Legislature(2003 - 2004)

05/06/2003 09:01 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
     HOUSE BILL NO. 203                                                                                                         
     "An  Act  relating  to  the definitions  of  'net  income'  and                                                            
     'unrestricted  net  income'  for purposes  of  calculating  the                                                            
     dividends  to be  paid to the  state by  the Alaska  Industrial                                                            
     Development   and  Export  Authority;  and  providing   for  an                                                            
     effective date."                                                                                                           
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Co-Chair Wilken  stated that this bill "clarifies  the definition of                                                            
'net income'  in regards to the annual  dividend that AIDEA  [Alaska                                                            
Industrial Development  and Export Authority] pays  to the State. If                                                            
passed, in  FY 04 AIDEA  dividend would raise  somewhere between  $9                                                            
and $18 million."                                                                                                               
REPRESENTATIVE MIKE HAWKER  testified on behalf of the House Finance                                                            
Committee that  this bill addresses a "circumstance  encountered" in                                                            
AIDEA  operations  and  financial   reporting  in  relation  to  the                                                            
statutory  net income  of  the Authority.  Under  the provisions  of                                                            
current statute, he informed  that, AIDEA would not contribute "it's                                                            
regular" dividend  to the State general fund in FY  04. He explained                                                            
that current  statute provides that  AIDEA "shall distribute  to the                                                            
State a judgmental  determination  between 25 and 50 percent  of its                                                            
net income" to the State general fund for "general purposes".                                                                   
Representative  Hawker specified that the definition  of "net income                                                            
subject to distribution"  is the purpose of this legislation, noting                                                            
the accounting  of net income by AIDEA  is "somewhat different  than                                                            
what  the  State  believes  [should  be]  subject  to  the  dividend                                                            
calculation."  He  explained  that current  statute  exempts  inter-                                                            
government  transfers, capital  contributions  and grants;  opining,                                                            
"Clearly, those items that  are not part of the operating results of                                                            
AIDEA that should be subject to some kind of a dividend."                                                                       
Representative  Hawker shared that this bill proposes  including the                                                            
"write-down  of fixed or  hard assets,  [i.e.] previous investments                                                             
that  one would  call impairment  losses"  to the  income items  not                                                            
utilized   in  the   calculation   of   net  income   for   dividend                                                            
distribution.  He  exampled  the  write-off  in  the  past  year  of                                                            
substantial  investments in the Alaska  Seafood International  (ASI)                                                            
processing  plant  in Anchorage  as  well as  the Healy  Clean  Coal                                                            
project.  He reminded  that  these investments  were  made by  AIDEA                                                            
"many years  ago" and  that the  write-down of  those assets  had no                                                            
affect  on  the  cash  flow  of  the  Authority,   nor  its  ongoing                                                            
operations  during  the  reporting  year.  He  elaborated  that  the                                                            
investments had not provided  a cash return to AIDEA for a number of                                                            
Representative Hawker instructed,  "these types of impairment losses                                                            
are  not uncommon;  they  are  to  be anticipated  in  operating  an                                                            
operation  like  AIDEA."  However,  he expressed  concern  with  the                                                            
ability of  AIDEA to utilize  write-downs of  past investments  as a                                                            
devise  to  avoid  payment  of  a  dividend.  He  noted  that  AIDEA                                                            
currently has $789 million  unrestricted net assets, $356 million of                                                            
which is unrestricted  cash and investments. Therefore,  he surmised                                                            
this legislation would  "facilitate a steady, regular, recurring and                                                            
predictable  dividend  from  AIDEA,"  to the  benefit  of  financial                                                            
planning  for the State.  He furthered that  the provisions  of this                                                            
legislation  would  not  impose  an  egregious  restriction  on  the                                                            
Authority's  net  income.  Rather, he  opined,  it would  provide  a                                                            
"stable  environment"  for  relations with  the  Authority's  debtor                                                            
agencies, lenders,  "the financial  community and the State  and the                                                            
Nation as a whole."                                                                                                             
Representative Hawker predicted  this legislation would result in an                                                            
additional  $18   million  AIDEA  dividend  for   FY  04,  which  he                                                            
considered "appropriate at this time".                                                                                          
Senator  Bunde asked  if the provisions  of  this legislation  would                                                            
comply with generally accepted accounting principles (GAAP).                                                                    
Representative  Hawker replied  that this  bill would reconcile  the                                                            
difference  between  GAAP, the  required  procedure  by which  AIDEA                                                            
reports  financial  statements,  to a  statutory definition  of  net                                                            
income,  whereby the  Legislature  would create  a dividend  policy.                                                            
This policy, he  said, would "modify the accountant's  definition of                                                            
the all inclusive net income  to exclude these particular items." In                                                            
his  professional  opinion, as  a Certified  Public  Accountant,  he                                                            
assured this would be in accordance with GAAP.                                                                                  
Co-Chair  Wilken referenced  a  letter of  opposition  to this  bill                                                            
dated April 1, 2003, from AIDEA.                                                                                                
Senator Olson wanted to know why AIDEA opposes this legislation.                                                                
SARA  FISHER-GOAD,   Alaska   Industrial   Development  and   Export                                                            
Authority,  testified via  teleconference from  an off net  location                                                            
about the Board's  primary concern  with the precedence a  statutory                                                            
change to dividend  calculations could  set in creating a  situation                                                            
whereby AIDEA could not pay a dividend.                                                                                         
Senator Olson asked the  sponsor if this legislation would result in                                                            
the Authority investing in "less than profitable" ventures.                                                                     
Representative Hawker asserted  this would not affect the investment                                                            
policy of AIDEA.  He recalled legislation passed the  prior session,                                                            
which  significantly  redefined  net  income  and  unrestricted  net                                                            
income and  was precipitated  by "the accounting  world's change  in                                                            
its presentation  of  financial  statements". He  characterized  the                                                            
current legislation  is a "finalization" of the changes  made in the                                                            
earlier  legislation and  actually  a "housekeeping"  matter than  a                                                            
policy  direction.  He surmised  it  would  not encourage  AIDEA  to                                                            
operate  in  a manner  other  than  the  most prudent  and  in  best                                                            
interest of the State.                                                                                                          
Senator Taylor asked why  the losses on investments, which have been                                                            
occurring  for some period  of time, are  only recently reported  as                                                            
such. He questioned  whether the reasons are political.  He compared                                                            
the practice  to the recent  national events  involving the  alleged                                                            
dubious  accounting   practices  of  the  Enron  Corporation.     He                                                            
contended that  the previous gubernatorial  administration  reported                                                            
the value of the seafood  plant and the clean coal project as higher                                                            
than  their  actual  worth.  He  therefore   asked  if  the  current                                                            
Murkowski  Administration  corrected the accounting  procedures  and                                                            
subsequently wrote down the losses.                                                                                             
Representative Hawker was  unable to speak to the motives of actions                                                            
taken  by AIDEA.  However, he  spoke to  the practice  of  preparing                                                            
financial   statements,    which   involves   judgment    decisions,                                                            
particularly  judgments  to  the "realizability"   of the  value  of                                                            
assets. He further informed  that the impaired value of "long lived"                                                            
assets has been  a matter of controversy due to inconsistencies.  As                                                            
a result, he  noted, accounting standards  have been changed  in the                                                            
past several years.                                                                                                             
Senator Taylor asked if  the State regularly audits AIDEA. If so, he                                                            
questioned  why auditors had not identified  the losses in  the past                                                            
and  subsequently require  the  Authority  to account  for them.  He                                                            
pointed  out that  AIDEA had  the ability  to pay  dividends to  the                                                            
State during the previous administration.                                                                                       
Ms. Fisher-Goad  spoke to a trigger  mechanism that determines  when                                                            
impairment losses  are recognized. She informed that  losses for the                                                            
Healy Clean  Coal project have been  written down once prior  to the                                                            
occasion  of the previous  fiscal year. She  noted that because  ASI                                                            
underwent   a  process   of  refinancing   and  restructuring,   the                                                            
impairment  loss  was not  "recognized"  until the  previous  fiscal                                                            
year. She stated  that AIDEA produces  audited financial  statements                                                            
each  year and  that  each legislator  should  receive  copy of  the                                                            
Senator  Taylor   requested  that  financial  auditors   within  the                                                            
Division of Legislative  Finance review the financial statements. He                                                            
was concerned why the losses  were not reflected earlier. He assured                                                            
he supports the legislation.                                                                                                    
Co-Chair Wilken  listed considerable discussion on  the two projects                                                            
as well as pending federal  legislation to "bail out" the clean coal                                                            
project as possible factors in the timing of the write-downs.                                                                   
Co-Chair Wilken  pointed out that  the fiscal note amount  indicates                                                            
an indeterminate  cost to  implement this  legislation; however  the                                                            
accompanying  analysis estimates the  cost to be between  $8 million                                                            
and $9 million. He asked  if a more definitive figure was available.                                                            
He also  wanted an  estimate of future  revenues  to the State  as a                                                            
result of the changed dividend amounts.                                                                                         
Representative   Hawker   responded   that   the  fiscal   note   is                                                            
indeterminate  because the statute provides a "range  upon which the                                                            
dividend  may be judgmentally  determined."  The range, he  said, is                                                            
between 25  to 50 percent  of net income.  He calculated a  possible                                                            
dividend of $9,058,000  at 25 percent and $18,170,000 at 50 percent.                                                            
He was unaware of any disputes to the accuracy of these figures.                                                                
Co-Chair Wilken surmised  that in a year that AIDEA unrestricted net                                                            
assets and/or investments  was unfavorable, the State has the option                                                            
of not receiving a dividend.                                                                                                    
Representative  Hawker affirmed and  clarified that current  statute                                                            
provides  that the legislature  would be  "statutorily post  scribed                                                            
from taking any cash from AIDEA."                                                                                               
Senator Taylor suggested  that with statutory change, AIDEA could be                                                            
liquidated and  approximately $700 million deposited  into the State                                                            
general fund.                                                                                                                   
Co-Chair Green asked for a definition of impairment losses.                                                                     
Representative  Hawker qualified that  accounting terms are  defined                                                            
similar  to the manner  in which  attorneys define  legal terms.  He                                                            
described  impairment  loss as  an investment  in  a "tangible  hard                                                            
asset," such as  a building, that has a "productive  capacity", i.e.                                                            
would generate  a return when utilized, but is no  longer capable to                                                            
do so  and subsequently  "pay for  itself". He  exampled a  building                                                            
fire as  an event that  could result in  an impairment loss  because                                                            
the value  of the  building would  be less than  the investment.  He                                                            
specified  that a  major fire  would  be considered  a catastrophic                                                             
impairment loss.  He furthered that other events could  result in an                                                            
impairment  loss,  telling  of  the investment  in  a  coal  loading                                                            
facility, with  the return on investment  dependent upon  a contract                                                            
for the  use of that facility.  If the contract  is not renewed,  he                                                            
pointed  out,  the  value  of  the  facility   is  impaired  and  an                                                            
impairment  loss  results.  He stated  that  an impairment  loss  is                                                            
reported in financial statements  as an estimate of the reduction in                                                            
Co-Chair Green  referenced a portion of the sponsor  statement [copy                                                            
on file], which reads as follows.                                                                                               
     Under current  statute there will be no AIDEA  income available                                                            
     for a dividend in  fiscal 2004 as a result of impairment losses                                                            
     recognized  on the Healy Clean Coal Project and  Alaska Seafood                                                            
     International.  Still, AIDEA  has $789 million in unrestricted                                                             
     net  assets   and  $356  million   of  unrestricted   cash  and                                                            
     investments  from which a dividend could be paid.  The dividend                                                            
     formula  proposed  in  House  Bill 203  would  make  $9 to  $18                                                            
     million of this money  available for a dividend to the State in                                                            
     FY 04.                                                                                                                     
Co-Chair  Green   next  directed  attention  to  a  handout   titled                                                            
"Management Discussion  and Analysis" [copy on file], which compares                                                            
assets  and liabilities  of FY  02 and  FY 03.  This information  is                                                            
contained on  page 13 of the AIDEA  2002 Annual Report [portions  of                                                            
which are  on file.] She  asked if the unrestricted  net income  and                                                            
unrestricted  cash figures  cited in the  sponsor statement  reflect                                                            
the  FY 03  amounts  shown  on the  Analysis,  and how  the  amounts                                                            
compare to previous years.                                                                                                      
Representative  Hawker  replied  that  the  amounts  listed  in  the                                                            
sponsor statement  reflect the amounts current as  of June 30, 2002.                                                            
For comparison  purposes, he  referenced page  16 of the AIDEA  2002                                                            
Annual  Report, titled  "Balance Sheet"  [copy on  file]. He  stated                                                            
that  the   figures  are  based  on   a  two  year  "back   trailing                                                            
Co-Chair Green  requested historical information from  2001 and 2002                                                            
for comparison purposes.   She wanted to know whether a trend exists                                                            
in the "status of AIDEA".                                                                                                       
Representative Hawker listed  the cash and equivalence component for                                                            
FY 02 as $14,415,000;  FY 01 as $28,600,000; and FY  00 $27,400,000.                                                            
He next listed  the current investment securities  amounts for FY 01                                                            
as $400,000,000  and  $352,000,000  for FY  00. He  stated that  the                                                            
reductions were as a result  of the write off of the impairment loss                                                            
from the two facilities.                                                                                                        
Co-Chair Wilken asked the unrestricted net assets of FY 00                                                                      
Representative  Hawker  answered  $856  [million],  qualifying  this                                                            
amount is an "approximation,  recognizing the change  in format." He                                                            
furthered  that the amount  in FY  01 was $877  [million], and  $789                                                            
[million] in FY 02.                                                                                                             
Senator  Taylor asked  whether this  legislation  must be passed  to                                                            
ensure  the State receives  a dividend  from AIDEA  in the  upcoming                                                            
fiscal year.                                                                                                                    
Co-Chair Wilken affirmed.                                                                                                       
Senator Olson  referenced the June 30, 2002 Balance  Sheet and asked                                                            
the percentage  of AIDEA earnings derived from the  Red Dog Mine and                                                            
how this legislation would affect that operation.                                                                               
Representative Hawker deferred to AIDEA                                                                                         
Senator  B. Stevens directed  attention  to pages  20 and 21  of the                                                            
AIDEA  2002  Annual   Report  titled,  "Notes  to  Basic   Financial                                                            
Statements"  [copy on file].  He pointed  out note (1) Organization                                                             
and  Operations, lists  the  initial AIDEA  bond  obligation of  $85                                                            
million for  the Healy Clean Coal  Project and $48 million  for ASI,                                                            
totaling $133 million.  He noted the write-down of the loss in these                                                            
investments  is $93 million and he  asked if additional write-downs                                                             
would occur for the balance  of approximately $41.6 million invested                                                            
in these projects.                                                                                                              
Representative Hawker again deferred to AIDEA.                                                                                  
Senator B.  Stevens continued to page  26 and (7) Net Investment  in                                                            
Direct Financing  Leases,  Notes and Development  Projects  [copy on                                                            
file] and cited a portion as follows.                                                                                           
     The components of the Authority's net investment in direct                                                                 
     financing leases at June 30, 2002 are (stated in thousands):                                                               
          Minimum lease payments receivable         $824,645                                                                    
                Less unearned income                (495,031)                                                                   
                Less impairment loss                 (25,600)                                                                   
          Net investment in direct financing leases                                                                             
Senator  B. Stevens surmised  the unearned  income represents  lease                                                            
payments  or  finance  payments  not  collected.   He  requested  an                                                            
explanation  of the impairment loss  in this context as it  appeared                                                            
to be recorded  as a payment not received  rather than as  an asset.                                                            
Representative Hawker explained  the two investments made into these                                                            
projects,  one into  a hard asset,  the other  financing leases  for                                                            
operations.  He furthered  that  the second  investment essentially                                                             
created a loan  to provide funding  to support the project.  In this                                                            
instance, he said the asset  is a loan to be repaid in the form of a                                                            
lease. The unearned  income, he stated, represents  the repayment of                                                            
the loan and the  impairment loss represents a further  reduction in                                                            
the value of the investment that would not be recouped.                                                                         
Senator B.  Stevens clarified  two forms  of impairment losses  were                                                            
realized, one  in the value of the asset, the other  in the value of                                                            
future revenues from that investment.                                                                                           
Representative  Hawker affirmed and  noted the loss of value  to the                                                            
State in this asset is manifested in the leases.                                                                                
Ms. Fisher-Goad  addressed the remaining  $41.6 million invested  in                                                            
the Healy and  ASI projects that had not been written  down to date.                                                            
She first clarified that  no bonds were issued for the investment in                                                            
Senator B. Stevens  asked if AIDEA therefore purchased  the facility                                                            
outright without bond financing.                                                                                                
Ms. Fisher-Goad  affirmed. She explained that the  value of ASI, for                                                            
the  purpose of  reporting  an impairment  loss,  was determined  by                                                            
calculating the "alternative use value" of the building.                                                                        
Co-Chair  Wilken again asked  the status of  the $41.6 million,  and                                                            
whether  it  would be  reported  as  an impairment  loss  in  future                                                            
financial statements.                                                                                                           
Ms. Fisher-Goad was not  prepared to answer to the future of the two                                                            
projects.  She noted that  impairment losses  were reported  for the                                                            
projects, but emphasized  that assets continue to depreciate and are                                                            
reported as  such regardless of whether  an impairment loss  occurs.                                                            
Senator B.  Stevens noted  the potential  that impairment losses  on                                                            
these investments  would be reported in future financial  statements                                                            
would influence his support  of this legislation because such write-                                                            
downs could impede the  Authority's ability to pay a dividend to the                                                            
Co-Chair  Wilken understood  that AIDEA recognizes  $133 million  in                                                            
asset value,  and although  $91 million has  been written down,  the                                                            
remainder of the investment has not yet "been dealt with".                                                                      
Representative  Hawker rephrased the question to AIDEA:  He asked in                                                            
the context of  future prospects, what is the current  book value of                                                            
the coal project  and of the ASI investments, and  the prospects for                                                            
further impairment recognitions in future fiscal years.                                                                         
Ms. Fisher-Goad  repeated that she  was not prepared to provide  the                                                            
current  book  value  of these  assets  nor  whether  the  Authority                                                            
expects future impairment loss recognition.                                                                                     
Co-Chair  Wilken  requested  this  information  be provided  to  the                                                            
Ms. Fisher-Goad  stated she would provide this information  later in                                                            
the week.                                                                                                                       
Senator  B.  Stevens   also  requested  information   regarding  the                                                            
impairment  losses reported over the  past five years. He  indicated                                                            
language  on  page  14 of  the  AIDEA  2002  Annual  Report,  titled                                                            
"Management's Discussion  and Analysis" [copy on file] referencing a                                                            
$10,419  impairment  loss recorded  in  FY 01  for the  Skagway  Ore                                                            
Terminal. He expressed  interest in the frequency of impairment loss                                                            
reporting by AIDEA.                                                                                                             
Ms. Fisher-Goad  would provide this  information the following  day.                                                            
Co-Chair   Green   also   requested   information    regarding   the                                                            
unrestricted  cash investments and  unrestricted net assets  for the                                                            
same five years.                                                                                                                
Ms.   Fisher-Goad   noted  significant   accounting   changes   were                                                            
implemented the  previous year, cautioning that comparison  would be                                                            
Senator  Taylor remarked  that  this  legislation provides  that  if                                                            
impairment  losses are recognized  and allowed as an exclusion  from                                                            
net  income, a  dividend  would be  available  to the  State in  the                                                            
current fiscal  year. He opined this issue is more  important than a                                                            
determination  of impairment  losses  in past  years. Therefore,  he                                                            
emphasized  the importance  of this legislation.  He commented  that                                                            
although  he  appreciated  that  the  recording  of  the  impairment                                                            
losses, as well as changing  accounting principles, have "cleaned up                                                            
the books".  However, he  stressed his "attitude  toward AIDEA"  and                                                            
the asset base,  is unchanged. He preferred to report  the bill from                                                            
Committee and address the questions later in the process.                                                                       
Co-Chair  Wilken noted  adequate time  remained  in the legislative                                                             
session to address this bill.                                                                                                   
Co-Chair  Wilken agreed  this bill  would provide  a revenue  source                                                            
that should be implemented.                                                                                                     
SFC 03 # 77, Side B 09:48 AM                                                                                                    
Co-Chair Wilken ordered the bill HELD in Committee.                                                                             

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