                                                                     
10:07:00 AM                                                                                                                   
MR. SUNDBERG said he would now distinguish between the debt or                                                                  
bond side of the equation and the investment side.  He                                                                          
     Not  wrapped up  in the  bond side  is the  prospect of                                                                    
     what you do  with the money once you  have borrowed it.                                                                    
     ...  Instead  of just  paying  a  payment based  on  an                                                                    
     interest  rate of  8.25  percent per  year,  in a  bond                                                                    
     world it is a requirement  that you actually invest the                                                                    
     money.   So, one thing  that you  need to do  from your                                                                    
     standpoint - a due diligence  standpoint - is make sure                                                                    
     you  have a  vehicle in  place that  you're comfortable                                                                    
     with  from  an investment  perspective.    And, by  all                                                                    
     accounts and by all observation,  you, in fact, do have                                                                    
     that.  You certainly  have something that would satisfy                                                                    
     the   requirements   of   the  rating   agencies   that                                                                    
     Representative Hawker referred to  earlier - Standard &                                                                    
     Poor's, Moody's, and Fitch -  as affording a high level                                                                    
     of confidence  that you  were going  to have  an entity                                                                    
     that  was investing  in  a prudent  fashion.   That  is                                                                    
     completely separate  from the  bond side, and  the tool                                                                    
     that  we're  proposing  as a  potential  piece  of  the                                                                    
     puzzle  does   not  incorporate  a  strategy   for  the                                                                    
     investment of  funds or a  necessary component  for the                                                                    
     investment of funds.  It's completely separate.                                                                            
The committee took an at-ease from 10:08:29 AM to 10:16:59 AM.                                                              
10:17:29 AM                                                                                                                   
MR. SUNDBERG suggested the easiest way  to look at [changing to a                                                               
POB structure]  is changing "one mortgage  obligation for another                                                               
mortgage obligation."   He said virtually  every municipal entity                                                               
is  well  accustomed  to  refinancing  its  debt  from  a  higher                                                               
interest rate to a lower one.  He continued:                                                                                    
     And  what you  do when  that process  is undertaken  is                                                                    
     that you  structure a  new bond issue  at a  lower cost                                                                    
     that  has cash  flows  that  are on  a  pro rata  basis                                                                    
     proportionate to  your previous  payments, but  in fact                                                                    
     lower, because it's a lower  interest rate.  And that's                                                                    
     another useful tool,  I think, in terms  of using bonds                                                                    
     versus  your  existing  contractual obligation  for  an                                                                    
     unfunded liability at 8.25 percent.                                                                                        
10:18:47 AM                                                                                                                   
REPRESENTATIVE  GRUENBERG  asked  if  there are  other  kinds  of                                                               
financing that  the committee should  consider allowing  under HB
278.    He  asked  if  there are  variables  or  other  kinds  of                                                               
securities that  would prevent the necessity  of underwriting new                                                               
bonds every time the interest rate changes.                                                                                     
10:19:26 AM                                                                                                                   
MR. SUNDBERG  said he is referring  to bonds in a  generic sense.                                                               
He  explained that  within the  framework  of bonds  there are  a                                                               
number   of   different   structural   features   that   can   be                                                               
10:19:50 AM                                                                                                                   
REPRESENTATIVE GRUENBERG  clarified that he wants  to ensure that                                                               
the words being used would  allow even the most conservative bond                                                               
lawyer to  "do what you're  saying."  He  said he would  like Mr.                                                               
Sundberg to return with an answer.                                                                                              
10:20:15 AM                                                                                                                   
REPRESENTATIVE HAWKER  noted that the  language of the  bill does                                                               
not  refer to  bonds, per  se;  therefore, it  is constructed  to                                                               
provide  access to  the widest  variety of  financial instruments                                                               
available on the street.                                                                                                        
10:20:37 AM                                                                                                                   
CHAIR SEATON  directed attention  to page 23  of the  update, the                                                               
"Oregon Example," which  shows results for the  City of Portland.                                                               
He noted  that the City of  Portland used a combination  of fixed                                                               
and  variable rate  debt.   Historically,  he said,  the cost  of                                                               
variable  rate debt  has  been significantly  below  the cost  of                                                               
fixed rate  debt.  The risk  of variable rate debt  is that rates                                                               
spike  up.   He said  it could  be conservatively  argued that  a                                                               
straight fixed rate program offers more assurance and certainty.                                                                
10:22:59 AM                                                                                                                   
MR.  SUNDBERG,  in  response  to   a  comment  by  Chair  Seaton,                                                               
proffered  that  the variable  rate  does  afford the  additional                                                               
benefit  of being  redeemable  at any  time.   In  response to  a                                                               
question  from  Chair  Seaton,   he  said  long-term  obligations                                                               
typically have a  redemption provision for calling  the debt back                                                               
in and restructuring it.  Inside of  10 years - based on the call                                                               
date on  the bonds -  the obligations could be  advance refunded.                                                               
Outside of  10 years, he said,  there is the same  flexibility as                                                               
with variable rate obligations.                                                                                                 
10:24:15 AM                                                                                                                   
MR.  SUNDBERG, in  response to  a follow-up  question from  Chair                                                               
Seaton, said the market has evolved  to the point where there are                                                               
a  lot of  obligations -  particularly in  the tax-exempt  realm,                                                               
where  there's not  a premium  charged for  "redemption of  bonds                                                               
early."   He  concluded,  "In  the taxable  world  - which  these                                                               
obligations would be  taxable - there is more  often a redemption                                                               
premium inside that 10 years."                                                                                                  
10:24:32 AM                                                                                                                   
MR.  SUNDBERG,  in response  to  a  question from  Representative                                                               
Gruenberg, said  there are entities  in various  jurisdictions in                                                               
the U.S. who have "looked for ways  to do these on [a] tax exempt                                                               
basis."   He said the federal  government tends to frown  on ways                                                               
for  the  state  to  benefit   at  the  expense  of  the  federal                                                               
government.    He said,  "In  our  way  of  thinking and  in  the                                                               
foreseeable future, we see these as always taxable obligations."                                                                
REPRESENTATIVE  GRUENBERG  asked,  "What  is  the  criterion  for                                                               
determining  whether an  obligation issued  by a  state or  local                                                               
government or  an entity  like the Bond  Bank Authority  would be                                                               
tax  exempt  versus  non-tax  exempt?   What's  the  bright  line                                                               
criterion that the [Internal Revenue Service (IRS)] uses?"                                                                      
MR. SUNDBERG  answered that it  varies by  entity and by  type of                                                               
purpose to which the monies will be  applied.  He said, "But as a                                                               
general  rule, in  this instance  what  we're dealing  with is  a                                                               
situation where the  federal government frowns on  the ability of                                                               
a local ... or ... state  jurisdiction to be able to borrow money                                                               
at a  tax-exempt rate and reinvest  it at a taxable  rate.  There                                                               
are very  limited circumstances where  you can do that,  and that                                                               
would tend to be the bright line."                                                                                              
10:26:51 AM                                                                                                                   
CHAIR SEATON  said he  would like  to pose  that question  to the                                                               
Alaska Municipal Bond  Bank Authority at a future  date, in order                                                               
to get an answer from a state perspective.                                                                                      
10:27:20 AM                                                                                                                   
MR. SUNDBERG recalled  another issue that had  been addressed was                                                               
in regard  to the type  of vehicle that would  be used to  fund a                                                               
bond obligation  within the state  of Alaska.  Mr.  Sundberg said                                                               
that although  he is not  an attorney, he  works in a  world that                                                               
intersects with bond attorneys every day.  He continued:                                                                        
     ... We  try to have  a nexus where  we come up  with an                                                                    
     idea  and  we match  that  to  existing laws,  best  as                                                                    
     possible,  and if  there are  requirements to  tweak or                                                                    
     change  the law,  we tweak  or  change the  law to  the                                                                    
     extent  that  it  is  desirable  on  the  part  of  the                                                                    
     benefiting  entity.   We try  to, at  all costs,  avoid                                                                    
     things  that   would  require   constitutional  change,                                                                    
     because  that's  something  that's  probably  the  most                                                                    
     difficult to achieve.                                                                                                      
     So, ...  when we first  started looking at  this issue,                                                                    
     we  were  looking at  it  on  the basis  of  individual                                                                    
     municipal  jurisdictions  -  not  looking at  it  on  a                                                                    
     statewide basis necessarily  or the state specifically.                                                                    
     We  ...  immediately came  to  the  conclusion that  it                                                                    
     would  be  very  difficult  to  do  this  under  Alaska                                                                    
     constitutional  law; that  ... a  general obligation  -                                                                    
     which is  the least  expensive way  of borrowing  - ...                                                                    
     would run afoul of the constitution.                                                                                       
MR. SUNDBERG  said Merrill Lynch  considered whom  an experienced                                                               
entity would  be that could serve  as a conduit or  as an issuing                                                               
entity  for  the  contractual   obligations  that  the  municipal                                                               
entities have built up.  He stated  that the Bond Bank has a long                                                               
history  of providing  funding for  municipal jurisdictions.   He                                                               
said thus far  the issue of whether the state  itself could solve                                                               
or address  its unfunded  liability through the  use of  the Bond                                                               
Bank has not  been discussed.  That, he said,  is a question that                                                               
attorneys  need  to   wrestle  with  further.     What  has  been                                                               
questioned  is  whether  there   is  a  precedent  for  municipal                                                               
entities coming  individually to the  Bond Bank for  the issuance                                                               
of debt, and the answer is yes.                                                                                                 
MR.  SUNDBERG  said,  "We jumped  then  from  general  obligation                                                               
issues to  two ... different  types of  bond issues based  on the                                                               
revenue  stream that's  used to  repay the  debt.   One of  those                                                               
would be appropriation debt."   He said [Merrill Lynch] looked at                                                               
the possibility of structuring an  obligation that was subject to                                                               
annual  appropriation  and  questioned   whether  that  would  be                                                               
covered under the umbrella of a  general obligation.  He said the                                                               
response received  from a  number of attorneys  is that  it would                                                               
not  be  covered;  it  would  be  considered  to  be  a  separate                                                               
obligation and one, in fact, that could be issued.                                                                              
MR. SUNDBERG  said another  question, primary to  the use  of the                                                               
Bond  Bank,  is  whether  there are  obligations  that  could  be                                                               
structured as  contractual obligations.   He offered  the example                                                               
of a funding  that he personally has been involved  in is that of                                                               
the  Federal  Bureau  of   Investigation  (FBI)  headquarters  in                                                               
Anchorage.   He  explained that  the FBI  building is  secured by                                                               
contractual   payments    from   the   U.S.    General   Services                                                               
Administration (GSA)  that flow  through an  intermediate entity.                                                               
He added,  "And that's ...  what would be  more referred to  as a                                                               
contract obligation, as opposed to  a general obligation.  So, we                                                               
looked at  that as another  vehicle, and  again one that  we felt                                                               
would  make  the  attorneys  more   comfortable  looking  at  the                                                               
constitution   restrictions   and   looking  at   the   available                                                               
mechanisms that might be used to  secure an obligation as a means                                                               
of selling debt.                                                                                                                
MR. SUNDBERG  explained that  once the  attorneys give  the okay,                                                               
the  flip side  of the  coin  is having  to question:   "Is  this                                                               
something we  could sell  into the market?   Would  investors buy                                                               
it?"   He  clarified that  the question  of whether  or not  bond                                                               
council will provide an opinion  is separate from the question of                                                               
whether  there  will be  a  market  for  these obligations  at  a                                                               
desirable rate.   He concluded, "And we feel in  the case of both                                                               
the  contract  obligation model,  as  well  as the  appropriation                                                               
model, that structurally  we can get to something that  has a lot                                                               
of investor appeal."                                                                                                            
10:31:58 AM                                                                                                                   
MR. SUNDBERG, in  response to a question from  Chair Seaton, said                                                               
a  contract  obligation  is  very   similar  to  a  revenue  bond                                                               
obligation.  He offered the  example that an individual municipal                                                               
entity that comes  to the Bond Bank has  a "cumulated contractual                                                               
obligation"  to make  payments into  the pension  obligation, and                                                               
instead  of making  those payments  on an  annual basis  into the                                                               
pension  fund, that  funding would  be provided  up front  by the                                                               
issuance  of bonds  and  the municipal  entity  would instead  be                                                               
making contractual payments to bond holders.                                                                                    
CHAIR  SEATON  stated his  understanding  that  Mr. Sundberg  was                                                               
separating  out the  past service  cost from  the normal  service                                                               
cost.    The  latter,  he  noted, would  still  be  paid  by  the                                                               
municipality into PERS.                                                                                                         
MR. SUNDBERG said that's correct.                                                                                               
REPRESENTATIVE GRUENBERG  recalled that  there was a  bill passed                                                               
last year  that provided for  a type of alternative  funding that                                                               
was contractual.                                                                                                                
10:33:28 AM                                                                                                                   
CHAIR SEATON  confirmed [with information shared  by Mr. Mitchell                                                               
off microphone] that the bill had  to do with a virology lab that                                                               
dealt   with  structured   payments   from   the  Department   of                                                               
10:34:23 AM                                                                                                                   
MR. SUNDBERG  said he  would conclude that  the vehicle  that was                                                               
used  was   "referred  in  our   lexicon  as  a   certificate  of                                                               
10:34:38 AM                                                                                                                   
REPRESENTATIVE GRUENBERG said yes.                                                                                              
10:34:43 AM                                                                                                                   
MR. SUNDBERG  said, "That particular  obligation does ...  bear a                                                               
great resemblance to what you are  doing with what I refer to as,                                                               
sort of,  middle-ground type obligation that  you could construct                                                               
under [HB] 278."                                                                                                                
10:34:55 AM                                                                                                                   
REPRESENTATIVE GRUENBERG  referred to part of  Article 9, Section                                                               
8, of the Alaska State Constitution, which read:                                                                                
     No state debt shall  be contracted unless authorized by                                                                    
     law for  capital improvements  or unless  authorized by                                                                    
     law for housing  loans for veterans, and  ratified by a                                                                    
     majority of the qualified voters  of the State who vote                                                                    
     on the question.                                                                                                           
He suggested  that the  legislature should  look at  whether that                                                               
provision is  out of date and  the state should be  provided with                                                               
more flexibility.                                                                                                               
10:36:16 AM                                                                                                                   
MR.  SUNDBERG said  there  is  a two-stage  check  on the  entire                                                               
process:   First,  the bill  does not  replace or  circumvent the                                                               
existing jurisdiction's process  for issuing bonds.   No one will                                                               
be  getting  blanket  authorization.   The  bill  just  adds  the                                                               
potential to use a  tool if it is viewed as a  prudent part of an                                                               
overall  package,  with  regard  to  the  balance  of  state  and                                                               
municipal  obligations as  well  as market  conditions.   Second,                                                               
each individual entity would have  to go through a serious review                                                               
by the rating agencies.  He continued:                                                                                          
     Rating   agencies    have   generally    become   quite                                                                    
     comfortable  with this  as a  tool.   In fact,  they've                                                                    
     become  more comfortable  with the  tool than  entities                                                                    
     that are  trying to  get along without  it.   They view                                                                    
     the obligations  in the same  way we  do - that  it's a                                                                    
     contractual obligation  you have  to fund on  an annual                                                                    
     basis.   And their  question is  very similar  to mine:                                                                    
     "Do you  do it at  [an] 8.25 percent interest  rate, or                                                                    
     do you  do it  at a  lower market rate?"   They  do not                                                                    
     necessarily penalize  you for not using  this tool, but                                                                    
     they  certainly don't  penalize you  for using  it when                                                                    
     it's combined with a prudent  investment practice.  And                                                                    
     the key is "prudent investment of proceeds."                                                                               
10:39:28 AM                                                                                                                   
CHAIR SEATON  directed attention to  page 5 of the  update, which                                                               
explains pension  financing.   He noted  [that the  chart showing                                                               
"taxable  pension  bond financings"]  shows  that  the number  of                                                               
financings in 2003  was approximately 70, but it  dropped to less                                                               
than 60 in 2004  and to less than 40 in 2005.   He asked what the                                                               
reason is for that fairly rapid decline.                                                                                        
10:40:29 AM                                                                                                                   
MR. SUNDBERG  responded that much  like a  lot of sectors  of the                                                               
market,  the  issuance  of  pension obligations  tends  to  be  a                                                               
somewhat  "lumpy" proposition.   He  reminded the  committee that                                                               
the chart shows  the number of financings rather  than the dollar                                                               
amount  of  financings; therefore,  the  dollar  volume may  have                                                               
increased while the number of  financings decreased.  In response                                                               
to a  follow-up question from  Chair Seaton, he noted  that there                                                               
was a dip  in interest rates in 2003, which  corresponded with an                                                               
increase in  financing.  He concluded,  "If we remain at  or near                                                               
the level of  interest rates that we are  experiencing right now,                                                               
we would anticipate  that based on the growing  problem, and this                                                               
being  more and  more  accepted as  a good  tool  to address  the                                                               
problem,  ... you'll  see  more  financings done  -  in terms  of                                                               
dollar amount."                                                                                                                 
10:43:18 AM                                                                                                                   
MARK  PRUSSING,  Vice   President,  Seattle-Northwest  Securities                                                               
Corporation,   said  that   the   corporation   is  the   leading                                                               
underwriter  of municipal  bonds and  financial advisory  work in                                                               
the  Northwest and  is  the  financial advisor  to  the State  of                                                               
Washington and  the City & Borough  of Juneau.  In  response to a                                                               
request from  Chair Seaton, he explained  that underwriting bonds                                                               
means buying  the bonds  and turning around  and selling  them to                                                               
investors,  thereby taking  the risk  of finding  the buyers  for                                                               
those bonds.  He stated that  he and Mr. Sundberg are competitors                                                               
in  their everyday  business;  however, "in  this  effort we  are                                                               
joining forces in that we both  have an interest ... in providing                                                               
a framework for  the State of Alaska to  issue pension obligation                                                               
bonds."  The  nature of each one of  those individual obligations                                                               
will vary, he said.                                                                                                             
MR. PRUSSING revealed that he has  had 25 years of public finance                                                               
experience - a substantial amount of  that in Alaska.  He offered                                                               
further credentials.   He said he was involved  in the initiation                                                               
of  the Alaska  State Pension  Investment Board  and "served  the                                                               
staff"  to  that  board for  a  number  of  years.   He  said  he                                                               
currently  works  in  municipal   finance  and  underwrites  bond                                                               
10:46:14 AM                                                                                                                   
MR. PRUSSING,  in response  to a  request for  clarification from                                                               
Representative Gruenberg,  said he  is speaking  today as  both a                                                               
potential  financial advisor  and  a potential  underwriter.   He                                                               
said   his  information   today  is   meant  to   be  shared   as                                                               
"informational  in  nature" rather  than  as  any obligation  his                                                               
corporation has with the State of Alaska or municipal entity.                                                                   
10:47:24 AM                                                                                                                   
MR.  PRUSSING said  the Seattle-Northwest  Securities Corporation                                                               
thinks the Bond Bank could  provide a broader ability for smaller                                                               
municipal  entities to  enter the  capital  markets "that  others                                                               
would  not be  able  to."   He  said  the  corporation sees  many                                                               
parallels between Oregon  and Alaska.  He noted that  in one case                                                               
the  Oregon School  Board Association  formed its  own entity  to                                                               
issue bonds with a trustee.  He  said that would be similar to if                                                               
the  Alaska  Municipal  League  decided  to  pool  municipalities                                                               
together.   He said the  Bond Bank is  not the only  vehicle, but                                                               
the corporation thinks  it would be a good one,  especially if it                                                               
were the  intent of  the legislature  to provide  some additional                                                               
security for  the bonds that  were issued through the  Bond Bank.                                                               
He  said he  doesn't think  that's what's  anticipated currently,                                                               
but it could be  added on if it were the  goal of the legislature                                                               
to reduce  the borrowing  cost of the  entities that  issue bonds                                                               
through the Bond Bank.                                                                                                          
MR. PRUSSING continued as follows:                                                                                              
     For  example,  you  could put  into  place  a  stronger                                                                    
     ability to  intercept revenues to a  school district or                                                                    
     municipality that  the money goes  to the Bond  Bank to                                                                    
     make that debt  payment first.  Doing  that would allow                                                                    
     an entity  to put that  pledge in place, and  it allows                                                                    
     investors then  greater security that they're  going to                                                                    
     receive their  money before  the operations  -- they're                                                                    
     the first  handout, if you  will, when money  comes in.                                                                    
     And  this would  particularly play  a role  in the  TRS                                                                    
     system  where  the  majority  of  funding  from  school                                                                    
     districts comes  from the state.   Putting an intercept                                                                    
     in place to  intercept that money first  before it goes                                                                    
     to  the school  districts to  pay the  debt service  on                                                                    
     these bonds,  would increase investor acceptance.   And                                                                    
     what that  means is it  would provide a  lower interest                                                                    
     rate on that  pension obligation bond.   And ... rather                                                                    
     than having  that liability  accruing at  8.25 percent,                                                                    
     having it accrue at a  lower rate would actually result                                                                    
     in  more of  the  money  that you  send  to the  school                                                                    
     districts  being put  to use  in education  and in  the                                                                    
     classrooms.   So, we  think that if  you choose  to use                                                                    
     the Bond  Bank, ... it would  be a good vehicle  to add                                                                    
     on some  abilities, if  that's what  you choose  to do.                                                                    
     We think  that, of course, the  stronger credit quality                                                                    
     that  you can  provide,  the lower  the borrowing  cost                                                                    
     would be; but it is  a legislative decision on how much                                                                    
     the   state   wants   to   stand   in   to   help   the                                                                    
10:50:18 AM                                                                                                                   
MR. PRUSSING, in  response to a question from  Chair Seaton, said                                                               
the information he had just discussed  can be found on page 13 of                                                               
his handout  [entitled, "Pension  Obligation Bonds,"  included in                                                               
the committee packet].  He continued:                                                                                           
     And this is something that  you could do without really                                                                    
     putting the state behind the debt  - say for ... any of                                                                    
     the school districts that pool  together.  You wouldn't                                                                    
     be saying  that if they  default ... you would  step in                                                                    
     and make  that payment.   But what you would  be saying                                                                    
     is that you  would provide the Bond  Bank the authority                                                                    
     to intercept  the money going  through the  district to                                                                    
     make the debt payments.                                                                                                    
CHAIR  SEATON,  regarding  the term  "intercept,"  asked  if  Mr.                                                               
Prussing is  talking about the  PERS payment that is  coming from                                                               
the school district based on the contribution rate.                                                                             
MR. PRUSSING  answered no.   He  clarified, "We're  talking about                                                               
...  the money  that the  state pays  to the  school district  to                                                               
support  its  operations.    ...  A  portion  of  that  could  be                                                               
intercepted in between the state  and the school district to make                                                               
the payment on the bonds through  the Bond Bank."  In response to                                                               
a question  from Representative  Gruenberg, he confirmed  that he                                                               
is talking about foundation formula money.                                                                                      
10:53:22 AM                                                                                                                   
CHAIR  SEATON  asked  if  that   would  be  the  portion  of  the                                                               
foundation formula  money that is  related to the salary  base of                                                               
teachers that make the contribution to PERS.                                                                                    
10:53:49 AM                                                                                                                   
MR.  PRUSSING  answered  that  the   goal  would  be  to  provide                                                               
bondholders more  assurance that  the district  is going  to make                                                               
its payment on  the bond.  He  said, "To the extent  that you can                                                               
intercept any  funds before [they]  get to  the hands of  the ...                                                               
school  district  ... and  send  [those  funds] to  bond  holders                                                               
provides  greater  assurance to  the  bond  holders that  they're                                                               
going to  receive their  money."  He  emphasized that  he offered                                                               
the previous remarks as an example, not a proposal.                                                                             
10:55:46 AM                                                                                                                   
REPRESENTATIVE HAWKER, in  response to a concern  stated by Chair                                                               
Seaton, said he thinks the  committee is focused on the specifics                                                               
when it  should have been  a more  general commentary.   He said,                                                               
"The interest on the debt will be  lower if there is less risk to                                                               
the lender.   All that we're  really discussing in this  point is                                                               
... a  possibility of  a way  the state itself  may, as  a policy                                                               
decision, decide to  lower the risk to the lender  of the money."                                                               
He  spoke of  a  municipal revenue  sharing  program as  possibly                                                               
being another source.  There  are any number of technical devices                                                               
that  could  be  considered;  however,   the  bill  is  only  the                                                               
framework to  "make this happen."   He said  it might be  best to                                                               
consider  vehicles that  might specifically  aid in  an execution                                                               
when  they are  specifically identified,  "rather than  trying to                                                               
create a generic catchall that might  open up or might cause some                                                               
unanticipated consequences."                                                                                                    
10:57:36 AM                                                                                                                   
MR. PRUSSING  agreed with the comments  of Representative Hawker.                                                               
He  said   the  state  later  could   consider  a  constitutional                                                               
amendment  that  would  allow a  municipality  to  issue  general                                                               
obligation bonds to fund pension obligation bonds.                                                                              
10:58:13 AM                                                                                                                   
REPRESENTATIVE  GARDNER asked  Mr. Prussing  if he  knows of  any                                                               
advisors who would be likely to advise against POBs.                                                                            
10:58:47 AM                                                                                                                   
MR.  PRUSSING  recalled that  within  the  Department of  Revenue                                                               
there is an opinion that  POBs should be entered into cautiously.                                                               
He said  his corporation  would agree with  that assessment.   He                                                               
said it  is important to analyze  the risk of any  financing that                                                               
is undertaken.  He said:                                                                                                        
     And in  this case  the risk  is:   "Will you  earn more                                                                    
     than you're  paying on the  bonds?"  If you  ... borrow                                                                    
     money and  put it  into an  investment vehicle,  and if                                                                    
     you do  not earn at  least what you're paying  on those                                                                    
     bonds, you would have been better off not doing that.                                                                      
MR. PRUSSING  said the  State of  Oregon conducted  a statistical                                                               
analysis in 2003  and came up with the conclusion  that there was                                                               
a  90 percent  probability of  exceeding the  bond interest  rate                                                               
with their  investment earnings.   He stated that  any investment                                                               
vehicle  has tradeoffs.   The  leaders in  Oregon that  moved for                                                               
incorporating POBs were the  school districts and municipalities;                                                               
initially  the state  was opposed  to issuing  POBs.   He offered                                                               
further details.  He stated that  Alaska would not be cutting new                                                               
ground; however, the  legal framework of the  state is different.                                                               
He  said  his  corporation  plans  on  working  with  the  Alaska                                                               
Retirement and Management Board to look  at the nuts and bolts of                                                               
the  system to  ensure  that the  money  that is  put  in can  be                                                               
appropriately  accounted   for  and   the  entity   receives  the                                                               
appropriate benefit.   He said  each governmental entity  has its                                                               
own process for approving debt,  whether it's a municipal entity,                                                               
or  the  state.   If  the  state  were  to  do something  on  its                                                               
liability, that is  something that could be  addressed through HB
278,  or  through  a  constitutional amendment.    He  said  it's                                                               
important to  distinguish between the state's  liability and what                                                               
it wants  to do  with it  versus the  municipalities' liabilities                                                               
and  what each  wants  to  do with  them.    He concluded,  "This                                                               
legislation,  essentially, while  it may  eventually be  used for                                                               
the  state,  [is] mainly  geared,  as  I  believe, to  allow  the                                                               
municipalities  to   work  with   their  legislative   bodies  to                                                               
determine  whether  this  is an  appropriate  vehicle  for  their                                                               
11:03:30 AM                                                                                                                   
REPRESENTATIVE  GRUENBERG   asked  Mr.  Prussing  what   kind  of                                                               
constitutional amendment was necessary in Oregon.                                                                               
11:03:46 AM                                                                                                                   
MR.  PRUSSING said  Oregon could  not  legally issue  bonds.   In                                                               
response to  a follow-up question from  Representative Gruenberg,                                                               
he said his corporation would  provide the committee with further                                                               
information in  that regard.   He  also noted  that he  has asked                                                               
legal  counsel to  draft what  a  constitutional amendment  would                                                               
look like  for Alaska.  He  offered to work with  Mr. Mitchell to                                                               
provide that.                                                                                                                   
[HB 278 was heard and held.]                                                                                                    

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