Legislature(2003 - 2004)
05/06/2003 09:01 AM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 Committee. 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 years. 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 report. 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 value. 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 calculation". 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 $304,014 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 ASI. 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 State. 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 Committee. 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 difficult. 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.