03/05/2007 03:33 PM House W&M
| Audio | Topic |
|---|---|
| Start | |
| HB13 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
March 5, 2007
3:33 p.m.
MEMBERS PRESENT
Representative Mike Hawker, Chair
Representative Anna Fairclough, Vice Chair
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Sharon Cissna
Representative Max Gruenberg
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Bob Lynn
COMMITTEE CALENDAR
HOUSE BILL NO. 13
"An Act relating to prepayments of accrued actuarial liabilities
of government retirement systems; relating to the Alaska
Municipal Bond Bank Authority; permitting the Alaska Municipal
Bond Bank Authority or a subsidiary of the authority to assist
state and municipal governmental employers by issuing bonds,
notes, commercial paper, or other obligations to enable the
governmental employers to prepay all or a portion of the
governmental employers' shares of the unfunded accrued actuarial
liabilities of retirement systems; authorizing a governmental
employer to issue obligations to prepay all or a portion of the
governmental employer's shares of the unfunded accrued actuarial
liabilities of retirement systems and to enter into a lease or
other contractual agreement with a trustee or the Alaska
Municipal Bond Bank Authority or a subsidiary of the authority
in connection with the issuance of obligations for that purpose,
and relating to those obligations; and providing for an
effective date."
- MOVED CSHB 13(W&M) OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
BILL: HB 13
SHORT TITLE: RETIREMENT SYSTEM LIABILITY/BONDS/CORP.
SPONSOR(s): REPRESENTATIVE(s) HAWKER
01/16/07 (H) PREFILE RELEASED 1/5/07
01/16/07 (H) READ THE FIRST TIME - REFERRALS
01/16/07 (H) W&M, STA, FIN
02/14/07 (H) W&M AT 3:30 PM HOUSE FINANCE 519
02/14/07 (H) Heard & Held
02/14/07 (H) MINUTE(W&M)
02/16/07 (H) W&M AT 3:30 PM HOUSE FINANCE 519
02/16/07 (H) Heard & Held
02/16/07 (H) MINUTE(W&M)
03/05/07 (H) W&M AT 3:30 PM HOUSE FINANCE 519
WITNESS REGISTER
BRIAN ANDREWS, Deputy Commissioner
Treasury Division
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Testified in favor of HB 13 and answered
questions.
DEVEN MITCHELL, Debt Manager
Treasury Division;
Executive Director
Municipal Bond Bank Authority (MBBA)
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Explained provisions of HB 13 and answered
questions.
MIKE BARNHILL, Assistant Attorney General
Labor and State Affairs Section
Department of Law (DOL)
Juneau, Alaska
POSITION STATEMENT: Presented an overview of HB 13 and answered
questions.
LAWRENCE A. SEMMENS, CPA, Finance Director
City of Kenai
Kenai, Alaska
POSITION STATEMENT: Testified in favor of HB 13 and responded
to questions.
MICHAEL E. LAMB, CPA, CGFM, Chief Financial Officer
Fairbanks North Star Borough
Fairbanks, Alaska
POSITION STATEMENT: Expressed his support for development of
options which would facilitate the reduction of unfunded pension
liabilities.
ACTION NARRATIVE
CHAIR MIKE HAWKER called the House Special Committee on Ways and
Means meeting to order at 3:33:19 PM. Present at the call to
order were Representatives Hawker, Roses, Cissna, Seaton,
Wilson, and Fairclough. Representative Gruenberg arrived as the
meeting was in progress.
HB 13-RETIREMENT SYSTEM LIABILITY/BONDS/CORP.
3:34:13 PM
CHAIR HAWKER announced that the only order of business would be
HOUSE BILL NO. 13, "An Act relating to prepayments of accrued
actuarial liabilities of government retirement systems; relating
to the Alaska Municipal Bond Bank Authority; permitting the
Alaska Municipal Bond Bank Authority or a subsidiary of the
authority to assist state and municipal governmental employers
by issuing bonds, notes, commercial paper, or other obligations
to enable the governmental employers to prepay all or a portion
of the governmental employers' shares of the unfunded accrued
actuarial liabilities of retirement systems; authorizing a
governmental employer to issue obligations to prepay all or a
portion of the governmental employer's shares of the unfunded
accrued actuarial liabilities of retirement systems and to enter
into a lease or other contractual agreement with a trustee or
the Alaska Municipal Bond Bank Authority or a subsidiary of the
authority in connection with the issuance of obligations for
that purpose, and relating to those obligations; and providing
for an effective date."
3:34:42 PM
REPRESENTATIVE FAIRCLOUGH moved to adopt the proposed committee
substitute (CS) for HB 13, Version 25-LSO0084\E, Cook, 3/1/07.
There being no objection, Version E was before the committee.
3:35:41 PM
BRIAN ANDREWS, Deputy Commissioner, Treasury Division,
Department of Revenue (DOR), explained that the bill broadens
the different authorities that can issue pension obligation
bonds (POBs). It authorizes the establishment of subsidiary
authorities within the Alaska Housing Finance Corporation
(AHFC), and DOR. It expands the authority of the state bond
committee to allow it to assist in the issuance of POBs. He set
forth two parameters for the committee to consider. First,
under the bill, the state is limited to issuance of no more than
$5 billion in POBs. Second, the bill contains a limitation that
these bonds may not be issued unless there is a minimum positive
arbitrage of 1.5 percent between the actuarially assumed rate of
return and the interest cost on the POBs. He said that DOR
recommends approval of HB 13.
3:38:01 PM
CHAIR HAWKER reminded the committee that a similar bill
considered by the legislature last year only enhanced the
authority of the Alaska Municipal Bond Bank Authority (MBBA) to
issue POBs on behalf of municipalities. The bill currently
before the committee proposes to expand the ability of the
executive branch to issue POBs, he said.
3:38:48 PM
REPRESENTATIVE SEATON asked whether the three entities with the
authority to issue bonds will issue bonds for separate sections
of government. He also inquired whether one of the entities
could end up competing with another entity to issue bonds; or
whether one entity could issue a POB if another bonding entity
had refused to do so.
3:39:37 PM
MR. ANDREWS replied that the bill allows for multiple entities
to accomplish what he hopes is a coordinated effort and that
only one entity will issue the POBs.
3:40:09 PM
CHAIR HAWKER indicated that today's review of the bill will
consider whether there will be centralized state control over
bond transactions.
3:40:33 PM
DEVEN MITCHELL, Debt Manager, Treasury Division; Executive
Director, Municipal Bond Bank Authority (MBBA), Department of
Revenue (DOR), said he believes that there will be centralized
control over POB transactions. He went on to say that any
transaction must have a basis for a credit structure in place;
this empowerment is provided by the bill. The entities with the
power to issue bonds will not be able to "double up," meaning
one entity will not be able to issue bonds on the same basis or
for the same purpose as another entity, he explained. The
intent of authorizing more than one state agency to issue POBs
is to enhance the ability for the state to make the best
decision as to how to tailor transactions to achieve the maximum
benefits for the state. He said there is currently some
uncertainty regarding the possible participation of some
municipal entities. He related his understanding that some
other legislation currently being considered may impact this
issue; therefore there is an added layer of flexibility in HB
13.
3:42:58 PM
MIKE BARNHILL, Assistant Attorney General, Labor and State
Affairs Section, Department of Law (DOL), explained that he
believes Section 1, subsection (d) is identical to last year's
bill on this same subject.
CHAIR HAWKER confirmed the aforementioned point.
MR. BARNHILL went on to say that subsection (e) on pages 2-3,
enables a revision in the employer contribution rate in
recognition of any financed portion of the employer's accrued
unfunded pension liability.
3:43:50 PM
MR. MITCHELL said that the aforementioned point is very
important. An employer that elects to prepay all or part of its
pension liabilities needs to receive relief from its past
service contribution rate and begin to pay debt service on the
borrowed money, which should be less than the amounts paid by
the employer on its past service contribution rate, he
explained. He agreed with the observation that the employer's
contribution rate would be recalculated within 180 days
following any prepayment.
3:44:31 PM
REPRESENTATIVE SEATON noted that Section 1 covers the Teachers'
Retirement System (TRS), which is a combined system that
employers contribute to at the same rate. He asked whether it
is possible to determine an employer's individual past service
cost for a combined system like TRS. He offered his
understanding that there has been some discussion about changing
the Public Employees' Retirement System (PERS) to a unified
system with unified employer contribution rates, and expressed
concern that this bill would allow TRS' to separate into a
multi-part system in which individual employers can contribute
varying amounts to their unfunded pension liabilities.
3:45:51 PM
MR. BARNHILL explained that TRS is a cost-share system with one
employer contribution rate and one unfunded pension liability to
which all employers in the system contribute. In contrast, PERS
is a multiple-employer system with 160 employers with differing
contribution rates, resulting in 160 unfunded liabilities that
need to be paid. He noted there has been some interest within
the administration in converting PERS to a system similar to
TRS. However, the provisions in this bill could create
something of a hybrid system for TRS because a new contribution
rate is created for TRS employers that finance their pension
liabilities through POBs. He said he does not believe this
creates a "mini system," but it would result in relief from high
employer contribution rates for those employers that use POBs to
pay all or part of their unfunded liabilities.
3:47:23 PM
CHAIR HAWKER pointed out that Section 1 page 2, line 17 states
"the lump sum payment shall be accounted for separately in
accordance with regulations adopted by the commissioner." This
provision would take care of the accounting issues related to
TRS, he opined.
3:48:11 PM
REPRESENTATIVE SEATON asked whether an employer that prepays all
or part of its pension liability is no longer liable for any
further obligations, even if costs continue to escalate and the
whole system accrues further liability.
MR. BARNHILL replied that an employer can pay its existing
liability, but if assumptions change in the future that result
in a systemwide cost increase, the employer is still responsible
to pay off its portion of unfunded pension liabilities.
3:50:09 PM
REPRESENTATIVE SEATON asked whether an employer will get a
rebate if favorable investment returns result in lowering that
employer's share of any unfunded liability.
MR. ANDREWS said that it is expected that employer contribution
rates will remain flexible, noting it is not unusual for
contribution rates to vary, depending on outside variables such
as medical costs. The employers remain responsible for their
share regardless of rate changes.
3:51:17 PM
REPRESENTATIVE WILSON asked whether the state or individual
school districts would issue POBs for school district
obligations.
MR. MITCHELL explained that the transaction details are not
completely clear at this time, which is why the bill sets forth
different options. This approach will give the state the
flexibility to determine how to approach the unfunded
liabilities. He went on to say that a potential structure for
TRS could be that the state would contract with municipalities
to fund the bonds directly for the schools, noting that the
state pays for the costs of education. In this type of
scenario, that there may be a recognition of the state's payment
in the education foundation formula, he suggested. In essence,
this approach would replace an ongoing contribution for the past
service liability for the school districts' pension funds, he
said. Currently, the legislature provides funding for school
districts to pay their past service contribution. In the
future, it may be recognized that a portion of the state's
payment is going to pay debt service instead of being paid
directly into the education foundation formula.
3:55:20 PM
CHAIR HAWKER noted that the aforementioned scenario sets forth a
potential transaction, but the bill provides the broad authority
and structures necessary to allow the executive branch to craft
these transactions. He opined it is not possible to give exact
scenarios for POB issuance at this time.
3:56:22 PM
MR. MITCHELL indicated, in his opinion, the bill sets forth
mechanisms intended to allow a centralized approach to POB
issuance, and anticipates that the state will pursue
transactions on behalf of smaller entities.
3:57:18 PM
REPRESENTATIVE WILSON sought assurance that the intent of the
bill was to allow transactions for payment of the school
districts' unfunded pension liabilities so that the schools
could have a reasonable employer contribution rate.
3:57:54 PM
CHAIR HAWKER indicated that the bill is intended to facilitate a
structure to accomplish the aforementioned scenario.
3:58:12 PM
REPRESENTATIVE ROSES observed that an employer's contribution
rate can be lowered by one legislature, but raised by another.
He opined that the provisions of the bill create an opportunity
for school districts to issue POBs for their unfunded
liabilities regardless of future scenarios.
3:59:13 PM
REPRESENTATIVE SEATON offered his understanding that bonding can
lower an employer's contribution rate, but perhaps only by 4
percent. He stated his concern that if some school districts
issue bonds, but others do not, it could result in the various
school districts' each having different employer contribution
rates. He noted that a school district with a larger tax base,
such as Anchorage, may be able to avail itself of the bonding
provisions of the bill and thereby lower its employer
contribution rate. However, a smaller school district that is
not able to pursue a POB transaction to lower its contribution
rate may have a very different approach to school funding. He
expressed concern that this may place school districts
throughout the state in "entirely different seats" when they
come before the legislature and request education funding.
MR. MITCHELL said he believes the aforementioned issue can be
differentiated from the PERS situation, where there could be
underlying credit concerns. He said this had been considered
last year, noting that there is a fairly finite list of
communities that have no property tax base and limited
economies. However, school districts are very reliant on the
state for funding; therefore any district could participate in
the program and would not be barred from participating based on
some kind of credit issue.
4:03:16 PM
REPRESENTATIVE SEATON reiterated his concern that school
districts will have very different economic scenarios and thus
different approaches in their education funding requests, if
some districts issue POBs while others do not.
MR. MITCHELL replied that school districts currently have fairly
different situations, for example urban areas have some
advantages due to economies of scale caused by their larger
size.
4:05:15 PM
REPRESENTATIVE SEATON continued to express concern that if
individual school districts had differing employer contribution
rates due to POB issuance, it could inject a "massive unknown"
into issues of education funding. He stated he does not object
to issuance of POBs on a statewide basis for TRS so as to reduce
the employer contribution rate. However, he related his
discomfort with allowing individual districts to take action
that will result in differing contribution rates, which may have
unexpected consequences.
CHAIR HAWKER said that he believes the aforementioned point
covers policy issues that are discussed annually. He reminded
the committee that a small reduction in the employer
contribution rate, even if it is only 4 percent, results in an
aggregate possible savings of perhaps $1 billion. He further
said that if the state did pursue POBs to pay the school
districts' past service liability, it could result in a
substantial reduction in an individual district's contribution
rate.
4:07:43 PM
REPRESENTATIVE WILSON related her hesitation to take any action
that would further complicate or worsen the already difficult
issue of education funding. She indicated her support to allow
the state to act for all the school districts, and expressed
concern that other approaches could cause difficulties for some
schools.
4:09:02 PM
REPRESENTATIVE FAIRCLOUGH respectfully stated her disagreement
with the prior statements related to school districts. She
offered her understanding that each district has a calculated
TRS obligation, and can use their individual management
techniques to reduce that obligation. As an example, two
persons may each owe a debt of $100, and although they may use
different methods to pay the debt, they each end up paying back
the principal debt of $100. Similarly, school districts will
choose to use different management tools to reduce their TRS
obligations.
CHAIR HAWKER noted his agreement with the aforementioned
comment, and emphasized that the provisions in the bill are
intended to empower various entities to issue POBs through the
authorized entities. He went on to say that not every state
entity will avail itself of this opportunity, however, he does
not anticipate that the lack of bond issuance would be punitive
or injurious to non-participating entities.
REPRESENTATIVE FAIRCLOUGH opined that if one school district
chose to issue POBs while another chose not to issue POBs, the
non-issuing district could be required to pay a large portion of
its debt at one time while the district that issued bonds would
be paying off its debt in smaller increments. In the end, they
are paying off the same debt, she opined.
4:11:03 PM
REPRESENTATIVE WILSON opined that the bill would allow larger
communities to avail themselves of its provisions, while smaller
communities could not because the state no longer provides funds
to communities through revenue sharing.
CHAIR HAWKER responded that the bill's provisions empower
smaller communities to join together and work with the MBBA to
pursue a POB transaction. Furthermore, he recalled that
testimony from last year indicated that smaller communities are
more likely to pursue the credit enhancement services of the
MBBA than larger areas, such as Anchorage.
MR. MITCHELL assured Representative Wilson that the MBBA has
experience in working with smaller communities, and has
facilitated a loan with Wrangell for $600,000, which was then
eligible for school debt reimbursement. He said he believes the
intent of the bill, on the TRS side, is to include as many
entities as possible through collaborative loan arrangements.
4:13:50 PM
REPRESENTATIVE ROSES set forth his understanding that Section 6
of HB 13 includes provisions to allow smaller communities to
join together to issue POBs. He said he understands the
concerns of other committee members, but warned that the
committee should be careful because the intent of the bill is to
include as many options as possible for government employers to
address their unfunded pension liabilities. The first option
would be to consolidate all state entities so that the state
handles the obligations, which would be the preferable option,
he opined. The second option is that inclusion of Section 6
will avoid the need to amend the bill in the future. He said he
is in favor of creating options now because it can be difficult
to make future amendments to include the municipal empowerment
provisions. He noted that in the area of education funding,
there are disadvantages to "pass through" funding options.
First, this type of funding can distort the perception of how
much money is truly going to the classroom. He said that
currently there is discussion of whether 70 percent of funding
should be going directly to fund classroom needs. However, if
the salary and benefits portion is inflated by paying the
unfunded liability, then the districts meet the 70 percent
ratio, even though it does not result in enhancement of the
educational process. Furthermore, "pass through" funding can
affect a school district's ability to receive grants because its
salary and benefit packages are too high. Third, some entities
could lose federal grants if there is a finding that salary and
benefits are over-inflated. He said he supports the bill
because it gives more options for payment of the unfunded
liabilities. He noted that if all education funding comes out
of the education funding formula there is only one way to pay --
through the general fund.
4:17:27 PM
REPRESENTATIVE SEATON opined that because TRS is a unitized
system, it is incorrect to characterize individual school
districts as having individual past service cost liabilities.
He reminded the committee that a teacher covered by TRS can move
within the system, and still be covered by TRS. In comparison,
each individual employer in PERS is liable for an employee's
years of service within its system. He expressed concern that
breaking up TRS and allowing different levels of contributions,
with its accompanying effect on levels of past service cost
liabilities, will cause significant changes in how schools are
funded. He also reminded the committee that school districts
are funded by the state, so if individual school districts issue
POBs, it could result in districts having different employer
contribution rates. This could make the legislature's funding
decisions for schools even more complex. He opined that TRS
should have the ability to issue bonds, but only through the
authority of the state, not through individual districts.
4:19:17 PM
MR. BARNHILL continued his review of HB 13 and explained that
Sections 2-5 empower the AHFC to create a subsidiary with the
authority to pursue POB transactions. In response to a
question, he explained that formation of a subsidiary was
recommended by bond counsel.
4:21:36 PM
MR. MITCHELL stated that there are a number reasons to form
subsidiary corporations to issue bonds. He said the MBBA has a
debt cap of $750 million; but its subsidiary will be exempt from
that cap. Furthermore, AHFC does not currently have power to
issue bonds for pension obligations. He said he believes that
the purpose of establishing a separate subsidiary within AHFC is
because the act of issuing POBs is a different activity than its
main corporate purpose. A separate entity will allow separate
indentures for borrowing purposes, he explained. The
recommendation to form the Alaska Pension Obligation Bond
Corporation ("POB corporation") came about due to bond counsel's
concern that the current structure of the state bond committee
may not allow it to issue POBs. The proposed POB corporation
will have the same membership as the state bond committee, is
close to the state treasury, and establishes a viable
alternative for bond issuance if the state bond committee
structure is deemed inappropriate, he opined.
4:24:21 PM
MR. BARNHILL responded to a query by stating that only
governmental employers, as defined by Section 5, can avail
themselves to the bonding powers of the AHFC or other entities.
Sections 6 and 12-18 are carried over from last year's bill and
pertain to the authority of the MBBA to issue POBs. Section 7
proposes an amendment to the state bond committee statute to
create the Alaska POB Corporation with the authority to issue
POBs. He explained that this section is similar to other
sections of the state bond committee statute.
4:26:22 PM
CHAIR HAWKER stressed that the bill had been drafted with
reference to other relevant statutes, and incorporates pre-
existing language from those statutes where appropriate.
MR. BARNHILL noted that the bill was drafted to create maximum
flexibility to structure bond transactions, and whether all of
its provisions will be used will depend on the nature of the
actual transaction. He opined that with all the options
contained in the bill, he is fairly certain that there will be
some state structure that can issue POBs.
4:27:44 PM
REPRESENTATIVE SEATON asked about the 1.5 percent figure on page
8, line 16 and whether bond issuance costs would lower the
state's return on the bonds.
MR. MITCHELL stated that he believes the costs of issuing the
bonds can be as much as 2 percent. However, the 1.5 percent on
page 8, line 17, provides the state bond committee a figure to
compare the interest cost on the bonds with the current assumed
rate of return of 8.25 percent. Therefore, if the cost of
capital rises to 7 percent, it will be too high because there is
less than a 1.5 percent difference between 7 percent and 8.25
percent. In the situation where the cost of capital has
decreased the margin between expected interest rates and current
rate of return, the bond issuance is more likely to be
unsuccessful, he opined.
CHAIR HAWKER clarified that the aforementioned point concerns
the true interest cost, which is the "all in" cost.
4:30:3 PM
MR. BARNHILL explained that Section 8 on pages 10-11 creates the
POB corporation for the purpose of issuing POBs. He said this
approach was suggested by bond counsel as the most
straightforward way for the state to issue a type of POB akin to
a moral obligation bond. He went on to say that his
understanding is that moral obligation bonds do not pledge state
general funds. However, if the state's reserve fund reaches a
point where its ability to pay debt service is impaired, the POB
corporation will notify the legislature and the governor of the
need for an appropriation to satisfy debt service, he said.
MR. MITCHELL reminded the committee that the POB corporation is
one possible structure through which bonds could be sold and
indicated that there are other possibilities for bond issuance
besides moral obligation bonds.
4:32:26 PM
REPRESENTATIVE WILSON requested further discussion of debt
repayment scenarios.
MR. BARNHILL pointed out that a useful document in this area is
the "Alaska Public Debt" report prepared by the Treasury
Division of DOR, which describes in detail the various
categories of state debt.
4:33:25 PM
MR. MITCHELL explained that debt issued under a moral obligation
pledge oftentimes is secured by a reserve fund. Establishment
of a reserve fund may be required by statute; or may be
optional, as in Section 8 of the bill. The reserve fund is set
aside to assure payment of bond debt. He indicated under the
provisions of the bill, the legislature must be notified if
there is a draw on the reserve fund. This type of provision
gives investors assurance that their debt will be paid, he
opined. However, if the legislature failed to appropriate money
back into the reserve fund after a draw was made, the market
would penalize the issuer by reducing its credit rating, he
indicated.
REPRESENTATIVE WILSON questioned whether the permissive nature
of the reserve fund in Section 8 would put the state in jeopardy
if it failed to have money set aside for debt repayment.
MR. MITCHELL agreed that an inability to pay a debt is very
serious, and the capital market penalizes non-payment by
downgrading the debtor's credit rating. He indicated that in
his opinion, the bill does not diminish the requirement for a
reserve. Indeed, it is likely there would always be some type
of reserve fund, but the bond issuer would not necessarily apply
the moral obligation pledge to it. He noted there are other
options for the state to use besides moral obligation bonds.
4:38:53 PM
REPRESENTATIVE WILSON expressed concern that a reserve fund
would likely not be established because the bill makes it
optional.
CHAIR HAWKER interjected the point that establishment of a
reserve fund is not something the state dictates; rather it will
be dictated by the demands of the capital market. He explained
that the reasonable expectation is that the market will require
a reserve fund.
MR. MITCHELL stated there are benefits to structuring a
transaction without a reserve, noting that there are
complexities with, and restrictions on, funds placed in reserve
accounts.
MR. ANDREWS stated that in most instances the issuance of POBs
has been a credit neutral experience for most states; indeed it
could even have a positive effect on the state's credit rating.
4:41:31 PM
REPRESENTATIVE CISSNA related her understanding that POB success
depends in part on conservative planning and expectations,
coupled with fortuitous timing. She indicated that she is under
the assumption that the additions to the bill may optimize
conservative planning. However, she expressed concern about the
timing element in light of market fluctuations and some negative
state history in financial matters.
MR. ANDREWS replied that current market rates are very low and
bonds could be issued today at a 5.5 percent interest rate.
Historically, the returns from the equity market fluctuate, but
can be around 10-12 percent. The average return from the state
pension plan investments in the last 20 years has been around
9.5 percent, he said. He explained that there are statistical
models that can be used to achieve a confidence level on how to
invest to achieve returns of more than 5.5 percent. He
indicated that for POBs with a 25-year term, one could achieve a
confidence level of around 97 to 98 percent that the bonds will
garner a greater rate of return than 5.5 percent.
4:45:21 PM
MR. BARNHILL set forth a hypothetical situation whereby the POB
corporation could decide to issue $2 billon worth of bonds on
behalf of the PERS employers. The POB corporation's board of
directors, consisting of the commissioners of commerce,
community and economic development; administration; and revenue,
would enter a contract with the state whereby the POB
corporation would issue bonds in exchange for the state's
agreement to pay debt service on the bonds. A reserve fund
would be established as set forth in Section 8.
MR. MITCHELL said it would be ideal under the aforementioned
hypothetical situation if contractual agreements could be
reached with PERS employers so that all contribution rates
flowed through the POB corporation, with a portion allocated to
pay debt service and the balance allocated to pay the ongoing
contribution rate. He opined that this structure could create a
credit strength.
MR. BARNHILL said he believes the bill is structured to allow
the state to receive as a good a rate as possible.
CHAIR HAWKER reminded the committee that realistically the state
would be the bond issuer.
4:49:23 PM
MR. BARNHILL continued with his hypothetical situation and
explained that if the amount in the reserve funds dips below
what is necessary to service the bonds, the POB corporation has
the ability to certify and deliver to the governor and
legislature a certificate of the amounts required to be restored
to the reserve fund. This creates the moral obligation, he
said.
MR. MITCHELL summarized that the bill's provisions allow the
state to exchange an unfunded liability for a financed amount
that is certain for the 25-year term of the bonds; therefore,
for budgeting purposes the state would know exactly what it
needs to pay for debt service.
4:50:47 PM
REPRESENTATIVE SEATON stated he would like to see the effect on
the employer contribution rate if there was a 2 percent
arbitrage on $2 billion worth of bonds over a 25-year period.
MR. ANDREWS indicated he has some information from Buck
Consultants on that matter that he will provide the committee.
4:52:43 PM
REPRESENTATIVE WILSON noted that some past funding decisions
have had unintentional consequences; therefore expressed concern
that whatever approach taken be fair to all parties that could
be affected.
4:53:31 PM
REPRESENTATIVE SEATON asked whether the state could use funds it
currently has available, such as funds under the Alaska
Retirement Management Board (ARM Board) and the Alaska Permanent
Fund Corporation (APFC), and enter some type of transaction
which would enable the state to receive similar returns with
less risk.
MR. MITCHELL responded that since the ARM Board and the APFC are
tax-exempt corporations, they could only issue tax-exempt bonds,
whereas POBs target the taxable market. He said he is not aware
of whether there would be any advantage to having either of
these corporations buy "this particular revenue stream." He
said that the likely buyers of POBs would be overseas investors.
REPRESENTATIVE SEATON opined it would be beneficial to ask DOR
about other, perhaps less risky, options.
MR. ANDREWS indicated that a future discussion regarding how the
bond proceeds should be invested and allocated could be helpful.
4:56:29 PM
LAWRENCE A. SEMMENS, CPA, Finance Director, City of Kenai,
testified that he is familiar with POBs and is pleased with the
efforts of the administration and this committee to set up a
structure whereby the state could issue POBs. He said he is
hopeful that the state will continue to treat TRS as a cost-
sharing plan and that POBs will be a factor in reducing the
overall plan costs. For PERS he said that perhaps a cost
sharing plan could be created, and that POBs could also be
issued to reduce these liabilities.
4:59:25 PM
REPRESENTATIVE SEATON asked whether Mr. Semmens was comfortable
with the indemnity provisions of Section 1 which holds TRS'
employers harmless if they prepay all or part of their pension
fund liabilities.
MR. SEMMENS responded that he recognizes that certain employers
have contributed to their pension liabilities in excess of what
was required. He said he believes the intent of the language in
the bill is to protect those employers, and he supports that
effort.
5:00:55 PM
MICHAEL E. LAMB, CPA, CGFM, Chief Financial Officer, Fairbanks
North Star Borough, said that he has been a proponent of POBs
for several years. He testified that he is extremely supportive
of having systemwide options available to help reduce the
obligation costs of the PERS/TRS unfunded liabilities.
5:02:07 PM
CHAIR HAWKER stated he would like to move the bill and suggested
that members could inform him of any specific areas of concern
they would like addressed.
REPRESENTATIVE FAIRCLOUGH related that she is comfortable moving
the bill out today, noting she will not be available for the
next meeting date of March 7, 2007. She noted that the concerns
raised today could be addressed by the House State Affairs
Standing Committee, which is the next committee of referral.
REPRESENTATIVE ROSES indicated his agreement to moving the bill
on to the next committee. He reminded the committee that he is
on the House State Affairs Standing Committee and assured
committee members that he will bring forward any of their
concerns or issues on the bill to that committee.
5:05:17 PM
REPRESENTATIVE FAIRCLOUGH stated she does not want to do
anything to adversely affect any smaller TRS district. Although
she said she agrees that it is likely the state will bond on
behalf of the smaller districts, she believes the concerns can
still be addressed as the bill moves through the system.
5:05:46 PM
REPRESENTATIVE SEATON reiterated that his concern relates to the
TRS section of the bill and suggested a conceptual amendment in
Section 1, page 2, line 10, to replace the phrase "An employer"
with "The state." He explained that the effect of the amendment
would be to make clear that the state is the entity authorized
to issue POBs on behalf of the TRS system.
The committee took an at ease from 5:07:04 p.m. to 5:11 p.m.
REPRESENTATIVE FAIRCLOUGH stated she understands the conceptual
amendment but does not know if she can support it without
knowing if it affects other portions of the bill. She pointed
out that with bond issues timing is very important and it can be
advantageous to move at the right time. She said she
understands the concerns, but is not clear whether the
conceptual amendment fixes the concerns. However, she feels
that this bill provides options to Alaska communities to address
the issue of their unfunded pension liabilities.
5:14:16 PM
REPRESENTATIVE SEATON characterized his amendment as affecting
only the school districts, which have no tax base and no
liability for the debt since they receive their funding from the
state. He said his proposed amendment does not affect the
ability of municipalities to issue bonds on their PERS debt. He
said that he heard one of today's witnesses express the opinion
that TRS should be kept as a unitized system. He expressed
concern with allowing the bill to go forward without resolution
of this fundamental issue of whether TRS should be broken apart
or kept as a unitized system.
REPRESENTATIVE FAIRCLOUGH offered that the role of this
committee is to bring forth as many revenue options as possible
for other committees to consider. She referenced that the
committee will have to wait for two weeks to consider the bill
again.
5:17:48 PM
CHAIR HAWKER stated that in his opinion the committee has
discharged its duty in consideration of the bill, and that the
issue raised by Representative Seaton is within the purview of
the House State Affairs Standing Committee, which he believes is
a more appropriate committee for this debate.
5:19:03 PM
REPRESENTATIVE ROSES reminded the committee that he has set
forth his reasons why he believes the state has the obligation
to shoulder TRS' pension fund liabilities and to issue any
bonds. He assured the committee that he plans to offer an
amendment in the House State Affairs Standing Committee to that
effect.
5:20:20 PM
REPRESENTATIVE CISSNA expressed her belief that the legislative
system was not designed for speed because of the powerful effect
its decisions have on constituents.
5:21:28 PM
REPRESENTATIVE FAIRCLOUGH noted she would like to take steps for
the state to resolve the pension fund issues and suggested that
perhaps Representative Seaton should offer his conceptual
amendment.
CHAIR HAWKER stated the bill will remain active if a motion to
move it out fails, but that he would like to see the bill moved
out of this committee. He stated they would be receiving an
indeterminate fiscal note from the DOR.
5:22:29 PM
REPRESENTATIVE FAIRCLOUGH moved to report the proposed committee
substitute (CS) HB 13, Version 25-LS0084\E, Cook, 3/1/07 out of
committee with individual recommendations and the forthcoming
fiscal notes.
5:22:54 PM
REPRESENTATIVE WILSON objected.
REPRESENTATIVE SEATON stated that he is comfortable with the
PERS section of the bill, but he has concerns about the TRS
section. He stated although he will not object to moving the
bill, he will proceed to draft an individual recommendation to
amend the bill in the next committee. He said he believes that
this committee should move bills out in as complete a form as
possible, but that he does not think the committee is doing so
in this case. However, he will agree to move this bill out in
consideration of his desire to work with Chair Hawker and in
light of Representative Roses' assurances that his concerns will
be addressed in the next committee of referral.
5:24:26 PM
CHAIR HAWKER took issue with any characterization that the bill
is being sent to the House State Affairs Standing Committee to
be fixed; rather he believes that it is a better venue to
discuss the issues raised here.
REPRESENTATIVE WILSON said she was not sure if the next
committee has a member with the depth of Representative Seaton's
knowledge of TRS, or one who can offer the perspective of a
smaller community.
5:25:56 PM
REPRESENTATIVE WILSON then withdrew her objection to
Representative Fairclough's motion to move the bill from
committee.
There being no further objections, CSHB 13 (W&M), Version 25-
LS0084\E, Cook, 3/1/07, was reported from House Special
Committee on Ways and Means with individual recommendations and
the forthcoming fiscal note.
CHAIR HAWKER stated he would write a letter to the Chair of the
House State Affairs Standing Committee, who is currently
present, about the issues discussed today.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
5:27:02 PM.
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