Legislature(2005 - 2006)SENATE FINANCE 532

03/08/2006 09:00 AM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
<Bill Hearing Postponed>
Moved CSSB 216(JUD) Out of Committee
Moved SB 265 Out of Committee
+ Bills Previously Heard/Scheduled TELECONFERENCED
     SENATE BILL NO. 265                                                                                                        
     "An Act increasing the total amount of bonds and notes that                                                                
     the Alaska Municipal Bond Bank Authority may have                                                                          
     outstanding; and providing for an effective date."                                                                         
This was  the first hearing for  this bill in the  Senate Finance                                                               
Senator Stedman,  the bill's sponsor,  explained that  the Alaska                                                               
Municipal  Bond Bank  Authority  (MBBA)  currently has  Statutory                                                               
authority to  issue $500,000,000  in bonds. Continuing,  he noted                                                               
that the  ability of communities in  the State "to borrow  in the                                                               
capital market  is limited  by their  size and  credit worthiness                                                               
and other  factors." The  benefit of  pooling communities  into a                                                               
central   bond   bank   authority  creates   "synergy   for   the                                                               
communities,  which  reduces  their fixed  costs"  and  increases                                                               
"investor interest  in the purchasing" of  their municipal bonds.                                                               
It also assists in increasing a municipality's credit rating.                                                                   
Senator  Stedman  continued that,  with  the  exception of  "very                                                               
small ones",  communities of various  sizes throughout  the State                                                               
utilize the Authority. Of the  total $500 million MBBA authority,                                                               
only  $50  million  is  un-issued   at  this  time.  The  current                                                               
expectation is  that $80 million  in community  capital expansion                                                               
applications  would be  forthcoming during  the next  six months.                                                               
This would exceed the MBBA's current authority balance.                                                                         
Senator Stedman  stated therefore that  the purpose of  this bill                                                               
would be  to increase  the bond bank  authority by  $250 million;                                                               
therefore the  total authority would  increase from  $500 million                                                               
to $750 million.                                                                                                                
Senator Stedman noted  the expenses reflected in  the fiscal note                                                               
would not affect  the State's general fund, but  would instead be                                                               
addressed  by  the  investment  earnings  of  the  Authority.  In                                                               
summary, this  bill would "expand"  the authority of the  MBB "to                                                               
facilitate the capital requirements of our communities."                                                                        
Co-Chair  Green  concluded  that  this bill  would  increase  the                                                               
current MBB authority from $500 million to $750 million.                                                                        
9:21:26 AM                                                                                                                    
Senator Bunde  asked whether the  MBBA bonds were  "guaranteed by                                                               
the full faith and credit of the State".                                                                                        
Senator  Stedman  responded  in  the negative;  "it's  a  pooling                                                               
mechanism  and financing  mechanism to  allow cost  reduction and                                                               
make it easier for the communities to issue the bonds".                                                                         
Senator Bunde acknowledged, but asked  whether the State would be                                                               
responsible  for   the  debt  were  a   community  to  experience                                                               
financial difficulties.                                                                                                         
Senator Stedman replied that the  State would have "the authority                                                               
to  interdict   in  case   of  a  default".   He  asked   that  a                                                               
representative of  the Department of Revenue  explain the process                                                               
were  a  default  to  occur.  He  understood  that  to  date,  no                                                               
community default has occurred.                                                                                                 
9:22:41 AM                                                                                                                    
JERRY  BURNETT,   Director,  Administrative   Services  Division,                                                               
Department  of   Revenue,  informed  the  Committee   that  Deven                                                               
Mitchell, Executive  Director of  the Alaska Municipal  Bond Bank                                                               
Authority,  Department  of  Revenue  was  unable  to  attend  the                                                               
hearing  due to  previous commitment.  Continuing, he  noted that                                                               
while no  community has defaulted  on a  loan to date,  the State                                                               
must be prepared for such  an event. "The general obligation debt                                                               
of  the Municipal  Bond  Bank  is moral  obligation  debt of  the                                                               
State."  Thus,   were  a   community  default   experienced,  the                                                               
Department  of  Revenue's  Commissioner  would  be  obligated  to                                                               
request an  appropriation from the Legislature.  The Legislature,                                                               
however,  would  not be  required  to  grant that  appropriation.                                                               
There would be no other obligation on the part of the State.                                                                    
Senator  Bunde asked  whether the  $250,  million increase  might                                                               
affect the  State's bond rating  in consideration of  this "moral                                                               
Mr.  Burnett  stated that  this  increase  would not  impact  the                                                               
State's credit rating.                                                                                                          
Senator Bunde  stated that even  though no community  default has                                                               
been  experienced to  date,  the "potential"  is  there. To  that                                                               
point, he  pondered about the  pressure that would be  exerted on                                                               
Legislators in  regards to the  State's moral obligation  to this                                                               
program  considering the  intense  pressure  the Legislature  has                                                               
received in  regards to Municipality Revenue  Sharing. While this                                                               
Committee  has  discussed  means  through  which  to  reduce  the                                                               
State's debt,  this program "encourages  further debt".  The hope                                                               
is  that  communities would  participate  in  this program  "with                                                               
their eyes very much wide open."  Even though the program is "not                                                               
legally binding,  any default  would end  up at  the feet  of the                                                               
Legislature eventually and would  a responsibility of the General                                                               
9:25:38 AM                                                                                                                    
Senator Stedman  pointed out that there  are "funding mechanisms"                                                               
such  as  covenants  within  the   MBBA  system  that  have  been                                                               
established  to  assist  in  alleviating  this  concern.  Were  a                                                               
community  in  the  State "to  face  general  obligation  default                                                               
issues,"  the State,  "regardless of  whether they  were in  this                                                               
program or not", would "step  in" because otherwise the situation                                                               
would  incur "implications  around  the State".  The State  would                                                               
receive "ample notice" were a  community to be reaching the point                                                               
of  default  and "breaching  their  covenants".  The State  would                                                               
receive  "ample  warning  that  there  is  substantial  financial                                                               
difficulty within  one of our  communities to step in".  One must                                                               
remember  that,  "the   State  is  the  deep   pockets  that  the                                                               
communities go to whenever they  get into a predicament that they                                                               
cannot get themselves  out of". One of the benefits  of having an                                                               
"instrument like  this is"  that a community  must meet  the bond                                                               
covenants in order  to qualify for the  program. This requirement                                                               
should  provide  the   State  "a  little  more   comfort  in  the                                                               
underwriting  of these  bonds". Another  "mechanism" in  the bond                                                               
bank  program is  that were  a community  experiencing cash  flow                                                               
problems and potential  default, "it would be  red-flagged by the                                                               
Municipal Bond Bank" and the  Legislature would be alerted to the                                                               
situation.  This  would  provide  sufficient  time  in  which  to                                                               
address the situation.                                                                                                          
Senator  Bunde stated  that  Senator  Stedman's comments  support                                                               
Senator  Bunde's concerns.  The State  currently has  communities                                                               
that  "are   not  anxious  to  be   financially  responsible  for                                                               
themselves."  Rather than  his position  to be  in opposition  to                                                               
this legislation, his  remarks are intended to be  an alert about                                                               
"potential ultimate outcomes".                                                                                                  
Mr. Burnett reminded  the Committee that the  Authority "has been                                                               
paying a dividend  to the State for the past  several years". The                                                               
MBBA's  original capitalization  was  approximately $18  million,                                                               
and to  date, it has  contributed $26  million to the  State. The                                                               
MBBA  is  both self-supporting  and  a  positive benefit  to  the                                                               
Co-Chair   Green  asked   for  confirmation   that  the   initial                                                               
capitalization was $18 million.                                                                                                 
In  response  to a  question  from  Co-Chair Green,  Mr.  Burnett                                                               
stated that the initial capitalization was in 1977.                                                                             
9:28:53 AM                                                                                                                    
Senator  Hoffman understood  that "the  vast majority  of bonding                                                               
authority has been used for  school construction". To that point,                                                               
he asked whether that trend continued today.                                                                                    
9:29:09 AM                                                                                                                    
Mr. Burnett communicated that the  more recent issuances have not                                                               
primarily been for school construction.  Specifics in this regard                                                               
could be provided.                                                                                                              
Senator  Stedman stated  that some  of the  FY 05  bond issuances                                                               
were  in   support  of  elementary,   middle,  and   high  school                                                               
renovations in  the community of  Petersburg, an ice rink  in the                                                               
community  of   Palmer,  a  hospital   expansion  in   Juneau,  a                                                               
performing arts  center in the  Municipality of Anchorage,  a new                                                               
high school  and pool  in Kodiak,  a small  boat harbor  in Adak,                                                               
street  improvements  in  North  Pole,  and  the  refinancing  of                                                               
outstanding bonds for Haines, Palmer, and other communities.                                                                    
Senator  Stedman stated  that the  MBBA has  served as  a funding                                                               
mechanism "for  more of  the organized areas"  of the  State. The                                                               
bonds  have  been utilized  more  in  communities from  Southeast                                                               
Alaska northward to Anchorage and  the North Slope area more than                                                               
they have been utilized in the Fairbanks area.                                                                                  
Co-Chair  Green asked  the location  of  the project  information                                                               
referenced by Senator Stedman.                                                                                                  
Senator Hoffman stated that the  information is located on page 7                                                               
of the "Alaska Municipal Bond  Bank Authority 2005 Annual Report"                                                               
[copy on file].                                                                                                                 
Co-Chair Green noted that a  "wide variety" of projects have been                                                               
funded by this mechanism.                                                                                                       
Senator  Stedman stated  that  the pie  chart on  page  8 of  the                                                               
report also provides pertinent project funding information.                                                                     
Senator Stedman concluded  his remarks by stating  that the lower                                                               
interest  rates  that  this   pooling  mechanism  offers  provide                                                               
further savings to the citizens of the communities.                                                                             
Co-Chair  Wilken moved  to report  the bill  from Committee  with                                                               
individual recommendations and accompanying fiscal note.                                                                        
There  being no  objection, SB  265 was  REPORTED from  Committee                                                               
with  previous $50,000  fiscal note  #1 dated  February 10,  2006                                                               
from the Department of Revenue.                                                                                                 

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