Legislature(2005 - 2006)
03/20/2006 09:01 AM House W&M
| Audio | Topic |
|---|---|
| Start | |
| HB492 | |
| 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
March 20, 2006
9:01 a.m.
MEMBERS PRESENT
Representative Bruce Weyhrauch, Chair
Representative Norman Rokeberg
Representative Ralph Samuels
Representative Paul Seaton
Representative Peggy Wilson
Representative Carl Moses
MEMBERS ABSENT
Representative Max Gruenberg
COMMITTEE CALENDAR
HOUSE BILL NO. 492
"An Act relating to the transfer of the state's interest in
certain gas to the Alaska Retirement Management Board for the
purpose of satisfying the unfunded accrued actuarial liability
of the state and employers of teachers in the state to state
retirement systems; and providing for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 492
SHORT TITLE: NATURAL GAS ROYALTIES TO FUND PERS/TRS
SPONSOR(S): FINANCE BY REQUEST
03/15/06 (H) READ THE FIRST TIME - REFERRALS
03/15/06 (H) W&M, FIN
03/20/06 (H) W&M AT 9:00 AM CAPITOL 106
WITNESS REGISTER
REPRESENTATIVE MIKE KELLY
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: During the hearing of HB 492, provided
information and answered questions.
BILL VAN DYKE, Acting Director
Division of Oil and Gas
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: During the hearing of HB 492, he explained
the possible challenges to the proposed transfer of gas assets
to address the unfunded liability of the state retirement
systems.
BOB SHEFCHIK, Chief of Staff
Mayor's Office
Fairbanks North Star Borough
Fairbanks, Alaska
POSITION STATEMENT: Testified in support of HB 492.
GARY BADER, Chief Investment Officer
Treasury Division
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: During the hearing of HB 492, answered
questions.
TOM BOUTIN, Deputy Commissioner
Treasury Division
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: During the hearing of HB 492, provided
information and answered questions.
DON BULLOCK, Attorney
Legislative Legal and Research Services
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: During the hearing of HB 492, answered
questions regarding the possible legal implications.
MIKE BARNHILL, Assistant Attorney General
Labor and State Affairs Section
Department of Law (DOL)
Juneau, Alaska
POSITION STATEMENT: During the hearing of HB 492, answered
questions regarding the possible legal implications.
DICK MYLIUS, Acting Director
Division of Mining, Land and Water
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: During the hearing of HB 492, answered
questions on the DNR fiscal note.
ACTION NARRATIVE
CHAIR BRUCE WEYHRAUCH called the House Special Committee on Ways
and Means meeting to order at 9:01:05 AM. Representatives
Weyhrauch, Moses, Seaton, and Wilson were present at the call to
order. Representatives Rokeberg and Samuels arrived as the
meeting was in progress.
HB 492-NATURAL GAS ROYALTIES TO FUND PERS/TRS
[Includes brief mention of SB 141 and HB 475.]
9:01:18 AM
CHAIR WEYHRAUCH announced that the only order of business would
be HOUSE BILL NO. 492, "An Act relating to the transfer of the
state's interest in certain gas to the Alaska Retirement
Management Board for the purpose of satisfying the unfunded
accrued actuarial liability of the state and employers of
teachers in the state to state retirement systems; and providing
for an effective date."
9:02:31 AM
REPRESENTATIVE MIKE KELLY, Alaska State Legislature, provided
background information to the bill on behalf of the House
Finance Committee of which he is a member. He relayed that
passage of SB 141 last year and the proposed legislation in HB
475 are initial steps to ensure the $6 billion unfunded
liability of the Public Employees' Retirement System (PERS) and
the Teachers' Retirement System (TRS) does not increase. He
explained other attempts to address the liability: having the
state fund the increases, holding the annual increases to 5
percent, and proposed legislation addressing everything from
pension obligation bonds to continuing the annual payments. He
noted that the annual payment is climbing from "$38 [million]
last year [and] will reach its terminal velocity at somewhere
around $140 million." He opined that whereas there may be "some
howling" in future discussions, [HB 492] is one possible
solution of several and has tremendous potential for upside
assistance in addressing the increasing debt.
REPRESENTATIVE KELLY directed the committee's attention to the
slideshow information in their packets prepared by Bob Shefchik
from the Fairbanks North Star Borough, one of the organizations
that might benefit from the [solution proposed in HB 492]. He
explained that Mr. Shefchik's prepared information suggests
using future assets to address the liabilities as opposed to
relying solely upon cash payments or financing through pension
obligation bonds. Representative Kelly noted that on page 2, it
shows the present annual impact in fiscal year 2007 (FY 07)
totaling $124 million which, with the 5 percent increases per
year, results in annual costs at terminal velocity totaling
approximately $400 million a year. He highlighted that
potential gas assets would match future liabilities and "thereby
stop the annual payment requirement for the unfunded portion of
[PERS and TRS]." He remarked that this would result in the
state being "fiscally solvent relative to the unfunded
liability." Furthermore, in conjunction with the defined
contribution plan for new hires, he added that a new plan would
be in place enabling more money be available for the state, the
university, the municipalities, and the schools. He listed the
changes for the current year as a result of this plan: the cost
of state government would be lowered by $44 million; $10 million
would be available to the university; the municipal payment
costs would be lowered by $26 million; and $44 million in
funding would be made available to school classrooms. He then
listed the results of the plan for FY 08 and beyond: state
government costs lowered by $140 million; $26 million more to
the university; municipal payment costs lowered by $55 million;
and $193 million more for the classrooms.
REPRESENTATIVE KELLY informed the committee that the proposed
transfer of interests in known natural gas reserves would have
no impact on the permanent fund and other constitutional
obligations. Furthermore, he said that the amount of these
transferred assets would be "equal to the future liability
stream" and, in the event this legislation passes expeditiously,
it would freeze the PERS and TRS rates beginning in FY 07.
Referring to the reduction of future gas revenue streams, he
opined that it would take "quite a bit of work to evaluate,
appraise, and identify those resources to be transferred to the
Alaska Retirement Management Board (ARMB).
9:13:30 AM
REPRESENTATIVE SAMUELS asked Representative Kelly if he was
referring to all gas in the state.
REPRESENTATIVE KELLY said he was referring specifically to North
Slope gas.
REPRESENTATIVE SAMUELS, on the premise that "the royalty doesn't
exist until the gas hits the ground and is developed," asked
whether Representative Kelly meant "only if the natural gas
pipeline is built." Additionally, given the royalty doesn't
currently exist and the gas pipeline may or may not be built, he
asked Representative Kelly how he ran his numbers.
9:14:24 AM
REPRESENTATIVE KELLY suggested that Don Bullock, an attorney
with the Division of Legal and Research Services, address this.
REPRESENTATIVE SAMUELS proceeded to list the other issues he
wished addressed, such as those regarding private royalties and
the effect on the National Petroleum Reserve-Alaska (NPR-A)
should Alaska royalties be less [than expected]. He also asked
about different royalty sets per lease and noted that whereas
the most common one is 12.5 percent, not all are at this same
percent. He concluded that it "seems problematic to try to
value a royalty on something which is obviously further along
now than it's ever been ...."
REPRESENTATIVE KELLY said he felt it important to note that "the
revenue stream required to extinguish these future liabilities
is also kicked out there; it's a 25-year run." He then informed
the committee that HB 492 currently does not have specific
language addressing municipalities. He explained that when the
bill was introduced by the House Finance Committee, there had
been considerable discussion regarding whether the
municipalities should be handled differently than the other
entities. He said that an amendment had been drafted to include
municipalities.
CHAIR WEYHRAUCH said he would like to address this at a future
meeting.
9:17:21 AM
REPRESENTATIVE SEATON expressed his belief that the intent of
this legislation is not to pay the past service cost liability
based on an assumption of obtaining revenues generated through a
gas pipeline that has yet to be built. He said he would like to
know projected increases in the liability until such point in
time that revenues are actually generated. He also relayed that
he had questions regarding the approximate 50 percent of the
liability resulting from those federal employees funded through
the state. He expressed his belief that this legislation
proposes the state pay "that half of the federal liability."
9:19:58 AM
REPRESENTATIVE SAMUELS explained that "the companies will get to
book the reserves after [the Federal Energy Regulatory
Commission] (FERC) sanctions the project." He opined that this
regulatory process would be slow and tedious. Furthermore, once
it's finally completed, companies will want to book the reserves
"to pump up their shareholder value" and the state, in
accordance to this legislation, would want to book the reserves
to [pay the unfunded liability]. He expressed his belief that
it would make better sense to postpone passing this legislation
until after the regulatory process when the state could better
determine which steps to take.
9:21:08 AM
REPRESENTATIVE SEATON, in regard to the transfer of assets,
noted that this legislation does not address the selling of
assets by the ARMB. He said that if he were on the ARMB, given
its fiduciary responsibility, he would want to examine how to
monetize [assets] in a shorter time to earn interest to then pay
off the liability. He expressed his belief that this "would be
a transfer out of complete state control ...." He asked whether
[HB 492] had any provisions preventing the [ARMB] from using
assets in that way.
CHAIR WEYHRAUCH requested this be addressed by Gary Bader, Chief
Investment Officer with the Treasury Division, Department of
Revenue (DOR), when he testified.
9:22:08 AM
REPRESENTATIVE WILSON expressed her concern for postponing
addressing the unfunded liability for another 10 years and said
that the debt would continue "to grow quite a bit in that time
because we're not doing a thing about it." She asked
Representative Kelly if he discussed the results of delaying
with the actuaries and whether he knew how high the percent
would grow should the state delay.
REPRESENTATIVE KELLY said he agreed and that theoretically the
liability would grow "until the ramp on the employers' shares
hits the terminal velocity and stops that." Furthermore, he
said that if "the gas interest was not sufficient to generate
the extinguishment of that past service liability, [the risk] is
still there."
REPRESENTATIVE WILSON said that she would want specific facts as
to what the percentage of debt would be overall in delaying 10
more years.
CHAIR WEYHRAUCH informed the committee that this information
could be obtained from the ARMB.
REPRESENTATIVE SEATON offered his understanding that [the
proposed legislation] would not only address the unfunded
liability but would wipe out the past service costs.
Additionally, he relayed that with assets available to
[accomplish this], there would be "no ramping up of employer
fees ... we would go back to just the normal cost because the
system would have the assets to equal the liability." He opined
that "under those circumstances, [the state would actually] be
reducing the percentage funding of money in the fund, and
transferring them to perceived assets that will be monetized in
the future ...." He noted that because some of these payments
are due in the next 10 years, the state will actually be making
the PERS and TRS payments from money not yet received, thereby
reducing the cash value of all other assets in the fund. How
much of a reduction and how much of the state's other asset base
would be lowered by past service cost payments, are questions he
said he would like addressed given the possibility that the gas
may not be flowing until 2015.
9:26:21 AM
REPRESENTATIVE KELLY sought confirmation from Representative
Seaton that what he was referring to is a "mismatch." That is,
there would be a risk to having the state begin writing checks
for the actual outflow without the matching inflow of gas
resources.
REPRESENTATIVE SEATON said that this is correct though noted it
is different than a past service cost liability growing at 8.25
percent. With this legislation, "we're actually eating up [the
state's] asset base from the rest of the fund," he explained,
and should the gas pipeline project not come online by 2015, it
would be an imaginary asset - "something we think will equal the
$5 billion net present value ...."
REPRESENTATIVE KELLY said he agrees and that the risk is there.
9:28:22 AM
BILL VAN DYKE, Acting Director, Division of Oil and Gas,
Department of Natural Resources (DNR) relayed that he
understands this committee is investigating ways to fund the
retirement system and said, "Obviously, in one way or another,
[Alaska's] resource wealth is going to be part of that
solution." He then presented three significant challenges the
bill presents. The first, he noted, is that not only does the
current or expected gas royalty in the Cook Inlet area fall
short of the [needed] "$5 billion," very little gas is presently
sold or marketed on the North Slope. A second concern, he
indicated, is the fact that the transfer of exclusively natural
gas rights, by either the state or a third party, has not been
done to date. He explained that what has previously been
transferred are complete oil and gas estates to other entities
in land trades or land assignments, to such entities as Native
corporations, the Alaska Mental Health Trust Authority, the
university, or the federal government. However, he relayed that
never before has the state tried to sever oil rights from gas
rights for the purpose of solely transferring the gas rights to
a third party. He then referred to a third concern regarding
the transfer of oil and gas interests which is the fact that a
net of the permanent fund and school fund share has not been
done to date. He clarified that when transferring land to a
third party, "it's been the entire estate, and the permanent
fund loses its right ... to royalties from that transferred
mineral estate." He opined that reserving or preserving a share
for the state - for either its permanent fund or its school fund
- poses a challenge. Additionally, he noted that the challenge
would be determining who would be responsible to assure that
both these funds receive their share and suggested that this
might involve "some sort of an overriding royalty or
participatory share ... in the fee itself" to [assure] it occurs
and is legally binding.
MR. VAN DYKE, drawing upon his former training in engineering,
informed the committee that natural gas [primarily] exists in
the same reservoirs with oil and that there have been very few
gas-only reservoirs discovered in the North Slope to date. He
listed the most common gas accumulations up north and relayed
that they are combination oil and gas pools which would require
"delicate surgery" to carve out the gas interest alone. He
referred to previous management and accounting challenges in
splitting the ownership of oil and gas in the same reservoir,
field, or lease, and expressed his belief that this, in itself,
"really was a headache." He said that he would recommend
avoiding the split oil and gas ownership if at all possible. He
then highlighted that the total statewide gas royalty revenue
for calendar year 2005 (CY 05) was approximately $61.8 million
gross and about $46.1 million net of the permanent fund and
school fund. For North Slope gas alone, he cited that CY 05
revenue was approximately $11.1 million gross, $8.3 million net,
and most of the gas is otherwise reinjected back into the
ground. Assuming that a value has been assigned to the gas, he
remarked that "somewhere between half and all of the total known
royalty gas on the North Slope" might represent an amount equal
to the $5 billion [needed to fund the state retirement system].
He opined that since there is no gas pipeline currently under
construction, it would be a challenge to assign a value for the
gas which, at present, is being re-injected in the ground.
Furthermore, he surmised that whereas the North Slope gas could
be booked as "official reserves," using accepted accounting
standards, "assigning any book value to those resources today is
probably not appropriate." He informed the committee that
assigning any value to the yet-to-be-discovered gas on the North
Slope - on either unexplored leases or on unleased state land -
is more of a challenge and one he would not recommend. He
relayed that the exploration risks on these unexplored lands is
too difficult to quantify.
9:37:00 AM
CHAIR WEYHRAUCH requested Mr. Van Dyke focus further testimony
on the general concept of the bill. He asked whether the
perspective would be any easier in replacing the words "natural
gas" with the word "oil."
MR. VAN DYKE opined that although it would certainly be easier
to assign a value to the [oil] resource, a question of "split
estate" would still be created. He provided an example of this
by noting the different interests, motivations, and management
practices the ARMB might have in oil rights versus those with
interests in gas rights.
CHAIR WEYHRAUCH asked whether the problem would be somewhat
easier if the gas was restricted to that of Cook Inlet.
MR. VAN DYKE expressed his belief that it would be easier if the
legislation referred to only the gas in the Cook Inlet, Beluga,
and Kenai fields. However, he remarked that there isn't a lot
of value remaining in the Cook Inlet reserves. "We just can't
come anywhere near $5 billion in value," he said.
9:39:03 AM
REPRESENTATIVE SEATON inquired as to whether the transfer of the
potential asset versus the transfer of a revenue stream from
that asset, would change Mr. Van Dyke's perception.
MR. VAN DYKE explained that from an accounting and management
standpoint, those oil and gas revenues specifically dedicated to
funds, such as the permanent fund and the school fund, work fine
and far more easily than having to transfer "the actual
ownership interest in the resource."
REPRESENTATIVE SEATON asked whether part of the anticipated
problem in splitting North Slope gas from oil may in part be a
result of unequal field shares and the variety of opinions
regarding whether to reinject gas or market it.
MR. VAN DYKE affirmed that determining the speed at which fields
are produced is one type of problem that often results in
tension between field owners.
9:41:51 AM
BOB SHEFCHIK, Chief of Staff, Mayor's Office, Fairbanks North
Star Borough, informed the committee that he prepared some of
the initial concept work and cost savings estimates available in
the committee packets. He opined that "the issue of rising PERS
and TRS rates for public employers really is an impending
budgetary crisis for years to come." Additionally, he remarked
that the $5.7 billion, which "slowly ratchets up 5 percent a
year," is a 20- to 23-year problem for employers when
determining how to meet payroll expenses and pay bills. He
expressed his belief that HB 492 provides an alternate solution
to the annual increase [of 5 percent]. He stated that finding a
different way to meet the past service rate and finding an asset
that would generate cash in the future, "really was the crux
behind [this legislation]." Returning to earlier questions
posed by the committee, he explained how he envisions the
concept will work in conjunction with the ARMB. Assuming that
DNR is able to find sufficient [gas] reserves with assets to
match the $5.7 billion, he relayed that the ARMB would then
value the asset transfer annually as it establishes the rates.
He said:
If [the project] proceeds and a gas line is in motion,
clearly the value of the gas is more certain. If in 3
to 5 years, there still is no action, [the state]
could expect a responsible ARMB to write down the
value of that asset based on the risk of it ever
coming to market. So the window of potential loss of
payments and the increase of the liability, I wouldn't
put at 10 or 15 years. I would put it at 3 or 4
[years] because [the state] will have an ARMB that's
annually going to evaluate the value of the gas."
MR. SHEFCHIK then returned to earlier discussion regarding what
happens should there be no gas pipeline by 2015. He expressed
his belief that although this risk is real, it is one the state
would be aware of prior to 2015 and would then return to the
same solution currently used - that of increasing rates with
methods paying off the unknown liability. He suggested that
this scenario might cost the state "3 years of ratcheting
payments, not 15 [years]." Although the current solution [for
addressing the long-term liability] is cash-based across 23
years, he opined that it need not be. Rather than using a cash
flow solution, he highlighted that this bill proposes using a
balance [sheet] approach by transferring a future asset to
offset a future liability. Additionally, he clarified that the
5 percent annual increases on salaries could be eliminated and
rates set at a 13 to 14 percent normal cost rate. He said:
The committee has already identified a number of the
problems - that the value of the gas reserve is
dependent on getting gas to market. In 3 to 5 years
those reserves, if there is no progress on the
gasoline, ... would get written down to near zero and
we would be at the same point we are now at 8 percent
for the 3 or 4 years that ... rates didn't ratchet up.
The bill does offset competing requirements of the
constitution: the requirement to meet pension
liabilities, versus dedicated funds in appropriation,
and it does reduce future discretionary revenues from
gas. However, ... they're neither insurmountable
[nor] greater than the problems created by the status
quo.
MR. SHEFCHIK informed the committee that the [Fairbanks North
Star] Borough is supportive of the ideas embodied in HB 492. He
relayed that although the borough would like to see
municipalities included [in the bill], it's "supportive of even
a partial solution to this huge problem." Referring to [Dr.
Pedro] van Meurs' testimony in February, he offered his
understanding that future gas royalties were estimated high
enough to address the state's retirement liability.
9:48:58 AM
CHAIR WEYHRAUCH sought confirmation of his understanding that
the asset is on paper only and that there is no real way for
ARMB to monetize that to where the liability is actually
reduced.
MR. SHEFCHIK opined that it would be no different than other
assets the state currently has. He referred to the risk of the
gas pipeline not being completed and not getting to market, as
one of the key pieces in valuing the future assets.
CHAIR WEYHRAUCH inquired as to whether there was any benefit to:
identifying revenue-producing lands - whether they are oil, gas,
timber, or otherwise; bestowing the authority to receive and
sell those lands upon the ARMB; transferring assets to the ARMB
for the purpose of reducing the unfunded liability; and when
[the liability] reverts to zero, having [the assets] revert to
the state.
MR. SHEFCHIK remarked that this would only be a benefit if the
state could identify those revenue-producing lands that were not
already committed elsewhere. Furthermore, should the state pull
a revenue-producing asset from the current mix, he opined that
it would cause a ripple effect throughout state operations. In
response to Chair Weyhrauch's query that this would hold true
for any committed resource, he countered that the pension
obligation is different in that it has a constitutional basis
unlike commitments to other projects such as those for improving
state roads or parks.
9:51:43 AM
REPRESENTATIVE SEATON, in noting that the state is obligated by
its constitution to make payments on the past service costs,
inquired as to why it's necessary to specifically identify "some
future valuation" of gas revenues to pay these costs. He
expressed that he is uncertain as to what the legislation is
effectively trying to accomplish.
MR. SHEFCHIK explained that the difference is due to the nature
of the commitment and the identification of the assets.
9:53:33 AM
REPRESENTATIVE KELLY commented on the differences between
university endowments and the [transfer of gas assets] proposed
in HB 492. Upon noting that the "valuation can bob up and
down," with increased exposure during this fluctuation, he asked
Mr. Shefchik what risks might be associated with that.
MR. SHEFCHIK informed the committee:
If you let it run for 10 years, the risks associated
with that are the current value times 8 percent and
that's bigger than one would want to take. Clearly,
the progress in the next two or three years would
determine whether or not this was continued on or a
different solution would be needed. It really would
have to be treated by the ARMB as a real asset similar
to a real estate investment or ... it would just be
putting the problem off into the future ... hoping
that things get better, and that would be a bad thing.
MR. SHEFCHIK returned to earlier discussion regarding the state
liability and the percent of federal liability that is passed
through. He explained that during his five years of finance
work at the Geophysical Institute at the University of Alaska
Fairbanks (UAF), there were those on federally funded projects -
funds with generally fixed amounts and not based on the actual
cost of projects. He relayed that "by having a system that
lowers the retirement cost onto projects, ... it frees up more
direct costs ... whether it's roads or research, that plows back
into the economy. It does make for a cost share but doesn't
reduce the amount of federal money that's coming into the state;
it changes it so that it's direct costs." Additionally, he
opined that as the PERS and TRS rates climb, those agencies
considering funding research proposals, may look negatively upon
the retirement rate being offered. He opined, "It would indeed
help offset federal payments toward PERS and TRS, but [wouldn't]
reduce the amount of federal money coming into the state; it
would just change what it would be paid for."
9:57:57 AM
REPRESENTATIVE SEATON sought confirmation of his understanding
that the state's current asset base would be reduced in addition
to the lowering of the percentage of funding within the state
system. He expressed his belief that "it's much larger than the
8.25 percent interest rate on the money; it's actually eating up
the asset."
MR. SHEFCHIK said he does not know the answer to this because he
doesn't know the cash flow projections of the PERS system.
9:59:11 AM
REPRESENTATIVE SAMUELS sought confirmation from Representative
Kelly that he was referring specifically to the cash flow and
that the transfer of leases would not be under ARMB control.
REPRESENTATIVE KELLY clarified that whereas the management of
the land stays with DNR, the interest in the gas would transfer
"for it to have any value to the ARMB."
9:59:55 AM
REPRESENTATIVE ROKEBERG inquired as to whether the title would
rest with the State of Alaska or with ARMB. Additionally, he
asked whether Representative Kelly was referring to "the income
stream rather than the vesting of title."
REPRESENTATIVE KELLY deferred discussion of this to Don Bullock,
an attorney with Legislative Legal and Research Services.
10:00:56 AM
GARY BADER, Chief Investment Officer, Treasury Division,
Department of Revenue (DOR), announced that the ARMB has no
position HB 492. He relayed that the board is scheduled to meet
this week with Mr. Shefchik and others to ask questions and
gather information to help the board prepare suggestions on how
the legislature might address the state's unfunded liability:
either all at once or "more likely in increments." He noted
that whereas the cash flow, as proposed in the bill, would equal
nearly a third of the fund, no cash would be generated for an
unknown number of years. He added that the ARMB would give
further consideration to the possibility that passage of the
bill, "might ... make [the retirement system] fully funded, but
without a revenue stream, we begin falling further behind by at
least $400 million a year ...."
10:03:41 AM
CHAIR WEYHRAUCH asked Mr. Bader to explain his relationship to
the ARMB.
MR. BADER clarified that he is a chief investment officer for
DOR and that the department is staff to the ARMB.
CHAIR WEYHRAUCH inquired as to whether, the board has the
statutory authority to obtain and manage an asset such as the
one proposed in the bill.
MR. BADER offered his understanding that the board does have
this authority, however, indicated that Michael Barnhill from
the Department of Law, would know the answer to this. Then
returning to earlier discussions on the transfer of assets, he
said it was his understanding that according to the wording in
the draft legislation, once the unfunded liability is fully
addressed, [the assets] revert back to DNR. He opined that this
"creates a marketability" and relates to the question of whether
the asset could be monetized.
10:05:14 AM
REPRESENTATIVE SEATON asked Mr. Bader to provide the committee
the schedule of payments on the past service costs. Whereas the
committee does have the amortized rate of contributions required
to pay the debt, he expressed that it does not have a schedule
of payments the state is required to make.
MR. BADER said he could provide the committee with a close
approximation of these figures.
10:06:54 AM
TOM BOUTIN, Deputy Commissioner, Treasury Division, Department
of Revenue (DOR), informed the committee that the department
learned from the auditors, KPMG International, that the asset
would have to be "measurable and have to be available to pay
liabilities in the current year in order to book it as a value."
He offered his understanding that according to generally
accepted accounting principles (GAAP), there isn't a way to book
assets that have not actually been purchased. He provided an
example of the estimated 7 billion barrels of oil remaining on
the North Slope and explained that these are neither booked nor
depleted assets by the state. Furthermore, he added, the Alaska
Permanent Fund Corporation (APFC) does not book the royalties it
expects to receive from those barrels of oil. The same would
apply, he said, to the resources in the timber and coal
industries; those assets do not appear on the state's balance
sheet. He expressed his understanding that GAAP doesn't allow
this.
10:09:31 AM
REPRESENTATIVE SAMUELS opined that there is a difference between
selling the cash flow after development [of the gas] to doing so
while [the gas] is still under ground and therefore would be
subject to considerably more rules. He asked Mr. Boutin how he
predicted it would play out in the long run should the gas be
transferred while it's still in the ground.
MR. BOUTIN suggested that these might be questions better
addressed by DNR than DOR. He repeated that the KPMG auditors
will look to see that the [gas asset] is measurable and
available to pay current year liabilities. "Whether there's a
way to have this asset in this bill be both measurable and
available for current year expenditures, I don't know," he said.
10:11:55 AM
REPRESENTATIVE ROKEBERG relayed that he is a "great skeptic" of
this legislation, however, said he appreciated the resulting
debate. He asked whether DOR could provide a variation of this
approach that would meet the requirements stipulated by KPMG and
still fund the liability of the state's retirement system.
MR. BOUTIN said that DOR has not examined other similar
approaches. Regardless of the approach, he remarked that an
asset would need to start earning 8.25 percent and that the rate
is assumed by the actuary to be long term, doubling every nine
years. He relayed that a booked asset that wasn't appreciating
at an 8.25 percent rate, starts diminishing the earnings
immediately. He said that the sponsors of the [retirement]
plans now have some investments that are relatively illiquid
such as those investments in private equity and real estate.
These assets, he explained, were purchased at a fair market
value and hopefully bring in a return that is even greater than
the 8.25 percent. "It's an investment concept ... every plan
sponsor has to have, and anybody talking about filling this gap
has to have," he opined.
10:15:39 AM
REPRESENTATIVE SEATON inquired as to whether "lease rentals,
royalties, royalty sale proceeds, net profit shares, and other
receipts related to the gas interests," listed on page 2, lines
29-30, would be [considered] liquid before gas is flowing down
the pipeline.
MR. BOUTIN said that others at DOR and DNR might know the answer
to this.
REPRESENTATIVE KELLY remarked that this problem is much more
sensitive to the required earnings rate of 8.25 percent than to
the cash flows. Without the liquidity, he expressed his belief
that the unfunded liability will continue to grow.
MR. BOUTIN relayed that the actuary annually provides the amount
required to meet both the future liability and to amortize the
past service liability over 25 years. He explained that
employers haven't been meeting the contribution rate needed to
amortize the past service liability over this 25-year period
because of the cap set each year on any increases to those rate.
He expressed that he has "never been able to buy into the model
that says that employers are being charged an interest rate of
8.25 percent on the past service liability."
10:18:20 AM
REPRESENTATIVE ROKEBERG, referring to an earlier question by
Representative Seaton, said that there would be a value to the
[gas] asset, regardless of whether it's actually flowing, but
only if that asset could be alienated. He offered his belief
that, "you could monetize it but ... only if you sold your
interest."
10:18:50 AM
CHAIR WEYHRAUCH noted that it's this committee's mission to
explore and determine ways to fund the state's [retirement]
liability. He referred to the meeting held last year in
Anchorage, with experts from the National Conference of State
Legislatures (NCSL) who presented the many ways other states are
addressing their pension fund liabilities. He highlighted that
some of the states investing in property have done well, unlike
those states investing in pension bonds. With Alaska being a
resource-rich state, he remarked that identifying and applying
this kind of asset, and using it as a future revenue stream to
pay off the debt without harming the other job functions of the
state government, would seem a viable approach. However, he
opined that "it's monetizing the asset and getting it to the
ARMB to pay the unfunded liability [that] seems to be the
problem."
10:20:21 AM
REPRESENTATIVE ROKEBERG returned to his earlier question as to
whether there would be a benefit to assigning a current-
producing oil and gas lease - or any other natural resource
asset - to the [ARMB] to reduce some of the unfunded liability.
He suggested that it "may run afoul constitutionally," but there
may be some benefit to it. However, he remarked that it would
decrease the amount of cash flow available for general fund
expenditures.
10:21:32 AM
REPRESENTATIVE SAMUELS, in response to Representative Rokeberg's
remarks, opined that North Slope gas is needed "to make it
worthwhile" and that the companies can't book [the gas] until
FERC sanctions the project; there is no value to company
shareholders until this is accomplished.
MR. BOUTIN relayed that unlike the oil companies, both the state
and APFC have a "higher test" because they comply with GAAP:
even when oil companies book North Slope oil, the state doesn't
book its share of the oil nor does the permanent fund book its
expected royalties from known oil reserves.
REPRESENTATIVE SEATON inquired as to whether there would be any
problem with having the state acquire the asset as gas, not
royalty payments, and then at some future point in time, the gas
would be sold to create the revenue stream.
MR. BOUTIN said it was not clear to him that this "would allow
booking today an asset value that would help fill this unfunded
liability hole and thereby reduce employer contribution rates
today." If wording to describe this option were given to him,
he said he would present it to the state's actuary and KPMG.
REPRESENTATIVE SEATON said he agreed with Mr. Boutin's earlier
testimony on the issue of cash payments versus the 8.25 percent
on the net present value. He opined that what is actually
happening is that the net present value is being determined by
back-calculations on scheduled cash payments.
MR. BOUTIN stated his agreement.
10:26:19 AM
REPRESENTATIVE ROKEBERG asked Mr. Bullock whether this
legislation, enacted as written, would run afoul of dedicated
funds as addressed in the state constitution.
10:26:30 AM
DON BULLOCK, Attorney, Legislative Legal and Research Services,
Alaska State Legislature, said that because the state's interest
in gas would go to the ARMB and because the earnings from that
would be dedicated to offset the unfunded liability, a dedicated
fund issue is raised. He informed the committee that whereas
Article IX, Section 7 of the Alaska State Constitution prohibits
dedicating state funds, Article XII, Section 7 competes with
this as follows:
Membership in employee retirement systems of the State
or its political subdivisions shall constitute a
contractual relationship. Accrued benefits of these
systems shall not be diminished or impaired.
MR. BULLOCK surmised, "It's possible that a court will look at
these competing sections and say that in this case, this is an
exception to the prohibition on dedicated funds."
10:27:49 AM
REPRESENTATIVE ROKEBERG inquired as to how the transfer of
Mental Health Trust Authority authorized receipts ("MHTAAR") was
justified and asked whether it was a requirement of the Alaska
Statehood Act.
MR. BULLOCK said he was not familiar with the MHTAAR, however,
he relayed that Section 6, subsection (i) of the Alaska
Statehood Act, specifies that those underlying mineral resources
below land received from the federal government at the time of
statehood, can't be transferred away from state. He clarified
that as long as the transfer takes place within the state, such
as to the university or the ARMB, the state would still retain
ownership and not be in violation of the Alaska Statehood Act.
REPRESENTATIVE ROKEBERG sought confirmation that this same act
also requires the state "look after local communities."
MR. BULLOCK stated his agreement.
REPRESENTATIVE SEATON asked Mr. Bullock to define the legal
parameters for the transfer of assets as opposed to the transfer
of a revenue stream with a conditional release of that asset.
MR. BULLOCK explained the underlying concept of the bill. He
relayed that the state's ownership in the natural gas is
actually being transferred to the ARMB; however, DNR will
continue to manage the land on behalf of the ARMB.
Additionally, he highlighted that there's a provision in the
bill that would require the ARMB reimburse DNR for the cost of
that management. Other aspects of the bill, he noted, include
DNR's management of reserves, leasing gas interests and
deducting the contributions made to the permanent fund as well
as to the public school trust fund. The net income would then
be transferred to the ARMB, he said, and "DNR will continue to
manage the interest just as any other interests that the state
has."
10:30:35 AM
REPRESENTATIVE SEATON posed a situation in which the ARMB wishes
to monetize its asset - the ownership of the gas - and inquired
as to whether it would be possible for the board to sell it to a
state entity such as University of Alaska.
MR. BULLOCK explained that under the Alaska Statehood Act, the
ARMB "could not sell [its] interest in the gas."
REPRESENTATIVE SEATON rephrased his question asking whether it
wouldn't be possible for the ARMB to sell to the university
which has had gas interests transferred to it previously.
MR. BULLOCK said this might be possible if the asset can be
identified and is saleable.
10:32:22 AM
REPRESENTATIVE SAMUELS sought confirmation of his understanding
that the sale of assets could not be made to a company such as
ExxonMobil Corporation.
MR. BULLOCK said this was correct and further clarified that
under the Alaska Statehood Act, the state's assets may be leased
with a royalty interest retained; however, the land and its
underlying resources may not be sold.
REPRESENTATIVE SAMUELS asked whether it was possible to transfer
the royalty itself and not the land.
MR. BULLOCK explained that then it would become an issue of
"whether it's the income stream or the gas itself."
REPRESENTATIVE SAMUELS asked how autonomous the ARMB is, whether
it's under the control of the governor, and whether its members
are appointed for specified terms or serve until just cause for
removal.
MR. BULLOCK said he is uncertain as to the particular status of
the employees of the board, however, noted that there are
political appointees that serve on the board as well as
representation from DNR and DOR. The ARMB, he clarified, has
the fiduciary responsibility to manage the funds responsibly
regardless of administration changes. Furthermore, he said that
"the obligation under the Alaska State Constitution not to
impair the retirement funds continues regardless of political
entities." In further response to Representative Samuels as to
possible conflicts of interest among ARMB members, the
commissioner of DNR and other top administrators, opined that
"anything is possible; however, the unfunded liability will
continue and the ARMB, regardless of what happens to [its]
investment in the gas, would have to come up with the money, at
least some other way."
10:35:44 AM
MIKE BARNHILL, Assistant Attorney General, Labor and State
Affairs Section, Department of Law (DOL), informed the committee
that although there appears to be constitutional concerns with
the bill, he is not prepared to provide a definitive answer as
to whether it would actually be in violation of dedicated funds.
He relayed that [DOL] will research this further. He referred
to the 2004 Alaska Supreme Court decision on the transfer of
university lands. He highlighted that the court determined that
this transfer was not an appropriation but rather a non-monetary
asset transfer. Whether [HB 492] proposes a similar transfer of
assets, has not yet been determined. He relayed that although
there is constitutional protection of the state pension funds,
he expressed his uncertainty as to "whether a court would
consider that and say that somehow excuses this bill from the
dedicated funds prohibition." He opined that they are "two
entirely separate provisions in the constitution that aren't
linked or necessarily in conflict." As per the request of Chair
Weyhrauch, he explained that his last point was in response to
Mr. Bullock's suggestion that "because there's a constitutional
provision to protect and not to diminish the retirement systems,
that somehow the courts would give the benefit of the doubt to
the legislature if there was a bill with a potential dedicated
funds violation." He reiterated his doubt that the courts would
do this.
CHAIR WEYHRAUCH relayed that with the likelihood of the bill
being amended, the actions of committee may overtake the legal
analysis.
10:39:40 AM
DICK MYLIUS, Acting Director, Division of Mining, Land and
Water, Department of Natural Resources (DNR), informed the
committee that he was available to answer only those questions
on the DNR fiscal note. He explained that because the note
assumes a transfer of property interests to the [ARMB], it
focuses on federal research and the preparation of deeds. He
highlighted that whereas this falls under the purview of the
Division of Mining, Land and Water, any technical issues are the
purview of the Division of Oil and Gas.
10:41:01 AM
REPRESENTATIVE KELLY inquired as to whether Mr. Mylius
envisioned the actual transfer to be that of the land interest.
MR. MYLIUS offered his understanding that it involves the
transfer of the "gas interest" to the ARMB. In further response
to Representative Kelly, he relayed that any previous testimony
did not alter his understanding of the basis for the calculation
of the fiscal note.
REPRESENTATIVE SEATON inquired as to whether DNR would foresee
any problems should the ARMB intend to monetize the interest and
transfer it within the state, such as to the University of
Alaska.
MR. MYLIUS expressed his belief that this would not be a problem
as the university is still an entity of the state. In further
response to Representative Seaton regarding any other
foreseeable problems, he suggested that the attorney general's
office might be better able to address this. He expressed his
uncertainty as to whether the ARMB has the authority to transfer
title of a portion of the state's land.
10:43:17 AM
CHAIR WEYHRAUCH announced that HB 492 would be held over.
REPRESENTATIVE KELLY, [referencing the upcoming ARMB meeting],
in addition to KPMG's approach to liquidity, opined that it
might be helpful to know whether the assumption of a gas
contract would perfect the usefulness of the asset.
10:44:44 AM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
10:44 a.m.
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