Legislature(2003 - 2004)

05/07/2003 09:01 AM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                                                                                                                                
     HOUSE BILL NO. 256                                                                                                         
     "An Act relating to a dividend payment to the state made by                                                                
     the Alaska Housing Finance Corporation each fiscal year; and                                                               
     providing for an effective date."                                                                                          
                                                                                                                                
                                                                                                                                
This was  the first  hearing for  this bill  in the Senate  Finance                                                             
Committee.                                                                                                                      
                                                                                                                                
Co-Chair Wilken  stated that the  House Finance Committee  sponsors                                                             
this legislation, which "amends and codifies the existing agreement                                                             
between  the Alaska  Housing  Finance  Corporation  (AHFC) and  the                                                             
Legislature regarding  an annual AHFC dividend." He  continued that                                                             
this legislation  would provide for  a $103,000,000 dividend  while                                                             
maintaining AHFC's strong bond rating.                                                                                          
                                                                                                                                
Amendment #1: This  amendment changes the fiscal year  date from FY                                                             
2007 to FY 2008 in Sec. 2, subsection  (5)(B) on page 4, line 13 in                                                             
HB 256, Version 23-LS0838\I.  This language would read  as follows.                                                             
                                                                                                                                
          (B)  minus the amount  of money  from the Alaska  Housing                                                             
     Finance  Corporation  used during  fiscal year  2008 for  bond                                                             
     repayments and  other costs related to the bonds  issued under                                                             
                                                                                                                                
Co-Chair Wilken  moved to adopt Amendment  #1. He stated  that this                                                             
amendment addresses  a technical change in the bill  and is offered                                                             
at the request of AHFC.                                                                                                         
                                                                                                                                
There being no objection, Amendment #1 was ADOPTED.                                                                             
                                                                                                                                
DAN  FAUSKE CEO  and  Executive Director,  Alaska  Housing  Finance                                                             
Corporation, Department of Revenue spoke in support of the bill. He                                                             
reviewed that  the AHFC dividend  transfer plan was established  in                                                             
1995  as a  means of  transferring some  of  the Corporation's  net                                                             
profits  to the  State to  support,  in particular,  State  capital                                                             
projects. He stated that a major concern addressed in those initial                                                             
discussions was that  the specified transfer amount  not affect the                                                             
Corporation's credit ratings. For  numerous years, he declared, the                                                             
total annual  transfer  amount has  been $103 million,  based  on a                                                             
variety of factors including net income levels.                                                                                 
                                                                                                                                
Mr.  Fauske  expressed that,  in  recent  years, the  reduction  in                                                             
lending interest  rates has resulted  in a significant  increase in                                                             
the  Corporation's  lending  activities   as  well  as  "investment                                                             
earnings on  short-term monies."  However, he informed  that, while                                                             
"the business  profile is excellent,  the Corporation's  net income                                                             
has fallen."                                                                                                                    
                                                                                                                                
Mr. Fauske  explained that in 2002,  in anticipation of  continuing                                                             
lower  net  income levels,  AHFC  requested  that  the  Legislature                                                             
readdress the  amount of the  AHFC dividend  paid to the  State. He                                                             
informed that the Corporation's FY 03 net income is projected to be                                                             
approximately $75.6 million; and therefore, he asserted that a plan                                                             
must  be  developed  to  enable  the  Corporation  to  continue  to                                                             
contribute  the  $103 million  amount  "that  the State  has  grown                                                             
accustomed to." Additionally, he  stressed that the plan must allow                                                             
the Corporation to be sustained at a level that would not adversely                                                             
affect its  ability to conduct its  business. He stressed  that the                                                             
level  must  also be  acceptable  to the  financial  community  and                                                             
investors.                                                                                                                      
                                                                                                                                
Mr. Fauske noted that this legislation would address these concerns                                                             
by proposing that "a percentage of net program" be implemented that                                                             
would allow  a gradual reduction  in the  amount of dividend  being                                                             
paid to the State. The proposed plan, he explained, would allow the                                                             
total dividend that  would be paid to the State for  the next three                                                             
fiscal years to remain at the current  $103 million level and that,                                                             
by FY 09, the amount  of the dividend would be calculated  at a 75-                                                             
percent of net income level. He  reminded that the final payment on                                                             
a $50 million debt service that AHFC assumed on behalf of the State                                                             
would be paid off in December of 2006.                                                                                          
                                                                                                                                
Mr.  Fauske  communicated  that   this  proposal  would  allow  the                                                             
Corporation to increase its equity  position; would allow dividends                                                             
to be paid  to the State, which  is its parental entity;  and would                                                             
provide the Corporation with sufficient  monies to reinvest in AHFC                                                             
programs in order to continue its  viability and continue to retain                                                             
its healthy  and predictable  profile with  financial entities.  He                                                             
opined that in consideration  of the Corporation's  current status,                                                             
"this is  a good bill."  He assured that,  as the financial  market                                                             
progresses, the issue could be revisited.                                                                                       
                                                                                                                                
Senator Taylor asked whether a separate proposal for a five-percent                                                             
of market value annual dividend program would provide the stability                                                             
and  continuity that  AHFC  would  require. Furthermore,  he  asked                                                             
whether a program of this type  would be more acceptable to the New                                                             
York City Wall Street financial market than this legislation.                                                                   
                                                                                                                                
JOE DUBLER,  Chief Financial Officer  and Finance Director,  Alaska                                                             
Housing Finance Corporation, Department  of Revenue stated that the                                                             
amount of the FY 04 transfer, based  on this bill's language, would                                                             
amount to  5.8 percent of the Corporation's  total liquidity  as of                                                             
June 30, 2002. He stated that this bill would allow the Corporation                                                             
to implement  a payout policy based  on net income as opposed  to a                                                             
payout based on net  assets. He noted that this predictable  payout                                                             
would be acceptable to Wall Street  investors and would, therefore,                                                             
enable AHFC to continue to fulfill  its mission of providing access                                                             
to housing for Alaskans. He opined that paying a dividend "based on                                                             
percentage of net income is the appropriate approach" for AHFC.                                                                 
                                                                                                                                
Senator Taylor acknowledged  that a dividend based  on a percent of                                                             
net income would be more appropriate program as, he calculated that                                                             
a percent of asset formula "would  eventually, significantly erode"                                                             
the Corporation's asset base.                                                                                                   
                                                                                                                                
                                                                                                                                
SFC 03 # 79, Side B 09:49 AM                                                                                                    
                                                                                                                                
                                                                                                                                
Senator Taylor furthered  that a dividend program that  might erode                                                             
the  Corporation's  asset base  would  negate  the ability  of  the                                                             
Corporation to lend money, which  is the basis of the Corporation's                                                             
mission.                                                                                                                        
                                                                                                                                
Mr. Fauske agreed.                                                                                                              
                                                                                                                                
Senator  Hoffman  stated  that  the  proposal  specifies  that  the                                                             
dividend to be paid in fiscal years  2007 through 2009 would be 95,                                                             
85, and 75 percent of net income, respectfully, based on the "prior                                                             
year's  income minus debt  service."  He asked for  a recap  of the                                                             
formula specified for FY 04 through FY 06.                                                                                      
                                                                                                                                
Mr. Dubler clarified that the annual dividend for fiscal years 2004                                                             
through 2006 would be $103 million  rather than a percentage of net                                                             
income.                                                                                                                         
                                                                                                                                
Senator Hoffman asked how $103 million would equate to a percentage                                                             
of net income basis.                                                                                                            
                                                                                                                                
Mr. Dubler explained  that the annual dividend determination  would                                                             
be calculated  as a percent  of the net  income of the base  fiscal                                                             
year, which is the  fiscal year ending two years before  the end of                                                             
the current fiscal year. In response to Senator Hoffman's question,                                                             
he calculated that the $103 million  dividend in FY 04 would equate                                                             
to 147 percent of the FY 02 net income; the FY 05 dividend would be                                                             
150  percent of  the projected  FY  03 net  income, and  the FY  06                                                             
dividend would  equate to  147 percent of  the projected FY  04 net                                                             
income.                                                                                                                         
                                                                                                                                
Senator Hoffman asked  how these dividend levels, which  are higher                                                             
than 100 percent of net income, would affect the Corporation's bond                                                             
ratings with  consideration given that,  as of FY 07;  the dividend                                                             
would be determined at a lower percentage of net income rate.                                                                   
                                                                                                                                
Mr. Fauske qualified that the Corporation  has been paying out more                                                             
than it has  been earning for several  years. He asserted  that the                                                             
dividend program specified in this legislation recognizes that AHFC                                                             
is a strong financial institution and that, while the FY 04, FY 05,                                                             
and FY  06 dividends  would exceed  net income,  "relief" would  be                                                             
forthcoming in later years.                                                                                                     
                                                                                                                                
Mr. Fauske relayed that "there has always been apprehension" in the                                                             
Stock Market  that the State would  request dividends in  excess of                                                             
$103  million.  He   communicated  that  "the  strength"   in  this                                                             
legislation is  that it "would place  in statute a predictable  and                                                             
sustainable payout  to the State."  He communicated that  while the                                                             
investment  market  is unpredictable,  expectations  are  that,  in                                                             
contrast to the current refinancing  trend, the next market "cycle"                                                             
would  allow  the Corporation  to  experience  an increase  in  net                                                             
profits due to an increase in conventional loans to first-time home                                                             
buyers  and   an  increase  in   the  interest  levels   earned  on                                                             
Corporation's investments.  He stated that during discussions  with                                                             
the rating agencies,  it is recognized that AHFC must  begin making                                                             
contributions into its "equity positions" over time.                                                                            
                                                                                                                                
Mr.  Dubler commented  that  this legislation  is  based on  AHFC's                                                             
historical  financial   projection  methodology  that   takes  into                                                             
consideration such things as the  Corporation's long-term bonds. He                                                             
noted that while  AHFC's longer-range financial projection  mode is                                                             
atypical to the normal  State financial projection  methodology, it                                                             
"has worked very well" for the Corporation.                                                                                     
                                                                                                                                
Co-Chair Wilken  asked the Corporation  to distribute to  Committee                                                             
members a pro forma  document titled "Summary of Projected  Amounts                                                             
Available  for Appropriation"  [copy  on file]  that was  developed                                                             
during  initial  discussions  on this  bill.  He stated  that  this                                                             
document  would provide  Members  with projected  dividend  amounts                                                             
based on a percent of net income formula.                                                                                       
                                                                                                                                
Co-Chair  Wilken pointed out  that other  material in the  Members'                                                             
packet includes a  Moody's Investors Service report  [copy on file]                                                             
dated  March 2003  that specifies  that, of  the 15  states with  a                                                             
Housing  Finance  Corporation  (HFC), Alaska's  program  is  ranked                                                             
number two "in its contribution back to the State." Furthermore, he                                                             
noted  that  the report  highlights  the  concern that  states  are                                                             
demanding higher levels of contribution  from their HFCs. He called                                                             
to  the Committee's  attention  the fact  that  AHFC contributes  a                                                             
"significantly" higher  amount per capita than other  HFC programs.                                                             
                                                                                                                                
Co-Chair Green voiced  that the sponsor's statement  "implies" that                                                             
the AHFC  dividend would  fund debt service  for certain bonds  and                                                             
capital projects.  However, she noted  that language in  Section 1,                                                             
page 1, beginning  on line 7, specifies that, "the  legislature may                                                             
appropriate  the dividend  for  capital projects."  She  questioned                                                             
whether this language should be  changed to include the phrase debt                                                             
service.                                                                                                                        
                                                                                                                                
Mr. Dubler responded  that debt service is addressed  in Section 1,                                                             
subsection (2) that reads as follows.                                                                                           
                                                                                                                                
     (2) minus the amount of money from the corporation used during                                                             
     that current fiscal year for bond repayment and other costs                                                                
     related to the bonds issued under                                                                                          
        (A) ch.26, SLA 1996, up to a maximum of $1,000,000;                                                                     
          (B) sec. 10(b), ch. 130, SLA 2000;                                                                                    
          (C) sec. 1, ch. 1, SSSLA 2002; and                                                                                    
                                                                                                                                
Co-Chair Green surmised, therefore, that this language provides for                                                             
the inclusion of the debt service in the calculation.                                                                           
                                                                                                                                
Mr. Dubler concurred.                                                                                                           
                                                                                                                                
Co-Chair Green noted that separate legislation being entertained by                                                             
the Committee  contains  a different  definition of  the term  "net                                                             
income." Therefore,  she questioned "the appropriateness"  of there                                                             
being multiple definitions of this term in State regulations.                                                                   
                                                                                                                                
Mr. Dubler  explained that the difficulty  in arriving at  a single                                                             
definition of  the term net income  arises from ongoing  changes in                                                             
the nationally recognized  General Accounting Standards.  He stated                                                             
that programs have been formulated using whatever definition was in                                                             
effect at  the time. Therefore, he  attested that to adjust  to one                                                             
terminology  would  be  tedious;  and  therefore,   each  situation                                                             
involving net income is defined accordingly.                                                                                    
                                                                                                                                
Co-Chair  Green continued  to  voice  concern that  State  statutes                                                             
incorporate numerous  definitions of net income. She  asked whether                                                             
crafting one definition would be possible.                                                                                      
                                                                                                                                
Mr.  Dubler stated  that  a goal  of  financial accountants  is  to                                                             
develop one definition. Unfortunately, he stated, the process might                                                             
be lengthy due to the multitude  of entities and terminologies that                                                             
would be affected.                                                                                                              
                                                                                                                                
Co-Chair Green  voiced frustration  at being required to  determine                                                             
which  net  income   definition  is  specific  to   each  piece  of                                                             
legislation being addressed.                                                                                                    
                                                                                                                                
Senator Hoffman asked the present  AHFC financial rating as well as                                                             
what bond rating  projections the Corporation expects  after FY 04.                                                             
Furthermore, he asked what type  of housing loans would be expected                                                             
based on State population growth forecasts.                                                                                     
                                                                                                                                
Mr. Fauske stated that currently  the Corporation has an AA and AA+                                                             
rating by two major  rating agencies; however, he voiced  that were                                                             
the ratings determined by statistical analysis, AHFC would be rated                                                             
AAA as it is one of the strongest performing HFAs in the nation. He                                                             
voiced that the official rating  is affected by subjective criteria                                                             
based on  such things as  the State's  economy, the State's  fiscal                                                             
gap,  the activity  in Prudhoe  Bay,  and the  fishing industry  in                                                             
Bristol Bay.  He credited the Legislature  for honoring  the intent                                                             
language specified  in every AHFC appropriation bill,  as he stated                                                             
that  that action  has allowed  AHFC  to maintain  its high  credit                                                             
rating.                                                                                                                         
                                                                                                                                
Mr. Fauske  predicted that  were this  legislation adopted,  AHFC's                                                             
credit rating would further improve  and that the Corporation would                                                             
be able to  contribute more to  the State without jeopardizing  its                                                             
ability to carry out its mission or negatively affecting its credit                                                             
rating.                                                                                                                         
                                                                                                                                
Mr. Fauske continued that AHFC  tracks the economy closely in order                                                             
to  effectively   anticipate  future  business  opportunities.   He                                                             
attested that such things as unemployment and demographics changes,                                                             
including an aging population,  are monitored. He stressed that the                                                             
job market is critical to a healthy  economy, as jobs are necessary                                                             
to attract  younger  people who  might purchase  homes and  require                                                             
loans. He avowed  that because AHFC is a strong entity  with a good                                                             
market share, financial programs  such as Fanny Mae and Freddie Mac                                                             
and other major lenders are able to operate in the State. He voiced                                                             
confidence  that  the  Legislature  would  adequately  address  the                                                             
State's  fiscal situation,  as he  qualified that  a healthy  State                                                             
fiscal plan is important  to the State and to the success  of AHFC.                                                             
                                                                                                                                
Mr. Fauske stressed  that the housing market must be  sustained, as                                                             
it is a "big player" in the State's economy in that it "occupies 25                                                             
percent of the State's domestic product."                                                                                       
                                                                                                                                
Senator Hoffman concluded therefore,  that AHFC does not anticipate                                                             
a drop in their bond ratings through FY 09.                                                                                     
                                                                                                                                
Mr. Fauske affirmed.                                                                                                            
                                                                                                                                
Senator Taylor voiced that this  legislation would establish policy                                                             
regarding AHFC dividends today  and for the future. He allowed that                                                             
while the  proposed  formula could  be changed in  the future,  the                                                             
proposal  currently "gives  an illusion  to the  market and to  the                                                             
people of Alaska" that the State  "would not get so desperate as to                                                             
liquidate an asset" that provides  funds to the State. "As a fiscal                                                             
conservative," he argued that the  legislation should be altered to                                                             
eliminate the requirement of a  $103 million dividend in FY 04, and                                                             
immediately  set in motion  the proposed  percentage of net  income                                                             
payout as, he declared, that continuing the status quo dividend for                                                             
three years would be an invasion of the Corporation's corpus.                                                                   
                                                                                                                                
Co-Chair Green asked regarding  the recurring phrase "unrestricted,                                                             
unencumbered money of the corporation"  in Sec. 2 subsection (2)(C)                                                             
located on  page 3, lines  1  3 and Sec.  2, subsection (3)  (C) on                                                             
page 3, lines 25-27 that reads as follows                                                                                       
                                                                                                                                
          (2)(C)   minus   any   appropriation   of   unrestricted,                                                             
     unencumbered money of the corporation during fiscal year 2005,                                                             
     other than  an appropriation  for the corporation's  operating                                                             
     budget;                                                                                                                    
                                                                                                                                
          (3)(C) minus any appropriation of unrestricted,                                                                       
     unencumbered money of the corporation during fiscal year 2006,                                                             
     other than an appropriation for the corporation's operating                                                                
     budget;                                                                                                                    
                                                                                                                                
Mr. Dubler responded that this  language is included "in an attempt                                                             
to make an all encompassing reference"  to all funds transferred to                                                             
the State  by the Corporation in  order to prevent the  Legislature                                                             
from classifying  some of those funds as non-dividends,  and saying                                                             
that "they don't count."                                                                                                        
                                                                                                                                
Co-Chair Green  asked whether  this language  is a change  from the                                                             
historical recognition of transferred  funds, and she asked whether                                                             
it would allow funds to be "manipulated."                                                                                       
                                                                                                                                
Mr. Dubler responded that the concept of this language is to define                                                             
which funds  being transferred  from  AHFC to the  State should  be                                                             
recognized as "a dividend."                                                                                                     
                                                                                                                                
Senator Taylor ascertained,  therefore, that other  funds the State                                                             
might  receive  from   AHFC  would  be  classified   as  "operating                                                             
expenses."                                                                                                                      
                                                                                                                                
Mr. Dubler reiterated that the intent of the language is to clarify                                                             
which  of  the  funds being  transferred  to  the  State  would  be                                                             
considered  dividends.  He  communicated  that  the bill  could  be                                                             
amended to provide further clarification.                                                                                       
                                                                                                                                
Senator  Taylor  moved  to report  the  bill  from  Committee  with                                                             
individual recommendations and accompanying fiscal note.                                                                        
                                                                                                                                
There  being no  objection,  SCS HB  256  (FIN) was  REPORTED  from                                                             
Committee with zero fiscal note  #1 from the Department of Revenue.                                                             
                                                                                                                                

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