Legislature(1995 - 1996)
03/02/1995 09:15 AM Senate FIN
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
March 2, 1995
9:15 a.m.
TAPES
SFC-95, #9, Side 1 and 2
SFC-95, #11, Side 1, (000-376)
CALL TO ORDER
Senator Rick Halford, Co-chairman, convened the meeting at
approximately 9:15 a.m.
PRESENT
In addition to Co-chairmen Halford and Frank, Senators
Donley, Phillips, Sharp, and Zharoff were present. Senator
Rieger arrived soon after the meeting began.
ALSO ATTENDING: Senator Taylor; Senator Salo; Randy Welker,
Legislative Auditor; Elmer Lindstrom, Special Assistant,
Dept. of Health and Social Services; Barbara Whiting,
Administrative Officer, Division of Elections, Office of the
Lt. Governor; Dan Fauske, Executive Director, Alaska Housing
Finance Corporation, Dept. of Revenue; Jan Sieberts, Senior
Vice President, National Bank of Alaska; Wes Clubb,
President, Alaska Homebuilders Association; Patricia
Grenier, aide to Senator Kelly; and aides to committee
members and other members of the legislature.
SUMMARY INFORMATION
SB 1 - REVIEW OF FEDERALLY MANDATED PROGRAMS
Testimony was presented by Senator Taylor and
Elmer Lindstrom. SB 1 was then REPORTED OUT of
committee with a zero SFC fiscal note
covering all departments.
SB 5 - ELECTION BALLOTS
Discussion was had with Barbara Whiting and
Patricia Grenier. CSSB 5 (STA) was REPORTED OUT
of committee with a zero fiscal note from the
Office of the Governor, Division of Elections.
SB 40 - APPROP: AHFC TO GENERAL FUND
Discussion was had with Randy Welker, Dan Fauske,
Jan Sieberts, and Wes Clubb. The bill was
subsequently HELD in committee for further review.
SENATE BILL NO. 1
An Act relating to state implementation of federal
statutes.
Co-chairman Halford directed that SB 1 be brought on for
discussion. SENATOR TAYLOR, sponsor of the legislation,
noted that the bill was not originally referred to Finance.
Referral was made when the legislation picked up additional
fiscal notes. The bill was introduced as companion
legislation to SJR 7--the Tenth Amendment resolution which
has already passed the legislature and been transmitted to
the Governor. That resolution demands that Congress stop
passing federal mandates which exceed Congressional
authority under the Tenth Amendment. SB 1 represents an
attempt to identify federal mandates, both statutory and
regulatory, which conflict with state policy or exceed state
constitutional limitations. Similar legislation, passed in
Colorado last year, declares that state government has an
obligation to the public to do what is necessary to protect
the right of citizens of the state while minimizing or
eliminating additional cost or regulatory burden.
To accomplish the foregoing goal, SB 1 requires annual
review of each Congressionally mandated program by the
executive branch. An annual report to the Governor and
Legislative Budget and Audit Committee would set forth
conclusions and make recommendations for changes in federal
law to make programs more cost effective and consistent with
state policy. A determination could also be made by the
Dept. of Law concerning whether the mandate exceeds federal
authority.
Sec. 1 of the bill contains findings of urgent need to
modify certain mandates because implementation of the
mandates wastes the financial resources of the state,
municipalities, and residents, and federal regulators often
do not understand the needs and priorities of Alaskans. The
bill provides for legislative review of federal mandates.
The Legislative Budget and Audit Committee would be charged
with making recommendations to the Governor on the need to
seek a change in federal statutes, regulations or policies
suited to state needs, suggest changes in the impacted state
program to implement the mandate more efficiently, or to
pursue legal challenge to the validity of the mandate.
Passage of SB 1 will add credence to passage of SJR 7.
Senator Taylor next referenced fiscal notes submitted by
departments, noting the Dept. of Health and Social Services'
claim it will need a $77.0 a year special assistant to
review federal mandates. The Dept. of Public Safety
requests $6.0 to establish a format and time table, seek
field input, compile responses, draw conclusions, and issue
a report. The Senator voiced his belief that the type of
review envisioned by SB 1 is already part of the budget
process. It is difficult to believe that departments do not
review mandated programs with an eye toward cost
effectiveness and inconsistency with state policy.
Senator Taylor acknowledged that departments do not
presently review programs to determine if they exceed
constitutional authority. The intent of SB 1 is to flag a
program for later review at the will of the Legislative
Budget and Audit Committee rather than to make a
determination at the department level. In that respect, SB
1 may need to be amended to strengthen legislative review.
Senator Taylor voiced his belief that much of the work the
proposed bill would generate at the department level is
already being done.
Co-chairman Halford asked the sponsor for a recommendation
on fiscal notes to accompany the bill. Senator Taylor
recommended a zero note. He reiterated that work
contemplated by the bill should be ongoing at the present
time, particularly in light of passage of SJR 7.
Senator Zharoff directed attention to page 2, line 13, and
noted language referencing "head of another agency."
Senator Taylor suggested that the legislature would want to
know if the Alaska Housing Finance Corporation, AIDEA, the
railroad, etc. are adversely impacted by federal
legislation. As an example, he cited the Americans with
Disabilities Act.
Senator Zharoff referenced a substantial fiscal note from
the Dept. of Health and Social Services and suggested that a
number of federal mandates impact the department and
necessitate substantial review. Senator Taylor concurred.
Senator Rieger asked if mandatory quarterly tax withholdings
or social security payments would be included within the
definition of federal mandates. Senator Taylor responded
that the definition is generic and would include areas
mentioned by Senator Rieger. The sponsor advised that those
items would likely be included in reports to the
legislature.
Senator Sharp voiced support for the legislation. He noted
concern that the state is often attracted to federal money,
and it provides the necessary match without knowing what the
overall economic impact will be, either long or short term.
The proposed bill would force an economic evaluation, a
determination of whether the program is necessary, and
evaluation of future impact.
Senator Taylor pointed to over $200 million in federal
mandates, grants, and incentive programs within the Dept. of
Education and noted that the department did not request
additional moneys for review and evaluation.
Senator Phillips MOVED that SB 1 pass from committee with
individual recommendations and the zero fiscal notes.
Senator Zharoff OBJECTED, voicing concern regarding the
burden that would be placed upon the Dept. of Health and
Social Services. He then REMOVED his OBJECTION.
ELMER LINDSTROM, Special Assistant, Dept. of Health and
Social Services, came before committee. He noted the wide
variation in fiscal notes submitted by departments and
suggested that it reflects a wide variation in assumptions
of what the bill would entail. He explained that since work
within the Dept. of Health and Social Services involves a
great deal of federal activity, the department assumes it
would be reviewing each federal dollar and each discrete
program as a federal mandate and reporting new and
additional information beyond historical analysis. If it is
the intent of the sponsor and the legislature that the bill
will merely entail a "recapitulation" of existing
information and efforts, there will be no cost.
Senator Donley voiced concern that passage of the proposed
bill would impose a mandate on state departments without
providing the necessary resources to do the work. He voiced
support for the bill but not for zeroing of fiscal notes.
The legislature may not get the results it seeks without
making some accommodation or providing some resources.
Co-chairman Halford voiced his belief that departments are
already doing what the proposed legislation requests. The
Dept. of Health and Social Service, in particular, must
analyze federal programs to maximize federal share, etc.
Co-chairman Halford called for objections to passage of the
bill. None were forthcoming. SB 1 was REPORTED OUT of
committee with a zero Senate Finance Committee fiscal note
covering all departments. Co-chairmen Halford and Frank and
Senators Phillips and Sharp signed the committee report with
a "do pass" recommendation. Senators Donley, Rieger, and
Zharoff signed "no recommendation."
SENATE BILL NO. 5
An Act prescribing the use and characteristics of
voting booths employed in elections and the color of
ballots used in state primary elections.
Co-chairman Halford directed that SB 5 be brought on for
discussion. PATRICIA GRENIER, aide to Senator Kelly, came
before committee. She explained that in the past election
voters complained about two things:
1. Different colored ballots
2. Curtainless suitcase voting booths
The proposed legislation addresses those concerns by
ensuring the secrecy of ballots and the privacy of voting,
in two ways:
1. Requiring that half of all booths at each precinct
be
curtain booths.
2. Having all primary ballots printed on white paper
only.
At present, the secrecy of voting in Alaska is severely
compromised. There are not enough curtain voting booths at
all polling places. Ms. Grenier stressed the importance of
maintaining privacy, both in terms of the color of the
ballot and the secrecy provided by curtain booths.
Senator Donley questioned the zero fiscal note accompanying
the bill and suggested that a physical cost would be
involved. Ms. Grenier advised that the state already has a
sufficient number of curtain booths. It is merely a matter
of correct distribution by contractors who set them up.
Senator Zharoff raised the question of whether it would be
practical, in rural areas with small populations ,to require
that 50% of the booths have curtains. He then asked if the
proposed change would apply to municipal as well as
statewide elections, and questioned whether sites at which a
voter picks up a ballot (absentee) would be considered a
polling place. BARBARA WHITING, Administrative Officer,
Division of Election, Office of the Lt. Governor, came
before committee. She said that the Lt. Governor and
division have taken a neutral position on the bill. Senator
Rieger followed up on one of Senator Zharoff's questions and
asked if the location where one picks up an absentee ballot
is considered a polling place. Ms. Whiting responded
affirmatively.
Senator Donley noted supplemental funding requested by the
division and inquired concerning lack of cost for the
proposed bill. Ms. Whiting described the present procedure
whereby the division issues a bid, and the award contractor
picks ups, delivers, and sets up voting booths. The
division has a sufficient number of curtain booths to place
half in every polling place. There is thus no need to
purchase additional booths. A mistake by the contractor
gave rise to the problem encountered by Senator Kelly in the
past election.
In response to a question from Senator Zharoff, Ms. Whiting
advised of 468 voting precincts. She also voiced her
understanding that the proposed bill would apply to state
rather than municipal elections.
Senator Donley spoke to need to pursue contractors who fail
to satisfactorily perform within contract specifications.
Senator Sharp MOVED that CSSB 5 (STA) pass from committee
with individual recommendations and accompanying zero fiscal
note. No objection having been raised, CSSB 5 (STA) was
REPORTED OUT of committee with a zero fiscal note from the
Office of the Governor, Division of Elections. All members
signed the committee report with a "do pass" recommendation
with the exception of Senator Zharoff who signed "no
recommendation."
SENATE BILL NO. 40
An Act making appropriations from the Alaska Housing
Finance Corporation revolving fund to the general fund;
and providing for an effective date.
Co-chairman Halford directed that SB 40 be brought on for
discussion. SENATOR SHARP, sponsor of the legislation,
noted that last year the legislature sent a signal to Alaska
Housing Finance Corporation (AHFC) that the legislature
expected a scheduled return on over a billion dollars in
equity placed in the corporation over the years
(particularly 1980 through 1984). Simple five percent
interest applied over the last ten years to the
$1,073,515,000 should not be too much to expect from the
investment. If extended out, it would amount to an increase
in equity to $2.2 billion. Up to this time, AHFC has
returned $316 million.
Senator Sharp referenced February 1, 1995, correspondence
(copy appended as Attachment A) and said he took exception
to the $250 million claimed as a return since that amount
represents a transfer of assets, upon which the corporation
will earn a return, rather than an equity return to the
state. Audit analysis conducted last year indicated
approximately $500 million in available equity that could be
transferred without affecting the bonding rating of the
corporation. An updated audit report dated February 9,
1995, (copy on file in the SFC original file for SB 40),
contains slight adjustments to estimated available equity.
Senator Sharp noted that the updated audit suggests that the
committee might want to consider amending SB 40 to provide a
$200 million draw down each year for the next two years.
Senator Sharp referenced lack of oversight at AHFC over the
last year or two and suggested that it amounts to "gross
malfeasance" in management. He noted that over $4 million
has been paid in liability suits relating to employee
problems, gold parachutes for departing executive directors,
five percent loans spread over thirty years, etc. The
Senators voiced concern that that amount of subsidy severely
disrupted the real estate market, and he cited examples
whereby prices increased when the subsidies were announced
and sellers rather than buyers received the benefit. In his
concluding comments, Senator Sharp stressed that AHFC should
be considered a continuing source of return of equity to the
state general fund.
RANDY WELKER, Legislative Auditor, came before committee.
He advised that, last year, the division of legislative
audit identified $535 million available to the legislature
over the period of three fiscal years:
FY 94 $200 million
FY 95 $214 million
FY 96 $121 million
The legislature appropriated $200 million in FY 95. At the
request of the Legislative Budget and Audit Committee, the
division updated and revised the foregoing numbers and
identified $295 million for FY 96 and $150 million for FY
97. In considering the numbers, Mr. Welker cautioned that
members should be aware that all number come from cash flow
statements prepared by AHFC. Funds are in excess of cash
flow needs over the next several years. The primary
adjustment made by the division of legislative audit was
elimination of AHFC's capital budget (from corporate
receipts) from cash flow projections. That was intended to
identify the maximum amount. If a capital budget is
appropriated for AHFC based on corporate receipts, division
numbers would have to be adjusted accordingly. AHFC has a
"very aggressive capital budget over the next five, six
years, to the tune of . . . $50 to $60 million a year . . .
." Cash flow activity for the current fiscal year indicates
that AHFC is using approximately $24 million. Mr. Welker
reiterated that AHFC has an aggressive capital budget plan
laid out "well past the year 2000."
Mr. Welker further cautioned that in reviewing bond
covenants and legal documents associated with AHFC activity
since prior division review, the division found a "poison
pill" in underlying documentation on a line of credit
agreement for a November bond issue. The provision says
that should the legislature take any action to transfer
assets away from the corporation, the $235 million in bonds
would be considered in default. That agreement was for a
short-term funding arrangement. AHFC is of the opinion that
the short-term funding will be rolled over into long-term
funding within the FY 96 time frame. Once that roll over to
long-term financing occurs, the default provision would no
longer be applicable. Mr. Welker advised that the agreement
provides for AHFC to request a waiver of the default
provision. That is one alternative that could be pursued.
AHFC believes it will be out from under that provision by
the end of FY 96. Should the legislature decide to
appropriate, the division of legislative audit does not
believe the provision would impact an appropriation, but it
might impact timing of the transfer of cash from AHFC to the
general fund.
Again addressing the corporation's capital budget, Mr.
Welker reiterated that numbers developed by Legislative
Audit are derived from the corporation's cash flow
projections that show that the corporation would be able to
maintain current programs even with the proposed withdrawal
of cash. However, the withdrawal would not bode well should
there be a major economic downturn and AHFC needed to rely
on surplus assets to bail out bond issues.
In his concluding comments, Mr. Welker noted credit rating
concerns that would be raised by withdrawal action by the
legislature. Standard & Poors has issued a negative outlook
on certain AHFC bonds because of continued legislative
interest in the assets of the corporation. There is no way
of knowing what impact a further appropriation would have on
AHFC's credit rating. Standard & Poors has put the
corporation on a negative outlook pending a downgrade should
a transfer occur. There is no indication how significant or
insignificant that downgrade might be. If downgrade was
from investment grade to below investment grade, that would
make the market "almost unreachable for AHFC." There are
numerous opinions on how drastic the bond rating change
might be.
Co-chairman Halford inquired regarding the effect of
triggering the "poison pill" provision, asking if AHFC would
go to the market and borrow moneys to cover the bonds. Mr.
Welker acknowledged that AHFC would "have to come up with
some means of repaying those bonds." Whether the
corporation could go to the market to accomplish that is
unsure. Mr. Welker further advised that while the default
provision remains in place, he could not say how ready the
bank would be to trigger that provision. There is a cost to
the bank to do so. If the bank does not anticipate a risk
to the bonds, there may be a reluctance to declare them in
default based on a technicality.
Co-chairman Halford asked if the legislature could
appropriate directly from AHFC to a department for
operational costs. Mr. Welker said he was unaware of any
prohibition. He added that default provisions speak to
transfer of "any asset away from AHFC." In response to a
further question from the Co-chairman, Mr. Welker advised,
"I believe the legislature could designate AHFC as the
funding source for any appropriation."
Senator Sharp raised a question regarding a rating
downgrade, suggesting that a system of various levels is in
place. Mr. Welker acknowledged that there are several
levels of investment bond ratings to go through before
ratings reach below investment grade.
Referencing the "poison pill" provision, Senator Sharp asked
if it places AHFC's capital budget in jeopardy for
authorizing expenditures from the equity account. He
further inquired regarding corporate ability to build assets
for its own use without legislative approval. Mr. Welker
suggested that the resulting conclusion would be that the
corporation is not transferring but merely converting from a
cash asset to a physical or structural asset. The total
asset value of the corporation has thus not been reduced.
Mr. Welker acknowledged that such action impacts corporate
liquidity.
Co-chairman Frank voiced his understanding that the "poison
pill" provision represents a technical default that might
result in the lender being able to demand immediate
repayment. He further advised that the arrangement is
temporary and intended to be refunded with "some type of
longer-term debt instrument." If the legislature withdraws
moneys from the corporation, the financing bank, should it
choose to do so, could demand payment, and AHFC would have
to provide repayment. In making that demand, the lender
would forego much of its interest earning.
End: SFC-95, #9, Side 1
Begin: SFC-95, #9, Side 2
Co-chairman Frank then stressed that the lender that
provided funding with the "poison pill" proviso should
"absolutely never be part of a new financing or a rolling
financing agreement that would allow them to get more fees
and interest . . . ." He attested to competitiveness in
financial markets and need to deal with "financing entities
that would treat us right as opposed to trying to blackmail
us into those kinds of terms." Co-chairman Halford
concurred but questioned whether the "poison pill" provision
was invented by the lender or AHFC.
In response to a question from Senator Sharp concerning bond
counsel oversight when the questioned provision was agreed
to, Mr. Welker said that correspondence regarding the
provision indicated it was a demand by the bank. It did not
appear to be generated internally at AHFC. It was reviewed
by legal counsel on contract to AHFC as well as AHFC staff.
The end result was that the provision prevailed and remained
a part of the line of credit.
Senator Sharp referenced AHFC capital budget matching of HUD
funds as an example of a situation where AHFC assets are not
retained. Match funding flows from AHFC to regional housing
authorities. Those buildings are not owned by AHFC. Mr.
Welker concurred.
In response to comments regarding lack of downgrade as a
result of last year's appropriation from the corporation,
Mr. Welker acknowledged that downgrade did not occur. He
noted, however, that Moodys placed AHFC on a negative
outlook. Standard and Poors has given earlier warning than
the state had the benefit of last year.
Senator Rieger voiced his recollection that the questioned
loan covenant is within a borrowing used to finance the $200
million payment to the state. Mr. Welker advised that the
two are not related. Senator Rieger then asked if the
source of the funds and administrator of the loan are the
same entity or is the bank a pass through for other lenders.
Mr. Welker advised that he did not know. He told members
that the lender is a major bank out of Germany. He further
surmised that a bank of that size is the primary entity
involved and is lending its own capital rather than
providing administrative services for another lender.
Co-chairman Frank directed attention to AHFC's combined
balance sheet within the 1994 annual report. He noted
assets of $4.4 billion and combined equities and liabilities
of $4.4 billion. Total fund equity as of June 30, 1994,
amounts to $1.7 billion. That is 39% equity. The Co-
chairman voiced his assumption that the foregoing numbers
reflect the status before withdrawal of last year's $200
million. When that appropriation is subtracted, the equity
percentage is 37%. Equity capitalization for banks ranges
from 7 to 10%. He then suggested that if AHFC equity is
reduced from 39% to 33%, by subsequent withdrawals, the
corporation remains "hugely capitalized." The corporation
has received contributed capital of $1,085,000,000 and has
retained earnings of $686.
Co-chairman Halford noted that while the title of SB 40
speaks to "An act making an appropriation," language in the
body of the bill relates to an amount "anticipated to be
transferred by the direction of the Alaska Housing Finance
Corporation Board." He then asked if the legislation is an
appropriation or something less and suggested that the
question be put to the drafter.
Co-chairman Halford further noted that the Governor's
balance sheet evidences $70 million from AHFC. He then
inquired concerning the amount of the corporation's proposed
capital budget. Mr. Welker answered that the draft capital
budget shows $52,749,600 from corporate receipts. The total
is $72,275,000, including federal funds. Co-chairman
Halford asked if the Governor's proposal and that of the
corporation itself are different from legislative
appropriation, in terms of impact on the bond covenant. Mr.
Welker said that if the $70 million proposed by the Governor
consists of $50 million in the capital budget and an
additional $20 million from AHFC's established dividend
program, it would be viewed differently by rating agencies.
Rating agencies recognize AHFC's dividend program as an
acceptable way of returning capital. A $70 cash extraction
from AHFC to the general fund would have the same
implication as SB 40.
Senator Rieger referenced testimony before the Legislative
Budget and Audit Committee indicating that anticipated FY 95
earnings would be "in the $90 million range." There is thus
a distinction between withdrawing earnings and withdrawing
capital. Mr. Welker stressed the importance of bearing in
mind that many of the assets within the "new AHFC" result
from combination of the old AHFC and ASHA. Many of the ASHA
programs are federally funded. He then voiced his
understanding that it is not the intent to impair those low-
income housing programs. It is the equity in old AHFC, that
generates surplus assets, that is addressed in the proposed
bill.
Co-chairman Frank voiced his understanding that the $70
million proposed by the Governor is in addition to AHFC's
capital budget. The Governor's proposed capital budget is
$135 million.
Referencing earlier comments by Senator Rieger regarding
earnings of the corporation, Co-chairman Frank stressed need
to examine the purpose of AHFC and what equity is needed to
maintain that purpose. When AHFC received large capital
injections in the early 1980s, its purpose was to subsidize
housing for many state residents. Over time, the
legislature changed AHFC policy to limit subsidy to that
which can be achieved through pass through of federal
subsidies. Ratcheting down has eliminated subsidies to
those who do not qualify for federal programs, yet a billion
in contributed capital remains within the corporation, plus
$500 million in retained earnings. The legislature is now
looking at AHFC's ability to contribute to the state general
fund on an ongoing basis. An assessment must thus be made
as to the amount the corporation needs as a capital base to
maintain existing programs. It cannot be assumed that the
corporation needs everything it now has. A fresh economic
look is needed. The Legislative Auditor has identified
"what their clear excess appears to be." Co-chairman Frank
voiced his belief that the purposes of the corporation could
be accomplished with "much, much less." The fund contains
$1.7 billion and is earning approximately $70 million. That
is not a good return on investment. Placement of the fund
balance in 30-year treasury bonds would be yielding "close
to 8% . . . ." The state is facing a fiscal gap of $500
million. A $1.7 billion corporation could be an important
part of Alaska's long-term fiscal plan.
Senator Sharp referenced an earlier inquiry by Co-chairman
Halford regarding wording in both the title and body of SB
40. He explained that it is patterned on language in the
budget last year. Language which allows the AHFC board of
directors to transfer the funds and make decisions on
surplus moneys was intended to be more acceptable to Wall
Street. Co-chairman Halford voiced his belief that the
proposed bill is not an appropriation since there is no
mandate to deposit. Mr. Welker concurred.
Senator Rieger reiterated remarks by Co-chairman Frank
regarding the purpose of expansion of AHFC in the early
1980s. The ultimate result was that the average Alaska
homeowner benefitted. The first of a series of mistakes by
the corporation was resistance to a dividend payout and the
fact that payouts have been low. Senator Rieger advised
that, in addition, the legislature made a further mistake in
merging AHFC and ASHA. The present perception is that this
$1.7 billion equity institution does not serve the vast
majority of Alaskans. It instead serves special interests
"out on the fringes" who are getting special 5% programs,
etc. If AHFC is to retain support in the legislature, it
will "have to do something for all Alaskans." The
corporation is noncompetitive at 10% when the market is 8.5
to 9%. Testimony before the Legislative Budget and Audit
Committee was that the corporation could have used its
assets to reduce its interest rate. It did not have to use
arbitrage earnings in the manner in which they were used.
Senator Rieger asked that the committee "entertain
resplitting AHFC from ASHA and let this corporation do some
good for its original purpose." He suggested that the
legislature should support AHFC in a workable manner or
dissolve it entirely. Withdrawing $200 million annually is
not likely to create beneficial interest rates for Alaskans.
It will, however, perpetuate fringe programs until the
agency collapses.
Senator Zharoff echoed Co-chairman Halford's concern
regarding language in the body of the bill. Mr. Welker
advised that as currently written, it is up to the board of
directors of AHFC to decide whether or not any of "this
money would be transferred to the general fund." Senator
Zharoff asked if the unrestricted cash is subject to sweep
to fill the void in the constitutional budget reserve. Mr.
Welker voiced his understanding that the assets of AHFC are
not subject to sweep. He acknowledged that if removed from
the corporation and placed in the general fund, they would
become vulnerable. The sweep is a fiscal year-end
calculation.
Further discussion of the sweep, calculated for the end of
FY 96, followed.
Senator Donley concurred in comments by Senator Rieger that
AHFC no longer serves the majority of Alaskans. He
questioned why it was continued once discounted rates were
no longer part of the program. He suggested that the recent
5% program was a fiasco. He voiced need to redefine the
program so that the corporation serves more Alaskans.
DAN FAUSKE, CEO and Executive Director, Alaska Housing
Finance Corporation, came before committee. He advised that
he had been on the job only two days. Prior to joining
AHFC, he served for ten years as chief financial and
administrative officer for the North Slope Borough. Mr.
Fauske advised that he has extensive experience in dealing
with bond issues and ratings. He cautioned that questions
of bond ratings are serious issues. He explained that he
had spent the past ten years at the North Slope Borough
"getting one back." In a teleconference last Friday,
Standard and Poors indicated they are seriously concerned by
the uncertainty. That is the natural hesitancy and paranoia
of rating agencies which have a reputation to uphold in
terms of the ratings upon which investors rely. Another key
consideration is that AHFC, unlike any other organization in
the United States, is a general obligation in and of itself.
It is backed by the full faith and credit of AHFC. Other
housing organizations are backed by the full faith and
credit of the resident state. AHFC assets are pledged for
the payment of debt. Mr. Fauske said that he was not
suggesting that there is not room to "work within those
numbers." There is a concern, however, as to how much money
is going to be taken out and the subsequent reaction of bond
rating agencies.
Mr. Fauske explained that he had discussed presentation of
numbers and scenarios with Standard and Poors in an attempt
to determine what rating agencies might be comfortable with.
He stressed the importance of maintaining the rating, saying
that AHFC is one of the strongest assets owned by the state.
Protecting the corporation and maintaining its ability to
access capital markets is important. Mr. Fauske spoke to
AHFC assistance in providing North Slope residents access to
loans.
Senator Phillips asked if a commitment by the state to
withdraw specific amounts ($200 and $100 million were cited)
each year over a two to three-year period and then terminate
withdrawals at the end of that time would satisfy bond
market concerns. Mr. Fauske responded that the methodology
would be correct, but he advised that he was unsure what
amounts might be acceptable until numbers were presented to
rating agencies.
Co-chairman Frank spoke to legislative attempts, over the
past six years, to elicit a meaningful dividend return to
the state from AHFC. Those attempts have been frustrated by
"stonewalling" by the corporation. As an alternative, the
legislature took action under its power to do so.
Legislative action was not done without justification and
analysis. Legislative auditors provided information on
excess reserves, and the appropriation were consistent with
that report. If AHFC and the legislature were to develop a
meaningful program of return of excess capital to the state,
that return could become an important part of how the state
meets its ongoing fiscal gap, could alleviate pressure to
appropriate from AHFC on an ad hoc basis, ensure long-term
viability of AHFC for its statutory purposes, and send the
right signals to the bond market. The Co-chairman
reiterated that legislative action is the direct result of
"the absolute stonewalling attitude of AHFC."
Senator Sharp concurred in comments by Co-chairman Frank.
He further commented that the purpose of AHFC, over the last
five years, has not been to provide first home buyers an
opportunity to purchase a home (one of the original purposes
of the corporation). AHFC has instead found a niche in
refinancing its own mortgages and funding low-interest
programs. He suggested that sale of the $115 million, 5%,
30-year mortgage portfolio would yield only $85 per $100.
That represents a great loss of equity.
Co-chairman Halford voiced concern over the fact that AHFC's
$50 million capital budget is half as large as the "entire
capital budget for the whole rest of the state in all other
functions." He then asked how the legislature could reduce
the program from $1.8 billion down to $500 million while
maintaining its health and function. He suggested that if
that could not be done, the corporation should be done away
with.
Senator Sharp suggested that commercial banks have not been
financing housing through AFHC, aside from special interest
projects. The federal housing market is much more feasible.
AHFC is not serving the general mortgage market for
Alaskans. It is being manipulated by special interest
groups.
End: SFC-95, #9, Side 2
Begin: SFC-95, #11, Side 1
JAN SIEBERTS, Senior Vice President, National Bank of
Alaska, and member, legislative committee, Alaska Bankers
Association, came before committee. He referenced passage
of a resolution by the Association in support of AHFC, but
advised that his comments at this time would be made on
behalf of NBA which services $2.4 billion in residential
loans throughout the state. NBA's impact and involvement in
housing issues surpasses the combined efforts of all other
financial institutions statewide, excluding AHFC.
Mr. Sieberts voiced support for AHFC, saying that it serves
an important purpose in Alaska. In much of the state there
would be no long-term home financing without the
corporation. He acknowledged legislative frustration and
suggested that recent reorganization is partially to blame
as well as need to restructure the board to provide for
ongoing legislative involvement.
National Bank of Alaska envisions AHFC's role, over the long
term, to be low to moderate-income financing. That involves
multifamily housing and rental units for that segment of the
public. Involvement in rural Alaska is absolutely
essential. Never before addressed special-needs financing
is an important function. He cited the St. Vincent DePaul
facility for the homeless in Juneau as an example.
Mr. Sieberts said that the owners and managers of NBA could
not sustain the operating scrutiny applied to AHFC. He
voiced his belief that AHFC is headed in the right direction
in terms of meeting state needs. He further advised that
NBA has long advocated a sustained dividend program to meet
legislative needs. On the other hand, taking 20% of the
capital from the corporation in one appropriation could have
devastating effects. Any corporation losing 20 to 25% of
its equity over a twelve-month or twenty-four-month period
would provide cause for alarm in terms of ratings. Mr.
Sieberts voiced his belief that if that happens, there will
probably be no ratings. Rather than ratcheting down AHFC's
rating, rating agencies would withdraw the rating because
the impact of removal of capital would be unknown.
Mr. Sieberts urged the legislature to develop a long-term
sustainable dividend program for the corporation. He
further encouraged the committee to change the directorship
of the corporation to allow for more direct involvement of
the legislature. As an aside, Mr. Sieberts advised that
through attendance at AHFC board meetings, he had observed
that "more low-income, moderate-income people show up at
their board meetings than are showing up for these
hearings." There is thus a constituency and great interest
by that constituency.
Co-chairman Halford reiterated need to reduce the size of
the corporation while maintaining its health.
WES CLUBB, PRESIDENT, ALASKA HOMEBUILDERS ASSOCIATION,
voiced need to define AHFC's role before determining what it
is to accomplish. He suggested that no one in attendance at
the present meeting knows what AHFC does, how its programs
are funded, matching needs, etc. It is important that the
committee have a good understanding of that and from there
define the direction in which the corporation is to go.
Co-chairman Halford advised that legislators understood
AHFC's function before the merger. He acknowledged lack of
information concerning what "the other pieces that we're
trying to do out there." Mr. Clubb concurred that AHFC has
changed its role and direction over the last few years. The
corporation is "doing more volume in rural Alaska than DC&RA
did." That is definable. AHFC is "taking care of more
special needs housing:" seniors, homeless, weatherization,
etc.
Mr. Clubb cautioned that "the impacts from the standpoint of
bond rating, and that type of thing, are very real." The
person that will pay the price is "going to be the people of
Alaska . . . ." It is very important that the committee be
"cautionary" and attempt to develop a long-term contribution
program. A wholesale taking is "one of the most dangerous
things that this body can do." Alaska has created the
finest housing agency in the country. It would be wrong to
destroy it at this time.
Mr. Clubb stressed the importance of AHFC to the state
homebuilders' association. He said that housing needs in
rural areas are very real. Hundreds of thousands of dollars
have been spent in housing needs assessments. Those
assessments evidenced that over 10,000 housing units are
necessary in rural Alaska in addition to needed
weatherization and improvements to existing homes. That
need can only be met by something like AHFC. Mr. Clubb
again urged caution. He voiced support for the Governor's
proposal for a contribution program that is sustainable over
time. The ability to obtain approval of such a program by
bond rating agencies is very real.
Co-chairman Halford asked if Mr. Clubb thought AHFC should
have a capital budget equal to half the capital budget for
the entire state. Mr. Clubb said he could not speak to the
issue since he did not know specifically what AHFC's budget
entails. AHFC is a $4.4 billion company. A $50 million
capital budget does not appear unreasonable. Co-chairman
Halford advised that he was not willing to support a
corporation twice the size of the state budget. Mr. Clubb
noted that the $4.4 billion is a function of "over 30,000
loans out there . . . to say nothing about the special
interest housing, the senior housing projects . . . ."
Senator Randy Phillips advised that over two-thirds of his
constituents want money withdrawn from AHFC to fund
government. Mr. Sieberts said that from NBA's perspective,
many statewide housing needs have not been met. Congress is
constantly asking federal housing programs to do more. Much
more needs to be done in Alaska. He voiced his hope that
with restructuring, AHFC would be encouraged by the
legislature to do more. Much of the housing stock in much
of Alaska is beginning to deteriorate rapidly. Alaska has
the tools to deal with the problem. However, it cannot be
effectively dealt with if AHFC changes management and
directors every two years, and the corporation remains a
political football. Mr. Clubb concurred, advising that AHFC
needs to stop having "rent execs." The stability of a $4.4
billion company is at risk. It is important that some of
the politics of the position be taken away.
Co-chairman Halford referenced a proposed constitutional
amendment that might be of assistance. He then voiced his
belief that executives and board members of the permanent
fund, board members of AHFC, and board members of the Alaska
Railroad should not be subject to removal each time a new
governor is elected. Those board members should also come
before the legislature for confirmation. Mr. Clubb voiced
support for that approach, advising that wholesale change
through the political process destroys both credibility and
ability to plan on a long-term basis.
Discussion of the makeup of the AHFC board followed between
committee members, Mr. Sieberts, and Mr. Clubb.
Co-chairman Halford queried the testifiers concerning their
thoughts on reseparation of AHFC. Mr. Clubb voiced his
opinion that it would be a big mistake. He noted that the
legislature used to fund $20 to $25 million a year in
general funds to operate the previously existing agencies.
Today that operation is within the parameters and earnings
of AHFC. He again stressed the detrimental effect of lack
of management stability and staff who work in constant fear
of losing their jobs.
Mr. Sieberts acknowledged concern over consolidation by some
at NBA. However, the transition has worked "fairly well."
He said that if the corporation was again to be separated,
he would recommend leaving rural housing and low income
urban programs together and moving out ASHA management.
Greater leverage of moneys for rural Alaska could be
achieved if housing aspects remain intact.
Co-chairman Frank asked if Mr. Sieberts would support a
professional review of the corporation, its statutory
mandates, and capitalization to determine whether it is
adequately or over capitalized. He suggested that review
might highlight techniques the corporation is not now using
that might allow for an increase on the rate of return on
assets and equity. Mr. Sieberts advised that NBA constantly
brings consultants in to evaluate internal performance.
That process is ongoing and could be conducted for AHFC as
well. Mr. Sieberts stressed need to develop a long-term
sustainable program rather than a "knee-jerk" withdrawal.
Mr. Clubb acknowledged the complexity of issues surrounding
the corporation. He again stressed that AHFC is a stand-
alone entity. It is not guaranteed by the State of Alaska.
Speaking to appropriation from the corporation, Mr. Clubb
raised a historical question concerning whether in doing so
without the approval of the board of directors the state
incurs a liability to guarantee the bonds.
ADJOURNMENT
The meeting was adjourned at approximately 11:15 a.m.
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