Legislature(2005 - 2006)CAPITOL 106

01/19/2006 08:00 AM STATE AFFAIRS

Download Mp3. <- Right click and save file as

* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Scheduled But Not Heard
Bills Previously Heard/Scheduled
Heard & Held
Heard & Held
HB 278-RETIREMENT SYSTEM BONDS                                                                                                
9:25:43 AM                                                                                                                    
CHAIR SEATON announced that the  next order of business was HOUSE                                                               
BILL NO. 278, "An Act relating  to the Alaska Municipal Bond Bank                                                               
Authority; permitting  the Alaska  Municipal Bond  Bank Authority                                                               
or a  subsidiary of the  authority to assist state  and municipal                                                               
governmental  employers by  issuing  bonds  and other  commercial                                                               
paper to  enable the  governmental employers to  prepay all  or a                                                               
portion  of the  governmental employers'  shares of  the unfunded                                                               
accrued   actuarial  liabilities   of   retirement  systems   and                                                               
authorizing governmental employers to  contract with and to issue                                                               
bonds,  notes,  or  commercial  paper to  the  authority  or  its                                                               
subsidiary  corporation for  that purpose;  and providing  for an                                                               
effective date."                                                                                                                
9:26:10 AM                                                                                                                    
CHAIR SEATON  noted that he had  listened to tapes that  had been                                                               
presented  to the  Alaska Retirement  Management (ARM)  Board and                                                               
would share highlights  from them.  He stated  that the workforce                                                               
influences  the  investment  strategy.    For  example,  a  young                                                               
workforce  would  have  an   aggressive  investment  strategy,  a                                                               
workforce  that is  "going along  with the  system" would  have a                                                               
more  intermediate  investment strategy,  and  a  system that  is                                                               
ending  because of  an older  workforce getting  ready to  retire                                                               
would have a more conservative  investment strategy.  He said the                                                               
committee  has been  talking about  a  25-year amortization,  but                                                               
many of the payments need to happen  in the next 20 years for all                                                               
the retirees  for which the  state did not collect  enough money.                                                               
He explained  that consideration needs  to be made  regarding the                                                               
amount of  money that needs  to be pulled  out of a  pension bond                                                               
for the schedule  of payments, because there can  be no long-term                                                               
strategy if payments  are needed right away for  the past service                                                               
cost.  He said it is a  balancing act.  He suggested one possible                                                               
solution would  be to make a  balloon payment.  He  added, "And I                                                               
think  that that  is  what  we would  be  looking at,  scheduling                                                               
something of  a balloon payment on  a mortgage, if we  were going                                                               
to have  lower payments  at the beginning.   Currently,  he noted                                                               
the contribution can  go up no more  than 5 percent  a  year.  He                                                               
said,  "If   we  issued  amortized   pension  bonds,   you  would                                                               
immediately go  to the higher rate;  it's going to be  lower than                                                               
the overall  rate under  the current system  by about  3 percent,                                                               
but you immediately  jump to it."  He said  balloon payments have                                                               
their own problems.                                                                                                             
9:29:15 AM                                                                                                                    
REPRESENTATIVE GARDNER said  she would like to  hear from experts                                                               
regarding the immediate jump that Chair Seaton just mentioned.                                                                  
9:30:07 AM                                                                                                                    
CHAIR  SEATON  said there  is  also  a  possibility of  making  a                                                               
balloon payment  at the  end.  He  said Seattle  Northwest talked                                                               
about   variable  versus   fixed  rates.     He   concurred  with                                                               
Representative Gardner regarding getting more information.                                                                      
9:31:03 AM                                                                                                                    
JULI  LUCKY, Staff  to Representative  Mike Hawker,  Alaska State                                                               
Legislature, on behalf of  Representative Hawker, sponsor, agreed                                                               
that it would be a good idea to hear from experts.  She said:                                                                   
     What I have  been discussing with them is  that you can                                                                    
     pretty much structure it how  you want to structure it,                                                                    
     but that would be something  ... down the line that the                                                                    
     person  that's entering  into the  agreement would  ...                                                                    
     [discuss]  with their  financial  advisor.   Basically,                                                                    
     you'll ... sell the bonds and  get a lump sum of money,                                                                    
     and how that is repaid  would be a structure that would                                                                    
     be able to be worked out in the financial agreements.                                                                      
9:32:02 AM                                                                                                                    
CHAIR SEATON  offered to loan  the previously  mentioned cassette                                                               
tapes  to any  legislators or  staff who  may want  to listen  to                                                               
9:32:43 AM                                                                                                                    
REPRESENTATIVE  GARDNER  asked  Ms.  Lucky  if  an  employer  who                                                               
switched to a  POB would automatically be converting  a soft debt                                                               
to a hard one.                                                                                                                  
9:32:58 AM                                                                                                                    
MS. LUCKY stated  her understanding that that  is not necessarily                                                               
the case.  She said with a  lump sum liability, the bond is being                                                               
repaid rather  than the unfunded liability.   She said it  is her                                                               
hope that  a more official answer  to that question will  be made                                                               
9:33:58 AM                                                                                                                    
REPRESENTATIVE GARDNER responded that  that would assume that the                                                               
bond  covers the  entire amount  of the  liability, which  is not                                                               
necessarily the case.                                                                                                           
9:34:22 AM                                                                                                                    
MS. LUCKY  said discussion  is taking place  on the  specifics of                                                               
what  a  particular  plan  might  look like,  but  there  is  not                                                               
necessarily a plan.                                                                                                             
9:35:06 AM                                                                                                                    
CHAIR  SEATON reiterated  his comments  about the  information on                                                               
the tapes for  Representative Hawker who had just  arrived in the                                                               
committee room.                                                                                                                 
9:35:18 AM                                                                                                                    
REPRESENTATIVE MIKE HAWKER,  Alaska State Legislature, testifying                                                               
as sponsor of HB 278, explained as follows:                                                                                     
     The  transactions contemplated  are  a structured  debt                                                                    
     transaction.   A  public entity  borrows  money on  the                                                                    
     international  capital  markets.   The  terms  for  the                                                                    
     repayment of that a money  can be structured in ... [a]                                                                    
     myriad of  choices for how  to structure  that payment.                                                                    
     In fact, frankly,  some of the structures  would not be                                                                    
     advisable in  this circumstance.   ... But  a structure                                                                    
     that allows  the repayment  curve not to  - ...  in all                                                                    
     cases  - be  less  than our  current  5 percent  annual                                                                    
     incrementing   normal  pension   contribution  can   be                                                                    
     structured.   ...  You could  structure  these so  that                                                                    
     they pay off  in their entirety in  one balloon payment                                                                    
     25 years down  the way.  That, of course,  would be ...                                                                    
     a  very inappropriate  decision  for  someone to  make.                                                                    
     But  the  point  is  that  the  markets  are  extremely                                                                    
     adaptable,  extremely  flexible,   very  creative,  ...                                                                    
     limited only  by the creativity  of both  bond council,                                                                    
     the  borrowing  organization,  the public  entity  that                                                                    
     might  be  interested  in   pursuing  this,  and  their                                                                    
     financial advisors.                                                                                                        
9:37:13 AM                                                                                                                    
CHAIR  SEATON said  the other  issue highlighted  by the  tape is                                                               
that  when less  is paid  up front,  not as  much is  saved.   He                                                               
clarified  that  the  previously  mentioned 5  percent  [cap  for                                                               
contributions] is  not the same  as interest  rates.  He  said an                                                               
issue  discussed by  the State  Bond Council  was in  relation to                                                               
Article  9,   Section  11,  which   read  as   follows  [original                                                               
punctuation provided]:                                                                                                          
     The restrictions  on contracting  debt do not  apply to                                                                    
     debt incurred through the issuance  of revenue bonds by                                                                    
     a public enterprise or public  corporation of the State                                                                    
     or a  political subdivision, when the  only security is                                                                    
     the  revenues of  the  enterprise  or corporation.  The                                                                    
     restrictions do  not apply to  indebtedness to  be paid                                                                    
     from  special assessments  on  the benefited  property,                                                                    
     nor  do they  apply  to refunding  indebtedness of  the                                                                    
     State or its political subdivisions.                                                                                       
CHAIR   SEATON  said   there   is   question  regarding   whether                                                               
municipalities would  be allowed to  take debt without a  vote of                                                               
the people.                                                                                                                     
9:39:51 AM                                                                                                                    
REPRESENTATIVE  HAWKER  said  the state,  municipal,  and  school                                                               
district employers  have, in  fact, already  entered into  a debt                                                               
contract  via the  employees' pension  plans, which  they have  a                                                               
constitutional  obligation  to  provide.     He  said  the  inner                                                               
structure by  which municipalities  manage themselves  and choose                                                               
what goes before their public  is certainly adequate.  He advised                                                               
against  opening  up  the  issue  of  the  state  usurping  local                                                               
decision-making  authority.    Representative Hawker  stated  his                                                               
belief that  the existing statutory  structure at both  the state                                                               
and  local   levels  is  adequate   to  provide   an  appropriate                                                               
protection for the public good.                                                                                                 
9:43:00 AM                                                                                                                    
CHAIR SEATON  suggested that Representative Hawker  might like to                                                               
listen  to the  tapes, as  well.   He reiterated  the subject  of                                                               
differing  requirements  for  investment strategies  for  various                                                               
types  of pension  plans.   He stated  that the  committee is  in                                                               
somewhat  of  a  conundrum,  because the  bill  proposes  issuing                                                               
pension  bonds,  but  the  investment   strategy  that  would  be                                                               
employed either  "makes it work or  makes it not work."   He said                                                               
it  is necessary  to ascertain  when the  structured payments  on                                                               
past service costs accrue.  He continued:                                                                                       
     It's not  like we  have the principal  and we  can just                                                                    
     leave it there and invest it,  and have it grow over 25                                                                    
     years.   Because we are  going to be making  payments -                                                                    
     in 8  or 10 years  - of that  money; we've got  to take                                                                    
     that principle  out and make ...  scheduled payments on                                                                    
9:46:14 AM                                                                                                                    
REPRESENTATIVE  HAWKER  emphasized  that   the  bill  before  the                                                               
committee authorizes nothing; "it  grants empty authority for the                                                               
investment  banking community  to  work with  the state's  public                                                               
employers  to find  a way  to ...  ultimately save  our taxpayers                                                               
money through a potential transaction."  He continued:                                                                          
     Essentially,  the decision  was  made last  legislative                                                                    
     session  to terminate  the previous  plan, which  means                                                                    
     ultimately  there  will be  a  final  payout, the  last                                                                    
     employee will die, and the  plan will be liquidated and                                                                    
     it  will  be no  more.    The  sensitivity of  ...  the                                                                    
     investment decision  will be  driven very much  by when                                                                    
     ... this  new money being  put into the plan  [will] be                                                                    
     needed.    I  would  offer   that  if  we  were  in  an                                                                    
     extraordinarily underfunded position  and we needed the                                                                    
     money  immediately   in  order  to  meet   payments  to                                                                    
     beneficiaries - the money that  we would be potentially                                                                    
     securing  through  [an]  issuance  of  [an]  obligation                                                                    
     bond,  we very  definitely  would have  to invest  that                                                                    
     money short,  and ... truly  the transaction  would not                                                                    
     be viable,  because we wouldn't  be able to  invest for                                                                    
     the  arbitrage   that  is  what  this   is  all  about.                                                                    
     However, the  State of Alaska's  plans - both  PERS and                                                                    
     TRS - on aggregate  are truly exceptionally well funded                                                                    
     today.  ... I can't tell  you the numbers right off the                                                                    
     top  of my  head,  but  despite the  fact  that we  are                                                                    
     arguably, actuarially $6  billion underfunded today, we                                                                    
     still  have  a  tremendous  amount of  money  in  those                                                                    
     plans.    That money  is  there  invested, will  remain                                                                    
     invested to  meet obligations that  are going to  go --                                                                    
     we've  got an  employee  that started  today that's  18                                                                    
     years   old;  they   will  vest   in  that   plan  ....                                                                    
     Potentially,   if  they   become   a  permanent   state                                                                    
     employee, that  plan will be  in existence for  the ...                                                                    
     actual  lifetime  of employees  today  that  may be  as                                                                    
     young as 16 or 18 years old.                                                                                               
     So, again, we have the  luxury before us today of time:                                                                    
     time to manage these  investments, time to achieve what                                                                    
     is again we've demonstrated over  and over again is the                                                                    
     ability of  the State of Alaska's  investment managers,                                                                    
     whether they be Department  of Revenue, whether they be                                                                    
     the pension  managers, or whether  it be  the permanent                                                                    
     fund,  to  obtain  a  10-year return  in  excess  of  8                                                                    
     And again,  ... we're looking a  ... potentially bonded                                                                    
     indebtedness  transaction  that  would be  designed  to                                                                    
     work  over a  20-25  years period  that  is still  well                                                                    
     within  the  expected   anticipated  existence  of  our                                                                    
     current pension  plan structure.   So, again,  we could                                                                    
     create ... hypothetical  transactions or circumstances,                                                                    
     but facts  are that to make  a transaction contemplated                                                                    
     under this  bill work, you  will have the best  and the                                                                    
     brightest  financial counselors  from Wall  Street, the                                                                    
     best  and  the  brightest  bond  council,  and,  quite,                                                                    
     frankly, as  we certainly  like to think  of ourselves,                                                                    
     we have  a very competent public  administration of all                                                                    
     municipalities   and   the   state   making   judicious                                                                    
... I  have faith in  the markets,  the legal community,  and the                                                               
elected officials statewide.                                                                                                    
9:50:14 AM                                                                                                                    
REPRESENTATIVE    RAMRAS    expressed   his    appreciation    of                                                               
Representative Hawker's abilities and efforts.   He said, "I hope                                                               
that as we  go forward with this you don't  see these people from                                                               
the state of Washington trotting  around here, flipping out their                                                               
business  cards from  Merrill, et  al, and  that we  look further                                                               
south  or further  east for  counsel in  how to  structure a  POB                                                               
program should we go forward with that."                                                                                        
9:50:57 AM                                                                                                                    
REPRESENTATIVE  HAWKER,  regarding  the investment  bankers  that                                                               
have  been providing  counsel through  this process,  stated that                                                               
Merrill Lynch is a global,  credible, and major Wall Street firm.                                                               
He said the credibility that  Seattle Northwest Securities brings                                                               
is that  it has been very  active and successful in  this type of                                                               
transaction, having  represented the  State of  Oregon.   He said                                                               
Representative  Ramras  brings   up  a  good  point.     He  said                                                               
investment  banking is  a  competitive market  and  the best  and                                                               
brightest will be vying for the work.                                                                                           
9:52:25 AM                                                                                                                    
CHAIR SEATON said the committee will  take up the bill again when                                                               
it gets the information back that it has requested.                                                                             
9:53:52 AM                                                                                                                    
REPRESENTATIVE HAWKER said he wants  to regroup with Chair Seaton                                                               
when all  the information is  gathered to ensure all  issues have                                                               
been covered.   He said the bill was originally  crafted to focus                                                               
on  the larger,  more sophisticated  municipalities; however,  if                                                               
the  committee decides  it would  be appropriate  to expand  that                                                               
authority, he  would be  amenable to the  idea.   Regarding Chair                                                               
Seaton's previously  stated concern about  cash flow, he  said he                                                               
is working on getting professional comments on that issue.                                                                      
9:55:50 AM                                                                                                                    
CHAIR SEATON  said if it's  structured so  that less money  is up                                                               
front, he  wants to  know if  there will  be the  same percentage                                                               
drop,  regarding the  2.6 percent  of wage-base  contributions by                                                               
the  employers.   He  mentioned a  presentation  from Jeff  Sinz,                                                               
which   showed  two   scenarios  with   a  decrease   in  payroll                                                               
contribution of 2.6 percent or 3.8  percent.  He said he would be                                                               
interested  in finding  out  whether that  was  structured on  an                                                               
amortized payment  that frontloaded up  to 26 percent  of payroll                                                               
as soon  as the bonds  are issued, or  whether that would  be the                                                               
collared payment.                                                                                                               
9:57:15 AM                                                                                                                    
REPRESENTATIVE   HAWKER   answered,    "They   structured   their                                                               
amortization for a  hypothetical issue ..., and yes,  they did in                                                               
fact incorporate into that a  ramping up paralleling the deferred                                                               
structure of  the current state  system that did  not immediately                                                               
jump  into a  fixed  amortization period."    He offered  further                                                               
[HB 278 was heard and held.]                                                                                                    

Document Name Date/Time Subjects