Legislature(2017 - 2018)HOUSE FINANCE 519
02/08/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: State Debt Affordability Analysis | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 23 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
February 8, 2017
1:49 p.m.
1:49:28 PM
CALL TO ORDER
Co-Chair Seaton called the House Finance Committee meeting
to order at 1:49 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative David Guttenberg
Representative Scott Kawasaki
Representative Dan Ortiz
Representative Lance Pruitt
Representative Steve Thompson
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Deven Mitchell, Debt Manager and Executive Director, Alaska
Municipal Bond Bank Authority, Department of Revenue.
SUMMARY
PRESENTATION: STATE DEBT AFFORDABILITY ANALYSIS
DEPARTMENT OF REVENUE
Co-Chair Seaton discussed the agenda for the day.
^PRESENTATION: STATE DEBT AFFORDABILITY ANALYSIS
1:50:49 PM
DEVEN MITCHELL, DEBT MANAGER AND EXECUTIVE DIRECTOR, ALASKA
MUNICIPAL BOND BANK AUTHORITY, DEPARTMENT OF REVENUE,
provided a PowerPoint presentation titled "2017 Credit
Review & State Debt Summary" (copy on file). He shared that
the Department of Revenue (DOR) was required to provide two
publications annually: "The Alaska Public Debt Book" and
"Debt Affordability Analysis." He began with the graph on
slide 2 titled "State Savings Account Balances and Ratings
Timeline" and explained that the state's credit was
evaluated by three national credit rating agencies:
Standard and Poor's, Moody's Investor's Service, and Fitch
Ratings. He noted that the graph depicted how the state's
credit rating fared over time. He reported that in 2014 the
state received an AAA rating, which was the highest rating.
The rating coincided with the state's reserves reaching
their peak (denoted by the blue horizontal line) in the
amount of $24 billion comprised of the Constitutional
Budget Reserve (CBR), Statutory Budget Reserve (SBR), and
the Earnings Reserve Account (ERA) of the Permanent Fund.
1:53:00 PM
Representative Guttenberg appreciated the presentation. He
asked about Alaska's rating as compared to other states.
Mr. Mitchell answered that Alaska was "squarely in the
middle" of the states with its current AA+ rating. He
remarked that the credit rating had the same "negative
trajectory associated with the state's reserve balances"
and was worrisome. He noted that if the historical
unrestricted general fund (UGF) revenue was superimposed on
the graph UGF would be in decline and when compared to
expenses caused a "recurring fiscal gap issue." He
indicated that how the state "categorized revenues and how
[the state] utilized reserves" was "creating a portrayal"
that resulted in "diminished credit strength." He furthered
that the state was on a "negative outlook from all three
credit rating agencies", which meant that the statistical
probability existed that the rating would drop if the state
did not "shift how it defined revenue compared to
expenditures."
1:56:09 PM
Representative Guttenberg stated that in the context of
Alaska and how it counted and looked at revenue what state
did Alaska compare to. He asked how other states credit
rating was measured. He thought that Alaska was unique with
a "single source" of revenue. Mr. Mitchell replied that
there was not a comparable state. He delineated that a
single source of income for another state would likely be a
broad-based tax that was more predictable and stable versus
the volatility of the price of oil.
Mr. Mitchell moved to slide 3 titled "Rating Agency Views -
State of Alaska:"
POSITIVES
•Large Reserves provide time to determine what fiscal
future will look like
•Some combination of re-casting the treatment of
various available revenue streams currently
restricted, creating new revenue, or reducing
expenditures can resolve funding gap
•Baseline assumption that the State will correct
deficit trend before coming close to reserve depletion
•Strong management of financial operations
Negatives
•Future of Alaska's creditworthiness hinges on the
ability of its political leaders to reach agreement on
substantive fiscal reforms during the 2017 Legislature
•Narrow revenue sources continue to reflect economic
volatility
•Alaska's share of the PERS/TRS net pension
liabilities translates to a very high $7,402 per
capita
Mr. Mitchell reiterated that the state's current credit
rating was AA+(Negative) [Standard and Poor's and Fitch
Ratings] and Aa2 [Moody's]. He noted that the credit
agencies released a report when issuing a rating. He
addressed the positive and negative findings contained in
the reports. He indicated that the state's pension
liability was the highest in the nation.
2:01:36 PM
Representative Kawasaki referred to slide 2 that tracked
the state's account balances and ratings and thought they
were confusing. He wondered how quickly the ratings could
change. Mr. Mitchell replied that in the summer of 2014 the
price of oil was $106/bbl. and quickly dropped by the fall,
and in December 2014, Moody's placed the state on a
negative outlook with S&P to follow. The downgrades had
coincided with time passing and no proposed solutions. He
offered that "settlement" funding deposited into the
Constitutional Budget Reserve (CBR) during the same year
CBR funds were used to close a fiscal gap was perceived as
reserve spending - even though the settlement was current
year revenue paying for current year costs. Representative
Kawasaki asked what it would take for the legislature to
turn the negative outlook around. He wondered which option
was most important. Mr. Mitchell replied it was a
combination of actions. He specified that the elimination
of risk was the most important action. Minimizing risk
included minimizing volatility, creating a balanced budget
and a sustainable means of paying for expenses in the
future.
2:04:39 PM
Representative Ortiz referred to the last bullet point on
slide 3 and offered that Mr. Mitchell described the amount
as "overwhelming" and "the highest in the country."
Representative Ortiz asked for further detail. Mr. Mitchell
responded he had a slide later in the presentation that
would answer the question. Historically, Alaska had been
overly generous in its retirement system and had a small
population. He exemplified the 5-year vesting benefit that
cost the state $1.5 million that was most likely
underfunded. He pointed to the benefits of the retirement
tier 1 as contributors to the liability that lessened with
each subsequent tier until the establishment of tier 4,
which moderated the problem.
Mr. Mitchell mentioned that the next three slides were
designed to point out the rating agencies methodology. He
turned to slide 4 titled "Overview of Moody's State GO
Rating Methodology:"
Moody's outlines four broad rating factors and 10 sub-
factors in its fundamental analytical framework for
rating U.S. States, each with an assigned weighting
Economy, 20% weight
Governance, 30% weight
Finances, 30% weight
Debt, 20% weight
Each of these factors is evaluated using various sub-
factors scored on a scale from 1 (Aaa) to 9(Baa and
Below)
Each sub-factor's value is multiplied by its assigned
weight and then summed to produce a weighted average
score, which is translated to the grid-indicated
rating
Mr. Mitchell reviewed slide 5 titled "Overview of S&P State
GO Rating Methodology:"
S&P outlines five key rating factors in its analytical
framework for rating U.S. States
Government framework
Financial management
Economy
Budgetary performance
Debt and liability profile
Each of these factors is evaluated using various
metrics scored on a scale from 1 (strongest) to 4
(weakest)
í
Each metric may have several indicators that are
scored on the same scale and averaged
Ultimately, the scores for the five factors are
averaged with equal weight to arrive at an overall
score which is translated to an indicative credit
level
2:07:50 PM
Representative Grenn spoke to the rating factors of Moody's
and S&P. He asked for examples of actions or items that
would fall under the category of government framework or
governance. Mr. Mitchell replied that a statutory
requirement to balance the budget, or the requirement to
develop a 10-year plan, and items such as the debt book and
affordability analysis, were some examples.
Mr. Mitchell addressed slide 6 titled " Overview of Fitch
State GO Rating Methodology:"
Fitch outlines four key rating factors in its U.S.
State Government Tax-Supported Rating Criteria
Debt and Other Long-term Liabilities
Economy
Finances
Management and Administration
Fitch does not use a numerical scoring system;
instead, for each rating factor an entity may be
classified as "Above Average," "Average," or "Below
Average" based on a number of different attributes
Fitch does not detail how a final rating is derived
based on how an entity rates in each category
Overall, Fitch's ratings for states' GO debt falls
within the two highest rating categories of AAA or AA,
with a few outliers
Fitch's methodology is more of a traditional rating
approach and allows the rating analysts greater
discretion in assigning relative weights to each
factor depending on issuer specifics
Mr. Mitchell commented that he attempted to present the
state in a positive manner when meeting with rating
agencies. He moved to slide 8 titled "Executive Summary"
that contained exerts from a ratings presentation given the
previous fall:
The State continues to make progress in implementing a
sustainable fiscal plan.
Fiscal and Budget Update
Budget passed with substantial reductions in
operations and capital spending
The Governor showed strong fiscal
discipline, cutting costs and exercising his
veto powers to significantly reduce state
spending
Unrestricted General Fund expense
reductions from FY2015: $1.2 billion
Oil and gas tax credits: $430 million
Paused capital projects totaling $250
million and closed down mega-projects
Permanent Fund Dividend: $665 million
The State is continuing to drive towards long
term solutions
Substantial Reserves and Resources
General Fund balance: $3.5 billion1
Constitutional Budget Reserve ("CBRF"):
$7.3 billion1
Permanent Fund: $52.8 billion,
comprised of $44.2 billion corpus and
$8.6 billion Earnings Reserve2
Oil, gas and other resource-based
industries provide substantial annual
revenue that is available for
appropriation
Alaska has taken extraordinary steps to
improve pension funding over the past
ten years including $3 billion deposit
from its CBRF in FY 2015
Mr. Mitchell detailed that even though a fiscal plan was
not implemented last session in response to the budget
crisis significant actions had occurred. He referred to the
governor's veto of a portion of the Permanent Fund Dividend
(PFD) and the legislature allowing the reduction to happen.
He highlighted the budget actions as recognition that
everyone understood the state was in difficult financial
times.
Representative Kawasaki referred to the PFD reduction and
asked whether the rating agencies viewed the action as
positive in the areas of governance and economy. Mr.
Mitchell answered in the affirmative. He shared that
historically, credit rating analysts took a skeptical
position regarding the state ever choosing to use the
Permanent Fund for government. He recognized that the state
had "limited options when it came to supporting the large
geographic area and dispersed population with services that
individuals had come to expect." The governor taking the
action showed it was not the "political third rail" and was
"definitely a credit strength."
2:13:41 PM
Representative Kawasaki referred to oil and gas tax credits
and asked whether the reduced payment was considered a
liability. Mr. Mitchell replied that the liability was
acknowledged, but it had not risen to the same level of
concern as the PERS/TRS issue because it was not considered
state debt.
Representative Pruitt referred to slide 8 related to the $3
billion deposit from the CBR into the retirement trust in
FY 15. He asked how the rating agencies viewed the step. He
noted it had been done prior to the current budget crisis.
He voiced that major policy shifts happened slowly over
time. He asked whether the rating agencies considered the
slow movement of the political process. Mr. Mitchell
replied in the affirmative. He likened the state to a ship
and relayed that it was difficult to turn a ship,
especially in the wind. He cited the contribution from the
CBR to the retirement systems. He delineated that he
stridently touted the action as a "credit positive" and the
agencies agreed. He qualified that the state recently
received the "credit" on its scorecards for "prudent
actions" for the deposit because rating agencies relied on
the Comprehensive Annual Financial Report (CAFR) from the
retirement systems for purposes of analysis. Representative
Pruitt asked how long it would take for Alaska to reduce
its highest ranking for retirement liability when compared
to other states. Mr. Mitchell responded that he was
uncertain but expected improvement due to the recent
recognition of the $3 billion deposit and new accounting
standards that required states to incorporate retirement
benefits into their balance sheets. He indicated that the
state had already been accounting for its retirement
liability, which would likely place the state in a stronger
position relative to other states that had to show its full
liability due to the rule change.
Representative Wilson asked how the reduction in the PFD
reduction and the oil tax credit liability's impact on the
economy affected the state's ratings. Mr. Mitchell replied
that since the state did not have a broad-based tax there
was not as much analysis on the economic sector. He related
that on the local level the economic responses were more
likely to have an impact on credit analysis. The oil and
gas tax credits and tax structure were factors and were
followed by ratings analysts. Representative Wilson
surmised that relative to the "credit rating portion" the
budgetary decisions the state makes was "just a numbers
game." Mr. Mitchell replied in the affirmative. He
explained that viewing the process "very simplistically"
the agencies considered what the state spent per capita and
what it received per capita from the economy. He offered
that as counterintuitive, the state's credit rating
improved if there were fewer residents in the state because
the state's income was from a third-party source.
2:21:46 PM
Co-Chair Seaton referred to a statement about a required
minimum payment the state owed for oil tax credits. He
corrected that the state was not required to appropriate a
certain amount out of the fund but was only required to
deposit money into the "028 fund."
Representative Wilson appreciated the correction.
Representative Ortiz referred to slide 8 and asked about
the General Fund (GF) balance of $3.5 billion listing under
the category "Substantial Reserves and Resources." Mr.
Mitchell answered that the amount was "sitting in the
general fund" and was obligated for a variety of purposes
and merely demonstrated liquidity. Representative Ortiz
asked for verification that the amount was obligated in the
current budget cycle. Mr. Mitchell replied in the
affirmative and confirmed that the money was encumbered.
Co-Chair Seaton asked if the amount included Power Cost
Equalization (PCE) and other funds. Mr. Mitchell answered
in the affirmative because they were sub-funds of the GF.
2:24:07 PM
Mr. Mitchell moved to slide 9 titled "Revenues & Expenses:
The Status Quo and Future Flexibility" that contained a
chart of the state's revenues and expenses. He noted that
the figures were based on the spring forecast. He reported
that the projected budget deficits through 2021 were listed
as $3.9 billion in 2016, $3.1 billion in 2017, $3 billion
in 2018, and $2.9 billion in 2019. He stated that "it was a
difficult credit story to tell" rating agencies. He pointed
to the diminishing short-term reserves that included the
CBR and the ERA. The data assumed shifting to the use of
the ERA. The chart portrayed the state as "continuing down
the same path" as the status quo and depicted the ERA
balance at $3.5 billion in 2021, reduced from $8.5 billion
in 2016. He felt that the scenario was negative when
considering the deficit line in red. Consequently, the
department included another category of funding that had
the potential for use. He pointed to the columns showing
"Total Revenue Subject to Appropriation." He explained that
DOR considered revenue available for appropriation but was
historically restricted for use by "custom" but could be
designated for certain purposes and added with UGF revenue
to total an amount that was roughly the amount needed to
balance the budget. He exemplified the 2018 column data
that listed $4.4 billion as the Total Revenue Subject to
Appropriation. The subject to appropriation revenue had
"potential" for GF budgetary use but did not included items
such as the dividend and other items not considered a GF
expense.
2:27:41 PM
Mr. Mitchell addressed slide 10 titled "FY 17 Enacted
Budget Overview." The graphs and charts depicted that
spending was significantly reduced over the last five years
from $8 billion to less than $4.4 billion while maintaining
essential services. The funding by type (lower right chart)
from FY 15 through FY 17 showed that DGF would remain about
the same, Undesignated General Funds (UGF) decreasing,
federal funds increasing, other funds remaining the same,
and the ERA diminished in FY 17.
Mr. Mitchell advanced to slide 11 titled "PERS and TRS
Funding Status:"
FY2016 returns are expected to impact funding levels;
however, the State's longer-run trend of improving
funding levels continues.
FY2015 valuations illustrate the State's improved
funding status across all areas of its PERS and
TRS programs (1)
FY2015 figures reflect the impact of the State's
$3 billion transfer from the CBRF
$1 billion PERS / $2 billion TRS
Defined Benefit OPEB funding is near or above
100% for both PERS and TRS
FY2015 final valuations were adopted by the ARM
Board in June, were used for the purpose of
determining the FY2018 funding amount, and will
be included in the FY2016 CAFR
Preliminary FY2016 Results
Preliminary FY2016 returns were -0.36%, well below
actuarial assumptions, but consistent with other
national pension returns
Estimated funded ratio of approximately 76.9% (PERS)
and 81.9% (TRS)
Draft FY2016 actuarial valuation incorporating FY2016
returns is expected to be available in early 2017
[The slide also contained a chart]
Mr. Mitchell relayed that in the past retirement system
funding had not been nearly as important in credit ratings
as it was at present. Alaska had gone from a fully funded
status to a not-so-great status, but it had been improving.
He pointed to the chart that showed the funding status for
PERS in 2015; the funded ratio based on valuation assets
was 67 percent. He detailed that the actuarial accrued
liability in 2015 was $13.337.9 billion and the valuation
assets amounted to $8.9 million. He defined that an
actuarially assumed unfunded liability existed when the
actuarial liability exceeded the assets. He offered that
there were many assumptions that went into the actuary
analysis and it was difficult to maintain consistency over
the years. He listed some of the factors that affected
liability from year to year: worse investment performance
than assumed; increased health care costs; retirees living
longer lifespans. He explained that the state determined
that the $8.9 billion in PERS assets earning 8 percent
between the current time and when the funds were expended
would be sufficient to satisfy the liabilities, but the
picture might look differently on a yearly basis due to
factors changing that affected liability. He remarked that
TRS performed better in FY 15 with the pension funded ratio
based on valuation assets at 76.9 percent and the
healthcare funded ratio at 100.3 percent.
2:33:03 PM
Mr. Mitchell continued that the FY 16 performance was worse
than expected and he anticipated the numbers to decrease
slightly.
Co-Chair Seaton worried about the 103 percent. He recalled
that if the ratio reached 105 percent the state would have
to pay retirees a post retirement pension adjustment
assuming the pension investments earned more than 8
percent. He believed that the 103 percent valuation
pertained to the GF contribution the legislature made in FY
15. He emphasized that the deposit was made with GF money
related to the underfunding situation and not from the
usual retirement system funding. He wondered whether the GF
money could be reimbursed to the state instead of being
dispersed as post retirement pension adjustments. Mr.
Mitchell believed the adjustment potential based on
overfunding the trust only applied to Tier 1 employees. Co-
Chair Seaton asked Mr. Mitchell to investigate the issue.
Mr. Mitchell agreed to follow up. He relayed that the issue
was a Division of Retirement and Benefits matter under the
Department of Administration (DOA). He referred to a recent
presentation by the commissioner [of DOA] who acknowledged
the Other Post-Employment Benefits (OPEB) overfunded level
and was actively trying to manage TRS in a manner to avoid
the potential adjustment payments by directing funds
towards pension benefits rather than OPEB as allowed.
2:36:58 PM
Representative Ortiz asked whether it was safe to say that
the PERS and TRS situation was gradually getting better.
Mr. Mitchell replied in the affirmative and delineated that
the situation had "substantively" improved recently due to
the $3 billion deposit. The funding ratios were "not
terrible," and placed the state in the upper middle ranking
when compared to other states.
Mr. Mitchell addressed slide 13 titled "State Debt
Obligation Process:"
All Forms of State Debt are Authorized First by law
May be a one-time issuance amount or a not-to-
exceed issuance limit in statute
General obligation bonds must then also be
approved by a majority of voters
All State Debt must be structured and authorized by
the State Bond Committee
Includes general obligation bonds, subject to
appropriation issues, & state revenue bonds
The State Bond Committee determines method and timing
of debt issues to best utilize the state's credit and
debt capacity while meeting the authorized projects
cash flow needs
The State has established other debt obligations
Reimbursement Programs
The School Debt Reimbursement Program or HB 528
reimbursement
Communities issues bonds and the State agrees to
reimburse at a certain level
Not currently authorized for new debt and periodically
partially funded
Retirement Systems
Unfunded actuarially assumed liability (UAAL) for
defined benefit employees is guaranteed by the
Constitution creating a state debt
Annual payments on the UAAL of other employers is
reflected as State debt in the CAFR
Some flexibility in how payments are made
2:39:47 PM
Mr. Mitchell addressed slides 14 and 15 titled " Total Debt
in Alaska at June 30, 2016," which was taken directly from
the debt book. He listed the debt categories and amount of
outstanding principal as follows:
State Debt
State of Alaska General Obligation Bond $823.2
State Guaranteed Debt
Alaska Housing Finance Corporation State Guaranteed Bonds
(Veterans' Mortgage Program) $11.6
State Supported Debt
Certificates of Participation $27.5
Lease Revenue Bonds with State Credit Pledge and Payment
$228.2
Total State Supported Debt $255.6
State Supported Municipal Debt
State Reimbursement of Municipal School Debt Service $901.0
State Reimbursement of capital projects $32.8
Total State Supported Municipal Debt $933.8
State Supported Unfunded Pension Liability
Unfunded Actuarially Assumed Liability $5,801.0
Total State Unfunded Pension Liability $5,801.0
State Moral Obligation Debt
Alaska Municipal Bond Bank:
2005, 2010, & 2016 General Resolution General Obligation
Bonds 1, $90.4
Alaska Energy Authority:
Power Revenue Bonds #1 through #6 $62.6
Alaska Student Loan Corporation
Student Loan Revenue Bonds $26.9
Education Loan Backed Notes $85.6
Total State Moral Obligation Debt $1,265.5
State Revenue Debt
Sportfish Revenue Bonds $27.9
International Airports Revenue Bonds $487.3
University of Alaska Debt
University of Alaska Revenue Bonds $270.3
University Lease Liability and Notes Payable $16.2
Installment Contracts $1.3
Total University of Alaska Debt $287.8
Total State Revenue and University Debt $803.0
State Agency Debt
Alaska Housing Finance Corporation:
Commercial Paper $71.6
Alaska Municipal Bond Bank Coastal Energy Loan Bonds
$10.3
Alaska Railroad $147.9
Northern Tobacco Securitization Corporation
2006 Tobacco Settlement Asset-Backed Bonds (1) $338.6
Total State Agency Debt $568.4
State Agency Collateralized or Insured Debt
Alaska Housing Finance Corporation:
Collateralized Home Mortgage Revenue Bonds & Mortgage
Revenue Bonds:
2002 Through 2011 (First Time Homebuyer Program) $799.4
General Mortgage Revenue Bonds II -2012 $121.6
Government Purpose Bonds 1997 & 2001 $122.8
State Capital Project Bonds, 2002-2011 (2) $147.6
State Capital Project Bonds, II 2012-2015 $818.5
Alaska Industrial Development and Export Authority:
Revolving Fund Bonds $55.6
Power Revenue Bonds, First Series (Snettisham Hydro
Project) $64.4
Total State Agency Collateralized or Insured Debt
$2,129.9
Total State and State Agency Debt $12,592.1
Municipal Debt
School G.O. Debt $1,338.8
Other G.O. Debt $1,047.8
Revenue Debt $960.2
Total Municipal Debt $3,346.8
Mr. Mitchell explained that the state via constitutional
amendment guaranteed Alaska Housing Finance Corporation
State Guaranteed Bonds for the Veterans' Mortgage Program
through GO bonds. He noted that the debt had always been
paid by the mortgages. He reported that the Unfunded
Actuarially Assumed Liability was a new category required
per new Governmental Accounting Standards Board (GASB)
rules. He informed committee members that the State Moral
Obligation Debts were credit enhancements used to acquire
lower capital costs by leveraging the state's credit rating
and historically no debt was owed. He clarified that State
Agency Debt was accumulated by state public corporations
and was not supported by the state.
2:41:46 PM
Mr. Mitchell moved to slide 16 titled "State Debt
Obligations Outstanding" as of June 30, 2016 and reported
that the GO debt "par amount" or current valuation was
$823.235 billion, and the final payment year was 2038.
Representative Thompson spoke to GO bond funded projects in
Fairbanks that the governor vetoed in FY 17. He asked if
the bonds had been sold by the 30th of June. Mr. Mitchell
responded that the governor did not have the authority to
veto GO bond spending although he could decide when the
spending occurred. He thought that the later was the case
stating that the governor wanted to slow down the projects.
Representative Thompson asked whether the interest was
accruing on the bonds. Ms. Mitchell answered that perhaps
but, indicated that the state had not issued roughly $110
million remaining of the 2012 Transportation Act authority.
He had not yet received the updated accounting from the
Department of Transportation and Public Facilities (DOT)
related to the slowdown.
2:44:33 PM
Representative Pruitt referred to the 2006 Tobacco
Settlement Asset-Backed Bonds on slide 15 and wanted to
know more about the bonds. Ms. Mitchell referred to the
tobacco lawsuit which was the impetus for the bonds. The
bonds were issued through a subsidiary of Alaska Housing
Finance Corporation (AHFC) [Northern Tobacco Securitization
Corporation] that securitized the master settlement
agreement with the tobacco companies. The bonds were
considered risky therefore, the interest rates were high.
Representative Pruitt noted a "substantial" amount of
interest accrued on the other AHFC debt. He inquired about
the reason. Ms. Mitchell did not perceive the interest
rates as high. He indicated that the interest to maturity
on the tobacco debt was more than the outstanding principle
but the other AHFC debts were at approximately 50 percent
and the interest rates were lower. He guessed that the
rates were market rate or better due to AHFC's typically
highly rated securities that performed well.
2:47:02 PM
Representative Guttenberg asked for clarification about the
interest collected from the GO bonds. He asked when the
interest began to accrue, and the payments were due. Mr.
Mitchell indicated that currently GO bonds were sold as
long dated fixed rate bonds. The state shifted over to long
term financing from one-year notes in the previous year,
which carried an interest rate of 3.25 percent. The state
had to be very conservative but had to reinvest the money
by the Treasury Division in a short-term pool earning .5
percent to 1 percent. He expounded that there was a cost to
money sitting in the pool that was not needed therefore,
not all the bonds were sold at once; DOR attempted to match
annual cash flow. He reported that the state had about $150
million in the bank waiting for expenditure.
Co-Chair Seaton indicated that Vice-Chair Gara had joined
the meeting.
Mr. Mitchell continued with slide 16. He highlighted the
level of contribution the state made for the Unfunded
Actuarially Assumed Liability. He defined the liability as
the payment the state made for the actuarially assumed rate
above the 22 percent for PERS and the 12 percent for TRS
employer rate. He elaborated that the $185 million FY 2018
UGF Payment was more than the state was paying in GO bonds
and close [less] to the amount the state paid for the total
of all other debt categories combined.
2:50:48 PM
Representative Wilson referred to slide 16 and asked what
the Subject to Appropriation (COP/Lease Revenue) category
was. Mr. Mitchell replied that subject to appropriation
meant that the legislature statutorily committed to pay on
an obligation. He explained that a COP was a Certificate of
Participation, which was a lease fractionalized into $5,000
participation notes; a certificate was essentially the same
thing as purchasing a $5,000 bond. There was currently one
COP outstanding for the Alaska Native Tribal Health
Consortium (ANTHC) residential housing facility. In
addition, the state had two Lease Revenue Bonds; Goose
Creek Correctional Center (GCCC) and the Atwood Building
and parking garage acquisition funded through AHFC.
Representative Wilson asked whether the UGF debt payment
total for FY 18 was paid through the operating budget. Mr.
Mitchell replied in the affirmative. Representative Wilson
asked if the state had bonding authority that it had not
yet utilized and if so, she wondered what the total amount
was. Mr. Mitchell replied the amount was $110 million
remaining from the Transportation Act. He noted the 2015
moratorium on the School Debt Reimbursement program.
Representative Wilson wondered whether recinding the
authorization required adopting statute.
2:54:18 PM
Mr. Mitchell responded in the affirmative and delineated
that it would be difficult to rescind the authority because
the projects were voted for in aggregate. Representative
Wilson wondered what the budgetary impacts of authorizing
the $110 million GO debt were and how to utilize it so the
state was not paying more interest. Mr. Mitchell answered
DOR always endeavored to issue debt wisely without paying
more interest. He turned to slide 18 titled "General
Obligation Bonds" that contained a graph that depicted
existing GO bond outstanding debt service. He elaborated
that the graph illustrated that in 2018 and 2019 the state
owed $90 million per year the debt stabilizing and
gradually declined. The data dovetailed with the prior
slide that illustrated a similar "glide path" for
outstanding principle. The state had a mature bond program
and issued bonds with level debt service. He hypothesized
that the state could utilize the $110 million in a manner
that would not increase above the FY 19 debt service level
into the future by the "back end load" method; larger
amounts of principle would mature further into the future.
However, he recommended that debt issuance was optimized
when it was part of a larger strategy.
2:57:44 PM
Mr. Mitchell reverted to slide 17 titled "General
Obligation Bonds Current Financings" containing a graph
that depicted outstanding GO bond principal gradually
declining in a stair step fashion. He determined that any
slowdown in the Transportation Act debt authorization would
not result in a requirement to increase debt from a prior
year's budget but would result in an overall greater level
of debt service. He returned to slide 18 and informed
committee members that the state had a limited ability to
determine debt capacity due to a volatile revenue stream
and a high reliance on reserves. The state relied on a
percentage of projected unrestricted revenue to determine a
level of debt service. He indicated that G.O. debt service
represented 5.4 percent of projected unrestricted revenue
for FY 2017 but was expected to decline to 2.5% by 2026. He
moved to slide 19 titled "Bonds Authorized by Law and Paid
from General Fund." He described the graph that illustrated
outstanding state debt annual payments; the GO bonds were
depicted in dark blue, certificates of participation were
lighter blue, and the lease financing were light blue. He
read the following bullet points from the slide:
Annual debt service remains well below the 1985 peak
of $182.2 million
Debt service represents 7.5% of projected unrestricted
revenue for FY 2017, but declines to 3.7% by 2026
Currently exceeds Debt Affordability Policy of 5%
Mr. Mitchell furthered that the debt affordability was
above 5 percent due to the decline in UGF.
3:01:06 PM
Mr. Mitchell reviewed slide 20 titled "Bonds, Bond
Reimbursements & Statutory UAAL Debt" and noted that the
graph layered on the PERS and TRS payments. He pointed to
the PERS/TRS payments depicted in light blue and offered
that the debt dwarfed other types of debt. He noted that by
2039 the debt was totally comprised of the retirement
obligation at roughly $830 million while all of debt
declined and disappeared the PERS/TRS debt increased.
Representative Wilson asked what the Capital Reimbursement
Program listed on slide 20 was. Mr. Mitchell replied that
the program was a result of legislation in 2002 that
reimbursed various projects around the state on military
bases, harbors, electric utilities, schools etc.
Representative Wilson followed up about PERS and TRS. She
wondered what the graph would look like if the state was
paying its obligated share and "if it was based on where
employees were." Mr. Mitchell estimated that the state paid
55 percent of the employer makeup in PERS; the amount was
smaller in TRS. He surmised that the issue was complex, and
he was unsure how it could be demonstrated in the chart due
to the necessity to rely on actuarial data that was
multifaceted.
3:04:41 PM
Representative Wilson restated her request for data on a
broad level based on the numbers on slide 20 to better
understanding how much money they were talking about. Mr.
Mitchell believed he could do more investigation and follow
up.
Co-Chair Seaton interjected that previous analyses had been
done two years earlier on determining what percentage
municipalities could absorb.
3:06:09 PM
Mr. Mitchell addressed slide 21 titled "Largest State Debt
Payment Volatility." He noted that the point of the slide
was that the largest liability to the state was also the
most volatile. He observed that the entire retirement
system construct was currently based on a rate of return of
8 percent. He remarked that at present value the total
unfunded liability was $6 billion assuming the trust made 8
percent. The actual cash flow was $11.3 billion amortized
over 23 years at a discount 8 percent. Historically, the
state had been able to achieve 8 percent over a 30-year
average. He voiced that some individuals were suggesting a
move to a lower assumption. However, a move to a lower
assumption increased what the state would owe; $19.5
billion in 2039 and the state debt payment would be $2.289
billion increasing from $865 million. The one percent
difference in the assumption was "astounding" and was much
higher at a reduction to a 5 percent assumption creating a
liability of $33.2 billion.
3:09:33 PM
Mr. Mitchell turned to slide 22 titled "State Debt
Obligations Authorized but Unissued" that contained a chart
listing authorized but unissued debt. He reported that the
Transportation Act GO bond balance of $110.348 million had
a potential issuance date of FY 18. In addition, there were
outstanding authorizations that were subject to
appropriation by the legislature for the Knik Arm Crossing
up to $300 million and the Pension Obligation Bond
authorization up to $5 billion.
Representative Wilson asked whether the state crime lab was
paid for via bonding. Mr. Mitchell replied the lab had been
proposed as a COP but was ultimately paid for using GF.
Representative Wilson asked about GCCC. Mr. Mitchell
replied that GCCC utilized lease revenue bonds. The state
paid all the costs and the Matanuska Susitna Borough acted
as a "conduit." The department refinanced the bonds in the
previous year. Representative Wilson stated someone had
told her the state would always owe millions on GCCC. She
asked whether the state would own the facility once the
bonds were paid in full. Mr. Mitchell replied that unlike
the Anchorage jail, the state would own GCCC when the bonds
were paid off.
3:12:41 PM
Co-Chair Seaton addressed the schedule for the following
day.
ADJOURNMENT
3:13:24 PM
The meeting was adjourned at 3:13 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| House Finance - DOR Debt Presentation - 2.8.17.pdf |
HFIN 2/8/2017 1:30:00 PM |
DOR Debt Analysis HFIN |
| 2017-02-14 AKMBBA final press release.pdf |
HFIN 2/8/2017 1:30:00 PM |
DOR Debt Response HFIN |
| S&P Report - Alaska Muni Bnd Bnk ser 2017A - Feb 14 2017.pdf |
HFIN 2/8/2017 1:30:00 PM |
DOR Debt Response HFIN |