Legislature(1999 - 2000)

05/01/2000 10:35 AM House FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
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HOUSE FINANCE COMMITTEE                                                                                                         
May 1, 2000                                                                                                                     
10:35 A.M.                                                                                                                      
                                                                                                                                
TAPE HFC 00 - 140, Side 1.                                                                                                      
                                                                                                                                
CALL TO ORDER                                                                                                                   
                                                                                                                                
Co-Chair Therriault called the House Finance Committee                                                                          
meeting to order at 10:35 A.M.                                                                                                  
                                                                                                                                
PRESENT                                                                                                                         
                                                                                                                                
Co-Chair Therriault   Representative Foster                                                                                     
Co-Chair Mulder    Representative Grussendorf                                                                                   
Representative Austerman  Representative Moses                                                                                  
Representative Bunde   Representative Phillips                                                                                  
Representative J. Davies  Representative Williams                                                                               
Representative G. Davis                                                                                                         
                                                                                                                                
ALSO PRESENT                                                                                                                    
                                                                                                                                
Senator John Torgerson; Larry Persily, Deputy Commissioner,                                                                     
Department of Revenue; John Jenks, Chief Investment Officer,                                                                    
Department of Revenue.                                                                                                          
                                                                                                                                
SUMMARY                                                                                                                         
                                                                                                                                
SB 312 An Act relating to the bond redemption subaccount                                                                        
in the earnings reserve account of the permanent                                                                                
fund; and providing for an effective date.                                                                                      
                                                                                                                                
HCS CS SB 312 (FIN) was reported out Committee                                                                                  
with a "do pass" recommendation.                                                                                                
SENATE BILL NO. 312 am                                                                                                          
                                                                                                                                
An Act relating to the special subaccount in the budget                                                                         
reserve fund; and providing for an effective date.                                                                              
                                                                                                                                
SENATOR JOHN TORGERSON stated that it was the intent of the                                                                     
Senate Finance Committee to create a subaccount in order to                                                                     
place $400 million dollars to invest in order to obtain a                                                                       
higher yield than current funds remaining in the Capital                                                                        
Budget Reserve (CBR).                                                                                                           
                                                                                                                                
Senator Torgerson noted that in earlier discussions with the                                                                    
Department of Revenue, it was indicated that the CBR had                                                                        
netted only 1.58% after inflation.  He observed that was not                                                                    
very high.  He noted that SB 312 initially started out                                                                          
setting up a sub account in the Earnings Reserve Account.                                                                       
The yield in that account is over 10%.   It was the intent                                                                      
that the funds would be directed toward the issuance of the                                                                     
repayment of any bonds or debt of the State.  He pointed out                                                                    
that language within the proposed committee substitute does                                                                     
not indicate that the funds be used for debt.                                                                                   
                                                                                                                                
Senator Torgerson added that the Senate had gone through                                                                        
bonding packages which did not create funding mechanisms for                                                                    
debt reimbursements.  He stated that if the money was placed                                                                    
into a sub-account with a higher yield, the Legislature                                                                         
could appropriate that money back into the general fund.                                                                        
                                                                                                                                
Senator Torgerson requested that language be added which                                                                        
would stipulate that the Legislature appropriate for the                                                                        
debt of the State.                                                                                                              
                                                                                                                                
Co-Chair Therriault referenced Page 2, Section (b), language                                                                    
originally linked to Senate language and the issuance of                                                                        
bonds.  He suggested the date was no longer needed. Senator                                                                     
Torgerson explained that in the initial version of the                                                                          
General Obligation (GO) bond package with the 10% earned,                                                                       
that language would be required.  He noted that the language                                                                    
would be subject to legislative appropriation every year.                                                                       
He did not see the need for an automatic redeposit, as it                                                                       
would be technically an accounting change, not a legal                                                                          
issue.                                                                                                                          
                                                                                                                                
Co-Chair Therriault advised that the concern was that if                                                                        
this were tied to the repayment of the debt, would there                                                                        
then be an arbitrage problem with the Internal Revenue                                                                          
Service (IRS).  Senator Torgerson pointed out that he had                                                                       
"run the language by" the State Bond Council, who then                                                                          
recommended language to amend the Senate version to address                                                                     
that concern.  He clarified that in stipulating May, there                                                                      
would be no arbitrage problem or other tax consequences.                                                                        
                                                                                                                                
Senator Torgerson added that if language were added which                                                                       
clarifies that the Legislature "may" appropriate for debt                                                                       
repayment, then the Bond Counsel recommends adding the                                                                          
language: "For other purposes provided by law".  That                                                                           
language would clearly stipulate that the Legislature could                                                                     
use the money for anything that they choose to.                                                                                 
                                                                                                                                
Representative Austerman inquired how $400 million dollars                                                                      
had been determined.  Senator Torgerson explained that the                                                                      
bond package passed from the Senate was for $440 million                                                                        
dollars.  The debt reimbursement portion of that is $38                                                                         
million dollars.  He compared it to the amount of return                                                                        
received from the investment of the Permanent Fund.                                                                             
                                                                                                                                
Representative Grussendorf pointed out that the Senate had                                                                      
moved away from the General Obligation (GO) approach.  He                                                                       
asked if that would take care of the municipal bonds dealing                                                                    
with harbors and schools.  Senator Torgerson stated that the                                                                    
funds could address such concerns.  He noted that there is                                                                      
other debt the State pays every year.  He interjected that                                                                      
part of the plan was to use a portion of the Tobacco                                                                            
Settlement money to pay for some of the school projects.                                                                        
                                                                                                                                
Senator Torgerson acknowledged that the legislation is a                                                                        
simple accounting mechanism.  If the money were aggressively                                                                    
managed, he believed it would be better for the State.  He                                                                      
pointed out that an 8% return would place an additional $25                                                                     
million dollars into the State coffers.                                                                                         
                                                                                                                                
Co-Chair Mulder recommended that a sentence be dropped in                                                                       
order to address the arbitrage concern.  He believed that                                                                       
the proposed language would raise a red flag.  Senator                                                                          
Torgerson disagreed, noting that there is no one indicating                                                                     
that this is an arbitrage problem.  He reiterated that the                                                                      
Stated Bond Counsel had recommended language to indicate                                                                        
that it be a dedicated fund.                                                                                                    
                                                                                                                                
Vice Chair Bunde agreed that a higher return would bring a                                                                      
higher risk to the State.  The Department of Revenue                                                                            
recommends that the money not be placed into a higher risk                                                                      
zone but rather remain as it is so that it will be                                                                              
available.  He pointed out that they base that suggestion on                                                                    
the expertise of the State hired money managers.  He pointed                                                                    
out that the legislation suggests that we ignore that                                                                           
judgement.  Senator Torgerson responded that it would depend                                                                    
on the price of oil.  He added it is "strange" that the                                                                         
Department would indicate that they do not want to attempt a                                                                    
higher return.  Vice Chair Bunde argued that the money                                                                          
should be accessible on a short-term basis and not more                                                                         
aggressively managed.                                                                                                           
                                                                                                                                
Senator Torgerson observed that the only "downside" would be                                                                    
if the price of oil went down.  If the money was obligated                                                                      
in a long-term situation, then there could be an                                                                                
appropriation.                                                                                                                  
                                                                                                                                
Representative J. Davies suggested that the problem is that                                                                     
there could be a substantial risk and penalty.  As employees                                                                    
get closer to retirement age, the advice is to move into                                                                        
more conservative investment strategies.  The concern rests                                                                     
with the volatility of the market.  He reiterated that there                                                                    
could be a "huge" loss.                                                                                                         
                                                                                                                                
Representative J. Davies noted for the record that if he                                                                        
supports the bill, it would be because there had been long                                                                      
discussions in the Committee regarding the investment                                                                           
horizon of the CBR.  He agreed that the House Finance                                                                           
Committee (HFC) has discussed that they would like to see a                                                                     
higher return on that account.  If the proposed legislation                                                                     
is a way to single that intent, then it would be                                                                                
appropriate.  Representative J. Davies clarified that the                                                                       
passage of the bill would effectively create two pieces of                                                                      
the CBR, a long and short-term investment.  It is essential                                                                     
to recognize that there will be a risk if more money should                                                                     
be needed from the CBR.  He observed that the Legislature                                                                       
has complete authority to spend the money in any way it                                                                         
wants with a _ vote.  The Legislature does not need to                                                                          
specify the purpose.                                                                                                            
                                                                                                                                
Representative Grussendorf stated that the legislation is a                                                                     
"statutory picket fence".  He added that the Legislature                                                                        
would be the ones to determine if the fence is crossed or                                                                       
torn down.  The legislation indicates to the Department of                                                                      
Revenue that they have the ability to invest at a higher                                                                        
rate.                                                                                                                           
                                                                                                                                
Representative G. Davis asked the constraints that would be                                                                     
used in order to pull the money out of the CBR account.  He                                                                     
reiterated the volatility of the stock market at this time.                                                                     
Representative G. Davis stated that the legislation would be                                                                    
starting a new account.  Co-Chair Therriault interjected                                                                        
that it would be a "sub-account", not a new account.  Any                                                                       
Legislature would not be able to put constraints on the                                                                         
appropriation powers of the next Legislature unless through                                                                     
a constitutional amendment.  The only restraints would be                                                                       
the current _ vote determination.                                                                                               
                                                                                                                                
Representative Phillips referenced Page 1, Section 3, and                                                                       
Page 2, Section (b).  She asked if that language was                                                                            
acceptable with Senator Torgerson.                                                                                              
                                                                                                                                
LARRY PERSILY, DEPUTY COMMISSIONER, DEPARTMENT OF REVNEUE,                                                                      
noted that the Department could invest money with a target                                                                      
of a higher yield.  It is important to remember that the                                                                        
higher yield creates a risk that the money would not be                                                                         
available and that we could loose on the investment.                                                                            
Cashing out equities when the market is down could cut into                                                                     
the principle.                                                                                                                  
                                                                                                                                
Mr. Persily recommended that the language in the proposed                                                                       
draft on Page 1, Section 1, should be in statute.  The                                                                          
Commissioner of Department of Revenue has the fiduciary                                                                         
obligation established in statute and the bill should give                                                                      
direction in statute.  He reiterated that there should not                                                                      
be a conflict between statute and Section 1.                                                                                    
                                                                                                                                
Mr. Persily noted that in present time, looking at the                                                                          
spring forecast, the Department determined that November                                                                        
2004, was the date when the CBR would run dry.  As explained                                                                    
in the spring forecast, the State needs about $300 million                                                                      
dollars to be available for a cash flow.  If that amount was                                                                    
backed out, and the projected oil prices were over by $2                                                                        
dollars a barrel, there could be a problem for the                                                                              
Department.                                                                                                                     
                                                                                                                                
Co-Chair Therriault inquired the cushion used by the                                                                            
Department before the CBR was available.  Mr. Persily                                                                           
replied that the CBR has been available for the last 10                                                                         
years.  He did not know what was used before that.                                                                              
                                                                                                                                
JOHN JENKS, CHIEF INVESTMENT OFFICIER, DEPARTMENT OF                                                                            
REVENUE, noted that a transition occurred in 1992, when the                                                                     
Statutory Budget Reserve fund was created.  The CBR has been                                                                    
the State's "shock absorber".                                                                                                   
                                                                                                                                
Mr. Jenks pointed out the time horizon and sensitivity in                                                                       
taking an additional more aggressive investment policy.  If                                                                     
the State was inclined to believe that they had a long time                                                                     
horizon, they might invest in a policy with 60% stocks and                                                                      
40% bonds.  That would be a balanced long-term investment                                                                       
policy and could make approximately 8.25% gross expected                                                                        
return over a five-year period.  He reiterated that would be                                                                    
a gross return and that policy would be substantially                                                                           
riskier than the shorter policy.  That policy would have the                                                                    
possibility of about a 4% chance that at the end of five                                                                        
years, you loose money.  Ending at 3 years, there is a 9%                                                                       
chance that money would be lost.  He emphasized how                                                                             
sensitive the consequences of taking risks are.  Mr. Jenks                                                                      
concluded that the critical nature of investing should be                                                                       
for the long term.                                                                                                              
                                                                                                                                
Representative Austerman inquired the amount of money in the                                                                    
CBR at this time.  Mr. Persily replied that there was about                                                                     
$2.6 billion dollars.  Representative Austerman asked what                                                                      
the FY00 anticipated draw would be.  Mr. Persily replied a                                                                      
little over $300 million dollars.                                                                                               
                                                                                                                                
Representative Austerman requested the Department to comment                                                                    
on the recommendation proposed by Senator Torgerson.  Mr.                                                                       
Persily responded that it would be a policy call for the                                                                        
Legislature.  Mr. Persily noted that the question is if the                                                                     
Department could take the $400 million dollars, place it                                                                        
into a subaccount and then make profitable investment                                                                           
decisions on the long-term horizon. The State Department can                                                                    
do what the Legislature wants; however, there will be a                                                                         
risk.  The amount placed into that account would be a policy                                                                    
call.                                                                                                                           
                                                                                                                                
Co-Chair Mulder asked if it would be absolutely necessary to                                                                    
restructure the language.  Mr. Persily explained that the                                                                       
money could be set aside.  Commissioner Condon has indicated                                                                    
that with the language left in the intent section, it would                                                                     
not relieve him of his fiduciary obligation as it exists in                                                                     
statute.  Mr. Persily emphasized that there needs to be                                                                         
language in legislation which clarifies that understanding.                                                                     
                                                                                                                                
Mr. Persily added that if the Legislature decided to pass SB
312 in some form, because the management fees are higher on                                                                     
equities than they are on fixed income, there would be a                                                                        
small fiscal cost attached for the management fees.  Mr.                                                                        
Jenks stated that the more aggressive policies have certain                                                                     
types of assets, where there is more reliance on the                                                                            
external managers.   There is a small fee associated with                                                                       
the external managers of the equities.                                                                                          
                                                                                                                                
Senator Torgerson interjected that $400 million dollars is                                                                      
equivalent to only 2 months operating budget.                                                                                   
                                                                                                                                
Co-Chair Therriault stated that before the committee                                                                            
substitute was adopted, he would propose to delete Section                                                                      
                                                                                                                                
Co-Chair Mulder MOVED to ADOPT the changed work draft 1-                                                                        
LS1627\D, Cook, 5/1/00, Cook, 5/1/00, as the version of the                                                                     
legislation before the Committee.  There being NO OBJECTION,                                                                    
it was adopted.                                                                                                                 
                                                                                                                                
Representative J. Davies MOVED to AMEND Page 1, Line 8,                                                                         
delete "the" and insert "A", and Page 1, Line 9, insert the                                                                     
sentence from the Intent Section and then delete the                                                                            
remaining portion of Section 1 and renumber appropriately.                                                                      
                                                                                                                                
Co-Chair Therriault asked if it would be appropriate to                                                                         
suggest the language added to Line 9, Page 1, to read:                                                                          
"Money in the sub account shall be invested to yield higher                                                                     
returns than might be feasible to obtain with other money in                                                                    
the budget reserve".  Co-Chair Therriault noted that would                                                                      
be Amendment #1.  There being NO OBJECTION, the change was                                                                      
made.                                                                                                                           
                                                                                                                                
Co-Chair Therriault MOVED to ADOPT Amendment #2 which would                                                                     
add a sentence which stipulates that the,  "Interest earned                                                                     
on the subaccount may be appropriated for debt repayment or                                                                     
any other lawful purpose".  He noted that the legal drafters                                                                    
could determine placement of that language.  Representative                                                                     
J. Davies OBJECTED.  He responded that the Legislature                                                                          
currently has the authority to take that action and that the                                                                    
language should stay as clean as possible.                                                                                      
                                                                                                                                
A roll call vote was taken on the motion.                                                                                       
                                                                                                                                
IN FAVOR:  Foster, Phillips, Mulder, Therriault                                                                                 
OPPOSED: Bunde, J. Davies, G. Davis, Grussendorf,                                                                               
Moses, Austerman                                                                                                                
                                                                                                                                
The MOTION FAILED (4-7).                                                                                                        
                                                                                                                                
Co-Chair Mulder MOVED to report HCS CS SB 312 (FIN) out of                                                                      
Committee.  There being NO OBJECTION, it was so ordered.                                                                        
                                                                                                                                
HCS CS SB 312 (FIN) was reported out of Committee with a "do                                                                    
pass" recommendation.                                                                                                           
ADJOURNMENT                                                                                                                     
                                                                                                                                
The meeting adjourned at 11:20 A.M.                                                                                             
                                                                                                                                
                                                                                                                                
H.F.C. 7 5/01/00                                                                                                                

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