Legislature(2003 - 2004)

05/09/2004 12:10 PM 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 second  hearing for  this bill in  the Senate  Finance                                                            
Committee.                                                                                                                      
                                                                                                                                
Co-Chair  Wilken  stated  that this  legislation  would  repeal  the                                                            
Constitutional  Budget Reserve (CBR) subaccount and,  thereby, allow                                                            
"the  entire CBR  to be  invested in  fixed income  securities."  He                                                            
informed  the Committee  that  the Department  of  Revenue would  be                                                            
responding to concerns  raised during the first hearing on this bill                                                            
regarding  the  investment  policy  pertinent  to the  $400  million                                                            
subaccount.                                                                                                                     
                                                                                                                                
TOMAS BOUTIN,  Deputy Commissioner, Department of  Revenue, reminded                                                            
that Committee that, in  the year 2000, legislation was adopted that                                                            
transferred $400 million  from the CBR into a separate subaccount to                                                            
be "invested  under  the assumption  that  it would  not need to  be                                                            
available for five years or longer."                                                                                            
                                                                                                                                
Mr.  Boutin stated  that the  Department  has determined  that  this                                                            
subaccount  "is no longer  appropriate"  in light  of the manner  in                                                            
which  the CRB  is currently  being  utilized.  He shared  that  the                                                            
subaccount  has experienced  "a great  deal of  volatility" and,  in                                                            
fact, did not  obtain its original  investment level until  December                                                            
2003. He declared  that "the fundamental  investment policy"  of the                                                            
Department  is that  the  CBR should  be  in fixed  income  accounts                                                            
rather than being "market timers."                                                                                              
                                                                                                                                
Senator  Olson asked  the current  value of the  subaccount and  its                                                            
anticipated year-end projection.                                                                                                
                                                                                                                                
Mr. Boutin  stated that  the current  balance of  the subaccount  is                                                            
$419 million, and that no projections have been undertaken.                                                                     
                                                                                                                                
Co-Chair Wilken  recalled that this subaccount was  established with                                                            
the goal of investing  for the long-term in order  to achieve higher                                                            
yields than  those realized  by the CBR, which,  due to the  State's                                                            
need to be  able to access CBR funds  to cover State deficits,  "was                                                            
invested on  a somewhat short-term  basis that have lower  returns."                                                            
He also  understood  that the revenue  generated  by the  subaccount                                                            
investments has never achieved  the revenue stream level required to                                                            
provide bond support.                                                                                                           
                                                                                                                                
Mr. Boutin  affirmed that  this is correct.  He also recounted  that                                                            
the Department had notified  the Legislature that the CBR fund could                                                            
not  be used  as security  for  the issuance  of  tax-exempt  bonds,                                                            
according  to Internal  Revenue Service  (IRS)  code guidelines  for                                                            
"replacement   proceeds".   Therefore,   he   continued,   a   yield                                                            
restriction  is "placed on  the entire CBR  and any part of  it then                                                            
pledged as security for tax exempt debt."                                                                                       
                                                                                                                                
Co-Chair  Wilken  acknowledged  that  yield restriction   parameters                                                            
exist.                                                                                                                          
                                                                                                                                
JAMES ARMSTRONG,  Staff to the bill's  sponsor, Representative  Bill                                                            
Williams, noted  that the bond support provisions  were removed from                                                            
the year 2000 legislation before it was adopted.                                                                                
                                                                                                                                
Co-Chair Wilken acknowledged the clarification.                                                                                 
                                                                                                                                
Senator  Hoffman   commented  that   in  light  of  Governor   Frank                                                            
Murkowski's  position  that  the CBR  should  maintain  a  specified                                                            
minimum  dollar   balance,  the  Legislature   could  "contemplate"                                                             
designating  that the  minimum balance  amount be  invested for  the                                                            
long-term in order to "potentially" obtain higher yields.                                                                       
                                                                                                                                
Mr. Boutin clarified  that the Governor's position  is to maintain a                                                            
one  billion  minimum CBR  balance.  He  informed  that projections                                                             
indicate  that this  "threshold  amount" might  be  breached in  the                                                            
spring  of 2006.  He stated  that,  "if and  when  that one  billion                                                            
dollar  account balance  is  reached," it  should  be maintained  in                                                            
liquid investments as traditionally,  in addition to the possibility                                                            
that a CBR  draw might be required  in order to balance the  State's                                                            
budget, a minimum  cash flow of $400  million has historically  been                                                            
required, annually, to  fund fire suppression, highway projects, and                                                            
other projects  that would later be  federally reimbursed  or funded                                                            
later in the year. In addition,  he stated that CBR funds might also                                                            
be  required  were crude  oil  prices, which  are  a factor  in  the                                                            
State's  budgeting  process,  to plummet.  He  stated  that the  CBR                                                            
account  balance, including  the  subaccount balance,  is  currently                                                            
$2,074,400,000.                                                                                                                 
                                                                                                                                
Senator Hoffman  asked the rationale  of abandoning this  subaccount                                                            
prior to its long-term  five-year maturity date, as he argued, doing                                                            
so would not allow proper evaluation of the concept.                                                                            
                                                                                                                                
Mr.  Boutin responded  that,  contrary to  procedures  that were  in                                                            
place when the  subaccount was established, the Department  does not                                                            
currently maintain five-year time horizon projections.                                                                          
                                                                                                                                
Senator  B.  Stevens  asked  whether the  current  $2  billion  cash                                                            
balance is an accrued balance or a cash balance.                                                                                
                                                                                                                                
Mr. Boutin clarified that it is the cash balance.                                                                               
                                                                                                                                
Senator  B. Stevens  asked  for further  information  regarding  the                                                            
accrued balance, or money owed from reimbursement.                                                                              
                                                                                                                                
Mr. Boutin stated  that there are no borrowings against  the CBR, as                                                            
it  has not  been used  to provide  security  or debt.  However,  he                                                            
stated that  "suspend account"  items such  as outstanding  warrants                                                            
from fire suppression  efforts and other reimbursable  funds are not                                                            
included in the cash balance amount.                                                                                            
                                                                                                                                
Senator B. Stevens asked  what the CBR balance would be were suspend                                                            
accounts included.                                                                                                              
                                                                                                                                
Mr. Boutin  stated  that each weekday  morning  a reconciliation  of                                                            
outstanding warrants is conducted.                                                                                              
                                                                                                                                
Senator B. Stevens informed  that, according to a recent Legislative                                                            
Finance Division  report [copy  not provided],  $300 million  of CBR                                                            
funds were allocated  to but not utilized by Departments  and should                                                            
be swept back into the CBR.                                                                                                     
                                                                                                                                
Co-Chair  Wilken  interjected  that  David  Teal,  the  Director  of                                                            
Legislative Finance,  has informed him that the cash  balance of the                                                            
CBR  is  approximately  two  billion   dollars  and  that  were  all                                                            
outstanding  warrants reimbursed,  the  cash balance  would be  $2.4                                                            
billion.                                                                                                                        
                                                                                                                                
Co-Chair Wilken  commented that reconciling the cash  balance of the                                                            
CBR is not pertinent to this legislation.                                                                                       
                                                                                                                                
Senator   B.  Stevens  stated   that  he   does  not  support   this                                                            
legislation.                                                                                                                    
                                                                                                                                
Senator  Hoffman  asked  the  Department   whether  a  CBR  draw  is                                                            
anticipated this  fiscal year due to the fact that  crude oil prices                                                            
are hovering in the $40 per barrel range.                                                                                       
                                                                                                                                
Mr.  Boutin  responded  that, based  on  recent  calculations,  this                                                            
year's CBR draw could be between $50 and $70 million.                                                                           
                                                                                                                                
Senator Hoffman  asked whether this  draw is factored into  the $2.1                                                            
billion cash balance.                                                                                                           
                                                                                                                                
Mr. Boutin responded in the negative.                                                                                           
                                                                                                                                
Senator  Bunde  moved  to  report  the  bill   from  Committee  with                                                            
individual recommendations and accompanying fiscal notes.                                                                       
                                                                                                                                
There  being  no  objection,  CS  HB  422(STA)   was  REPORTED  from                                                            
Committee with  negative $125,000 fiscal note #1,  dated February 9,                                                            
2004 from the Department of Revenue.                                                                                            
                                                                                                                                

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