Legislature(2017 - 2018)SENATE FINANCE 532
03/02/2017 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB57 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 14 | TELECONFERENCED | |
| *+ | SB 57 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
March 2, 2017
9:02 a.m.
9:02:46 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:02 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Anna MacKinnon, Co-Chair
Senator Click Bishop, Vice-Chair
Senator Donny Olson
Senator Mike Dunleavy
Senator Peter Micciche
Senator Natasha von Imhof
MEMBERS ABSENT
None
ALSO PRESENT
Gene Therriault, Energy Policy Assistant, Alaska Energy
Authority.
PRESENT VIA TELECONFERENCE
Brenda Applegate, Controller and Assistant CFO, Alaska
Industrial Development and Export Authority (AIDEA); John
Springsteen, Chief Executive Officer and Executive
Director, Alaska Industrial Development and Export
Authority, Department of Commerce, Community and Economic
Development.
SUMMARY
SB 57 AIDEA:DIVIDEND TO STATE;INCOME;VALUATION
SB 57 was HEARD and HELD in committee for further
consideration.
SENATE BILL NO. 57
"An Act relating to the dividends from the Alaska
Industrial Development and Export Authority; relating
to the meaning of 'mark-to-market fair value,' 'net
income,' 'project or development,' and 'unrestricted
net income' for purposes of the Alaska Industrial
Development and Export Authority; and providing for an
effective date."
Co-Chair MacKinnon introduced two guest pages: Meadow
Stanley and Maisy Messing.
9:04:21 AM
GENE THERRIAULT, ENERGY POLICY ASSISTANT, ALASKA ENERGY
AUTHORITY, (AEA) discussed the PowerPoint, "Alaska
Development Finance Authority; SB 57 Proposed Language
Changes to Modernize AIDEA's Dividend Statute" (copy on
file).
Mr. Therriault highlighted slide 2, "AIDEA's Dividend:
History, Goal, Statutory Language, and Two Accounting
Problems Working to Fix." The goal was to bring stability
and predictability to the Alaska Industrial Development and
Export Authority (AIDEA) dividend calculation. He remarked
that there were two current problems. The market valuation
issue was triggered by some new general accounting
standards rules. The dividend penalty dealt with infrequent
right-downs of projects funded with outside sources.
Mr. Therriault addressed slide 3, "Dividend Statute
Language Needs Modernizing, As Accounting Rules Have
Evolved Over Time":
3 Accounting Transaction Types, 3 Causes Dividend
Problems:
1. Entries from "real transactions" that actually
occurred, they are historic in nature. Examples:
booking what was paid for an asset, revenue that is
generated, payroll that is paid, taxes paid, what was
cash received and why, etc.
2. Entries from "estimates and allocations". Examples:
booking depreciation and amortization expenses which
recognizes and records that an asset used up some of
it estimated useful life over the period of
operations.
3. Entries from "market value adjustments". These are
entries related to transactions that didn't happen,
but, AIDEA must record them for the audit as though
they did to comply with G.A.S.B. and have a G.A.A.P.
audit. (SB 57 proposes to update the existing
"excluding…" statutory language and remove G.A.S.B.
"market value" impacts on the AIDEA dividend
calculation) Example: booking the gain or loss that
would have resulted from selling your marketable
securities on the last day of the year (GASB 31).
Mr. Therriault looked at slide 4, "Sec. 44.88.088. Payment
of dividend to state":
The Pertinent Language:
The authority shall adopt a policy for payment of a
dividend… to the state each fiscal year.
The amount of the dividend payable… may not be less
than 25 percent nor more than 50 percent of the net
income …for the base fiscal year…
…"net income" means the change in net position, or the
equivalent term under generally accepted accounting
principles, … as set out in the audited financial
statements of the authority for the base fiscal year,
excluding amounts attributable to intergovernmental
transfers, capital contributions, grants, or
impairment losses on development projects financed
under AS 44.88.172;
Mr. Therriault highlighted slide 5, "Dividend Problem 1:
"Market Value" Adjusting Entries":
Problem 1:
1. G.A.A.P. keeps evolving, requiring
booking/recording "market value" adjusting entries.
Essentially, act like something happened that didn't
happen, and book it as though it did…
2. The result: AIDEA's "net income" swings, sometimes
materially, which means the State's dividend swings
sometimes materially year-over-year, SB 57 will
correct this.
3. Ultimately, the dividend payment is a cash based
transaction. (Paying it when cash hasn't been earned
is a problem -- for AIDEA. Not paying it when cash has
been earned is a problem -- for the State.)
Mr. Therriault addressed slide 6, "Problem 1 Analogy of
'Market Value' Entries Impacts."
Mr. Therriault looked at slide 7, "Money Based Tax Payer
Analogy."
Mr. Therriault highlighted slide 8, "Form 1040 Impact
Analogy." He showed an example of a 10-40 tax form. He
stated that the example suggested that the individual had
wages of $100,000, some investment income, dividends, and
the bottom showed a total of $109,000 net income. That
number would then go into their tax calculation, and write
a check to the federal government.
Mr. Therriault discussed slide 9, "GASB Statements 31, 68,
72, and 75." He stated that the slide showed what would be
required of that individual based on the AIDEA dividend's
current accounting rules.
Mr. Therriault looked at slide 10, "Form 1040 Analogy - Add
GASB Impacts":
(Now adjust your 1040 total income as if "GASB Type"
adjustments were required at year-end)
Senator von Imhof remarked that the gains could not be
recorded when the asset was sold. Mr. Therriault deferred
to Ms. Applegate for accounting information.
9:10:07 AM
BRENDA APPLEGATE, CONTROLLER AND ASSISTANT CFO, ALASKA
INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY (AIDEA) (via
teleconference), agreed with Senator von Imhof. She
explained that the unrealized gains and losses became an
adjustment to the carrying basis of those investments going
forward. She stated that there would be a realized gain or
loss on the books when the investment was sold, which would
be the difference between what was actually paid for the
investment and the sales proceeds. The unrealized
difference would flow back to the unrealized gains and
losses in the year of sale.
Senator von Imhof surmised that the changes would result in
a large gain with a significant appreciation of an asset
over time and a large dividend. Ms. Applegate replied in
the affirmative.
Senator von Imhof wondered how the elimination of the four
GASB rules would "smooth out" the dividend over time. Ms.
Applegate replied that it would allow for payment of a
dividend on the available cash for the dividend, rather
than the paper gains and losses that would fluctuate over
time. She remarked that there could be a large gain on an
appreciated marketable security, but it would be real cash.
JOHN SPRINGSTEEN, CHIEF EXECUTIVE OFFICER AND EXECUTIVE
DIRECTOR, ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT
AUTHORITY, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC
DEVELOPMENT (via teleconference), furthered that the change
would allow for more predictability and better planning.
Mr. Therriault addressed slide 11, "SB 57 Impact To 1040
Analogy":
The "market value" unrealized adjustments would be
excluded from "Net Income."
Senator Micciche remarked that the GASB rules was related
to transparency, and stressed that changing the rules
eliminated some of the transparency for the public. He,
however, understood that the changes would make the process
easier for AIDEA. He queried an explanation to the public
of the reason for "sidestepping" the most recent GASB
recommendations for recording the transactions. Mr.
Therriault replied that AIDEA would continue to follow the
rules in order to get its audited financial statement. He
stated that the change was to the statute that instructed
AIDEA how to calculate the dividend. He remarked that the
legislature would instruct AIDEA on what number to run
through the dividend calculation. He pointed out that the
request was to change the dividend calculation to true cash
rather than an inflated or artificially deflated number.
9:16:11 AM
Vice-Chair Bishop surmised that the attempt was utilize
actual dividends to achieve a "smoothing" affect; rather
than addressing the "peaks and valleys" in order to
calculate a dividend. Mr. Therriault agreed, and furthered
that the next two slides would help illustrate Vice-Chair
Bishop's comment.
Mr. Therriault discussed slide 12, "AIDEA's Net Income,
Pre-G.A.S.B. 31 "Market Value" Adjusting Entries." He noted
that the graph line moved up and down depending on the
amount of AIDEA activity.
Mr. Therriault highlighted slide 13, "GASB 31 Impact to Net
Income." He remarked that the graph had the impact of GASB-
31 overlaying the current situation. He noted that,
starting in 1998 at the initiation of GASB, there was a
suggestion that the true net income was artificially low.
The GASB rule had artificially inflated the true net
income. He furthered that the rule also sometimes
artificially depressed the true net income. The peaks and
valleys were getting steeper over time. He stressed that
the GASB rule would be followed to produce the audited
financial statement.
Mr. Therriault addressed slide 15, "Dividend Problem 2:
"Dividend-Penalty" Effect Adjusting Entries":
Problem 2:
1. When the value of a project has been determined to
have been permanently reduced, G.A.A.P. requires
recording an adjusting entry between the Balance Sheet
and the Income Statement to reduce some or all of the
value of an asset or a project from AIDEA's Balance
Sheet.
2. The resulting entry reduces net income. The
consequence could either reduce the State's dividend
from a project it funded or have AIDEA adjusting its
dividend calculation to offset the reduction in
project value.
3. Thus, there could be up to a 25 percent to 50
percent "dividend penalty" from an adjusting entry. SB
57 will correct this.
9:21:04 AM
Senator Micciche noted that there would be a feasibility
study, instead of an actual "environmental impact study"
(EIS). Mr. Therriault agreed.
Senator Micciche wondered whether the reference to GASB-68
and GASB-75 was merely for example purposes. He wondered
whether those rules had an impact on AIDEA. Mr. Therriault
replied that they would have an impact on AIDEA. He
deferred to Ms. Applegate.
Ms. Applegate furthered that AIDEA had implemented GASB-68.
She explained that AIDEA was part of the Public Employees'
Retirement System (PERS). She remarked that, as employer
under the state, AIDEA had a portion of the pension costs
and were required to follow the same accounting guidelines
as the rest of the state. She explained that AIDEA recorded
a portion of the pension expense that was calculated under
GASB-68, and reduced the dividend amount. She explained
that GASB-75 was the other post-employment benefits
portion.
Senator Micciche assumed that the state had carried the
employment burden, and opposed to AIDEA carrying that
burden individually.
9:23:11 AM
Mr. Therriault discussed slide 16, "Hypothetical State
Funded Non-172 Project, if Stopped, Impact to "Net Income".
He remarked that should AIDEA have written off the project
in FY 16, the graph displayed the situation.
Mr. Therriault looked at the Sectional Analysis (copy on
file):
Section 1: Section 1 amends AS 44.88.088(b) to include
a definition for "mark-to-market fair value"
adjustments that are mandated by the General
Accounting Standards Board (GASB) and Generally
Accepted Accounting Principles (GAAP). It then adds
these adjustments and noncash accounting entries
relating to pension obligations and benefits to the
existing statutory list of items that are to be
excluded from "net income" prior to calculation of
AIDEA's dividend to the state treasury.
Section 1 also adjusts the existing scope of project
losses that are to be excluded from the definition of
AIDEA's statutory net income (dividend base). The
Legislature previously instructed that amounts
attributable to intergovernmental transfers, capital
contributions and grants were to be excluded so as not
to impact the dividend base. Additionally, losses on
development projects financed under AS44.88.172 were
also excluded. However, the prior policy instruction
did not anticipate periodic write offs for projects
financed outside of AS44.88.172 with funds from non
AIDEA sources. In these limited cases, project losses
would affect AIDEA financial statement net income
which could, in turn lower the calculated dividend.
Finally, Section 1 applies the mark-to-market
adjustment, noncash pension and other postemployment
benefit adjustments and redefined project loss
exclusions discussed above to all AIDEA funds subject
to the dividend statute to remove unnecessary
volatility from the yearly dividend.
Section 2: Section 2 provides for an immediate
effective date.
9:27:38 AM
Senator Micciche understood the purpose of the bill, and
expressed support for the legislation. He remarked that the
bill expanded AIDEA's categories of projects. Mr.
Therriault replied that the changes acknowledged that there
had been additional funds added over the years, so those
funds were added to the list. He deferred to Mr.
Springsteen and Ms. Applegate.
Mr. Springsteen agreed with Mr. Therriault.
Ms. Applegate stated that the current dividend statute
applied to projects financed under the Section 172 statute.
She stated that AIDEA had been participating in projects
that did not fit into the Section 172 statute, so there was
a desire to include the projects in the bill language.
9:29:34 AM
AT EASE
9:32:09 AM
RECONVENED
9:32:13 AM
Senator Micciche wondered whether the purpose of the bill
was to modernize the dividend statute or to expand the
scope of AIDEA's ability to participate in energy projects
up to and including existing facilities in the state. Mr.
Therriault replied that the bill allowed for predictability
to the calculation of the dividend. The bill did not expand
AIDEA's authority to participate in any projects beyond the
current statutes.
Co-Chair Hoffman looked at line 5 and line 23, on page 2,
and wondered why impairment was excluded. Mr. Therriault
deferred to Ms. Applegate.
Ms. Applegate explained that the word, "losses" was
intended to include impairment. She furthered that AIDEA
would also like to capture within the word, "losses" was
related to whether AIDEA were to sell a project at a loss.
The impairment loss would be on a separate line item from a
loss on the sale of an asset.
Co-Chair Hoffman noted that the Arctic Infrastructure
Development Fund listed AS 44.88.810, and that same fund
was defined later in a different statute. He queried those
differences in definition. Mr. Therriault replied that the
first one was an overall acknowledgement of the overall
section of statute that set up the program. The other was a
specific project as listed in the section.
Co-Chair MacKinnon remarked that AS 44.88.900 was a list of
definitions in statute.
Co-Chair MacKinnon looked at page 16, Section 1, AS
44.88.088 was the actual dividend calculation.
Mr. Therriault, in response to Co-Chair Hoffman's question,
looked at Section 4 referenced the definition section for
all the investment tools that AIDEA was given. He explained
that it was were the definition of a development project
within each tool.
Senator von Imhof looked at slide 13, and felt that the
legislation's intent was relating to the volatility in the
market related to the large fluctuations of assets. She
argued that suggesting the changes would not necessarily
eliminate the volatility, because there would still be cash
volatility. She explained that a financial event was the
point at which the dividend would be paid. She stressed
that investments took a long time to mature. She wondered
whether there was a simulation under the current proposal.
Mr. Therriault deferred to Ms. Applegate.
Ms. Applegate agreed to provide that information.
Co-Chair MacKinnon CLOSED public testimony.
9:39:40 AM
AT EASE
9:40:13 AM
RECONVENED
SB 57 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
9:40:35 AM
The meeting was adjourned at 9:40 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB057 Sectional Analysis.pdf |
SFIN 3/2/2017 9:00:00 AM |
SB 57 |
| SB057 Transmittal Letter.pdf |
SFIN 3/2/2017 9:00:00 AM |
SB 57 |
| SB 57 AIDEA Presentation 030217.pdf |
SFIN 3/2/2017 9:00:00 AM |
SB 57 |