Legislature(2007 - 2008)
02/20/2008 03:46 PM House W&M
| Audio | Topic |
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| Start | |
| HJR35 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
February 20, 2008
3:46 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
COMMITTEE CALENDAR
HOUSE JOINT RESOLUTION NO. 35
Proposing an amendment to the Constitution of the State of
Alaska relating to state debt.
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HJR 35
SHORT TITLE: CONST AM: STATE DEBT
SPONSOR(s): WAYS & MEANS
02/19/08 (H) READ THE FIRST TIME - REFERRALS
02/19/08 (H) W&M, JUD, FIN
02/20/08 (H) W&M AT 3:30 PM HOUSE FINANCE 519
WITNESS REGISTER
LISA MARIOTTI, Staff
to Representative Gruenberg
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: During discussion of HJR 35, answered
questions on behalf of the House Special Committee on Ways and
Means, sponsor of the bill, of which Representative Gruenberg is
a member.
DEVEN MITCHELL, Debt Manager
Treasury Division
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: During discussion of HJR 35, offered
comments and suggestions, and responded to questions.
JERRY BURNETT, Director, Legislative Liaison
Administrative Services Division
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: During discussion of HJR 35, offered
comments and suggestions, and responded to questions.
ACTION NARRATIVE
CHAIR MIKE HAWKER called the House Special Committee on Ways and
Means meeting to order at 3:46:48 PM. Representatives Hawker,
Seaton, Cissna, Roses, Fairclough, Gruenberg, and Wilson were
present at the call to order.
HJR 35-CONST AM: STATE DEBT
3:47:12 PM
CHAIR HAWKER announced that the first order of business would be
HOUSE JOINT RESOLUTION NO. 35, Proposing an amendment to the
Constitution of the State of Alaska relating to state debt.
3:49:27 PM
REPRESENTATIVE GRUENBERG, speaking on behalf of the House
Special Committee on Ways and Means, sponsor of the bill,
explained that the resolution would amend Article IX, sec. 8 of
the Alaska State Constitution by deleting "for capital
improvements or unless authorized by law for housing loans for
veterans," as this places a limitation on state debt. He
acknowledged that state debt would still have to be ratified by
a majority of the voters. He referred to a handout included in
the members' packets, "Gordon Harrison, Alaska's Constitution: A
Citizen's Guide," pages 151-152, which discusses the common
state constitutional limitations on the ability of states to
incur debt. He noted that some states restrict debt to specific
purposes, some declare a ceiling for allowable debt payments,
and some require a vote of the legislature or the electorate.
He stated that originally Alaska, as a territory, was not
allowed to incur debt, but that provision was removed and the
current provision was inserted. He pointed out that the
relevant court cases are documented in the Harrison article on
page 152.
3:53:37 PM
REPRESENTATIVE GRUENBERG referred to the other handout included
in the members' packets from Patricia Young, Legislative
Research Services, dated June 25, 2007.
CHAIR HAWKER mentioned that the assemblage of all the referenced
attachments to the handout is 177 pages and, although much of it
is copyright protected, the sponsor will make it available upon
request.
REPRESENTATIVE GRUENBERG referred to the single page handout in
the members' packets labeled "Journal of Law, Economics &
Organization, Vol. 12 1996" which indicates by state the types
of limitations on long-term debt. He noted that only a few
states have no limitations, but that the majority require
approval by the voters. He pointed out that Ms. Young's paper
refers to the four basic groups of constitutional provisions:
referendum approval, supermajority vote of the legislature,
revenue based ceiling, and prohibiting guaranteed debt. He
noted that the voters will want the right to approve large
debts, so this was retained in the amendment. He expressed that
the purpose of the resolution is to provide additional
flexibility for the state to incur debt.
3:57:54 PM
CHAIR HAWKER asked for an explanation of why this is good for
Alaska and what is meant by greater flexibility in the
utilization of debt. He also requested to know what changes in
public policy might be expected as a result of the amendment.
REPRESENTATIVE GRUENBERG responded that there might be a need
for creative financing. He offered his belief that the
government should be free to govern as efficiently as possible
without unnecessary strictures, and that the government should
be able to incur debt with the voters' approval.
3:59:51 PM
CHAIR HAWKER asked for confirmation that deleting the language
allowing debt for housing loans for veterans would not be
eliminating this capability, but would instead be creating a
broader authority.
REPRESENTATIVE GRUENBERG agreed.
4:00:36 PM
REPRESENTATIVE CISSNA expressed her concern that the state does
not have a long term fiscal plan. She asked what advantages the
resolution offers to the state.
REPRESENTATIVE GRUENBERG suggested that this amendment to the
Alaska State Constitution may become part of the fiscal plan
presented in HB 125. He responded that this would remove a
constitutional impediment and allow the state to obtain GARVEE
bonds and pension obligation bonds with the voters' approval.
He allowed that there may be a need for additional legislation
to limit the indebtedness.
4:03:51 PM
CHAIR HAWKER asked for confirmation that the resolution would
not change the proposal procedure and would still require a
voter referendum.
REPRESENTATIVE GRUENBERG agreed.
REPRESENTATIVE SEATON asked why the state should look for an
alternative to the permanent fund for debt relief, as either
will require a voter referendum.
REPRESENTATIVE GRUENBERG said that Mr. Mitchell will give
specific reasons during his testimony. He explained that GARVEE
bonds borrow against future highway trust fund payments. It is
a method of incurring debt to build capital projects now,
possibly cheaper than later, and spreading the cost to the
future generations also using the projects. He explained that
pension bonds will provide creative financing without
withdrawing money from the permanent fund. These will be dealt
with in a fiscal manner that is different than the rest of the
budget. He offered his belief that it is sometimes advantageous
to incur debt with a tax exempt, low interest rate, while
allowing the state to retain its money for investments with
higher earnings.
REPRESENTATIVE SEATON offered his belief that the state has
previously used GARVEE bonds for capital improvements. He asked
if the premise is to work on arbitrage and time the investments.
He posed that this does not work well for most people, and asked
why it would work better for the state.
4:08:52 PM
REPRESENTATIVE GRUENBERG said that he was not aware that the
state has already used GARVEE bonds, and that he will defer the
arbitrage questions to Mr. Mitchell.
LISA MARIOTTI, Staff to Representative Gruenberg, Alaska State
Legislature, offered her understanding that the state currently
contracts debt by setting up a public corporation that manages
and issues the debt. She explained that the amendment provides
a transparency that will allow voters to know what the debt is
incurred for.
4:11:38 PM
DEVEN MITCHELL, Debt Manager, Treasury Division, Department of
Revenue (DOR), stated that the amendment would apply to more
than general obligation bonds, and would include certain revenue
bonds, the Alaska International Airport system, sport fish
revenue bonds, and lease revenue or certificates of
participation that the state cannot currently issue without a
capital project. He explained that the state can set up a
public corporation in statute which is not restricted to the
same limitations as the state itself. He pointed out that there
is pending legislation that will allow public corporations to be
set up with the authority to borrow, even though there are no
projects, for pension obligation bonds. He noted that when
money is borrowed for other than a capital project, the taxable
loan rate is very similar to an investment rate of return, so
there is no gain from borrowing as opposed to using state funds.
He established that within the Alaska State Constitution there
is a prohibition to the dedication of revenues, which is a much
bigger problem for debt management. There are revenues which
have the potential for being segregated and levered. He
explained that GARVEE bonds allow a pledge of future federal
revenue, but that obligation does not count against the net tax
supported debt. However, in Alaska, we cannot do that, because
the Alaska State Constitution prohibits dedicating those federal
revenues.
4:16:00 PM
REPRESENTATIVE WILSON asked if this resolution would allow
Alaska to borrow to pay off the PERS/TERS unfunded liability.
MR. MITCHELL said that the state already can, but this would
allow the state to proceed in a more direct fashion. [He
referred to HB 13, which will allow the state to issue bonds to
fund an unfunded liability; however, he offered his belief that
the Alaska State Constitution prohibition against the dedication
of revenues will not allow the state to issue these bonds. He
noted that HB 13 will also create the Pension Obligation Bond
Corporation which could borrow money under the current
constitutional limitations.]
4:17:28 PM
REPRESENTATIVE SEATON asked if this resolution would make
certificates of participation or revenue bonds subject to a
voter referendum.
MR. MITCHELL responded that the amendment would not change how
debt is issued by various entities, but it would change the
options that might be available, as currently state debt is not
an option if there is not a capital project. He explained that
revenue bonds, increases to the allowable bond limit, and
certificates of participation are all legislative actions that
would remain the same if this bill were to pass.
REPRESENTATIVE SEATON posed that if this resolution does not
have any effect on revenue bonds or certificates of
participation, why are they being discussed.
MR. MITCHELL said that this amendment would allow the state to
issue revenue bonds or certificates of participation without a
capital project, whereas right now, there has to be a capital
project. He noted that there is no change in the process or the
structure, just a change to where the money will go.
REPRESENTATIVE SEATON asked to clarify if there is still the
need to set up the public corporations for issuing debt.
4:20:59 PM
MR. MITCHELL said that currently the state cannot borrow the
money when there is no capital project, so the state sets up a
public corporation to borrow the money. He explained that this
resolution would not impact the existing corporations. He
pointed out that this resolution will give the state, through
certificates of participation and revenue bonds, the flexibility
to issue debt when there is no capital project, but that the
process will remain the same.
REPRESENTATIVE WILSON reflected that the resolution removes two
allowances for state debt. She asked whether a public
corporation would still be able to offer a general obligation
bond that was not for a capital project.
MR. MITCHELL said this would not change the public corporation's
statutory ability to do things.
JERRY BURNETT, Legislative Liaison, Director, Administrative
Services Division, Department of Revenue (DOR), said that
currently public corporations can issue general obligation debt
which is not specific to a capital project. He explained that
these public corporations are not incurring state debt, and the
resolution refers to state debt only. Certificates of
participation are not considered state debt.
CHAIR HAWKER asked for a definition of state debt, as opposed to
public corporation obligations. He requested more definition
for general obligation debt and other generic forms of debt,
including subject to appropriation debt and moral obligation
debt, as they relate to state debt.
MR. MITCHELL responded that these questions are in the bond
counsel realm. He pointed out that it is state debt if the
letterhead on the offering document says State of Alaska and
this would include general obligation bonds, revenue bonds, and
certificates of participation. He allowed, however, that these
are not considered debt under the constitutional definition. He
explained that general obligation bonds are obligations that
have the full faith, credit, and taxing authority of an issuer
behind them, so either the state or a public corporation can
issue them. He described that the public corporation is
pledging the corporation's assets and ability to pay, whereas
the state is pledging its ability to impose taxes and funds, and
this usually allows the state a higher credit rating. He said
that the state general obligation bonds are given the state's
highest credit rating. He recommended that the committee read
the Alaska Public Debt report which gives a thorough explanation
of all the state debt, down through municipal debt.
CHAIR HAWKER advised that the committee review the Alaska Public
Debt report as it gives a good explanation of the types of debt,
and it also introduces a foundational vocabulary necessary to
understand debt issues.
4:29:18 PM
REPRESENTATIVE CISSNA compared the Alaska and Washington State
investment strategies and systems, noting that Alaska still
needs more tools to expand.
4:30:57 PM
MR. BURNETT responded that the resolution offers a potential
tool.
REPRESENTATIVE ROSES asked what the consequence is if a public
corporation defaults on a bond, as this is not considered state
debt.
MR. MITCHELL replied that only a moral obligation bond carries
an implied commitment for the state to stand behind the bonds.
He stated that public corporation debt is supported by revenue
generating projects, and although a default might generate
pressure on the state, the state does not have a requirement to
repay. He offered his belief that this would not bring any
direct negative financial ramification to the state.
REPRESENTATIVE ROSES recounted that a public corporation can
issue bonds without a vote from the citizens, yet, if this is a
moral obligation bond, the state is accountable for that debt.
He analyzed that the resolution eliminates the necessity to set
up a public corporation in order to offer a bond which is not
tied to a capital project, but that the bond offering will still
need a vote of approval. He asked if this will ensure the state
a lower interest rate, and thereby let the state arbitrage the
money.
MR. MITCHELL offered his belief that the real potential exists
with pension obligation bonds. He compared "general obligation"
debt to "subject to appropriation" debt, either of which may
entail a few billion dollars worth of borrowing. He allowed
that there is currently a lot of angst with credit rating, and a
different perception of credit worthiness will result in a
better interest rate. He explained that these bonds would have
the State of Alaska as the primary borrower, as opposed to a
public corporation. The general obligation bond or the
certificate of participation could result in a lower interest
rate. He cited an example of a lower interest rate of 25 basis
points, which would generate a savings of $25 million per $1
billion borrowed.
4:35:26 PM
REPRESENTATIVE ROSES reminded the committee that this resolution
is a constitutional amendment and there have been 21
constitutional amendments proposed this year. He asked if this
establishes the need for another constitutional convention.
4:36:34 PM
REPRESENTATIVE SEATON asked if this resolution would allow the
state to bond debt for operations. He cited an example of the
Knik Arm Bridge and Toll Authority (KABATA), a large mine, or a
timber operation that will not generate enough cash, but will
generate economic activity in a region. He explained that he
was searching for applications other than the pension obligation
bonds.
MR. BURNETT relayed that there is some potential for similar
projects, however the legislature would still need to propose a
bill. He considered that a bond for an alternative energy fund
or an economic development fund may be possible, and this has
occurred in other states which have no limitation on debt. He
allowed that there could be applications that "push the
envelope."
MR. MITCHELL stated that any proposal will be judged on its
merits. He explained that there needs to be a compelling reason
to borrow money on a taxable basis. He reported that lower
interest rates are given on tax-exempt loans, so that more
speculative projects are best paid with cash. He advised to pay
for schools, repairs, etc. with tax-exempt loans. He allowed
that this is the compelling reason for public entities to borrow
when they have money in the bank.
REPRESENTATIVE SEATON posed that he was searching for
applications that were not capital projects, and he suggested
operational partnerships for an economic development project.
4:41:31 PM
MR. BURNETT said that they have not had time to study this
resolution enough to make any recommendations.
REPRESENTATIVE CISSNA asked for a suggestion, given the current
debt management structure, for a bigger strategy.
MR. MITCHELL explained that there is no debt capacity limitation
in statute or in the constitution. He allowed that there is a
policy that the state tries to maintain the general fund
supported debt at 8 percent of unrestricted revenue. He
commented that some states have stronger debt management
language written into statute, which can give them a better
credit rating and lower interest rates, but that can also limit
their capability for projects.
4:44:28 PM
CHAIR HAWKER explained that the purpose of this committee
meeting is to introduce the idea, and develop an awareness of
the technical, complex nature of any proposed changes.
[HJR 35 was held over.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
4:45:37 PM.
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