Legislature(2003 - 2004)

05/07/2004 08:44 AM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                                                                                                                                
     CS FOR HOUSE BILL NO. 422(STA)                                                                                             
     "An Act repealing the special subaccount established in the                                                                
     constitutional budget reserve fund; and providing for an                                                                   
     effective date."                                                                                                           
                                                                                                                                
                                                                                                                                
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Committee.                                                                                                                      
                                                                                                                                
Co-Chair   Wilken   stated  that   this   bill  would   repeal   the                                                            
Constitutional  Budget Reserve  (CBR) subaccount  and thereby  allow                                                            
the Constitutional  Budget  Reserve  (CBR) account  balance, in  its                                                            
entirety,  "to be invested  in fixed income  securities." He  stated                                                            
that  CS HB  422(STA),  Version 23-LS1527\S,  and  its accompanying                                                             
fiscal  note  #1 from  the  Department  of Revenue,  is  before  the                                                            
Committee.                                                                                                                      
                                                                                                                                
JAMES ARMSTRONG,  Staff to Representative Bill Williams,  the bill's                                                            
sponsor,  specified that this  bill would repeal  an act enacted  in                                                            
the year 2000 that created  a $400 million subaccount within the CBR                                                            
Fund. This  action, he continued would  "collapse" those  funds back                                                            
into the primary  CBR account. He  stated that this subaccount  "was                                                            
targeted  to obtain  a higher yield  for the  investment  strategy."                                                            
Furthermore,  he noted, that the Commissioner  of the Department  of                                                            
Revenue was  instructed to assume  that the subaccount would  not be                                                            
accessed  for  five  years.  He  stated  that  this  legislation  is                                                            
requested by the Department of Revenue.                                                                                         
                                                                                                                                
Senator Dyson asked regarding  the rate of return experienced by the                                                            
subaccount.                                                                                                                     
                                                                                                                                
TOMAS BOUTIN, Deputy Commissioner,  Department of Revenue, responded                                                            
that during  the last three  years, the subaccount  achieved  a 4.70                                                            
percent  rate of return  as compared  to the  primary CBR  account's                                                            
5.44 percent rate of return.                                                                                                    
                                                                                                                                
Senator Dyson asked whether these are gross or net return rates.                                                                
                                                                                                                                
Mr.  Boutin  expressed  that  these returns  "are  gross  of  fees."                                                            
However,  he  noted   that  the  subaccount  has  an   annual  fixed                                                            
management  fee amounting  to  $125,000. He  stated  that the  CBR's                                                            
fixed income accounts are  managed internally, at an annual "rule of                                                            
thumb cost" of approximately three basis points.                                                                                
                                                                                                                                
Senator Dyson  declared that  contrary to the  goal of generating  a                                                            
higher yield,  the subaccount actually  returned a lesser  rate than                                                            
the primary CBR account.                                                                                                        
                                                                                                                                
Mr.  Boutin opined  that  the  timing of  establishing  the  account                                                            
"couldn't  have been poorer"  in that it  ventured into equities  in                                                            
the spring of the year 2000.                                                                                                    
                                                                                                                                
Senator Bunde  communicated that the  reason that CBR Funds  are not                                                            
positioned  in "more aggressive  management"  is that access  to the                                                            
funds must be available  on "a short-term basis" in order to be used                                                            
to balance the State's  budget. This, he asserted, was and continues                                                            
to be a concern  regarding the establishment of this  subaccount. He                                                            
communicated  that because  a higher  rate of  risk accompanies  the                                                            
decision  to achieve a higher  rate of return,  the investment  must                                                            
remain invested  in the financial  market over a long-term  in order                                                            
to amortize the risk. He  stated that this is contrary to being able                                                            
to access CBR funds as budgeting factors might require.                                                                         
                                                                                                                                
Mr.  Boutin  responded  that  that   is "exactly   the  reason"  the                                                            
Department   of  Revenue   has   requested  this   legislation.   He                                                            
distributed  two handouts  titled " Constitutional  Budget  Reserve"                                                            
and "Constitutional Budget Reserve Subaccount" [copies on file].                                                                
                                                                                                                                
Senator  B. Stevens  reviewed  the  "Constitutional  Budget  Reserve                                                            
Subaccount" handout and  asked whether eliminating the subaccount at                                                            
this  time  would  result  in  selling  at  a  loss  as  opposed  to                                                            
continuing the account until the loss could be "recaptured."                                                                    
                                                                                                                                
Mr. Boutin qualified that  neither the Department of Revenue nor the                                                            
Legislature are  "market timers," and therefore, he  reiterated that                                                            
this is the  reason the Department  of Revenue believes that  "fixed                                                            
income  is appropriate."   He noted  that  the Commissioner  of  the                                                            
Department  of  Revenue, as  the  fiduciary  for this  money,  could                                                            
invest it,  limited by the  prudent investor  rule, for the  highest                                                            
rate of return. He disclosed  that the Department conducts quarterly                                                            
evaluations  of the Fund's  "targets" to  determine the appropriate                                                             
investment strategy.  He declared that because the  CBR is currently                                                            
utilized  as the  State's  "checking  account," the  Department  has                                                            
determined  that long-term investments  are not the proper  strategy                                                            
at this time.                                                                                                                   
                                                                                                                                
Senator  B.  Stevens voiced  that,  "at  this  point," he  does  not                                                            
support this legislation,  as he calculated, that there would not be                                                            
"a  significant  draw"  on  the  CBR,  which  currently  amounts  to                                                            
approximately  $1.5 billion,  until  June 30, 2005.  He opined  that                                                            
that  a three-year  and five-year  "time  horizon  on an  investment                                                            
cycle is short-term."  He stated that  were the Legislature  "forced                                                            
to liquidate  the $420 million  that was  originally invested  for a                                                            
long-term horizon,  prematurely, we are destined to  lose money." He                                                            
spoke against  the legislation  as he reiterated  that the  money is                                                            
not required  at this time  and should continue  to be invested,  as                                                            
established,  in  the  long-term  equity  market  investment  for  a                                                            
minimum of five years.                                                                                                          
                                                                                                                                
Co-Chair  Wilken ordered  the  bill HELD  in Committee  for  further                                                            
consideration.                                                                                                                  
                                                                                                                                

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