Legislature(1993 - 1994)
03/24/1994 09:10 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE BILL NO. 312
An Act relating to school construction grants; and
providing for an effective date.
Upon reconvening the meeting, Co-chair Frank noted the
teleconference availability of bond bank staff and bond
counsel to speak to SB 312 and directed that it be brought
before committee.
The Co-chair stressed need to understand the impact of
amendments offered by Senator Rieger, in terms of municipal
issuance of debt.
NORM LEVESQUE, Municipal Bond Band, testified via
teleconference from Anchorage. He pointed out that language
added by committee is difficult to comprehend. It has been
interpreted by those working on the bill in many different
ways. The language addresses premiums but not discounts.
He referenced a recent MatSu Borough sale and explained
that, as a net effect of the sale, the borough will end up
with a discount of $17.0.
Mr. Levesque said that he failed to comprehend the rationale
behind the amendment. Premium and discount application is a
marketing concept. What the state should be most concerned
by is the net interest cost for the issue. Mr. Levesque
advised that, this morning, the bond bank had a sale of $3.6
million in bonds. The net interest cost was 5.3212. That
is an excellent rate for the ten-year term.
ERIC WOHLFORTH, Bond Counsel, Alaska Municipal Bond Bank,
next spoke via teleconference. He attested to the fact that
the proposed amendment addresses a problem "which doesn't,
in fact, exist." When municipal bonds are sold, they are
sold with both an original issue premium and an original
issue discount. That means that the maturities are offered
for more or less than par. There are categories of bond
purchasers who desire the high interest rate bonds that a
bid for more than par produces, and there are categories of
investors who prefer discount bonds. The bottom line is:
Has the transaction, in its totality, produced the lowest
net interest cost to the municipality? When bonds are sold
at public or private sale, the drive is to produce the
lowest net interest cost. Configuring a bond issue with
premium and discount bonds is designed to attract a broad
category of investors that prefer those kinds of bond
issues. The fact that they are attracted broadens the
market and tends to reduce the true interest cost to the
lowest amount. With this legislation pending, the MatSu
issue, $16,145,000 for school purposes, may have to bear an
official statement for investors indicating that the
legislation has been approved by committee. That particular
issue is an example of why this is not the correct approach
to limiting interest costs and reducing the amount taxpayers
or the state must pay. The issue contains both premium and
discount bonds. The net cost of the issue is basically a
discount when the premiums are added and subtracted from the
discount. The net interest cost was favorable. If the
proposed legislation penalizes an issue for having premium
bonds, it would, in like fashion, have to a have a formula
that benefits the issue for having discount bonds. The
bottom line is that the legislation is not necessary. It
does not address a real issue in public finance in Alaska.
Senator Sharp referenced a sale with the majority of the
bonds due in four years at over 9.5% tax-exempt interest
with a $15 premium. He then asked who would receive moneys
over and above the face value. Mr. Wohlforth advised that
the municipality receives the funds. With respect to that
particular issue, subsequent bonds are being offered at a
discount so that the premium produced by the earlier issue
is reduced by the discount at which later maturities are
sold.
Senator Sharp noted legislation limiting bonding authority
and suggested that issues such as that described above
generate excess cash and obligate the state to extra
interest payments. Mr. Wohlforth reiterated that later
portions of the issue are sold at a discount so that the
premium for early maturities is reduced by the discount for
later maturities. Senator Sharp inquired concerning what
would prevent a large premium on all the bonds and
subsequent higher reimbursement by the state. Mr. Wohlforth
acknowledged that he could not say that the foregoing would
be a mathematical impossibility.
Senator Sharp than asked how often the blend of premiums and
discounts had been utilized. Mr. Wohlforth attested to
numerous instances in which issues have had both original
issue premium and discount bonds. He said he knew of no
cases of the above-suggested abuse whereby an entire issue
was sold at a premium. Senator Sharp reiterated that the
exposure exists and sought assistance in development of
corrective language.
Discussion followed between Mr. Wohlforth and Senator Rieger
concerning the particulars of the recent bond issue.
Senator Rieger concurred in comments by Senator Sharp that
language should be developed to avoid possible abuse. He
expressed additional concern over ability to shift offsets
for premiums and discounts over a shorter period than the
legislation generally requires. Senator Rieger acknowledged
that present amending language does not "get accurately at
the potential abuse the committee would like to get at or at
least preclude." Mr. Levesque concurred. Senator Kerttula
voiced support for plugging what appears to be a potential
loophole.
Co-chair Pearce called for additional questions. None were
forthcoming. She then advised that she would meet with
Senator Rieger prior to bringing the bill back before
committee. SB 312 was thus HELD in committee for subsequent
discussion.
ADJOURNMENT
The meeting was adjourned at approximately 10:25 a.m.
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