Legislature(2005 - 2006)CAPITOL 106

01/17/2006 08:00 AM STATE AFFAIRS

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
<Bill Hearing Canceled>
Heard & Held
Heard & Held
HB 278-RETIREMENT SYSTEM BONDS                                                                                                
8:05:27 AM                                                                                                                    
CHAIR  SEATON announced  that  the first  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."                                                                                                                
CHAIR  SEATON  said  the  meeting   will  focus  on  the  Pension                                                               
Obligation Bond  (POB) because using  POBs is one of  the methods                                                               
that is  being considered in  addressing the  under-funded Public                                                               
Employees' Retirement System (PERS)  and the Teachers' Retirement                                                               
System (TRS).                                                                                                                   
8:07:04 AM                                                                                                                    
CAROL  SAMUELS,  Vice  President, Seattle  Northwest  Securities,                                                               
Oregon,  said  POBs offer  a  potential  tool  that can  be  very                                                               
flexible and  useful to local  and state jurisdictions.   Seattle                                                               
Northwest  Securities has  been involved  in over  $3 billion  of                                                               
"these  types  of  obligations"  in Oregon.    Referring  to  her                                                               
presentation,  Ms.  Samuels  defined   a  POB  as  a  replacement                                                               
obligation for  a jurisdiction's  already existing  obligation to                                                               
the pension system.  She continued as follows:                                                                                  
     It can help  defray some of the costs  that are already                                                                    
     on  the books.    Pension  systems essentially  measure                                                                    
     assets  on one  hand,  in other  words, the  securities                                                                    
     they own  in their portfolio, against  a calculation of                                                                    
     future  liabilities  over  the long  term,  which  they                                                                    
     translate into  present value dollars, or  dollars that                                                                    
     are meaningful  today.  They  compare the two  of them,                                                                    
     and  if liabilities  are  greater  than assets,  again,                                                                    
     measured on  a present  value basis,  then you  have an                                                                    
     unfunded   actuarial  accrued   liability,  which   ...                                                                    
     everybody abbreviates ... to UAAL  or UAL.  This is not                                                                    
     an  uncommon problem.   In  fact  it's rare  to find  a                                                                    
     pension system, either in the  private sector or in the                                                                    
     public  sector,  that  does   not  have  a  significant                                                                    
     unfunded   liability.     [This  is]   largely  because                                                                    
     investment returns  in the early  years of  this decade                                                                    
     lagged expectations.                                                                                                       
8:10:15 AM                                                                                                                    
MS. SAMUELS further explained:                                                                                                  
     In  Alaska, repayment  of this  debt -  this UAAL  - is                                                                    
     amortized just  like any  other bond  or loan  that you                                                                    
     might  have  on  your  mortgage,  for  example.    It's                                                                    
     amortized  over  a fixed  period  and  it's built  into                                                                    
     existing  payroll  rates.   So,  a  fairly  significant                                                                    
     component of  payroll rates is devoted  to repaying the                                                                    
     debt.  The  debt is amortized in Alaska  at an interest                                                                    
     rate  of 8.25  percent.   Now,  I  often get  questions                                                                    
     about  the differences  in  percents -  why  is it  one                                                                    
     percent  of  payroll  and another  percent  that  isn't                                                                    
     equal  to 8.25  - and  it's important  to keep  in mind                                                                    
     that they're different.   One is a  percent of payroll,                                                                    
     so  you take  a given  payroll of  a jurisdiction,  you                                                                    
     figure out the dollars that  are necessary to repay the                                                                    
     debt at an interest rate  of 8.25 percent, and then you                                                                    
     divide by  the payroll of  the jurisdiction to  get the                                                                    
     payroll rate.   So  they're both percentage  terms, but                                                                    
     they're measuring different things.                                                                                        
     Therefore,  the retirement  system  is essentially  the                                                                    
     banker, and  when I say  it's a  replacement obligation                                                                    
     to  issue a  pension  obligation  bond, that's  exactly                                                                    
     why.   There is an  obligation; it is  an unconditional                                                                    
     obligation  of the  jurisdiction.   They have  to repay                                                                    
     it, and  it's being  amortized at  8.25 percent.   Many                                                                    
     jurisdictions  have looked  to the  marketplace to  see                                                                    
     whether  or not  they can  get a  better deal.   Again,                                                                    
     it's  not a  new  obligation, it's  not like  borrowing                                                                    
     money to  build a  new sewer system  where you  have to                                                                    
     come up with additional revenue.   If this works as you                                                                    
     hope  it will,  this  should lower  your overall  costs                                                                    
     because you  will only enter  into this if  you believe                                                                    
     you can save money on an obligation you have already.                                                                      
     Moving  to  page three,  being  more  specific to  your                                                                    
     situation, why  might this be  something you'd  want to                                                                    
     consider   granting  authority   to  jurisdictions   to                                                                    
     pursue?  Well, according  to the most recently released                                                                    
     valuation,  which   is  from  2004,   PERS  rates...are                                                                    
     expected to  rise to 32  percent of  payroll, beginning                                                                    
     in  2011, and  they  don't go  down  again until  2029.                                                                    
     Paying  a third  of your  payroll in  pension costs  is                                                                    
     obviously a  pretty significant bite  for jurisdictions                                                                    
     to take  on, and they're  not paying anywhere  close to                                                                    
     that right  now, so you  can expect that over  time the                                                                    
     amount of  money that's devoted  to paying  pension and                                                                    
     related  healthcare  costs is  going  to  eat up  their                                                                    
     ability to  do the  other things that  citizens expect,                                                                    
     from cities, boroughs, school districts...                                                                                 
     TRS rates  are even  expected to go  higher.   They are                                                                    
     expected to  go to 50  percent of payroll in  2011, and                                                                    
     they  will continue  increasing to  56 percent  by 2028                                                                    
     before they  then decline.   So it's  a long way  to go                                                                    
     with pretty  extreme rates relative to  what we've seen                                                                    
     elsewhere.   Properly structured pension bonds  - and I                                                                    
     underscore properly structured, there  are lots of ways                                                                    
     to structure these  that would not be,  in our opinion,                                                                    
     prudent for a  jurisdiction - can be  an effective tool                                                                    
     to  bring these  payroll  rates  down immediately,  and                                                                    
     more  importantly, to  produce  long  term savings  for                                                                    
     these jurisdictions.  In Oregon,  as I mentioned, we've                                                                    
     been    pretty    heavily   involved    in    assisting                                                                    
     jurisdictions with obligations of  this type.  In fact,                                                                    
     jurisdictions overall  have sold more than  $5 billion,                                                                    
     and we  project that, at  the rates of return  that the                                                                    
     Oregon  actuary uses,  which is  8 percent  (not 8.25),                                                                    
     that  savings are  going to  be over  $1.3 billion,  or                                                                    
     close to 25 percent of the total.                                                                                          
8:14:37 AM                                                                                                                    
REPRESENTATIVE GARDNER  asked what the  normal life of  a pension                                                               
bond is, regarding PERS and TRS.                                                                                                
8:15:00 AM                                                                                                                    
MS.  SAMUELS said  she recommends  a structure  that matches  the                                                               
amortization  period of  the loan  Alaska is  receiving from  the                                                               
system.   She added that it  is tempting to lengthen  that period                                                               
to reduce costs, but it is  not financially prudent because it is                                                               
borrowing against the borrowing.                                                                                                
8:16:30 AM                                                                                                                    
CHAIR  SEATON  said  the  present dollar  value  of  the  pension                                                               
obligation system  is based  on a schedule  of payments  over the                                                               
next 20 years,  and those scheduled payments have  to take place.                                                               
He asked  if the  POBs have  anything to  do with  the structured                                                               
payment schedule or only with the present dollar value.                                                                         
8:17:35 AM                                                                                                                    
MS.  SAMUELS said  she thinks  her presentation  will answer  his                                                               
question.  She said there may  not be a direct match between what                                                               
the  debt service  is  and  the annual  saving,  because in  many                                                               
cases,  these   are  not  like  typical   bonds  with  guaranteed                                                               
payments.  She  said payments are based on rates  of returns that                                                               
are earned on  the bond proceeds, how quickly  the payroll grows,                                                               
and on  other demographic variables.   She added that it  is very                                                               
complicated, and  needs to be considered  carefully before moving                                                               
ahead.  It is not as predictable as refinancing a mortgage, she                                                                 
REPRESENTATIVE GRUENBERG asked if there was a way to make it                                                                    
more predictable.                                                                                                               
8:19:25 AM                                                                                                                    
MS. SAMUELS said, "Not exactly," and requested that she continue                                                                
her presentation.  Referring to page 4 of her presentation, she                                                                 
     PERS is  basically twice the  size as TRS, in  terms of                                                                    
     the asset  base.   The number  of covered  employees is                                                                    
     70,000,  versus  approximately  21,000.    The  average                                                                    
     employer  rates  that  are currently  being  paid,  and                                                                    
     these   are   in  contrast   to   the   ones  I   cited                                                                    
     earlier...are   approximately  16.8   percent  and   21                                                                    
     percent.    Please  note  the   footnote:    these  are                                                                    
     collared   rates,  meaning   they   are,   in  a   way,                                                                    
     artificially  reduced  in  order  to keep  within  a  5                                                                    
     percent  band.   The actuary  actually calculated  that                                                                    
     for PERS the rate should  have been about 25.6 percent,                                                                    
     where  as for  TRS it  should  have been  closer to  39                                                                    
     percent.     So   you  can   already  see   the  steady                                                                    
     increase...and   the  longer   you  take   to  pay   it                                                                    
     back...the  more interest  accrues.   It's like  you're                                                                    
     not  making   a  payment,  so   the  debt   just  keeps                                                                    
     increasing, which is one of  the reasons that rates are                                                                    
     projected to rise so high.   Funded ratios for PERS and                                                                    
     TRS are  approximately 72 percent  and 64  percent, and                                                                    
     when you translate  the debt, the shortfall  in 2004 in                                                                    
     present  value  terms  is  approximately  $5.7  billion                                                                    
MS. SAMUELS continued, referring to page 5:                                                                                     
     Obviously saving  somewhere between  20 and  25 percent                                                                    
     of your  debt sounds pretty good,  and reducing payroll                                                                    
     rates sounds  even better...but  the thing  that people                                                                    
     need  to   understand  and   be  comfortable   with  is                                                                    
     that...this  is  basically...an  arbitrage play.    Now                                                                    
     usually when  you use the  words "arbitrage  play," you                                                                    
     say that  in sort  of a whisper  with a  giggle because                                                                    
     it's illegal under  federal tax laws.   The reason that                                                                    
     we say it proudly in  this case, is because federal tax                                                                    
     law  does not  rule  over  this type  of  issue.   Why?                                                                    
     Because  you  would  have  to sell  these  bonds  on  a                                                                    
     taxable basis.   In  other words,  unlike a  bond issue                                                                    
     that Juneau  might sell for  a new sewer  facility, the                                                                    
     interest  on which  would be  tax-exempt under  federal                                                                    
     tax  law...these  bonds would  have  to  be sold  on  a                                                                    
     taxable  basis.    Interest  earned  on  the  bonds  is                                                                    
     subject  to  federal  tax.    The  reason  the  federal                                                                    
     government  makes   these  taxable,  which   makes  the                                                                    
     interest  rate higher  (right now  we're projecting  an                                                                    
     interest rate for an obligation  of this type to be 5.5                                                                    
     to  6.0  percent),  is  they  reserve  the  tax  exempt                                                                    
     privilege for capital projects.   This is considered to                                                                    
     be an operating project.                                                                                                   
     The  good  news of  the  federal  government not  being                                                                    
     involved  in this  is they  have absolutely  nothing to                                                                    
     say   about  whether   or  not   you  earn   arbitrage.                                                                    
     Arbitrage is  borrowing at one rate  and turning around                                                                    
     and re-investing  at another.  That  is essentially the                                                                    
     main issue  when it  comes to pension  bonds.   Can you                                                                    
     borrow  at,  say, 6  percent...,  and  turn around  and                                                                    
     invest it  at the PERS system  at 8.25?  If  that's the                                                                    
     case,  that 2.25  percent  difference,  that's what  we                                                                    
     call  the arbitrage,  allows  municipalities to  reduce                                                                    
     their overall cost of the pension system...                                                                                
     In  this  example,  the  breakeven   is  your  rate  of                                                                    
     borrowing.    In  other  words,  if  you  borrow  at  6                                                                    
     percent, as long  as you earn more than  6 percent, you                                                                    
     will  end up  costing your  jurisdictions less  than if                                                                    
     they  continue to  make their  loan  repayments to  the                                                                    
     PERS system.   On the other hand, and if  you earn 8.25                                                                    
     percent, you will  meet the savings that I  am going to                                                                    
     show  you  later in  the  presentation.   If  you  earn                                                                    
     somewhere  between  6 and  8.25,  you  will still  save                                                                    
     money, but  you won't save as  much.  If you  earn more                                                                    
     than 8.25  percent, which historically the  system has,                                                                    
     you'll save even  more than I'm going to  show you, but                                                                    
     then, of course,  if you earn less than  6 percent, you                                                                    
     will end up costing your jurisdictions more.                                                                               
     So, the  real question that a  municipal official needs                                                                    
     to ask themselves before going  ahead and entering into                                                                    
     a POB, is do I believe  over the next 22 years, in this                                                                    
     case, that  I can earn  more than my  current borrowing                                                                    
     rate which  is somewhere  between 5.5 and  6.0 percent.                                                                    
     If you think  that that's a good bet, and  again we use                                                                    
     the  word bet  because  that is  what it  is,  it is  a                                                                    
     guestimate, it's  a gamble, but  in this case  it could                                                                    
     work  very heavily  to your  advantage.   If you  think                                                                    
     that  that's a  good gamble,  then it's  something that                                                                    
     you should do.                                                                                                             
     Of  course,  you  are  kind  of  gambling  either  way,                                                                    
     because  if  you  don't  make   this  choice,  and  you                                                                    
     could've  earned  a  higher rate  of  return  on  these                                                                    
     proceeds,  you could  put  your  jurisdiction in  worse                                                                    
     shape by not pursuing a POB.                                                                                               
8:26:00 AM                                                                                                                    
     Moving on  to page 6,  we have  a snapshot of  rates of                                                                    
     return, since 1992, in the  pension system.  As you can                                                                    
     see, in  most periods it's  in excess of  8.25 percent.                                                                    
     I do not have statistics that  date back as far as I do                                                                    
     in  Oregon,  but  under  the  theory  that  the  Oregon                                                                    
     investment   system  is   equivalent   to  the   Alaska                                                                    
     investment  system,  I can  tell  you  that Oregon  has                                                                    
     statistics  that  over the  past  50  years, they  have                                                                    
     earned more than 10 percent  return.  That doesn't mean                                                                    
     they're going to earn 10  percent return every year; it                                                                    
     doesn't  mean they're  going to  earn  8 percent  every                                                                    
     year,  which is  the benchmark  for the  Oregon system.                                                                    
     There  are going  to be  some  years where  you have  a                                                                    
     1994, or worse,  you have a 2001.  But  if, on average,                                                                    
     the system  earns more than 8.25  percent, you're ahead                                                                    
     of the game.                                                                                                               
8:27:10 AM                                                                                                                    
CHAIR SEATON asked if the 2004-2005 numbers are available.                                                                      
8:27:24 AM                                                                                                                    
MS.  SAMUELS answered  no, and  that other  testifiers will  have                                                               
that.    Referring to  page  7,  she  said 133  jurisdictions  in                                                               
Oregon, including the state, have used  POBs.  In Oregon they use                                                               
a  full-phasing credit  obligation, which  means "you  can borrow                                                               
funds and repay them on  an unconditional basis without receiving                                                               
a vote."   School districts and counties use  that technique, she                                                               
said.   She said the  state chose to go  to the voters  to change                                                               
the  constitution to  allow  the process,  which  ended up  being                                                               
easily passed.  It was a  general obligation bond, and for public                                                               
perception  reasons,  Oregon chose  to  say  that property  taxes                                                               
could not  be used  to repay  that debt, she  noted.   Oregon has                                                               
never levied a property tax, she  added.  Alaska could do it that                                                               
8:29:38 AM                                                                                                                    
REPRESENTATIVE  GRUENBERG  said Alaska's  constitution  prohibits                                                               
general obligation bonds,  so "all we can do  is moral obligation                                                               
8:29:42 AM                                                                                                                    
MS. SAMUELS said Alaska could  pursue a constitutional amendment,                                                               
because  the  interest   cost  will  be  lower   with  a  general                                                               
obligation bond than with a moral  obligation bond.  She said the                                                               
state  would need  to  consider how  long  that authority  change                                                               
would take,  because interest rates  may go up during  that time.                                                               
The interest rate  for a moral obligation bond  would probably be                                                               
half a percentage point higher,  she surmised, and over a 22-year                                                               
period that can really add up.  She continued:                                                                                  
     The  key lesson  we learned  in  Oregon is  that it  is                                                                    
     important to make sure you  protect the borrowing side,                                                                    
     and you  create a security structure  that is saleable,                                                                    
     but it's  probably more important  that you  figure out                                                                    
     the  housekeeping  issues...of   what  happens  to  the                                                                    
     proceeds when they're delivered to  the system.  If the                                                                    
     system  were about  to receive  about  $5 billion  that                                                                    
     they weren't counting on, you'd  want to make sure that                                                                    
     that money was protected,  and that those jurisdictions                                                                    
     that  had actually  borrowed the  funds,  would end  up                                                                    
     getting the credit  for the amount they  borrowed.  The                                                                    
     process in Oregon  is that there is a  lump sum account                                                                    
     - and  this is built into  statute - that had  a little                                                                    
     black  box around  it.   The  jurisdiction that  funded                                                                    
     that black box  is the only jurisdiction  that gets the                                                                    
     credit for the funds that are  in there.  It is kind of                                                                    
     like  a  prepayment  account.    As  money  accumulated                                                                    
     through interest earnings, those  funds are used to buy                                                                    
     down the payroll  rate.  So in the TRS  example, if you                                                                    
     had a  50 percent payroll  rate and you created  a lump                                                                    
     sum account, funds  would be drawn out  of that account                                                                    
     on an annual  basis and used to reduce  that 50 percent                                                                    
     to something lower  than that - say, 20  or 30 percent.                                                                    
     If  the fund  earns greater  interest, over  time, then                                                                    
     the 8.25  percent (which is assumed),  then the payroll                                                                    
     rate  buy-down will  be even  more significant...if  it                                                                    
     earns  less the  payroll  rate buy-down  will be  lower                                                                    
     than  what's   estimated.    That  gets   back  to  the                                                                    
     question...about   the  predictability.     There   are                                                                    
     savings,  but  they  may not  come  in  your...standard                                                                    
     savings report where you're going  to save $1 million a                                                                    
     year.   You may save  $2 million one year  and $500,000                                                                    
     the next.   It really  depends on what happens  to that                                                                    
8:33:26 AM                                                                                                                    
CHAIR  SEATON referred  to Table  6,  and asked  if payments  are                                                               
strictly  amortized,  so  that  the employer  is  not  seeing  an                                                               
increase  in the  percent of  payroll for  retirement during  low                                                               
return years.                                                                                                                   
8:34:27 AM                                                                                                                    
MS. SAMUELS  said if there  was "a  series of [low]  periods that                                                               
look like 2001,  2002, and 2003, you could see  a situation where                                                               
payroll  rates  were higher  than  what  would otherwise  be  the                                                               
case."   Referring to  page 9,  which shows  the rates  of return                                                               
that  affected  Oregon, she  said  that  because things  "snapped                                                               
back"  after   2003,  actual  earnings  were   over  60  percent,                                                               
translating to  a 19 percent  return.   She said Alaska  needs to                                                               
try and predict future rates, and then do a "gut check."                                                                        
8:36:22 AM                                                                                                                    
CHAIR SEATON  said that in  spite of  the snapping back,  table 6                                                               
shows figures well below 5 percent in 2003.                                                                                     
8:36:42 AM                                                                                                                    
MS. SAMUELS  said she  doesn't know where  that 2003  figure came                                                               
from, and  she is skeptical  because the system in  Oregon earned                                                               
about  26 percent  that year.    She said  the comparable  months                                                               
might  be different.   Referring  to page  9, she  said that  the                                                               
rates  of  return for  2002  have  been  well  in excess  of  the                                                               
borrowing rate.   Page  10 refers to  the legislative  process to                                                               
begin  to  use  POBs.    She  said she  is  often  asked  if  the                                                               
obligation can  be paid off,  and she said probably  not, because                                                               
the system  assumes an  8.25 percent  return, and  if there  is a                                                               
period  when it  doesn't earn  close to  that, the  employer will                                                               
need to provide  the cash.  If the fund  earns double digits, for                                                               
example,  it  must benefit  the  jurisdiction  only.   These  are                                                               
housekeeping issues, she said.   Arbitrage risk remains the same.                                                               
She noted  that the structure  of the financing is  important; it                                                               
is not appropriate to use  unrealistic assumptions about rates of                                                               
returns.   New Jersey did that,  she stated.  She  said she would                                                               
not go  into a borrowing at  an interest rate of  over 7 percent,                                                               
which  is  why  the  window  for Alaska  is  narrow.    Long-term                                                               
interest rates  are expected to go  up, and they are  between 5.5                                                               
and 6.0  now.   She doesn't  think it  is prudent  to re-amortize                                                               
over a longer period  of time or back weight it  by taking all of                                                               
the savings up  front.  New Jersey and Illinois  tried to balance                                                               
their budgets in  that manner.  She referred to  page 11 and said                                                               
that statutes and administrative rules  must be made to make sure                                                               
the money is handled properly.                                                                                                  
8:41:21 AM                                                                                                                    
MS. SAMUELS said the bonds are  not likely to be subject to early                                                               
redemption.    The  bonds  are  taxable  and  sold  predominately                                                               
overseas to  international banks, and Alaska's  competition would                                                               
not  be with  other municipalities.    If there  is a  redemption                                                               
provision it will  cost half a percent, and she  said that is too                                                               
high of a price to pay at  the current low interest rates.  "Once                                                               
you go  down this road,  your chances of  getting back out  of it                                                               
are pretty minimal," she warned.                                                                                                
MS. SAMUELS  stated that rating  agencies would know  that Alaska                                                               
has a shortfall, and in  their opinion translating that shortfall                                                               
into a bond is  no different, in fact it might  be a plus because                                                               
Alaska is  doing all  it can  to bring  down its  cost structure.                                                               
She  added it  is  less flexible  to  use a  bond  issue than  to                                                               
continue to use PERS as a banker.                                                                                               
8:43:38 AM                                                                                                                    
CHAIR SEATON said  Alaska's contribution rates are  only going up                                                               
5 percent per year, "even though  actuarially we should be at the                                                               
25 and  38 percent...and  structurally we  have just  limited the                                                               
payments.  Under  the bond system...are we going to  be paying at                                                               
an actuary  rate or would  we soft-structure  it the same  way so                                                               
that our payments...accrue slowly at first."   He ask if it would                                                               
immediately increase the employers' payments per year.                                                                          
8:44:31 AM                                                                                                                    
MS.  SAMUELS said  yes, a  5  percent collar  is essentially  the                                                               
meaning of a soft liability.   She said it is taking advantage of                                                               
the  softness of  the obligation,  but by  doing that,  the costs                                                               
will  be significantly  steeper  down the  road.   Secondly,  she                                                               
said,  bonds are fixed, with  a promise to repay a certain amount                                                               
of principle  every year at a  certain interest rate.   There are                                                               
variable-rate  structures,   but  it  would  still   be  a  fixed                                                               
obligation,  she noted.   "The  hardness of  the structure  means                                                               
you're taking  care of  your business now,"  and not  waiting for                                                               
payroll  growth.   The  bond  is  a more  conservative  financial                                                               
structure because, "you're making your payment as you owe them."                                                                
8:46:53 AM                                                                                                                    
REPRESENTATIVE  GRUENBERG questioned  if  markets  would look  at                                                               
Alaska differently than Oregon because  the state is so dependent                                                               
on the volatile oil resource for its revenues.                                                                                  
8:47:28 AM                                                                                                                    
MS. SAMUELS said Oregon can  offer a different security structure                                                               
to  the market.    Alaska has  a strong  reputation  in the  bond                                                               
market, she noted,  but a moral obligation pledge is  worth a lot                                                               
less  to  investors.    Alaska  needs  to  evaluate  "meaningful"                                                               
access, and she guessed that  Alaska is well positioned under any                                                               
circumstance to enter  the market.  Some small cities  may not be                                                               
able to  enter the market.   She said that getting  an obligation                                                               
approved by the voters that would  allow the state to not have it                                                               
subject  to the  appropriation process  would grant  much broader                                                               
and less  expensive access  to all  municipalities in  the state.                                                               
She continued:                                                                                                                  
     Approaching the  [Alaskan] voters is pretty  tough hill                                                                    
     to get over.   Our sense is that there  are ways in ...                                                                    
     Point  2  to  expand access  with  additional  security                                                                    
     structures, such  as the intercept.   The  intercept is                                                                    
     pretty important,  and in  our opinion  HB 278,  if you                                                                    
     pursue that, should be expanded  to include things like                                                                    
     allowing an  intercept for schools.   ... Since schools                                                                    
     get such  a wide proportion  of their funding  from the                                                                    
     state, effectively you've got  a state credit, and that                                                                    
     is exactly  the way  we did  it in  Oregon.   In Oregon                                                                    
     school  districts ...  get about  70  percent of  their                                                                    
     operating  cash from  the state;  they entered  into an                                                                    
     intercept agreement  with the state, whereby  the state                                                                    
     paid the  debt service directly,  right off the  top of                                                                    
     their appropriation,  and they  ended up with  a credit                                                                    
     rating that was just one  small notch below the state's                                                                    
     rating  ....    We  would  recommend  that  you  pursue                                                                    
     something  similar in  Alaska to  the extent  there's a                                                                    
     way to get there under your current constraints.                                                                           
8:51:19 AM                                                                                                                    
MS.  SAMUELS  said  allowing  bond  reserves to  be  set  up  and                                                               
accessing bond insurance is important.   Referring to HB 278, she                                                               
said the  one significant issue  she suggests is that  the nature                                                               
of the  obligation between the  local entities and the  Bond Bank                                                               
needs to  be further defined.   She said it wasn't  clear that HB
278 granted  authority for the Bond  Bank to sell bonds  for this                                                               
purpose,  and the  bill does  not  grant clear  authority to  the                                                               
local  governments  to sell  bonds  to  the  Bond Bank  for  this                                                               
purpose, she  warned.  She  said the  bill should be  expanded to                                                               
contain  an intercept  agreement for  schools.   This could  help                                                               
expand the  amount of  dollars for  schools.   She said  the bill                                                               
should  have additional  flexibility, so  that jurisdictions  can                                                               
pool  together  outside of  the  Bond  Bank  and have  their  own                                                               
8:53:42 AM                                                                                                                    
MS. SAMUELS  gave an example of  the City and Borough  of Juneau.                                                               
Juneau  owes about  $75 million  to  the PERS  system.   Assuming                                                               
bonds  were  sold  in  March  and the  borrowing  rate  would  be                                                               
[indecipherable], which  is about .25  percent too high,  and the                                                               
fund earned  8.25 percent, Juneau's  total savings would  be over                                                               
$23 million, which is an annual  savings of $1 million per year -                                                               
real money for a community the  size of Juneau.  She said another                                                               
way to  look at it  is a 20 percent  savings, and she  noted that                                                               
Oregon has a minimum requirement of  saving 3 percent, so by that                                                               
definition, "this is a terrific refinancing."                                                                                   
8:55:23 AM                                                                                                                    
REPRESENTATIVE GATTO indicated  that it sounds bad to  say we are                                                               
going to solve  money problems by borrowing money.   He said that                                                               
in the late 1800s, there was  the gay '90s, and that was followed                                                               
by the great  depression.  We are fighting a  major war, he said,                                                               
and he asked if  we could "find ourselves in such  a hole that we                                                               
get sued by the bond holders" and lose Alaska's permanent fund.                                                                 
8:57:26 AM                                                                                                                    
MS. SAMUELS  agreed that  the state would  be borrowing,  but she                                                               
said the state has already borrowed  that money and would just be                                                               
changing its  banker.   "This is  a debt  you have  already," she                                                               
said.   She said POBs  are a bad choice  if there is  an economic                                                               
depression.   She  noted that  Oregon  has a  56-year history  of                                                               
investment returns,  and it is  over 10 percent through  boom and                                                               
bust  cycles.   Alaska  has an  actuary to  give  an estimate  of                                                               
returns, and the 8.25 percent is  not the upper end, she said, it                                                               
is supposed to be the average.   It is not a guarantee, she said,                                                               
but it could also turn out badly if Alaska doesn't do a POB.                                                                    
9:00:06 AM                                                                                                                    
REPRESENTATIVE  GRUENBERG  said  if these  are  moral  obligation                                                               
bonds, then the permanent fund would be protected.                                                                              
9:00:59 AM                                                                                                                    
MS. SAMUELS  said she  does not know  about the  laws restricting                                                               
the  use  of   the  permanent  fund,  but   generically  a  moral                                                               
obligation is  one in which  investors have only a  moral promise                                                               
to make payments.                                                                                                               
9:02:18 AM                                                                                                                    
CHAIR SEATON asked if POBs  were issued on an amortized repayment                                                               
schedule,  would  the  individual  municipalities  issuing  these                                                               
bonds  see  the  employee  wage  base  percentages  jump  to  the                                                               
actuarial listed  amounts.   He noted the  5 percent  collar now,                                                               
and wants to know if that would change.                                                                                         
9:04:15 AM                                                                                                                    
MS. SAMUELS  said that  is a housekeeping  issue that  needs some                                                               
attention.   She added that  there needs  to be a  structure that                                                               
memorialize  how the  rate reductions  would  be applied  against                                                               
payroll rates.   She doesn't think  that has been set  up, but it                                                               
could be done in the legislation or by administrative rule.                                                                     
9:05:40 AM                                                                                                                    
CHAIR SEATON said the PERS and  TRS actuarial rates are 25 and 38                                                               
percent, and "we're  paying 14 percent because of  the soft cap."                                                               
There  is a  collar of  5 percent,  and he  asked if  that collar                                                               
would go away with a POB.                                                                                                       
9:06:30 AM                                                                                                                    
MS. SAMUELS said it depends on how the system structures it, and                                                                
it is her understanding that the 5 percent collar is going away                                                                 
anyway.  She indicated that the following would work best:                                                                      
     Let's assume that PERS calculates  that based upon your                                                                    
     $20 million payment,  you're going to get  an 8 percent                                                                    
     reduction in your payroll from  now until 2028 when the                                                                    
     debt is  retired.  That's  at the assumed rate  of 8.25                                                                    
     percent.   ... If the  system itself projects  that the                                                                    
     rate  is going  to go  from this  year's 16.77  to next                                                                    
     year  at 21.77,  you  would still  get  that 8  percent                                                                    
     [reduction], it would just be against a higher number.                                                                     
9:07:50 AM                                                                                                                    
CHAIR SEATON said an Alaska Retirement Management Board (ARMB)                                                                  
presentation said a payroll reduction would be around 2.6 to                                                                    
3.1.  He asked if the 8 percent was a guess.                                                                                    
9:08:18 AM                                                                                                                    
MS. SAMUELS said she was pulling that number out of the air, but                                                                
she could probably calculate what the payroll rate reduction                                                                    
would be.                                                                                                                       
9:08:37 AM                                                                                                                    
CHAIR SEATON said that would be helpful.                                                                                        
9:08:48 AM                                                                                                                    
MS. SAMUELS said:                                                                                                               
     Part of  what makes  a large rate  reduction is  if you                                                                    
     are  making   a  payment  in   advance  of   when  it's                                                                    
     recognized  in the  rates.   So,  if you  pay the  full                                                                    
     amount of  your unfunded  liabilities when  you're only                                                                    
     being charged  for, say,  60 percent of  it -  which is                                                                    
     basically  what's happening  now [because]  they're not                                                                    
     building into your rates exactly  what you owe - you're                                                                    
     going  to get  a bigger  rate reduction  if it's  fully                                                                    
     recognized.   ... There are quite  a few municipalities                                                                    
     in Oregon who are paying nothing  on PERS ....  I would                                                                    
     not be surprised to see  a pretty significant reduction                                                                    
     in rates because you are paying before it's recognized                                                                     
     in your rate structure.                                                                                                    
CHAIR SEATON requested estimates from Ms. Samuels.                                                                              
9:10:59 AM                                                                                                                    
GARY   BADER,  Chief   Investment  Officer,   Treasury  Division,                                                               
Department  of Revenue  (DOR), said  DOR is  staff to  the Alaska                                                               
Retirement Management Board (ARMB).   He noted that the board was                                                               
established in October and recently  heard its first presentation                                                               
on POBs.   He said the board learned that  without POBs the [PERS                                                               
and  TRS]   system  is   significantly  underfunded   and  future                                                               
contributions  will be  the way  to cover  those balances.   POBs                                                               
lever the contribution  risk - if the fund  achieves greater than                                                               
the  actuarial  discount  rate,  the  contributors  to  the  fund                                                               
benefit, if  it does not,  they are at  a disadvantage.   He said                                                               
the leverage cuts  two ways.  If such bonds  had been issued five                                                               
years ago,  the total returns  to the  system would be  less than                                                               
the cost  of issuing the bonds.   "We would be  disappointed with                                                               
the experience," he said, and if  the bonds had been issued three                                                               
years ago,  we all would  have been happy  with the outcome.   He                                                               
added  that POBs  impose a  market timing  decision on  the ARMB.                                                               
"While it  may make sense  to invest all the  assets immediately,                                                               
politics may  require some  sort of  dollar averaging,"  he said.                                                               
"Imagine  if we  had invested  all of  the proceeds  in mid-2000,                                                               
just about the  peak of the stock market, today  we would be very                                                               
dissatisfied with  the results."   The real test is  what happens                                                               
over the life of the bonds, he noted.                                                                                           
9:14:29 AM                                                                                                                    
MR. BADER  said several asset  categories that the  pension funds                                                               
invest in are  not accessible immediately, like real  estate.  If                                                               
an  infusion  of   $1-2  billion  were  available   to  the  ARMB                                                               
immediately,  it is  doubtful that  they could  immediately adopt                                                               
the same  asset allocations that they  have now, and may  need to                                                               
look more at  public markets to invest the funds,  he stated.  He                                                               
told  the committee  that the  state  financial advisor,  Chester                                                               
Johnson,  recommended  that  "the  bond rating  agencies  take  a                                                               
harder  look at  general obligation  bonds...and consider  that a                                                               
hard  liability,  versus  a  promise  to  have  to  increase  the                                                               
contribution rate  as a soft  liability."  Regarding the  cost of                                                               
issuing POBs,  Mr. Johnson told him  it depends on the  amount of                                                               
bonds that  are issued, but estimated  that one to two  percent -                                                               
or $10-20 million - of that  which was underwritten might be used                                                               
up.  He  said ARMB heard four presentations on  POBs and explored                                                               
the concept,  but they did  not come  to any conclusions,  and so                                                               
have no  position on  HB 278.   Regarding page  6 of  Ms. Samuels                                                               
report regarding investment returns, the  FY04 rate of return was                                                               
14.7 percent, and in FY05, it was 8.95 percent for PERS.                                                                        
9:17:24 AM                                                                                                                    
CHAIR SEATON  asked if the  asset allocation of the  Alaska State                                                               
Pension Investment Board  (ASPIB) was 60 percent  in equities and                                                               
40 percent in bonds, and what that means regarding the POBs.                                                                    
9:19:17 AM                                                                                                                    
MR.  BADER said,  "It's likely  if you  sell taxable  bonds at  6                                                               
percent and  you invest it in  bonds, trying to mimic  the Lehman                                                               
[Brothers  Aggregate Index],  you  would get  close  to the  same                                                               
return, and so it  would be hard to make a case  for that just on                                                               
the basis  of looking at returns.   However, when the  board does                                                               
its asset  allocation, it looks  not only at  investment returns,                                                               
but looks at  the variability of returns and how  they match with                                                               
other investments.   For example, in 2002, when  the stock market                                                               
peaked, equity returns...fell  a lot.  At the  same time interest                                                               
rates  were coming  down, so  fixed income  returns were  kind of                                                               
helping the  portfolio, and  keeping it  from suffering  the ten,                                                               
fifteen,  twenty  percent  losses  in   equity  returns.    So  a                                                               
portfolio is  structured to try  and have investments  where some                                                               
are doing well  and others are not  in favor.  That  would be one                                                               
of the  arguments for keeping an  investment in bonds."   He said                                                               
selling  a POB  and  put it  all  in equities  would  be an  even                                                               
riskier proposition than the way  the board currently invests its                                                               
funds.  He added that he can't give an answer.                                                                                  
9:21:19 AM                                                                                                                    
CHAIR SEATON  said he would  like the board to  carefully address                                                               
9:23:15 AM                                                                                                                    
MR. BADER said, "If you sell a  bond today for 6 percent, and the                                                               
market happens  to be 6  percent, well we  look at that  and say,                                                               
'What's the  point?'"  If interest  rates go down, you  will make                                                               
money on  the investment.  It  isn't a given that  you break even                                                               
or lose money.                                                                                                                  
9:23:53 AM                                                                                                                    
CHAIR SEATON said the POBs  would probably not be redeemable, "so                                                               
is the difference  than that the bonds that you  might be buying,                                                               
you could...I guess you could resell them."                                                                                     
9:24:29 AM                                                                                                                    
MR. BADER  said, "We do resell  the bonds, and if  interest rates                                                               
go down, we sell them at a profit."                                                                                             
9:24:37 AM                                                                                                                    
CHAIR SEATON  asked about the structure  of POBs and if  they are                                                               
9:24:55 AM                                                                                                                    
MR.  BADER said  the comments  from the  state financial  advisor                                                               
indicate  that  the  premium  would  be too  high  to  make  POBs                                                               
9:25:10 AM                                                                                                                    
REPRESENTATIVE  GRUENBERG  said  he  is confused,  and  the  only                                                               
reason he heard  on why POBs are taxable is  because they are not                                                               
for  capital  construction  projects.   He  said  he  would  like                                                               
something in  writing analyzing what  kinds of bonds  are taxable                                                               
and  what are  not.   He  also  wants  to know  how  they can  be                                                               
structured to be tax-free.                                                                                                      
9:26:54 AM                                                                                                                    
TOM  BOUTIN, Deputy  Commissioner, Treasure  Division, Department                                                               
of Revenue, said  the department generally opposes  POBs, so far.                                                               
He noted that six to  eight banking firms have made presentations                                                               
to the  department, and Mr.  Boutin said  he has read  reports on                                                               
the topic.   He told the  committee that he has  been involved in                                                               
Alaska  public finance  for  about 20  years, and  he  sits on  a                                                               
number of  boards that  issue state  debt.   He said  real estate                                                               
investments can make sense, but  "issuing long term taxable bonds                                                               
in the  hope to invest  in a higher  yield is not  something that                                                               
the Department  of Revenue would recommend  to state government."                                                               
He said that  HB 278 brings up unanswered questions.   If a lease                                                               
structure  is contemplated  for HB  278,  then he  said he  would                                                               
worry about extending  the state moral obligation  to lease debt.                                                               
He  said that  has implications  for ongoing  debt, and  he added                                                               
that there is  about $1.3 billion of state  moral obligation debt                                                               
now.  If  the state moral obligation is not  explicitly tacked on                                                               
the POBs,  he said, there  is a  significant chance that  a large                                                               
amount of  this kind of  debt would still  be counted in  a moral                                                               
obligation way.                                                                                                                 
9:30:33 AM                                                                                                                    
MR.  BOUTIN  said  the  state  has a  finite  limit  to  a  moral                                                               
obligation debt  at the current  rating levels, and HB  278 could                                                               
use  up  that   debt  capacity.    He  added   that  most  Alaska                                                               
municipalities are too small to use  the Bond Bank, and so the HB
278 structure would not be available to them.                                                                                   
9:31:37 AM                                                                                                                    
CHAIR SEATON asked  Mr. Boutin to explain further  about the size                                                               
of communities and their access to the Bond Bank.                                                                               
9:32:01 AM                                                                                                                    
MR. BOUTIN  answered that a  number of Alaska  municipalities are                                                               
rated the  same as,  or higher than,  the state  moral obligation                                                               
credit rating, so it doesn't make  sense for them to use the Bond                                                               
Bank.  Anchorage  used the Bond Bank last year  for replacing the                                                               
roof on their  performing arts center.  It made  sense because in                                                               
that case part of the ticket  receipts were used to make the debt                                                               
service for  the roof.   But if Anchorage  went out and  did that                                                               
structure  on its  own, the  credit  quality of  having a  ticket                                                               
surcharge  wouldn't be  a very  good credit  structure, he  said.                                                               
When  Anchorage came  to the  Bond Bank  then all  of the  money,                                                               
including  school foundation  money,  was pledged  with a  senior                                                               
lien to  the Bond Bank.   But typically, Anchorage won't  come to                                                               
the Bond  Bank.  Juneau doesn't  normally come to the  Bond Bank,                                                               
but did so a year or  two ago for hospital revenue bonds, because                                                               
health  care bonds  are well  liked  now.   The Northwest  Arctic                                                               
Borough is 25 percent of the  Bond Bank's portfolio, he noted, so                                                               
"there's a  typical community  that gains  an advantage  from the                                                               
Bond Bank."   That borough doesn't have a  credit rating, doesn't                                                               
have property  taxes, and  so has  used the  Bond Bank  more than                                                               
other communities.                                                                                                              
9:35:20 AM                                                                                                                    
CHAIR  SEATON  said  he  thought Mr.  Boutin  said  some  smaller                                                               
communities don't have access to the Bond Bank.                                                                                 
9:35:41 AM                                                                                                                    
MR.  BOUTIN  said absolutely.    He  said Ms.  Samuels  mentioned                                                               
Hyder, and he  said he would be skeptical if  Hyder could come to                                                               
the  Bond  Bank  and  access  the  credit  markets.    "Likewise,                                                               
Hydaburg would  be on the  edge."   He said communities  that are                                                               
too small and  don't have predictable revenue  normally would not                                                               
have access to the Bond Bank.   He said Kaktovik did a small deal                                                               
through the Bond Bank, but that was an anomaly.                                                                                 
9:36:59 AM                                                                                                                    
CHAIR SEATON said there were  155 different PERS employers around                                                               
the state  and the legislature  is trying  to figure out  if POBs                                                               
could be useful.   He asked if Mr. Boutin was  saying that the 30                                                               
smallest employers could not use POBs.                                                                                          
9:37:51 AM                                                                                                                    
MR.  BOUTIN said  that would  have  to be  assessed community  by                                                               
community,  but it's  a  safe  bet that  there  is a  significant                                                               
number  of  municipalities  that  could  not  access  the  credit                                                               
markets through the Bond Bank under HB 278.                                                                                     
9:38:28 AM                                                                                                                    
CHAIR SEATON  said he wants  an estimation of the  employers that                                                               
could not participate,  and if there is a  structural change that                                                               
could  fix  that, because  the  attempt  is  to design  this  for                                                               
9:39:18 AM                                                                                                                    
REPRESENTATIVE GATTO asked if Oregon has an AA credit rating.                                                                   
9:39:27 AM                                                                                                                    
MR.  BOUTIN said  he  did not  know.   He  said Alaska's  general                                                               
obligation rating  is AA with  all three credit  rating agencies.                                                               
The moral obligation rating is usually  a full notch below, so he                                                               
expects an A rating for that.                                                                                                   
9:40:15 AM                                                                                                                    
REPRESENTATIVE  GATTO asked  if  the state's  credit rating  will                                                               
change by taking on the debt.                                                                                                   
9:40:30 AM                                                                                                                    
MR. BOUTIN said  he does not know what the  moral obligation debt                                                               
capacity is, but it is far less  than $6 billion.  He said Alaska                                                               
depends upon a  volatile single source of  income, unlike Oregon,                                                               
and that is  a concern of the  credit raters.  He  said he didn't                                                               
think Oregon would  be switching to a  defined contribution plan,                                                               
but Alaska will be on July 1.                                                                                                   
9:42:10 AM                                                                                                                    
REPRESENTATIVE GRUENBERG said he would  like the same answers for                                                               
TRS.   He  asked  if Rural  Education  Attendance [Areas]  (REAA)                                                               
would have the same problems because they have no tax base.                                                                     
9:42:45 AM                                                                                                                    
MR.  BOUTIN said  he doesn't  know what  structure would  allow a                                                               
REAA to issue debt.                                                                                                             
9:43:15 AM                                                                                                                    
CHAIR SEATON  asked if the  school districts have the  ability to                                                               
issue debt.                                                                                                                     
9:43:26 AM                                                                                                                    
MR.  BOUTIN said  many municipalities  issue school  debt now  to                                                               
build schools.                                                                                                                  
9:44:00 AM                                                                                                                    
REPRESENTATIVE GRUENBERG said it  is the municipality that issues                                                               
debt, not the  schools.  He noted that Alaska  differs from other                                                               
states in its dependency on the federal government.                                                                             
9:44:21 AM                                                                                                                    
REPRESENTATIVE GARDNER asked about  the state already having $1.3                                                               
billion in outstanding moral obligation.                                                                                        
9:44:48 AM                                                                                                                    
MR.  BOUTIN  said  that  is  debt for  the  Alaska  Student  Loan                                                               
Corporation,  the Alaska  Municipal  Bond  Bank Authority  ("Bond                                                               
Bank"), the Alaska  Energy Authority, and perhaps  for the Alaska                                                               
Industrial  Development  and  Export   Authority.    State  moral                                                               
obligation  is a  device  used  across the  country  as a  credit                                                               
enhancement.    "It's language  of  art  that  you stick  in  the                                                               
enabling legislation for an authority,  and then you repeat it in                                                               
the bond documents that state that  there will be a reserve fund,                                                               
and if  that reserve fund is  used to pay debt  service, then the                                                               
executive  director  or commissioner  is  pledged  to go  to  the                                                               
legislature and  ask that the  reserve fund be replenished."   He                                                               
said if  a state failed  to meet  that moral obligation,  even to                                                               
the extent  of not replenishing  the reserve fund, then  it would                                                               
not have access to the debt markets.                                                                                            
9:47:28 AM                                                                                                                    
CHAIR SEATON asked about a limit on the moral obligation.                                                                       
9:47:39 AM                                                                                                                    
MR.  BOUTIN  said there  is  a  limit, and  it  is  less than  $6                                                               
billion, but the state hasn't tried to test the limit.                                                                          
9:49:04 AM                                                                                                                    
REPRESENTATIVE  GRUENBERG  said  he  is  interested  in  pursuing                                                               
whether a  constitutional amendment would  be needed for  POBs to                                                               
be used.   He said  general obligation  bonds are easier  to sell                                                               
and carry a lower interest.                                                                                                     
9:49:47 AM                                                                                                                    
MR. BOUTIN said under most circumstances that's correct.                                                                        
9:50:00 AM                                                                                                                    
REPRESENTATIVE  GRUENBERG noted  that  Mr. Boutin  said that  two                                                               
other  entities would  benefit  by having  the  ability to  issue                                                               
general obligation bonds, including the student loan program.                                                                   
9:50:26 AM                                                                                                                    
REPRESENTATIVE  SEATON said  a  constitutional  amendment is  not                                                               
part of the bill.                                                                                                               
9:51:20 AM                                                                                                                    
MR. BOUTIN  declared that market timing  of POBs is key,  and the                                                               
state wouldn't  issue POBs if  it knew interest rates  were about                                                               
to go down.                                                                                                                     
9:53:35 AM                                                                                                                    
REPRESENTATIVE GRUENBERG  asked if timing  is the issue  with the                                                               
issuance of any bond.                                                                                                           
9:53:51 AM                                                                                                                    
MR. BOUTIN answered no, a state  debt is for a particular product                                                               
or a particular need, so "it's  not timing for the market, you're                                                               
accessing the  credit markets as  cost effectively as you  can to                                                               
make those  student loans or to  build that school or  that road,                                                               
and so,  no, it's  only in  this case where  you're trying  to do                                                               
arbitrage that it's a market timing issue."                                                                                     
9:54:31 AM                                                                                                                    
DEVEN MITCHELL,  Executive Director,  Alaska Municipal  Bond Bank                                                               
Authority,  and Debt  Manager for  the State  of Alaska,  said he                                                               
could discuss the  annual report or answer  questions.  Referring                                                               
to the question of why POBs  can't be taxed, he said that without                                                               
a project  the federal tax code  requires that it be  taxed.  The                                                               
state  could  possibly  access  a tax-exempt  market  if  it  had                                                               
another project  that it was  going to  pay cash for  and instead                                                               
used   tax-exempt   bonds   and   used  that   cash   for   "this                                                               
9:56:23 AM                                                                                                                    
CHAIR SEATON  said, "That would  be a  substitute for POBs.   You                                                               
would take  state money that we  were going to put  into whatever                                                               
project...we were going to put cash  in, and we would infuse that                                                               
cash into the system.  But  we wouldn't be issuing bonds for that                                                               
case; that would be an alternative.  Is that correct?"                                                                          
9:56:38 AM                                                                                                                    
MR.  MITCHELL  said  that's  correct.    He  said  the  intercept                                                               
provision is  already in  statute, "and that  when the  Bond Bank                                                               
makes loans  there is a contract  that is entered into  with that                                                               
municipality  that provides  the Bond  Bank -  not to  take money                                                               
from the  municipality, but to take  it from the state  before it                                                               
gets to  the municipality -  and that is the  intercept provision                                                               
that helps garner the ratings  the Bond Bank achieves in addition                                                               
to the moral obligation."                                                                                                       
MR. MITCHELL  said the ability  of municipalities to  issue bonds                                                               
is  already defined.   After  speaking with  attorneys, he  said,                                                               
"some appropriation-backed  bond would be possible,  meaning that                                                               
it  would  be  a  subject-to-appropriation   pledge  of  a  local                                                               
jurisdiction," which is  a fairly weak pledge.  He  noted that in                                                               
this case there  is no building that might be  taken, so the only                                                               
penalty might be the loss of  market access, which would not be a                                                               
big threat  to a  small community.   Mr.  Mitchell said  the Bond                                                               
Bank has  to have sufficient  ability to encourage  the repayment                                                               
of the loan,  and "there has not  been a case of  default in this                                                               
program."   There have been  about 34 communities in  Alaska that                                                               
"have accessed the Bond Bank - and  one authority - and in all of                                                               
those cases, but the authority,  we have the ability to intercept                                                               
state aid,  which is a huge  hammer to that community."   He said                                                               
some small  communities have an  infrastructure and  other assets                                                               
like  taxes and  federal  timber  receipts, "and  so  you have  a                                                               
mechanism  for gathering  that money  for the  repayment of  your                                                               
obligation, where there really just  isn't any ability to provide                                                               
that type  of security in  a large number of  smaller communities                                                               
in the state of Alaska."                                                                                                        
10:00:24 AM                                                                                                                   
CHAIR SEATON asked, "But with  the intercept, you've been able to                                                               
finesse that lack of credit?"                                                                                                   
10:00:43 AM                                                                                                                   
MR.  MITCHELL answered  that in  some incidences  that's correct.                                                               
He  said   those  communities  were   also  pledging   a  general                                                               
obligation of that community.  He  added that there was "a lot of                                                               
hand-wringing" regarding the Kaktovik loan,  because it is a very                                                               
small community  and doesn't have  a lot of  financial resources.                                                               
But  he said  the community  found the  project important  enough                                                               
that  it  was  willing  to  make  a  commitment  with  a  general                                                               
obligation pledge  "where they have  put up their full  faith and                                                               
credit of the community taxing  authority," which he said carries                                                               
more weight  than a local  legislative body saying it  is willing                                                               
to  promise  to  pay  annually.    The  intercept  provision  has                                                               
limitations, for example, without  a school district "it wouldn't                                                               
be sufficient  to cover debt  service."   He added that  with the                                                               
foundation formula there's another set of issues to address.                                                                    
10:02:21 AM                                                                                                                   
CHAIR SEATON  asked if the  five communities that  have dissolved                                                               
have been involved with the Bond Bank.                                                                                          
10:02:49 AM                                                                                                                   
MR. MITCHELL answered no.                                                                                                       
CHAIR SEATON asked him to  provide information on the communities                                                               
with PERS liabilities that may  not have the credit worthiness to                                                               
access the Bond Bank, and how that might be remedied.                                                                           
MR. MITCHELL said it would be  difficult.  He will provide a list                                                               
of communities that "might" or "definitely will" be able to.                                                                    
REPRESENTATIVE GARDNER asked the down  side of borrowing money to                                                               
help fix the unfunded liability.   She called it a "shell game of                                                               
taking  money from  existing capital  projects and  applying that                                                               
against the  unfunded liability  and then  getting bonds  for the                                                               
capital  projects, which  would have  a lower  interest rate  and                                                               
would be tax-exempt."                                                                                                           
10:04:47 AM                                                                                                                   
MR.  MITCHELL said  that  is a  theoretical  possibility, but  it                                                               
would be very  difficult to implement, because  the United States                                                               
Treasury has  an interest in limiting  tax-exempt bond authority.                                                               
He  continued,  "If  there  were maybe  one  large  project  that                                                               
otherwise was  going to  be-or one  large group  of projects-that                                                               
could otherwise have been funded  with general obligation debt or                                                               
some  other mechanism  that the  state had  available...there are                                                               
other credit ramifications."                                                                                                    
MR. MITCHELL  said, as the  debt manager, he has  been discussing                                                               
the state's ability to access  capital markets that would be paid                                                               
from the general fund, but "we've  been operating on a little bit                                                               
of  thin ice."   He  noted that  Alaska's revenue  forecast is  a                                                               
"dire picture in  the mid to long term"  because its expenditures                                                               
are  not  going to  match  revenues.    "We're  going to  have  a                                                               
shortfall," he stated.  The state  has been reluctant to borrow a                                                               
lot of long-term obligations prior to  a fiscal fix, he said.  He                                                               
stated that  it isn't  just the issue  before the  committee, but                                                               
the state as a whole.  "I don't  think that there would be a good                                                               
alternative  is the  bottom line  at this  point." he  said.   He                                                               
agreed that  it is  theoretically possible  but it's  not without                                                               
other costs.                                                                                                                    
10:07:50 AM                                                                                                                   
REPRESENTATIVE GRUENBERG  asked about the state  paying back over                                                               
time and cutting  out the middleman entirely,  "rather than going                                                               
through this whole POB thing."                                                                                                  
10:08:29 AM                                                                                                                   
MR. MITCHELL said that's one of the options.                                                                                    
10:08:44 AM                                                                                                                   
CHAIR SEATON  clarified that  the debt is  structured to  be paid                                                               
off by  the employers that have  the debt.  The  mechanism to pay                                                               
that  debt  is  from  individual   contributions  based  on  each                                                               
employee's wage  base.  Those  are "the contributions that  go up                                                               
to the 25  and 38 percent-depending on the figures.   The problem                                                               
is that when a third of the  salary base is charged for PERS, and                                                               
in  TRS, almost  50  percent  of the  salary  wage  base must  be                                                               
charged, it's  a large burden on  the employers."  The  POB would                                                               
be an attempt to  pay off that debt up front, "so  that we do not                                                               
collect  that  from the  individual  employers  or the  teachers'                                                               
salary, and so that we lower  that amount and then the funds that                                                               
are  available  to those  communities,  those  employers, or  the                                                               
school district could  be used for other things."   He said there                                                               
could  be other  mechanisms for  paying off  that debt  besides a                                                               
percentage of employee wage base, and POBs are one mechanism.                                                                   
10:11:15 AM                                                                                                                   
The committee took an at-ease from 10:11 a.m. to 10:12 a.m.                                                                     
10:12:29 AM                                                                                                                   
JEFFREY SINZ,  Chief Fiscal  Officer, Municipality  of Anchorage,                                                               
asked if  the committee had  copies of his  previous presentation                                                               
entitled,    "Pension    Obligation   Bonds:    One    Employer's                                                               
Perspective."   He said pension  obligation debt is  an important                                                               
tool, and there are very few  tools available.  "We have not made                                                               
any  decision about  the  appropriateness of  their  use at  this                                                               
point, but we  strongly advocate for the  preservation of pension                                                               
obligation debt as  one tool that may become  appropriate at some                                                               
point in the future."                                                                                                           
MR.  SINZ  noted  three  basic   issues  to  be  overcome  before                                                               
considering  using POBs:  access to  the market  place for  small                                                               
communities;  access  to  financial  expertise  during  decision-                                                               
making, and; uncertainty and unanswered  questions.  He put forth                                                               
the following questions:  What does  the system do if it receives                                                               
a large  inflow of cash from  an employer?  Who  issues the debt?                                                               
How  is it  invested?   What  happens if  investments are  highly                                                               
successful or not?  How are rates adjusted?                                                                                     
10:17:01 AM                                                                                                                   
MR.  SINZ  said  the  challenge is  the  large  unfunded  accrued                                                               
actuarial liability, and  one answer is SB 141,  "which is really                                                               
a long  term change," and the  effects would be seen  sometime in                                                               
the  future.   He said  rapidly increasing  employer contribution                                                               
rates  are  limited by  the  five  percent statutory  limitation.                                                               
"The opportunity that  seems to exist here is  the opportunity to                                                               
substitute pension  obligation debt for  all or a portion  of the                                                               
unfunded  liability."   He  said he  used  analysis from  Merrill                                                               
Lynch  for a  statewide  perspective and  from Seattle  Northwest                                                               
Securities  for specific  information for  Anchorage.   Statewide                                                               
PERS unfunded  actuarial liability,  as of  June 2004,  was $3.41                                                               
billion,  and by  substituting pension  obligation debt  for that                                                               
liability,  "it is  possible to  generate a  significant savings.                                                               
The assumption  Merrill Lynch used  was that the  entire unfunded                                                               
liability  would be  substituted with  POBs."   The cost  of debt                                                               
would be 5.8  percent, "and PERS would earn  the actuarially 8.25                                                               
percent rate on those monies, and  by doing this the future value                                                               
of payments  made by  all of the  employers participating  in the                                                               
system  would  be  reduced  by  $2.5  billion,"  which  would  be                                                               
realized over a 25-year period of  the debt.  He said the present                                                               
value of that savings is $1.2 billion.                                                                                          
10:19:55 AM                                                                                                                   
MR.  SINZ  said,  "The   effective  reduction  for  participating                                                               
employers is 3.85  percent in the effective  contribution rate we                                                               
would be  paying."  He  noted that  both normal and  past service                                                               
cost rates  are now  being paid  to the  PERS in  the form  of an                                                               
employer  contribution.     "With   a  pension   obligation  debt                                                               
alternative, we  would be  paying the normal  cost rate  to PERS,                                                               
but we  would be paying a  debt service payment rather  than that                                                               
past  service contribution."    Looking only  at  Anchorage as  a                                                               
specific employer,  its share  of the  current liability  is $462                                                               
million.  Using  data from Seattle Northwest  Securities, "we can                                                               
come up with a different set  of savings assumptions.  The future                                                               
value of  savings they calculate-the potential  future savings-is                                                               
$212.9  million  for  Anchorage  with a  present  value  of  $113                                                               
million."   He said  that analysis  assumed a cost  of debt  of 6                                                               
10:22:19 AM                                                                                                                   
CHAIR  SEATON said  Seattle Northwest  Securities spoke  of an  8                                                               
percent reduction.   He asked about  going from 28 percent  to 25                                                               
10:23:08 AM                                                                                                                   
MR.  SINZ said  over a  25-year period  there will  be an  annual                                                               
savings of about $6 million a  year, which grows over the life of                                                               
the debt because of growth in the assumed payroll.                                                                              
10:23:50 AM                                                                                                                   
CHAIR  SEATON asked  if he  looked at  "this being  an amortized,                                                               
hard number...instead of increasing at  the 5 percent per year in                                                               
the year that this is issued,  you would then immediately jump to                                                               
the 25 percent...individual  rate for those 25  years, instead of                                                               
having the soft increase of 5 percent."                                                                                         
10:24:19 AM                                                                                                                   
MR. SINZ said  the analysis used the assumption  of selling bonds                                                               
soon - within the next year.                                                                                                    
10:24:37 AM                                                                                                                   
CHAIR SEATON  said the state  has been providing money  to offset                                                               
the increases  in the  system.  If  the municipality  would issue                                                               
bonds for  this debt, "my  understanding from the  testimony is,"                                                               
that  the  contribution rate  would  immediately  jump from  14.7                                                               
percent to  25 percent.   "You would  immediately jump to  a hard                                                               
number  basically equal  to 25  percent of  employee salary,  and                                                               
that would stay fixed for the  entire length of the debt since it                                                               
can't  be recalled."    Chair Seaton  asked if  that  has been  a                                                               
consideration that Mr. Sinz looked at in his analysis.                                                                          
10:26:11 AM                                                                                                                   
MR. SINZ said it  was not.  He said his  analysis does not factor                                                               
in debt-design structural issues.   He said there are many things                                                               
that would need to be considered before a decision was made.                                                                    
10:26:37 AM                                                                                                                   
CHAIR  SEATON stated  his concern  that municipalities  would not                                                               
like an increase  in this amount, and POBs will  cause a dramatic                                                               
increase in  the contributions of  employers for the  short term.                                                               
He asked Mr. Sinz to look into that.                                                                                            
10:27:40 AM                                                                                                                   
REPRESENTATIVE GARDNER said  the shift from the  collared rate of                                                               
increase  is   not  really  before   the  committee;  it   is  an                                                               
authorization to explore  the POB option, and  then each employer                                                               
can make the decision to participate.                                                                                           
10:28:07 AM                                                                                                                   
CHAIR  SEATON   said  "the  biggest   cry  we  have   heard  from                                                               
municipalities is the increasing  rate."  Authorizing a structure                                                               
that  will dramatically  increase these  contribution rates  is a                                                               
critical factor to consider, he point out.                                                                                      
10:29:40 AM                                                                                                                   
REPRESENTATIVE  GARDNER said  the  bill will  authorize the  tool                                                               
"should they choose to use it."                                                                                                 
10:29:53 AM                                                                                                                   
MR.  SINZ added  that  such  an increase  is  not an  unavoidable                                                               
consequence of POBs; there are ways  to mitigate that effect.  He                                                               
said HB  278 in its current  form is not a  perfect solution, nor                                                               
is it  a decision to issue  POBs in itself,  but it is a  step in                                                               
the right direction.  He stated his support of the bill.                                                                        
10:31:25 AM                                                                                                                   
CHAIR SEATON announced that HB 278 was heard and held.                                                                          

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