Legislature(2007 - 2008)SENATE FINANCE 532

02/08/2008 09:00 AM Senate FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ SB 57 MARINE PARKS ADDITIONS/HUNTING ALLOWED TELECONFERENCED
Moved CSSB 57(RES) Out of Committee
+ HB 13 RETIREMENT SYSTEM LIABILITY/BONDS/CORP. TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
+= SB 119 SCHOOL LIBRARY GRANTS TELECONFERENCED
Moved CSSB 119(FIN) Out of Committee
                  SENATE FINANCE COMMITTEE                                                                                      
                      February 8, 2008                                                                                          
                         9:19 a.m.                                                                                              
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Stedman called the Senate  Finance Committee meeting                                                                   
to order at 9:19:09 AM.                                                                                                       
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Kim Elton                                                                                                               
Senator Donny Olson                                                                                                             
Senator Joe Thomas                                                                                                              
Senator Fred Dyson                                                                                                              
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Charlie Huggins, Vice-Chair                                                                                             
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Darwin Peterson, Staff, Senator  Bert Stedman; Brian Andrews,                                                                   
Deputy   Commissioner,  Treasury   Division,  Department   of                                                                   
Revenue;   Representative   Mike  Hawker;   Mike   Eberhardt,                                                                   
Division  of Parks,  Department  of Natural  Resources;  Gary                                                                   
Miller, Juneau State Parks Advisory Board                                                                                       
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Judith  McQuerry,   Ketchikan;  Taralee  Alcock,   Librarian,                                                                   
Petersburg;  Julie   Hursey,  Petersburg;   Melinda  Hofstad,                                                                   
Petersburg                                                                                                                      
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
SB 119    "An  Act establishing  a grant  program to  support                                                                   
          public school libraries."                                                                                             
                                                                                                                                
          CSSB 119(FIN) was REPORTED  out of Committee with a                                                                   
          "do  pass"  recommendation  and  with  a  new  zero                                                                   
          fiscal  note  by the  Department  of Education  and                                                                   
          Early Development.                                                                                                    
                                                                                                                                
SB 57     "An Act relating to hunting in marine park units                                                                      
          of the Alaska state  park system, amending the area                                                                   
          within designated  marine park units  of the Alaska                                                                   
          state park system, and  adding marine park units to                                                                   
          the Alaska state park system."                                                                                        
                                                                                                                                
          CSSB 57(RES)  was REPORTED out of Committee  with a                                                                   
          "no recommendation",  with a new fiscal note by the                                                                   
          Department  of Natural  Resources, and  with  a new                                                                   
          zero  fiscal note  by  the Department  of Fish  and                                                                   
          Game.                                                                                                                 
                                                                                                                                
CSHB 13(FIN)                                                                                                                    
          "An   Act  relating   to  prepayments  of   accrued                                                                   
          actuarial  liabilities   of  government  retirement                                                                   
          systems;  relating  to  the Alaska  Municipal  Bond                                                                   
          Bank   Authority,   the  Alaska   Housing   Finance                                                                   
          Corporation,   and   the  state   bond   committee;                                                                   
          establishing  the  Alaska Pension  Obligation  Bond                                                                   
          Corporation;  permitting the Alaska  Municipal Bond                                                                   
          Bank Authority or a  subsidiary of the authority, a                                                                   
          subsidiary   of   the    Alaska   Housing   Finance                                                                   
          Corporation,  the  state  bond committee,  and  the                                                                   
          Alaska  Pension  Obligation   Bond  Corporation  to                                                                   
          assist state  and municipal governmental  employers                                                                   
          by  issuing  bonds,  notes,  commercial  paper,  or                                                                   
          other  obligations   to  enable   the  governmental                                                                   
          employers  to  prepay  all  or  a  portion  of  the                                                                   
          governmental  employers'  shares  of  the  unfunded                                                                   
          accrued   actuarial   liabilities   of   retirement                                                                   
          systems;  authorizing  a governmental  employer  to                                                                   
          issue  obligations to  prepay all  or a portion  of                                                                   
          the governmental employer's  shares of the unfunded                                                                   
          accrued   actuarial   liabilities   of   retirement                                                                   
          systems  and  to  enter   into  a  lease  or  other                                                                   
          contractual  agreement with  a trustee, the  Alaska                                                                   
          Municipal  Bond Bank Authority  or a subsidiary  of                                                                   
          the authority,  a subsidiary of the  Alaska Housing                                                                   
          Finance Corporation,  the state bond  committee, or                                                                   
          the Alaska  Pension Obligation Bond  Corporation in                                                                   
          connection  with the  issuance  of obligations  for                                                                   
          that  purpose, and relating  to those  obligations;                                                                   
          relating to  revision of the employer  contribution                                                                   
          rate  in  connection  with financed  prepayment  of                                                                   
          unfunded    accrued   actuarial   liabilities    of                                                                   
          government  retirement systems;  and providing  for                                                                   
          an effective date."                                                                                                   
                                                                                                                                
          CSHB  13(FIN) was heard  and HELD in  Committee for                                                                   
          further consideration.                                                                                                
                                                                                                                                
9:19:24 AM                                                                                                                    
                                                                                                                                
SENATE BILL NO. 119                                                                                                           
                                                                                                                                
     "An Act establishing a grant program to support public                                                                     
     school libraries."                                                                                                         
                                                                                                                                
[A previous motion to adopt CSHB 119(FIN), version C, was                                                                       
withdrawn.]                                                                                                                     
                                                                                                                                
Senator  Olson  MOVED to  ADOPT  CSSB 119(FIN),  labeled  25-                                                                   
LS0749\M, Mischel, 2/5/08.                                                                                                      
                                                                                                                                
Co-Chair Stedman OBJECTED for discussion purposes.                                                                              
                                                                                                                                
9:23:00 AM                                                                                                                    
                                                                                                                                
DARWIN PETERSON, STAFF, SENATOR  BERT STEDMAN, explained that                                                                   
the  current  version of  the  bill  changes Section  1,  the                                                                   
library  construction  and  major  expansion  matching  grant                                                                   
program  part of  the  bill, from  having  the Department  of                                                                   
Education  administrating  the  grant to  the  Department  of                                                                   
Commerce, Community  and Economic Development.   The Board of                                                                   
Education is no longer involved  in adopting the regulations.                                                                   
                                                                                                                                
The  major  expansion  is  now defined  as  an  expansion  to                                                                   
increase the square  footage of a structure by  not less than                                                                   
30 percent.  On page 2, line 3,  eligibility requirements are                                                                   
outlined.  A library has to be  publically owned and operated                                                                   
and located  in a  community with a  population of  less than                                                                   
10,000 persons.   Local communities must now  provide a match                                                                   
of 20  percent or  more.   The state  can contribute  no more                                                                   
than 50 percent.  Private donors would pick up the rest.                                                                        
                                                                                                                                
The library collection  grant has been changed  in subsection                                                                   
(c),  line 24,  to  say that  if there  is  not enough  money                                                                   
appropriated,  it  goes  to  the   highest  ranking  eligible                                                                   
grantee.   If there is too  much money appropriated,  it goes                                                                   
back into the general fund.                                                                                                     
                                                                                                                                
9:26:13 AM                                                                                                                    
                                                                                                                                
Mr. Peterson described  the change on page 3, lines  23 - 25,                                                                   
which  was  in  response  to  Senator  Elton's  concern  that                                                                   
schools may use  the money to supplant  their responsibility.                                                                   
The library  collection grants  may not  be used to  supplant                                                                   
school district library expenditures.                                                                                           
                                                                                                                                
Co-Chair   Hoffman  asked   about   the   criteria  to   rank                                                                   
applicants.  Mr.  Peterson replied that the  criteria will be                                                                   
developed  by  the  Department  of  Commerce,  Community  and                                                                   
Economic Development through regulations.                                                                                       
                                                                                                                                
Senator  Olson referred  to the  eligibility  section of  the                                                                   
bill and  asked if  some libraries are  being excluded.   Mr.                                                                   
Peterson  replied  that the  grant  is for  construction  and                                                                   
major  expansion  of  publically  owned  libraries,  not  for                                                                   
school libraries.   He said the title was changed  to reflect                                                                   
that.   Part of  the bill  deals with  public school  library                                                                   
collection   grants  and   part  of   the  bill  deals   with                                                                   
construction   grants   for   public   libraries   in   small                                                                   
communities.                                                                                                                    
                                                                                                                                
9:27:59 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  WITHDREW his  objection to adopt  version M                                                                   
of  SB 119.   There  being NO  further OBJECTION,  it was  so                                                                   
ordered.                                                                                                                        
                                                                                                                                
9:28:25 AM                                                                                                                    
                                                                                                                                
JUDITH MCQUERRY,  KETCHIKAN, testified in support  of SB 119.                                                                   
She asked  why there  was a  population limit  of 10,000  for                                                                   
communities.   She thought the  community of Ketchikan  would                                                                   
not  qualify for  the  grant,  however, the  municipality  of                                                                   
Ketchikan would.   Co-Chair Stedman  clarified that  the city                                                                   
of  Ketchikan would  qualify  for the  grant  program with  a                                                                   
population of 7,622.  Smaller  communities would apply and be                                                                   
ranked, and  then the  legislature would  approve a  block of                                                                   
funds.   Large populations such  as Juneau with  30,000 would                                                                   
not qualify.                                                                                                                    
                                                                                                                                
9:31:06 AM                                                                                                                    
                                                                                                                                
TARALEE ALCOCK,  LIBRARIAN, PETERSBURG, testified  in support                                                                   
of the bill.   She addressed Section 1,  library construction                                                                   
and major  expansion matching  grant program.   She described                                                                   
the need  for a  new library  in Petersburg  as urgent.   She                                                                   
noted that financial support by  the community was essential.                                                                   
                                                                                                                                
JULIE HURSEY,  PETERSBURG,  testified in  support of  SB 119,                                                                   
especially the  state matching fund component.   She detailed                                                                   
plans for a new Petersburg library.                                                                                             
                                                                                                                                
9:34:57 AM                                                                                                                    
                                                                                                                                
MELINDA HOFSTAD, PETERSBURG, testified  in support of SB 119.                                                                   
She spoke  of the  diligent work of  a local community  group                                                                   
toward building  a new  library in  Petersburg.  She  praised                                                                   
the  local  librarian  and shared  statistics  about  library                                                                   
usage.   She mentioned  local fundraising  efforts for  a new                                                                   
library.                                                                                                                        
                                                                                                                                
9:38:04 AM                                                                                                                    
                                                                                                                                
Senator Thomas commented that  the definitions of "community"                                                                   
and  "on-going maintenance"  should be  clarified.   Co-Chair                                                                   
Stedman  explained that  the issues  of on-going  maintenance                                                                   
and  fiscal  capability  would  be  addressed  in  department                                                                   
regulations.  He  pointed out that the bill  is going forward                                                                   
without the funding in it, but  regulations would be written.                                                                   
                                                                                                                                
Mr.  Peterson   spoke  of   researching  the  definition   of                                                                   
"community".   Legislative Legal Services explained  that the                                                                   
term is used  throughout statutes and is  an all-encompassing                                                                   
term  that includes  towns, cities,  and  boroughs.   Senator                                                                   
Thomas asked  if a community could  be just an area  that has                                                                   
existed for  a long  time.  Mr.  Peterson said the  community                                                                   
does  not have  to be  organized.   The provision  in the  CS                                                                   
states that the community would  have to provide a 20 percent                                                                   
matching   grant,   which   would    eliminate   very   small                                                                   
communities.                                                                                                                    
                                                                                                                                
Senator Dyson  asked if  a community  defined by federal  law                                                                   
would  qualify.  Mr.  Peterson  replied that  it would.   For                                                                   
example, the community of Metlakatla  would qualify.  Senator                                                                   
Dyson  asked if  tribes  and villages  would.   Mr.  Peterson                                                                   
replied  that  they  would  also qualify.      Senator  Dyson                                                                   
inquired  if a  community not  recognized by  state law,  but                                                                   
recognized under  federal law,  would qualify.   Mr. Peterson                                                                   
said if a community  is not recognized by state  law it would                                                                   
not  qualify.   He offered  to research  the subject  further                                                                   
with the drafter of the bill.                                                                                                   
                                                                                                                                
9:42:57 AM                                                                                                                    
                                                                                                                                
Senator Olson MOVED to REPORT  CSHB 119(FIN) out of Committee                                                                   
with individual  recommendations and the  accompanying fiscal                                                                   
note.  There being NO OBJECTION, it was so ordered.                                                                             
                                                                                                                                
CSSB 119(FIN) was REPORTED out  of Committee with a "do pass"                                                                   
recommendation  and   with  new  zero  fiscal   note  by  the                                                                   
Department of Education and Early Development.                                                                                  
                                                                                                                                
9:44:24 AM                                                                                                                    
                                                                                                                                
SENATE BILL NO. 57                                                                                                            
                                                                                                                                
     "An Act relating to hunting  in marine park units of the                                                                   
     Alaska  state  park  system, amending  the  area  within                                                                   
     designated  marine park units  of the Alaska  state park                                                                   
     system,  and  adding marine  park  units  to the  Alaska                                                                   
     state park system."                                                                                                        
                                                                                                                                
Senator Elton, sponsor, highlighted  SB 57.  The bill adds 14                                                                   
islands adjacent to Juneau and  to the existing Marine Parks.                                                                   
They  range from  Lincoln  Island in  the  north to  Portland                                                                   
Island in  the south.  The  islands are frequented  by locals                                                                   
and  Southeast  Alaska  residents   and  are  used  for  many                                                                   
purposes.   The islands are an  integral part of  the tourism                                                                   
economy.  It is expected that  outdoor groups, especially the                                                                   
Territorial  Sportsmen,  will   add  amenities  to  the  park                                                                   
system.                                                                                                                         
                                                                                                                                
Senator  Elton  reported  that  the  bill  was  developed  in                                                                   
consultation  with the  Division of Parks,  Juneau Parks  and                                                                   
Recreation  Advisory   Committee,  the  Juneau   State  Parks                                                                   
Advisory  Committee, local  tourism companies,  and the  City                                                                   
and Borough of Juneau.  It excludes  private landholdings but                                                                   
protects private  landholdings already  on the islands.   The                                                                   
bill  is supported  by CBJ,  Territorial Sportsmen,  Goldbelt                                                                   
Native  Corporation,  Anytime  Charters, Juneau  State  Parks                                                                   
Advisory Board,  Southeast Alaska  Land Trust, and  Southeast                                                                   
Alaska  Conservation Council.   Senator  Elton noted  that in                                                                   
the  previous  committee  a 10-fathom  bathymetric  line  was                                                                   
added in order to protect areas  adjacent to the Marine Park.                                                                   
The bill says  that the commissioner cannot  prohibit hunting                                                                   
and fishing in the Marine Park.                                                                                                 
                                                                                                                                
9:49:09 AM                                                                                                                    
                                                                                                                                
Senator Olson  asked if trapping  is allowed.   Senator Elton                                                                   
referred  to  Section  2  to show  that  trapping  cannot  be                                                                   
prohibited.   Senator  Olson asked if  commercial fishing  is                                                                   
included in the section.  Senator Elton said it was.                                                                            
                                                                                                                                
Co-Chair  Stedman  commented  that 10  fathoms  was  selected                                                                   
because it is easy to see on all electronic charts.                                                                             
                                                                                                                                
Co-Chair Hoffman  asked how many acres the  park encompasses.                                                                   
Senator  Elton   deferred  to   the  Department   of  Natural                                                                   
Resources.                                                                                                                      
                                                                                                                                
9:50:48 AM                                                                                                                    
                                                                                                                                
MIKE  EBERHARDT, DIVISION  OF  PARKS, DEPARTMENT  OF  NATURAL                                                                   
RESOURCES, replied  that he does  not know the  total acreage                                                                   
of  the Marine  Park.   He  thought there  was  approximately                                                                   
1,500  acres   of  land.   Senator  Stedman  requested   more                                                                   
information, broken down by land and water.                                                                                     
                                                                                                                                
Senator  Olson asked  how much  of  the park  was on  private                                                                   
land.   Mr.  Eberhardt  replied that  there  were only  three                                                                   
private  landowners and  they have been  contacted.   Senator                                                                   
Olson asked if they are supportive.   Mr. Eberhardt said they                                                                   
have not voiced opposition.                                                                                                     
                                                                                                                                
Co-Chair  Stedman asked  if the  three  private parcels  have                                                                   
waterfront  access.   Mr.  Eberhardt  replied  that they  do.                                                                   
Senator  Elton noted  a letter  of  support from  one of  the                                                                   
landowners.                                                                                                                     
                                                                                                                                
Senator  Dyson  assumed  that  the  property  rights  of  the                                                                   
landholders are not  diminished.  Mr. Eberhardt  said that is                                                                   
correct.                                                                                                                        
                                                                                                                                
9:54:39 AM                                                                                                                    
                                                                                                                                
GARY  MILLER, JUNEAU  STATE  PARKS ADVISORY  BOARD,  reported                                                                   
that the park consists of 12.1  square miles of land and 11.5                                                                   
square miles  of water,  which would  be somewhat reduced  by                                                                   
the 10-fathom  boundary.  Co-Chair  Stedman asked if  most of                                                                   
the land is on Shelter and Lincoln  Islands.  Mr. Miller said                                                                   
yes  and added  that hunting  and trapping  are available  on                                                                   
both islands.                                                                                                                   
                                                                                                                                
9:56:32 AM                                                                                                                    
                                                                                                                                
Senator Elton MOVED to CSSB 57(FIN) out of Committee with                                                                       
individual recommendations and the accompanying fiscal                                                                          
notes.  There being NO OBJECTION, it was so ordered.                                                                            
                                                                                                                                
CSSB  57(RES)  was  REPORTED  out of  Committee  with  a  "no                                                                   
recommendation" and with a new  fiscal note by the Department                                                                   
of Natural  Resources,  and with  a new zero  fiscal note  by                                                                   
Department of Fish and Game.                                                                                                    
                                                                                                                                
9:57:07 AM                                                                                                                    
                                                                                                                                
At-ease                                                                                                                         
                                                                                                                                
10:01:38 AM                                                                                                                   
                                                                                                                                
CS FOR HOUSE BILL NO. 13(FIN)                                                                                                 
                                                                                                                                
     "An  Act relating  to prepayments  of accrued  actuarial                                                                   
     liabilities of  government retirement  systems; relating                                                                   
     to the Alaska Municipal Bond  Bank Authority, the Alaska                                                                   
     Housing   Finance  Corporation,   and  the  state   bond                                                                   
     committee;  establishing the  Alaska Pension  Obligation                                                                   
     Bond Corporation;  permitting the Alaska  Municipal Bond                                                                   
     Bank  Authority  or a  subsidiary  of the  authority,  a                                                                   
     subsidiary  of the Alaska  Housing Finance  Corporation,                                                                   
     the  state  bond  committee,   and  the  Alaska  Pension                                                                   
     Obligation   Bond  Corporation   to  assist  state   and                                                                   
     municipal  governmental   employers  by  issuing  bonds,                                                                   
     notes, commercial paper,  or other obligations to enable                                                                   
     the governmental  employers to  prepay all or  a portion                                                                   
     of the  governmental employers'  shares of the  unfunded                                                                   
     accrued  actuarial  liabilities of  retirement  systems;                                                                   
     authorizing    a   governmental   employer    to   issue                                                                   
     obligations   to  prepay  all   or  a  portion   of  the                                                                   
     governmental employer's  shares of the  unfunded accrued                                                                   
     actuarial  liabilities  of  retirement  systems  and  to                                                                   
     enter into  a lease or other contractual  agreement with                                                                   
     a trustee,  the Alaska Municipal Bond Bank  Authority or                                                                   
     a  subsidiary  of the  authority,  a subsidiary  of  the                                                                   
     Alaska  Housing  Finance  Corporation,  the  state  bond                                                                   
     committee,  or   the  Alaska  Pension   Obligation  Bond                                                                   
     Corporation   in  connection   with   the  issuance   of                                                                   
     obligations  for  that purpose,  and  relating to  those                                                                   
     obligations;  relating  to   revision  of  the  employer                                                                   
     contribution   rate   in    connection   with   financed                                                                   
     prepayment of unfunded accrued  actuarial liabilities of                                                                   
     government  retirement  systems;  and providing  for  an                                                                   
     effective date."                                                                                                           
                                                                                                                                
Co-Chair  Stedman  commented that  the  bill  has an  immense                                                                   
magnitude in  dollars and is one  of the tools  to facilitate                                                                   
cash flow for the unfunded liability.   He referred to a book                                                                   
called "Pension  Obligation Bonds  and Other  Post-Employment                                                                   
Benefits" by  Roger Davis.   He referred to the  presentation                                                                   
by the  Department  of Revenue  (DOR).  He  also referred  to                                                                   
documents from the  PEW Center on the States,  "Promises with                                                                   
a Price",  and a fact sheet  regarding other  states' retiree                                                                   
benefit obligations.   There is also a handout  from Standard                                                                   
and  Poor's  RatingsDirect,  "Time  May  Be Ripe  For  A  POB                                                                   
Revival".  (All copies are on file.)                                                                                            
                                                                                                                                
10:05:49 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  MIKE HAWKER,  SPONSOR, explained  that  HB 13                                                                   
deals  with the  unfunded  liability  related  to the  Public                                                                   
Employee Retirement System (PERS)  and the Teacher Retirement                                                                   
System   (TRS),  due   to   insufficient   assets  to   cover                                                                   
liabilities.   About  $8.5  billion is  needed  to cover  the                                                                   
unfunded  liabilities.   The retirement  obligation to  those                                                                   
trusts is a requirement fixed  in the state constitution.  HB
13 provides  a mechanism  by which to  pay off the  liability                                                                   
through the use of the capital markets financial leverage.                                                                      
                                                                                                                                
Representative Hawker  compared the debt  to a mortgage  on a                                                                   
house, which accrues interest.   The pension liabilities also                                                                   
accrue interest,  of sorts.  The  device offered in  the bill                                                                   
would empower  the political  subdivision to refinance  these                                                                   
pension  funds  by  going  into   the  international  capital                                                                   
markets,  borrowing money  at  a low  rate  of interest,  and                                                                   
investing  it.   He  explained  how the  state  saves on  the                                                                   
arbitrage.   There are  many federal  restrictions,  but this                                                                   
method is federally sanctioned.                                                                                                 
                                                                                                                                
10:11:03 AM                                                                                                                   
                                                                                                                                
Representative  Hawker   emphasized  that  the   bill  is  an                                                                   
empowerment  bill.  It  allows the  municipal authorities  to                                                                   
engage  in Pension  Obligation  Bonds (POBs)  to help  reduce                                                                   
debt.  He pointed out that the  state has qualified financial                                                                   
advisors.   He highly  recommended the  Orrick (Roger  Davis)                                                                   
book.                                                                                                                           
                                                                                                                                
10:14:09 AM                                                                                                                   
                                                                                                                                
BRIAN  ANDREWS,   DEPUTY  COMMISSIONER,  TREASURY   DIVISION,                                                                   
DEPARTMENT  OF REVENUE, testified  on HB  13 using  a handout                                                                   
entitled  "Pension Obligation  Bonds" (copy  on file.)     He                                                                   
referred to  page one of the  handout to define  what Pension                                                                   
Obligation  Bonds  (POBs)  are.     He  explained  that  POBs                                                                   
replaces  one form  of debt with  another form  of debt  that                                                                   
carries a  lower interest rate  cost, similar  to refinancing                                                                   
the mortgage  on  a house.   They are  issued  by a state  or                                                                   
local government.  The greater  the investment arbitrage, the                                                                   
better  off   the  state  will   be  in  achieving   a  lower                                                                   
contribution rate  to the state's  pension plans.   POBs have                                                                   
been a increasingly popular and  successful way for state and                                                                   
local  governments  to  accomplish financial  goals.    Since                                                                   
1955, six states  and over 234 local governments  have issued                                                                   
POBs totaling  in  excess of $40  billion.   In the  mid-90's                                                                   
Anchorage issued a POB.                                                                                                         
                                                                                                                                
Mr.  Andrews turned  to  page  2, a  map  of the  U.S.  which                                                                   
depicts states  that have  issued POBs.   Illinois  holds the                                                                   
record for the  largest POB, in 2003, worth $10  billion.  He                                                                   
noted that  Connecticut would  be issuing a  POB in  the next                                                                   
couple weeks.                                                                                                                   
                                                                                                                                
10:17:55 AM                                                                                                                   
                                                                                                                                
Mr. Andrews addressed  the question, "Why Should  We Consider                                                                   
Issuing  POBs?" found on  page 3.   Some  of the benefits  of                                                                   
POBs  are  interest   rate  savings,  a   positive  arbitrage                                                                   
potential, and  the fact that  they are not generally  viewed                                                                   
as adding to the debt burden of  the state government issuer.                                                                   
                                                                                                                                
Mr. Andrews  emphasized that  POBs are  not a golden  bullet,                                                                   
but rather a financial tool - page 4.                                                                                           
                                                                                                                                
Mr. Andrews  discussed page 5, "Alaska  Pension Bill/Unfunded                                                                   
Actuarial Accrued  Liability (UAAL)  in 2006".   The unfunded                                                                   
liability is  a bill that the  pension systems are  giving to                                                                   
the state and  local governments, which totals  $8.6 billion.                                                                   
Co-Chair  Stedman asked  for a  definition of  PERS and  TRS.                                                                   
Mr. Andrews defined those terms.                                                                                                
                                                                                                                                
Mr.  Andrews  continued  to  explain   page  6,  "Paying  the                                                                   
Bill/UAAL".  One of the options  is to pay with cash; another                                                                   
option is to pay  with a loan at 8.25 percent  over 25 years.                                                                   
The question  is whether  a POB can reduce  the cost  to less                                                                   
than 8.25 percent.                                                                                                              
                                                                                                                                
10:20:27 AM                                                                                                                   
                                                                                                                                
Mr.  Andrews reported  on the  "Funding  Status Overview"  on                                                                   
page 7.  He  reviewed the funding status for PERS  and TRS as                                                                   
of June 30, 2006, according to the actuarial report.                                                                            
                                                                                                                                
Mr. Andrews discussed  "Interest Rate Savings" -  page 8.  IF                                                                   
a  bond transaction  was issued  this  week, it  would be  at                                                                   
about 5.25 percent.  He cautioned  that credit markets are in                                                                   
an  unstable state.   The  difference between  8.25 and  5.25                                                                   
over  twenty-five years  is  $323 million  in  savings on  $1                                                                   
billion, or $23 million annually.                                                                                               
                                                                                                                                
Mr. Andrews explained the "Interest  Rate History" on page 9.                                                                   
The interest  rate  is very low,  the lowest  since the  mid-                                                                   
60's.  Page 10 deals with "Treasury  Rates Still Historically                                                                   
Attractive".                                                                                                                    
                                                                                                                                
10:23:44 AM                                                                                                                   
                                                                                                                                
Mr.  Andrews  turned  to  the  topic  of  arbitrage  and  the                                                                   
"Historical  Investment   Returns  of  State   Pension  Plans                                                                   
(PERS)" on page  11 and 12.  The average return  from 1992 to                                                                   
2007 is  9.67 percent.   The  numbers from  2003 and  up have                                                                   
been  very  attractive.   He  discussed  the risk,  which  is                                                                   
usually  measured by  volatility, a  measurement of  standard                                                                   
deviation.  The level of volatility  is low.  The numbers are                                                                   
very similar for TRS because the portfolio is similar.                                                                          
                                                                                                                                
Mr.  Andrews  turned to  page  13,  "Long Term  Target  Asset                                                                   
Allocation".   The ARM  Board reviews  the asset  allocations                                                                   
each  year with  the help  of the  financial advisor,  Callan                                                                   
Associates, Inc.   The median  return is 8.05 percent  with a                                                                   
standard deviation of 12.27 percent.                                                                                            
                                                                                                                                
10:26:05 AM                                                                                                                   
                                                                                                                                
Mr. Andrews  discussed the  third reason  for going  to POBs,                                                                   
credit   neutrality.       He   explained    "Credit   Rating                                                                   
Consideration" on  page 14.  He summarized that  POBs are not                                                                   
considered  new debt.   Rating  agencies like  to talk  about                                                                   
unfunded liabilities as being  a soft liability, which allows                                                                   
for  some  flexibility.    A POB  transaction  turns  a  soft                                                                   
liability  into a hard  liability.   He argued that  unfunded                                                                   
liabilities are really hard liabilities  because they are set                                                                   
in constitution.   He  recalled a case,  the State  v. Duncan                                                                   
that   agreed   with   the   interpretation   that   unfunded                                                                   
liabilities are  hard liabilities.   He opined  that treating                                                                   
the unfunded  liabilities as  hard liabilities brings  fiscal                                                                   
stability to the process.                                                                                                       
                                                                                                                                
10:28:07 AM                                                                                                                   
                                                                                                                                
Mr. Andrews  turned to page  15, "Prudently Structured,  POBs                                                                   
are Ratings Neutral".  He pointed  out that the funding level                                                                   
rating  agencies  like  to  look at  is  around  80  percent.                                                                   
Overfunding  above  80 percent  is  somewhat  risky.   Ratios                                                                   
below 80 percent are a potential negative.                                                                                      
                                                                                                                                
Mr. Andrews explained, on page  16, the three types of risks:                                                                   
investment, political,  and market.   He turned to page  17 -                                                                   
"Investment  Risk Analysis".   As long  as those  bond-funded                                                                   
assets  earn more  than  5.25 percent,  there  is a  positive                                                                   
effect;  anything under  that percentage  fails to cover  the                                                                   
cost  of  the  bond.    Page  18  depicts  "Investment  Risks                                                                   
(PERS)".   The  graph  shows the  various  scenarios by  year                                                                   
since 1992 if POBs  had been issued.  For 14  out of 16 years                                                                   
the issuance  of POBs would  have resulted  in a gain  to the                                                                   
pension plan.   It highlights  one of  the risks of  having a                                                                   
negative scenario, such as in 2000 and in 2001.                                                                                 
                                                                                                                                
10:31:37 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman  asked for more information  about cash flow                                                                   
impacts in various environments.   The 90's had a very strong                                                                   
equity  market.  2002  and 2001  were negative  environments.                                                                   
Mr. Andrews agreed to provide  more information.  He spoke of                                                                   
bull markets and bear markets as examples.                                                                                      
                                                                                                                                
10:33:14 AM                                                                                                                   
                                                                                                                                
Mr.  Andrews  addressed  page  20, "UAAL  vs.  POB  Financial                                                                   
Success".   He  summarized that  as long  as the  bond-funded                                                                   
assets make more  than 5.25 percent, the state  is better off                                                                   
for  having borrowed.   If  the  assets earn  less than  8.25                                                                   
percent,  the unfunded  liability  goes up.    Even if  those                                                                   
assets earn  more than 8.25  percent, the unfunded  liability                                                                   
can increase due to actuarial and/or accounting changes.                                                                        
                                                                                                                                
Senator Thomas asked about the  charts on pages 18 and 19 and                                                                   
the change  in the  estimated cost of  borrowing column.   He                                                                   
wondered  if  the  percentages  are  actuals.    Mr.  Andrews                                                                   
replied that  each year stands  by itself.  He  gave examples                                                                   
from  various years.    Co-Chair Stedman  asked  if that  was                                                                   
before or  after transaction  costs.   Mr. Andrews  said that                                                                   
included  transaction fees.   In  2007, the  rate would  have                                                                   
been around  5.75 percent.  He  noted that these  figures are                                                                   
for fiscal years.                                                                                                               
                                                                                                                                
10:36:59 AM                                                                                                                   
                                                                                                                                
Mr. Andrews turned to page 21,  "Investment Return Forecast",                                                                   
a Monte  Carlo simulation that  takes historical  returns and                                                                   
scrambles them  and tries to determine  what the return  of a                                                                   
portfolio would  be.   In a conservative  scenario -  70/30 -                                                                   
the  return was  greater than  5.25 percent,  but included  a                                                                   
risk.                                                                                                                           
                                                                                                                                
Co-Chair Stedman  referred to page  18 and a reference  to if                                                                   
POBs  had  been  implemented  last  year  on  June  30.    He                                                                   
requested more  information.   Mr. Andrews corrected  that it                                                                   
would  have been  in  June of  2006, with  a  return of  18.9                                                                   
percent.                                                                                                                        
                                                                                                                                
Representative Hawker  spoke of this proposed  transaction as                                                                   
having a  high degree  of confidence that,  over the  life of                                                                   
the transaction, works to the  state's benefit.  He explained                                                                   
how the Monte  Carlo simulation documents  the possibilities.                                                                   
He said  this POB  proposal has a  high degree of  confidence                                                                   
due  to  the fortuitous  time  of  low  interest rates.    He                                                                   
cautioned not to try to time a transaction with the market.                                                                     
                                                                                                                                
10:40:56 AM                                                                                                                   
                                                                                                                                
Senator Elton referred to page  21 and noted it was a 25-year                                                                   
investment period.  He assumed  there was a 5.25 percent cost                                                                   
over that  time, based upon  assumptions in the  market place                                                                   
at  the  time over  the  life  of  the bonds.    Mr.  Andrews                                                                   
explained  how the  Monte Carlo  model  worked by  scrambling                                                                   
iterations.   Senator Elton said  he is assuming if  the bill                                                                   
passes, the  interest rate will  be predicated over  the full                                                                   
life  of the term  of the  bond.   Mr. Andrews  said that  is                                                                   
correct.                                                                                                                        
                                                                                                                                
10:43:21 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman requested information  about the probability                                                                   
of  the outcome  using  various  time  periods, not  just  25                                                                   
years.  Mr. Andrews replied that  the life of the bonds is 25                                                                   
years, and the  shorter the time period, the  more volatility                                                                   
there  is.   Over  time,  that  is lessened  and  the  return                                                                   
averages out.   If  the time frame  is shortened  to 5  or 10                                                                   
years, the confidence level decreases.                                                                                          
                                                                                                                                
Co-Chair  Stedman  offered  to   provide  more  data  to  the                                                                   
committee.   He asked where  Mr. Andrews  got his data.   Mr.                                                                   
Andrews replied that  it came from the S & P  500 index.  Co-                                                                   
Chair Stedman  asked if allocations  were used.   Mr. Andrews                                                                   
reported that  the 70/30, 80/20,  and 90/10 allocations  were                                                                   
used.  Co-Chair Stedman said the  70 percent was from the S &                                                                   
P 500.  He asked where the 30  percent was from.  Mr. Andrews                                                                   
replied Lehman  aggregate, an  index that  is used  for fixed                                                                   
income  securities with  a duration  of about  7 years.   Mr.                                                                   
Andrews  explained that  the average  maturity of the  Lehman                                                                   
aggregate  or  fixed  income portfolio  is  approximately  10                                                                   
years.  Co-Chair Stedman added  that it is a weighted average                                                                   
of cash flows.                                                                                                                  
                                                                                                                                
10:47:36 AM                                                                                                                   
                                                                                                                                
Mr. Andrews turned  to page 22, "Political Risk  - Key Driver                                                                   
of  UAAL".   He explained  that  the unfunded  liability,  as                                                                   
reported  by  the  state's actuary,  was  really  created  by                                                                   
increased  health benefit  costs  in 2001-2003.   There  were                                                                   
also  some  pension  plan changes  that  contributed  to  the                                                                   
expense.  It was not the result of poor investment returns.                                                                     
                                                                                                                                
Mr.  Andrews  discussed political  risk  on  page 23.    High                                                                   
amounts of  POB proceeds may cause  the pension system  to be                                                                   
over-funded, which  could lead to political  pressure calling                                                                   
for benefit  increases  that would incur  new liabilities  in                                                                   
the future.                                                                                                                     
                                                                                                                                
Mr. Andrews spoke of "Market Risk"  on page 24.  POB proceeds                                                                   
cause a  large amount  of capital  infusion into the  pension                                                                   
system at once, and how the ARM  Board invests those proceeds                                                                   
is critical.   The success  of the POB  plan relies on  a low                                                                   
cost and  a positive  arbitrage.   When the  issuance of  the                                                                   
bonds have  proceeds, it's very  important that  they achieve                                                                   
at least 5.25 percent  during the first couple of  years.  He                                                                   
provided an example:  If a $100  investment drops to $50, the                                                                   
loss is  50 percent;  however, to  go from  $50 back  to $100                                                                   
requires a 100 percent gain.                                                                                                    
                                                                                                                                
Representative Hawker related  a strategy by the ARM Board to                                                                   
invest more conservatively in the first couple of years.                                                                        
                                                                                                                                
10:51:33 AM                                                                                                                   
                                                                                                                                
Mr. Andrews  turned to three types  of public debt,  page 25,                                                                   
"Security": general obligation  bonds, obligations imposed by                                                                   
law, and annual appropriation  bonds.  HB 13 calls for annual                                                                   
appropriation bonds.                                                                                                            
                                                                                                                                
He  explained   potential  savings,  page  27,   "Case  Study                                                                   
(PERS)".    The upper  left  matrix,  "Employer  Contribution                                                                   
Rates",  shows  a  figure  of 35.22  percent,  which  is  the                                                                   
contribution  rate  that  the   ARM  Board  adopted  for  the                                                                   
unfunded liability.  The matrices  show the potential savings                                                                   
of  issuing POBs  or  using cash  to  pay down  the  unfunded                                                                   
liability.  He gave an example  from the first matrix of a $2                                                                   
billion POB  transaction moving the annual  contribution rate                                                                   
down  to 32.91  percent.     That equals  a  savings of  2.31                                                                   
percent on  the annual contribution  rate as depicted  in the                                                                   
lower  left column.   That equates  to dollars  in the  upper                                                                   
right column, which is a savings  of $38.62 million annually.                                                                   
Over  the  life  of  the  bonds,  or  25  years,  that  is  a                                                                   
cumulative  rate of  $544.28 million  in savings,  discounted                                                                   
out at 35  percent.  That final  tally is shown in  the lower                                                                   
right column.                                                                                                                   
                                                                                                                                
10:54:15 AM                                                                                                                   
                                                                                                                                
Mr. Andrews summarized the "Take-aways"  on page 31.  He read                                                                   
the 4 points:                                                                                                                   
                                                                                                                                
     If we can earn more than the cost of POB, we are better                                                                    
     off for issuing it.                                                                                                        
                                                                                                                                
     We are in a very favorable interest rate environment -                                                                     
     take advantage of it!                                                                                                      
                                                                                                                                
     Risks associated with POB issuance are quantifiable and                                                                    
     statistically justified by the rewards.                                                                                    
                                                                                                                                
     Doing nothing is not a viable option.                                                                                      
                                                                                                                                
Mr. Andrews concluded that the  Administration is in favor of                                                                   
HB 13.                                                                                                                          
                                                                                                                                
CSHB 13(FIN) was heard and HELD in Committee for further                                                                        
consideration.                                                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:54 AM.                                                                                          

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