Legislature(2003 - 2004)
01/20/2004 02:31 PM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE January 20, 2004 2:31 PM TAPE HFC 04-7, Side A CALL TO ORDER Co-Chair Harris called the House Finance Committee meeting to order at 2:31 PM. MEMBERS PRESENT Representative John Harris, Co-Chair Representative Bill Williams, Co-Chair Representative Kevin Meyer, Vice-Chair Representative Mike Chenault Representative Eric Croft Representative Hugh Fate Representative Richard Foster Representative Mike Hawker Representative Bill Stoltze MEMBERS ABSENT Representative Carl Moses Representative Reggie Joule ALSO PRESENT Linda Hall, Director, Division of Insurance, Department of Community & Economic Development; Paul Lisankie, Director, Division of Workers Compensation, Department of Labor & Workforce Development; Edward Fisher, Deputy Commissioner, Department of Labor; Alaska Housing Finance Corporation; Dan Fauske, Executive Director, Alaska Housing Finance Corporation, Department of Revenue; Diane Barrans, Executive Officer, Alaska Student Loan Corporation, Alaska Commission on Postsecondary Education, Department of Education; Sheila King, Finance Officer, Postsecondary Education Commission. PRESENT VIA TELECONFERENCE None GENERAL SUBJECT(S): OVERVIEW: WORKERS COMPENSATION/INCREASED COSTS/ SALARY ADJUSTMENTS BONDING: ALASKA HOUSING FINANCE CORPORATION (AHFC) ALASKA STUDENT LOAN CORPORATION The following overview was taken in log note format. Tapes and handouts will be on file with the House Finance Committee through the 23rd Legislative Session, contact 465- 2156. After the 23rd Legislative Session they will be available through the Legislative Library at 465-3808. LOG SPEAKER DISCUSSION TAPE HFC 04-07 SIDE A 000 Co-Chair Harris Convened the House Finance Committee meeting at 2:31 p.m. WORKERS COMPENSATION 0012 LINDA HALL, Discussed the insurance marketplace, the DIRECTOR, assigned risk market, profitability of DIVISION OF insurance companies, the rate increases INSURANCE, receiving publicity, and the current DEPARTMENT OF prices in Alaska's guaranty associations. COMMUNITY & ECONOMIC DEVELOPMENT 226 Ms. Hall Stated the assigned risk plan has been losing money for about four years. The expenses become a major burden to businesses. 305 Ms. Hall Discussed the expense and loss ratios range and the Alaska loss ratio for a six-year period. 428 Ms. Hall Reviewed rate increases since 1988 and stated the cost of claims has gone up. 531 Ms. Hall Discussed the number of claims, and the cost of individual claims and rate increases that affect employers across the state. Pointed to crisis in insurance guaranty association formed under statute as a safety net to minimize financial loss to claimants or policyholders because of the insolvency of the insurer. Noted that the costs are passed on. Described the Fremont Indemnity Company insolvency. Offered to provide a cash flow model. 743 Ms. Hall Talked about three other insolvent insurance carriers whose claims are being handled through the guaranty association. Stated that the claims affect about 700 injured workers and approximately 400 employers. 828 Ms. Hall Discussed the prorating of claim payments, "an unacceptable solution for everyone involved." Explained that injured workers receive lower weekly wage checks and partial payment for medical expenses. 913 Ms. Hall Explained that when a carrier becomes insolvent, claims are transferred to the guaranty fund of the state, or to the employer. This additional, unanticipated cost could force small companies out of business. 1006 Ms. Hall Continued discussing the Alaska Guaranty Fund and the potential for prorating claims, which was averted through 2003 and for the next few months. 1100 Ms. Hall Emphasized need for a stable environment to attract new markets, and for a solution to the funding crisis. 1128 Co-Chair Harris Asked about forthcoming legislation from the Administration. 1148 Ms. Hall Described proposed sources of funding involving additional assessments and a guaranty of loans. Stated that new legislation will include streamlining the appeals processes. 1309 Ms. Hall Continued answering questions relating to the first substantial rate increase since 1988, the assumptions that go into rate- making, and losses in the operation of the insurance industry. 1546 Vice-Chair Meyer Asked if insurance companies prefer lump sum payments rather than paying for job rehabilitation of claimants. 1604 PAUL LISANKIE, Offered to research the question and DIRECTOR, DIVISION provide a response. OF WORKERS COMPENSATION, DEPARTMENT OF LABOR & WORKFORCE DEVELOPMENT 1713 Vice-Chair Meyer Expressed concern that an insurance company might prefer a lump sum payment that wouldn't help train the worker to reenter the workforce. 1757 Co-Chair Williams Asked the cost to the state to cover the loss. 1815 Ms. Hall Responded that it will not be a general fund request in the bills to be introduced this week. 1859 Ms. Hall Continued to answer questions posed by the members of the Committee. 3151 Representative Croft Asked, in relation to the data presented from 1997, how much loss is attributable to stock market performance versus inadequate premium levels. 3241 Ms. Hall Replied that historically and in the mid- 1990s there was an ability by insurance companies to offset underwriting losses with investment income. 2252 ALASKA HOUSING FINANCE CORPORATION (AHFC) 3508 DAN FAUSKE, Referenced AHFC's bonding authority and EXECUTIVE DIRECTOR, capacity to generate money. Explained ALASKA HOUSING that the State has proposed [in SB 279] FINANCE CORPORATION, that AHFC issue two additional bond DEPARTMENT OF series to fund state capital projects REVENUE totaling $45 million. In the housing loan fund, $480 million are not currently leveraged with debt, and the equity in that fund will be transferred to the general account. The AHFC made a proposal to long-term bond for $25 million at low- interest rates for the Village Safe Water Program. There is potential use of AHFC general obligation for an additional $20 million, increasing the total commitment to $45 million. 3749 Mr. Fauske Continued, the three major rating agencies were agreeable to the $20 million proposal but not with going further until the State comes to terms with its current fiscal situation. Stated that he believes the State can maintain its credit rating. 3900 Mr. Fauske Continued discussing the proposal to replace the bonds with $45 million in 10- year serial bonds. Mr. Fauske referred to HB 256 [Passed in 2003] that arrived at a formula-driven dividend plan that led to the AHFC being upgraded. He asserted that AHFC would want to protect that and its core mission in the housing market across the state. 3952 Mr. Fauske Explained that the nature of the revolving loan fund program will remain the same and should be made bondable. The size of the program has grown and now represents $19-20 million of net income to the corporation. The Corporation must be able to sell bonds to assist in its liquidity position from a working capital position. For AHFC to function, it must have significant working capital to buy the loans as they come in and then recycle them with loan proceeds as it goes to market. 4039 Mr. Fauske Continued, AHFC is currently doing well but it is now even more important to have an informative debate on SB 279, which will assist AHFC in generating these additional monies. 4107 Representative Questioned why the rating agencies were Hawker hesitant to provide good ratings for the $45 million package in light of AHFC's $278 million unrestricted net asset balance as of June 30, 2003. 4253 Mr. Fauske Replied that it is due to the rating agencies' concerns that for years AHFC has been paying out more than it earns, as well as the length of debt service in conjunction with net income. 4327 Mr. Fauske Further explained that the fund equity balance that has been maintained at $1.7- 1.8 billion is a key number examined by the rating agencies. If the number falls, the rating agency takes necessary steps. 4356 JOE DUBLER, DIRECTOR Pointed out that different schedules in OF FINANCE, ALASKA the financial statements have bond issues HOUSING FINANCE that rely solely on AHFC's general CORPORATION obligations without specific assets pledged to them. The fund deficits that reside in those funds would have to be made up by the general account of the revolving fund. After backing all those out, the result is the $103 million dividend for FY 04 and a balance of $100 million in unrestricted money. The AHFC mortgage loan activity in FY 03 was nearly $1 billion. In FY 05, another $100 million will go out from the Corporation without returning. The rate agencies project outward when cash flows out from the Corporation instead of strictly looking at present balances. 4523 Representative Croft Regarding the two bonding proposals, he asked how much would be incurred in annual obligation for the $45 million bond and how much the dividend would be reduced. 4602 Mr. Dubler Replied that the debt service is approximately $5.5 million on a 10-year bond. 4631 Representative Croft Asked about the other proposal involving buildings and maintenance. 4640 Mr. Fauske Replied that from the perspective of AHFC, purchasing a working asset is a viable business. TAPE HFC 04-07, Side B 4606 Mr. Fauske Explained that significant capital would be raised for maintenance on the buildings. Spoke to the purchase of the Atwood Building. 4543 Representative Croft Commented that he had understood that the State had purchased the Atwood Building to save paying rent while, in fact, AHFC collects rent on the building. 4509 Representative Croft Asked if, in effect, these bonds involve some money obligation now, and future payments over the next 10-20 years. Mr. Fauske affirmed. 4433 Co-Chair Harris Asked if there is anything in the Governor's proposal [SB 279] involving AHFC that they would prefer not to do in terms of their portfolio. 4417 Mr. Fauske Replied that AHFC did not want to go beyond $45 million. 4332 Mr. Fauske Continued that AHFC has $1 billion dollars of variable rate debt. The AHFC is now at a point that makes proceeding further potentially detrimental. 4238 Mr. Fauske Commented on making progress in solving the issues of debt. 4201 Co-Chair Harris Referred to the anticipated $103 million dollar dividend this year and asked the amount that would be available in unrestricted general funds. 4141 Mr. Fauske Replied that of the $103 million, $50 million will go to debt service. General Obligation Bonds were sold, leaving $53 million of which $20-25 million went to the Village Safe Water Program with another $18-20 million in AHFC matching money for federal dollars. POSTSECONDARY EDUCATION: ASLC 3941 DIANE BARRANS, Stated that over the past ten years, the EXECUTIVE OFFICER, Legislature has played a key role in ALASKA STUDENT LOAN improving the Alaska Student Loan CORPORATION; Corporation's (ASLC) financial health. EXECUTIVE DIRECTOR, ALASKA COMMISSION ON Discussed commitments of the Corporation POSTSECONDARY and optimizing assets. EDUCATION, DEPARTMENT OF Discussed Capital Project Revenue Bonds. EDUCATION Referred to handout, "Return of Contributed Assets to State," (copy on file.) 3606 Ms. Barrans Explained a new master trust indenture, the 2002 indenture, in "Recent Management Enhancements," (copy on file.) 3353 Ms. Barrans Referred to two bar charts, "Cumulative State Contributions to ASLC," and "ASLC Fund Equity by Fiscal Year," (copies on file.) Explained that these illustrate that between 1988-1992 ASLC received assets and cash just over $306 million and will return some of the contributed capital to the State when the Corporation can do so without impairing its ability to offer low-interest loans. 3237 Representative Croft Asked about the $260 million seed fund to ASLC, and questioned if there were also infusions of general fund dollars during the period 1988-1992. 3214 Ms. Barrans Confirmed that through 1992, an additional $47 million in cash was provided. Stated that $260 million in loan assets were transferred at the time the Corporation was created. 3152 Representative Croft Asked if $307 million can be returned to the State over time, or if the $260 million are secured assets for student loans. 3139 Ms. Barrans Stated that ASLC intends to return approximately $250-260 million over the next three years, including $75 million intended for capital projects in FY 05. Discussed the continuation of annual dividends, and the restructuring of underlying assets in 1994. 3038 Ms. Barrans Discussed federal guaranteed loans and payment to ASLC of a special subsidy by the federal government as a lender. 2932 Representative Croft Responded to Representative Croft's comment regarding a better fiscal outlook due to several factors including elimination of student loan forgiveness, better collection including garnishing Permanent Fund dividends, and federal subsidies. Ms. Barrans agreed and also noted the low rate issuing bonds in the market in the last few years. 2850 Representative Croft Asked if ASLC is under undue pressure. 2828 Ms. Barrans Responded that ASLC feels assured it can continue to offer an attractive education loan package and also return these assets to the State. 2817 Ms. Barrans Discussed the return of $260 million over the next three years and the annual dividend. 2720 Representative Asked how the $306 million in Hawker contributions were included and reported in ASLC financial statements. 2627 SHEILA KING, FINANCE Explained that net equity is on the OFFICER, ALASKA balance sheet as net assets, and ASLC is STUDENT LOAN wrapped in with other programs. Offered CORPORATION, to provide financial statements. POSTSECONDARY EDUCATION COMMISSION 2544 Representative Requested the 2003 annual report. Hawker 2456 Ms. Barrans Explained that ASLC created a new consolidated loan program allowing borrowers at 8-9% to consolidate at lower interest, and the Corporation used assets through those programs to issue and leverage bonds. 2339 ADJOURNMENT The meeting was adjourned at 3:43 PM.