Legislature(2017 - 2018)SENATE FINANCE 532

03/30/2017 09:00 AM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ SB 97 PENSION OBLIGATION BONDS TELECONFERENCED
Heard & Held
+ HB 57 APPROP: OPERATING BUDGET/LOANS/FUNDS TELECONFERENCED
Scheduled but Not Heard
+ Bills Previously Heard/Scheduled TELECONFERENCED
+= SB 32 PRESCRIPTIONS FOR BIOLOGICAL PRODUCTS TELECONFERENCED
Moved SB 32 Out of Committee
SENATE BILL NO. 97                                                                                                            
                                                                                                                                
     "An Act relating to pension obligation bonds."                                                                             
                                                                                                                                
9:01:42 AM                                                                                                                    
                                                                                                                                
LAURA CRAMER, STAFF, SENATOR  ANNA MACKINNON, introduced the                                                                    
legislation.  She  stated that  the  bill  would reduce  the                                                                    
state's authority to issue pension  obligation bonds from $5                                                                    
billion, to  $2.5 billion. The  bill also required  that the                                                                    
Department of Revenue  (DOR) would submit a  proposal to the                                                                    
Legislative budget  and Audit Committee  (LB&A) on  the plan                                                                    
for issuing the bonds, the purpose  of which as to bring the                                                                    
item  before the  legislature  for consideration,  therefore                                                                    
involving the legislature in the process.                                                                                       
                                                                                                                                
9:02:22 AM                                                                                                                    
                                                                                                                                
Ms.  Cramer  highlighted  the Sectional  Analysis  (copy  on                                                                    
file):                                                                                                                          
                                                                                                                                
     *Section  1: Requires  a subsidiary  created under  the                                                                  
     Alaska   Housing  Finance   Corporation  to   submit  a                                                                    
     proposal  to the  Legislative Budget  and Audit  (LB&A)                                                                    
     Committee prior  to borrowing  money and  issuing bonds                                                                    
     for the purpose of  financing or facilitating financing                                                                    
     of a governmental employer's  share of unfunded accrued                                                                    
     actuarial liability of retirement systems                                                                                  
                                                                                                                                
     *Section  2: Creates  a  new  subsection outlining  the                                                                  
     process  for   submitting  a   proposal  to   the  LB&A                                                                    
     Committee                                                                                                                  
                                                                                                                                
     *Section  3:  Requires  the  State  Bond  Committee  to                                                                  
     submit  a  proposal  to the  LB&A  Committee  prior  to                                                                    
     issuance  and  sales  of  bonds   for  the  purpose  of                                                                    
     financing or  facilitating financing of  a governmental                                                                    
     employer's   share   of  unfunded   accrued   actuarial                                                                    
     liability  of retirement  systems, including  the costs                                                                    
     of issuance and administration                                                                                             
     *Section  4: Creates  a  new  subsection outlining  the                                                                  
     process  for   submitting  a   proposal  to   the  LB&A                                                                    
     Committee                                                                                                                  
                                                                                                                              
     *Section 5:  Amends the  pension obligation  bond limit                                                                  
     from $5,000,000,000 to $2,500,000,000                                                                                      
                                                                                                                                
     *Section  6:  Requires   the  Pension  Obligation  Bond                                                                  
     Corporation to submit a proposal  to the LB&A Committee                                                                    
     prior to  issuance and sales  of bonds for  the purpose                                                                    
     of   financing   or   facilitating   financing   of   a                                                                    
     governmental  employer's  share   of  unfunded  accrued                                                                    
     actuarial  liability of  retirement systems,  including                                                                    
     the costs of issuance and administration                                                                                   
                                                                                                                              
     *Section  7: Creates  a  new  subsection outlining  the                                                                  
     process  for   submitting  a   proposal  to   the  LB&A                                                                    
     Committee                                                                                                                  
                                                                                                                                
     *Section  8: Requires  the Alaska  Municipal Bond  Bank                                                                  
     Authority to  submit a proposal  to the  LB&A Committee                                                                    
     prior to  issuance of  bonds, notes,  commercial paper,                                                                    
     or  other  obligations  for the  purpose  of  assisting                                                                    
     employers to prepay all or  a portion of their share of                                                                    
     unfunded  accrued actuarial  liabilities of  retirement                                                                    
     systems in an effort to reduce their costs                                                                                 
                                                                                                                              
     *Section  9: Requires  a subsidiary  created under  the                                                                  
     Alaska  Municipal  Bond  Bank  Authority  to  submit  a                                                                    
     proposal  to  the  LB&A Committee  prior  to  borrowing                                                                    
     money and  issuing bonds for  the purpose  of financing                                                                    
     or facilitating financing  of a governmental employer's                                                                    
     share  of  unfunded   accrued  actuarial  liability  of                                                                    
     retirement systems                                                                                                         
                                                                                                                                
     *Section  10: Creates  a new  subsection outlining  the                                                                  
     process  for   submitting  a   proposal  to   the  LB&A                                                                    
     Committee                                                                                                                  
                                                                                                                                
     *Section 11:  Conforming language  for the powers  of a                                                                  
     subsidiary   corporation  created   under  the   Alaska                                                                    
     Municipal Bond Bank Authority                                                                                              
                                                                                                                                
     *Section 13:  Conforming language  for the  issuance of                                                                  
     bonds  and  notes by  the  Alaska  Municipal Bond  Bank                                                                    
     Authority                                                                                                                  
                                                                                                                                
9:05:05 AM                                                                                                                    
                                                                                                                                
Co-Chair MacKinnon was  open to the bill  being sponsored by                                                                    
the   Senate  Finance   Committee.  She   recalled  a   past                                                                    
conversation regarding  the riskiness of  pension obligation                                                                    
bonds. She  recognized that  some legislative  members would                                                                    
prefer  the  number  of  bonds  be zero,  and  she  was  not                                                                    
endorsing  the  issuance  of pension  obligation  bonds  but                                                                    
believed that the bill struck  a balance with the governor's                                                                    
office.                                                                                                                         
                                                                                                                                
9:07:03 AM                                                                                                                    
                                                                                                                                
Co-Chair Hoffman thought that  the legislation reflected the                                                                    
currently  fiscal climate  of the  state  and believed  that                                                                    
committee  support  would  be  a  strong  statement  to  the                                                                    
public.                                                                                                                         
                                                                                                                                
Co-Chair  MacKinnon  said  that   she  would  clean  up  any                                                                    
technical details caused by changing the sponsorship.                                                                           
                                                                                                                                
Vice-Chair  Bishop  and  Senator  von  Imhof  supported  the                                                                    
change in sponsorship.                                                                                                          
                                                                                                                                
9:07:53 AM                                                                                                                    
                                                                                                                                
Senator Olson expressed grave  reservations about the future                                                                    
repercussions of the legislation.                                                                                               
                                                                                                                                
9:08:20 AM                                                                                                                    
                                                                                                                                
Vice-Chair  Bishop  opined   the  possible  consequences  of                                                                    
issuing pension obligation bonds.                                                                                               
                                                                                                                                
9:09:08 AM                                                                                                                    
                                                                                                                                
Senator  von Imhof  thought that  the  bill was  a good  and                                                                    
reasonable compromise.                                                                                                          
                                                                                                                                
9:09:42 AM                                                                                                                    
                                                                                                                                
Senator Dunleavy  appreciated the conversation.  He wondered                                                                    
how the  bill would be  perceived by Legislative  Budget and                                                                    
Audit (LB&A).                                                                                                                   
                                                                                                                                
9:10:27 AM                                                                                                                    
                                                                                                                                
Co-Chair MacKinnon replied that  the Pension Obligation Bond                                                                    
Corporation would take  the administration's proposal, which                                                                    
they would  have already approved by  resolution, and submit                                                                    
it to LB&A 45 days prior  to the bond issuance. She spoke of                                                                    
previous  attempts  by  the administration  to  address  the                                                                    
issue  of  pension  obligation bonds.  She  noted  that  the                                                                    
administration  would  not  be   obligated  to  advance  the                                                                    
legislation,  and  could   still  issue  pension  obligation                                                                    
bonds, but that a formalized  notification would be given to                                                                    
the legislature.                                                                                                                
                                                                                                                                
Senator   Dunleavy  understood   that   regardless  of   the                                                                    
legislation the administration could issue bonds.                                                                               
                                                                                                                                
Co-Chair  MacKinnon replied  in  the affirmative,  up to  $5                                                                    
billion. The  legislation would  limit the  authorization to                                                                    
$2.5  billion.  She specified  that  the  bill would  simply                                                                    
reduce  the  borrowing   capacity.  She  directed  committee                                                                    
attention to  Page 5,  which reflected  the $5  billion, she                                                                    
believed  that the  bill would  allow the  administration to                                                                    
act  in the  best interest  of the  state while  providing a                                                                    
checkpoint, so  the legislature could all  a special session                                                                    
if  necessary.   She  expounded  on  the   state's  unfunded                                                                    
liability and  how the bill  would limit the  financial risk                                                                    
to  the  state  by  issuing pension  obligation  bonds.  She                                                                    
relayed that  she had met  with the governor on  the matter.                                                                    
She hoped that the legislation  struck a balance between the                                                                    
many different schools of thought surrounding the issue.                                                                        
                                                                                                                                
9:16:43 AM                                                                                                                    
                                                                                                                                
Senator  Dunleavy supported  the full  committee sponsorship                                                                    
of the legislation.                                                                                                             
                                                                                                                                
9:17:44 AM                                                                                                                    
                                                                                                                                
Co-Chair  MacKinnon  explained  that the  legislation  would                                                                    
provide  the  opportunity  for the  legislature  to  call  a                                                                    
special  session   in  order  to  formally   oppose  pension                                                                    
obligation  bonds proposed  by  the  governor. She  asserted                                                                    
that the governor had been  receptive in previous talks with                                                                    
the legislature concerning the issue.                                                                                           
                                                                                                                                
9:18:18 AM                                                                                                                    
                                                                                                                                
Co-Chair  MacKinnon  relayed  that  a  new  version  of  the                                                                    
legislation would  be drafted to reflect  the full committee                                                                    
sponsorship.                                                                                                                    
                                                                                                                                
Co-Chair MacKinnon CLOSED public testimony.                                                                                     
                                                                                                                                
9:20:02 AM                                                                                                                    
                                                                                                                                
DEVEN  MITCHELL, EXECUTIVE  DIRECTOR, ALASKA  MUNICIPAL BOND                                                                    
BANK  AUTHORITY,  DEPARTMENT  OF REVENUE,  stated  that  the                                                                    
administration  supported   the  proposed   legislation.  He                                                                    
believed that  collaboration between the  administration and                                                                    
the legislature on issuing bonds  would be beneficial to the                                                                    
state. He  felt that  the $2.5 billion  issuance was  in the                                                                    
"sweet  spot" and  added  that  the state  did  not want  to                                                                    
become overfunded in the retirement  trust or there could be                                                                    
the  negative  impact  of  extra   benefits  being  paid  to                                                                    
retirees  that   people  believed  already   had  sufficient                                                                    
benefits.  He  said  that  there  were  nuances  within  the                                                                    
current structure  of the  state's participation  in funding                                                                    
the  retirement  system through  the  payment  on behalf  of                                                                    
allowance that  was currently  established. He  expounded on                                                                    
the size of future payments  on the bonds, which could reach                                                                    
up to $11 billion over 5 years.                                                                                                 
                                                                                                                                
9:23:52 AM                                                                                                                    
                                                                                                                                
Senator  von  Imhof  understood  that  under  the  bill  the                                                                    
administration would  have the  authority to issue  bonds up                                                                    
to $2.5 billion against the wishes of LB&A.                                                                                     
                                                                                                                                
Ms. Cramer  replied that he  would need  legal clarification                                                                    
to  answer  the  question.  He  thought  that  there  was  a                                                                    
requirement  to  provide  additional  information  to  LB&A,                                                                    
which would  result in an  additional 45 days. He  said that                                                                    
if  LB&A did  not  approve, and  the  legislature failed  to                                                                    
convene a special session, there  would be potential for the                                                                    
administration  to move  forward despite  the objections  of                                                                    
LB&A.                                                                                                                           
                                                                                                                                
Ms.  Cramer added  that the  legislature could  not delegate                                                                    
its authority  entirely to one  committee, which  meant that                                                                    
the LB&A  committee could  not act on  behalf of  the entire                                                                    
legislature. She  said that  after a  45-day period,  if the                                                                    
legislature  did  not  act, the  administration  could  move                                                                    
forward with a pension obligation issuance.                                                                                     
                                                                                                                                
9:25:55 AM                                                                                                                    
                                                                                                                                
Senator  von   Imhof  queried  what  would   happen  if  the                                                                    
legislature convened to vote against a proposal.                                                                                
                                                                                                                                
Ms. Cramer  believed that the legislature  would introduce a                                                                    
resolution taking  official action  against the  issuance of                                                                    
the bond, which would result  in the administration no being                                                                    
able to issue the bonds.                                                                                                        
                                                                                                                                
9:26:39 AM                                                                                                                    
                                                                                                                                
Senator von  Imhof understood that the  legislature crafting                                                                    
a  resolution that  stated they  did not  support the  bonds                                                                    
would be enough to block the bond sale.                                                                                         
                                                                                                                                
9:26:57 AM                                                                                                                    
                                                                                                                                
Co-Chair MacKinnon  interjected that the bond  sale would be                                                                    
blocked if  the legislature raised  any flag that  they were                                                                    
non-supportive. She  said that  the market would  then raise                                                                    
the interest  rate on the  bond if  there was a  chance that                                                                    
the legislature would not back the payments.                                                                                    
                                                                                                                                
9:28:17 AM                                                                                                                    
                                                                                                                                
Senator von  Imhof thought that  it could be  worth pursuing                                                                    
whether   there  was   a  final   legal  backstop   for  the                                                                    
legislature if  the markets did  not respond  quickly enough                                                                    
during the 45 to 90-day window.                                                                                                 
                                                                                                                                
9:29:01 AM                                                                                                                    
                                                                                                                                
Co-Chair MacKinnon  suggested that an amendment  to the bill                                                                    
could  be   offered  that  spoke  to   Senator  von  Imhof's                                                                    
concerns. She hoped to have  the bill on the governor's desk                                                                    
at the end of this session.                                                                                                     
                                                                                                                                
9:30:21 AM                                                                                                                    
                                                                                                                                
Mr.  Mitchell imagined  that  the  legislature convening  in                                                                    
special session in objection to  the proposed issuance would                                                                    
have a significant  impact on the issuance of  the bonds. He                                                                    
said that  the law could  be changed during  special session                                                                    
to eliminate the authority to issue bonds altogether.                                                                           
                                                                                                                                
9:30:35 AM                                                                                                                    
Co-Chair MacKinnon  said that the  bill was an  attempted to                                                                    
strike   a  balance   between   the   legislature  and   the                                                                    
administration.                                                                                                                 
                                                                                                                                
9:31:46 AM                                                                                                                    
                                                                                                                                
Senator Olson  wondered whether the finance  committee could                                                                    
stop  the legislation  by denying  an appropriation  for the                                                                    
bonds that are issued.                                                                                                          
                                                                                                                                
Ms. Cramer replied  that the committee would not  be able to                                                                    
legally   stop  the   appropriation  for   the  bonds.   She                                                                    
reiterated that  the entire legislature  would have  to vote                                                                    
against the appropriation.                                                                                                      
                                                                                                                                
9:32:26 AM                                                                                                                    
                                                                                                                                
Mr.  Mitchell furthered  that the  only thing  being pledged                                                                    
with the bonds would be the  state's word that it would pay.                                                                    
He said  that if the  Senate or House Finance  committee, in                                                                    
isolation, were to  put forward a resolution  that they were                                                                    
not going to  support payment on the bonds,  the state would                                                                    
lose investors.                                                                                                                 
                                                                                                                                
9:33:51 AM                                                                                                                    
                                                                                                                                
Co-Chair  MacKinnon  queried  the ramifications  inside  the                                                                    
credit market that if a  finance committee failed to pay the                                                                    
debt.                                                                                                                           
                                                                                                                                
Mr. Mitchell  replied that the  ramifications would  be very                                                                    
negative. He said  that the state would expect  to receive a                                                                    
significant  downgrade of  its  credit rating  and would  be                                                                    
locked out of the capital  markets for an extended period of                                                                    
time.                                                                                                                           
                                                                                                                                
9:34:41 AM                                                                                                                    
                                                                                                                                
Senator Dunleavy  thought that if  LB&A said no to  the bond                                                                    
they  should  forward  a letter  to  the  finance  committee                                                                    
stating their position. he understood  that the only way the                                                                    
system worked was for the  governor to get agreement through                                                                    
LB&A.                                                                                                                           
                                                                                                                                
Mr. Mitchell  thought that the bill  would further establish                                                                    
the partnership that existed  between the legislative branch                                                                    
and the executive branch.                                                                                                       
                                                                                                                                
9:36:22 AM                                                                                                                    
                                                                                                                                
Vice-Chair Bishop appreciated the discussion.                                                                                   
                                                                                                                                
9:37:06 AM                                                                                                                    
                                                                                                                                
Co-Chair  MacKinnon  said  that  if  the  state  had  issued                                                                    
pension obligation  bonds in 2007, the  arbitrage would have                                                                    
worked to the  benefit of the state. She stated  that if the                                                                    
state had  issued the  2016 bonds Alaska  would have  seen a                                                                    
positive  return.  She  underscored that  there  were  risks                                                                    
associated with arbitrage.                                                                                                      
                                                                                                                                
9:39:24 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:45:51 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
9:46:24 AM                                                                                                                    
                                                                                                                                
Senator  Olson  noted that  Mr.  Mitchell  had been  in  his                                                                    
position through  several administrations. He  lamented that                                                                    
the tension  between the administration and  the legislature                                                                    
could be intense. He spoke of  the trouble that the State of                                                                    
Kansas was currently experiencing  due to pension obligation                                                                    
bonds.                                                                                                                          
                                                                                                                                
Mr. Mitchell  said that he  could not speak directly  to the                                                                    
situation in  Kansas but knew that  pension obligation could                                                                    
be structured  and used in a  variety of ways. He  said that                                                                    
in come  circumstances a short-term  expense could  become a                                                                    
long-term liability. He countered  that in other instances a                                                                    
deposit could be  put into a trust, obligating  the trust to                                                                    
pay the debt service. He noted  that the cost of capital was                                                                    
one thing that could be  controlled, and that he had focused                                                                    
on getting the lowest cost  possible when looking at pension                                                                    
obligation bonds. He  relayed that the state  was pursuing a                                                                    
more  conservative   structure  and  the  benefits   of  the                                                                    
issuance that had been contemplated  in Fall 2106 would have                                                                    
been  the  most  significant  in   the  final  year  of  the                                                                    
transaction;  23  years  from   now  the  actuarily  assumed                                                                    
payment would  have be  cut in half.  He thought  that there                                                                    
could  be  addition  restrictions  on the  allowed  cost  of                                                                    
capital.  He  warned  against being  overfunded  within  the                                                                    
trust.                                                                                                                          
                                                                                                                                
9:51:23 AM                                                                                                                    
                                                                                                                                
Senator  Olson understood  that the  measures that  had been                                                                    
put in  place in 2016  had been  adequate to keep  the state                                                                    
out of financial trouble.                                                                                                       
                                                                                                                                
Mr.  Mitchell  in the  affirmative.  He  explained that  the                                                                    
state had  a cost of capital  below 4 percent, as  well as a                                                                    
structure that assured that savings accrued interest.                                                                           
                                                                                                                                
9:51:46 AM                                                                                                                    
                                                                                                                                
Senator Olson wondered whether the  state had made a mistake                                                                    
of not issuing bonds when the stock market was stronger.                                                                        
                                                                                                                                
Mr.  Mitchell replied  that time  would tell.  He said  that                                                                    
debt could be controlled.                                                                                                       
                                                                                                                                
9:53:27 AM                                                                                                                    
                                                                                                                                
Senator  Olson  wondered  whether  having  too  many  people                                                                    
scrutinizing  the   matter  could  be  detrimental   to  the                                                                    
process.                                                                                                                        
                                                                                                                                
Mr. Mitchell responded  that nimbleness was a  virtue in the                                                                    
financial market  and that being  able to act quickly  was a                                                                    
strength,  he warned  that  there  had to  be  a balance  in                                                                    
government.  He believed  that  proper  checks and  balances                                                                    
should be practiced.                                                                                                            
                                                                                                                                
9:55:40 AM                                                                                                                    
                                                                                                                                
Senator  von  Imhof spoke  of  global  trade agreements  and                                                                    
their  effects  on the  global  markets.  She lamented  that                                                                    
economic trends could be unpredictable.                                                                                         
                                                                                                                                
SB  97  was   HEARD  and  HELD  in   committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                

Document Name Date/Time Subjects
SB 97 Sectional Analysis.pdf SFIN 3/30/2017 9:00:00 AM
SB 97
SB 97 Sponsor Statement.pdf SFIN 3/30/2017 9:00:00 AM
SB 97
SB32 Letters of Support.pdf HHSS 4/13/2017 3:00:00 PM
SFIN 3/30/2017 9:00:00 AM
SB 32
SB32 Letters of Opposition.pdf HHSS 4/13/2017 3:00:00 PM
SFIN 3/30/2017 9:00:00 AM
SB 32