Legislature(1993 - 1994)

03/24/1994 09:10 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
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                             MINUTES                                           
                    SENATE FINANCE COMMITTEE                                   
                         March 24, 1994                                        
                            9:10 a.m.                                          
  TAPES                                                                        
                                                                               
  SFC-94, #36, Side 2 (000-end)                                                
  SFC-94, #38, Side 1 (000-372)                                                
                                                                               
  CALL TO ORDER                                                                
                                                                               
  Co-chairman   Steve   Frank    convened   the   meeting   at                 
  approximately 9:10 a.m.                                                      
                                                                               
  PRESENT                                                                      
                                                                               
  In addition to Co-chairs Frank and Pearce, Senators Kerttula                 
  and Sharp were  present.  Senators Jacko, Kelly,  and Rieger                 
  arrived soon after the meeting began.                                        
                                                                               
  ALSO   ATTENDING:  Nancy   Usera,  Commissioner,   Dept.  of                 
  Administration;  Jim  Baldwin,  Assistant Attorney  General,                 
  Dept. of Law; Elizabeth Shaw, Deputy Attorney General, Dept.                 
  of Law; Nancy  Slagle, Director of Budget  Review, Office of                 
  Management  and  Budget; Tom  Williams,  Director, Permanent                 
  Fund Dividend Division, Dept. of Revenue; Pete Bushre, Chief                 
  Financial Officer,  Alaska Permanent Fund  Corporation; Mike                 
  Greany, Director, Legislative Finance Division; and aides to                 
  committee members and other members of the legislature.                      
                                                                               
  ALSO PARTICIPATING VIA TELECONFERENCE  FROM ANCHORAGE:  Norm                 
  Levesque, Alaska  Municipal Bond Bank;  Eric Wohlforth, Bond                 
  Counsel.                                                                     
                                                                               
  SUMMARY INFORMATION                                                          
                                                                               
  SB 288 -  APPROP: GOVERNOR'S SUPPLEMENTAL                                    
                                                                               
            An overview of Secs. 1 through 15  was provided by                 
            Nancy Slagle.  Commissioner Usera, Elizabeth Shaw,                 
            Tom Williams, and Pete Bushre also testified.  The                 
            bill was HELD  in committee for further  sectional                 
            review.                                                            
                                                                               
  SB 312 -  SCHOOL CONSTRUCTION GRANT REVIEW                                   
                                                                               
            Teleconference   testimony   from   Anchorage  was                 
            provided by Eric Wohlforth and Norm Levesque.  The                 
            bill  was  HELD  in  committee   for  drafting  of                 
            additional language by Senators Rieger and Sharp.                  
                                                                               
                                                                               
  SB 288 -  APPROP: GOVERNOR'S SUPPLEMENTAL                                    
                                                                               
                                                                               
       An  Act  making  and  amending  operating  and  capital                 
       appropriations    and    ratifying     certain    state                 
       expenditures; and providing for an effective date.                      
                                                                               
                                                                               
  HOUSE BILL NO. 455                                                           
                                                                               
       An  Act  making  and  amending  operating  and  capital                 
       appropriations    and    ratifying     certain    state                 
       expenditures; and providing for an effective date.                      
                                                                               
  [Cross-reference  between SB  288 and  HB 455.   Most Senate                 
  Finance Committee discussion of  FY 94 supplemental  funding                 
  relates to SB  288.   The bill which  ultimately passed  the                 
  1994 legislature was HB 455]                                                 
                                                                               
  Upon convening the meeting,  Co-chairman Frank directed that                 
  a sectional  overview of  the FY  94 supplemental  commence.                 
  NANCY  SLAGLE,  Director   of  Budget   Review,  Office   of                 
  Management and Budget, came before committee.  She explained                 
  that  the administration's  policy  on supplemental  funding                 
  reflects  an  attempt  to accommodate  shortages  in  agency                 
  budgets  through  means  (cost  cutting  or  realignment  of                 
  funding) other  than the  supplemental.   However, in  areas                 
  where a supplemental  is unavoidable, particularly  in areas                 
  of judgments,  claims, court-ordered  payments, and  formula                 
  funded   programs,   etc.,   funding   therefor   has   been                 
  incorporated within the proposed bill.                                       
                                                                               
  Sec. 1.  Appropriates $955.8 to the Office of Management and                 
  Budget for compliance  with the  Fair Labors Standards  Act.                 
  Funding would pay retroactive overtime claims under the act.                 
  In  response to a question from  Co-chair Frank, Mrs. Slagle                 
  explained  that the  request  relates  only  to  retroactive                 
  overtime.  Agencies  are required to absorb overtime for the                 
  current year.  Claims covered by the appropriation date back                 
  to  FY  91.    Co-chair   Frank  requested  a  breakout   by                 
  department.   Mrs. Slagle advised that the  Dept. of Natural                 
  Resource,  Dept.  of Health  and  Social Services,  Dept. of                 
  Corrections,   and  Dept.   of  Transportation   and  Public                 
  Facilities are the four agencies impacted by the request.                    
                                                                               
  Sec. 2.  Contains a $1,694.9 appropriation for the longevity                 
  bonus program.   That amount will cover the increased number                 
  of  recipients   for  the   fiscal  year.     NANCY   USERA,                 
  Commissioner,  Dept. of  Administration, explained  that the                 
  department  budgets  prospectively   based  on   demographic                 
  information on the  number of  people entering the  program.                 
  That  information  is adjusted  on  an  annual basis.    The                 
  program  contains no  provisions for  proration of  funding.                 
  Co-chair Frank suggested  that the number of  recipients has                 
  been chronically  under-estimated.  Senator Rieger  asked if                 
                                                                               
                                                                               
  the increased number  of participants is due  to individuals                 
  coming into  Alaska and  signing up  for the  program.   Ms.                 
  Usera  said   that  the  department  has   not  conclusively                 
  established  a  growth  pattern.    There  has  been  a  net                 
  immigration of seniors.   Senator Kerttula noted that was  a                 
  general immigration of people into the state during the past                 
  year.                                                                        
                                                                               
  Sec.  3.   Contains a  $466.0  appropriation for  the public                 
  defender agency  to cover underfunding in  personal services                 
  for FY 94.  Co-chair Frank  asked how the request correlates                 
  with cuts in  agency funding  in the  FY 94  budget.   NANCY                 
  USERA said  that the  requested  appropriation reflects  the                 
  cut.  She referenced a four-year supplemental history.  Last                 
  year's supplemental  was $342.0.   This  year it  is $466.0.                 
  The  increase  reflects  the  deeper   cut  in  last  year's                 
  operating budget.   Co-chair  Frank noted  that the  request                 
  exceeds the amount cut.  Ms. Usera concurred.  Senator Kelly                 
  asked  what  would  happen if  supplemental  funding  is not                 
  provided.    Ms.  Usera  pointed  out that  public  defender                 
  services are constitutionally  mandated.   The court  orders                 
  that a defense be provided, and the agency has an obligation                 
  to  respond.    The agency  is  chronically  underfunded and                 
  understaffed.                                                                
                                                                               
  Discussion followed between Ms.  Usera and members regarding                 
  court referrals and the increasing caseload.  She noted that                 
  the  Dept.  of  Law  seeks  reimbursement of  defense  costs                 
  through  individual permanent  fund  dividends.    To  date,                 
  approximately $400.0 has been recovered  and returned to the                 
  general fund.                                                                
                                                                               
  Further discussion of determinations of indigence ensued.                    
                                                                               
  Sec. 4.    Appropriates  $554.7  for the  office  of  public                 
  advocacy.    Of  that  amount,  $460.0  is  for  contractual                 
  services.                                                                    
                                                                               
  Sec.  5.  Appropriates  $100.0 to the  division of personnel                 
  for arbitration case costs.  NANCY  USERA attested to a two-                 
  year backlog  in arbitrations.   A  number  of unfair  labor                 
  practices  have been  filed for  lack of  arbitration.   The                 
  Public Employee Relations Act is very clear as to what state                 
  obligation are.  The request relates to the cost to bring an                 
  arbiter to Alaska to issue rulings.  The backlog consists of                 
  400  grievances.  The risk  associated with not dealing with                 
  these matters is substantial.                                                
                                                                               
  Sec. 6.  In  response to a question from Co-chair Frank, Ms.                 
  Usera explained that  the $18.0 request represents  a single                 
  grievance award  resulting from  a grievance  brought by  an                 
  employee against the Dept. of Administration.                                
                                                                               
  Sec. 7.   The  $60.0 for  a salary  survey and  geographical                 
                                                                               
                                                                               
  shift differential study  was ordered  by the court  system.                 
  Ms. Usera explained that the  study is statutorily required.                 
  In past years, the department has not had the needed funding                 
  to conduct the study.  The  state was subsequently sued, and                 
  the  court  ordered  that  the  statutes be  complied  with.                 
  Responding to questions  by Co-chair  Frank, Ms. Usera  said                 
  that the law predates collective bargaining.  The department                 
  has, on a  number of  occasions, suggested that  the law  be                 
  changed.   In 1991 legislation was introduced to correct the                 
  situation,  but it  did not  progress.   Needed  changes are                 
  again incorporated within the administration's omnibus bill.                 
                                                                               
                                                                               
  Sec. 8.   Contains a  $1,752.4 appropriation for  additional                 
  leasing costs for FY 94.  In response to a question from Co-                 
  chair Frank, Ms.  Usera pointed to substantial  savings from                 
  renegotiated leases.  However, that savings is inadequate to                 
  stem growth or make up for last year's underfunding.                         
                                                                               
  Data Processing Chargebacks                                                  
                                                                               
  Discussion of data  processing chargebacks followed  between                 
  Senator Rieger and  Ms. Usera.   Ms. Usera  attested to  the                 
  fact that DOA  chargeback rates have gone  down as provision                 
  of computer services  has become  more efficient.   Agencies                 
  have also effected savings.                                                  
                                                                               
  Ethics Complaints                                                            
                                                                               
  Mrs. Slagle directed  attention to  new requests within  the                 
  supplemental  bill and  noted  the  $35.0 appropriation  for                 
  ethics complaints  grievance awards.   NANCY USERA explained                 
  that the  personnel board  is responsible  for investigation                 
  and findings  concerning ethics  complaints brought  against                 
  the  governor,   lt.   governor,   and   attorney   general.                 
  Grievances have  been  filed.    There  is  no  funding  for                 
  investigations  or contracts with  independent counsel.  Ms.                 
  Usera noted that  a number of  the grievances were filed  by                 
  the Democratic Party.                                                        
                                                                               
  Sec.  9.    Appropriates $325.4  to  the  Dept.  of Law  for                 
  judgments  and  claims.    ELIZABETH SHAW,  Deputy  Attorney                 
  General,  Civil   Division,  Dept.   of  Law,  came   before                 
  committee.  She explained that funding relates to  costs and                 
  attorney fees  on  cases where  the  state has  been  deemed                 
  responsible  for  payment.    Funds  represent  either court                 
  ordered  payments or  settlement of  claims.   Approximately                 
  nineteen  have  been  grouped  together  within  the  $325.4                 
  request.  Senator Sharp directed  attention to backup detail                 
  and suggested that  eight claims totaling $209.0  are highly                 
  questionable.                                                                
                                                                               
  Ms. Slagle noted  that subsection (b)  of Sec. 9 contains  a                 
  $50.0 appropriation to the Dept. of Education for legal fees                 
                                                                               
                                                                               
  for   litigation   relating  to   pupil   transportation  in                 
  Fairbanks.                                                                   
                                                                               
  Sec.  10.   Appropriates  $462.4  to  the Dept.  of  Law for                 
  settlements  stemming from  the reapportionment  case.   Mr.                 
  Slagle  directed  attention to  information  set forth  on a                 
  handout (page 4 of Attachment A) which, she explained, shows                 
  the  judgment amount  and  interest owed  each  of the  four                 
  plaintiffs.                                                                  
                                                                               
  Sec. 11.  Contains a $142.6 appropriation from the permanent                 
  fund to the Dept.  of Revenue for printing of  1994 dividend                 
  application booklets.   Funding  relates to  default by  the                 
  original contractor.  TOM WILLIAMS, Director, Permanent Fund                 
  Dividend Division,  Dept. of Revenue, came before committee.                 
  He provided background information on  award of the printing                 
  contract to  an Anchorage contractor.   On  December 2,  the                 
  contractor notified  the department  it would  be unable  to                 
  meet the end of the month delivery deadline.  At that point,                 
  the  department sought another source.  Supplemental funding                 
  covers  additional costs  relating  thereto.   Approximately                 
  half of the cost  relates to air freighting of  the booklets                 
  for timely distribution.  The  state has subsequently billed                 
  the original  contractor for  the additional  costs and  has                 
  asked that the Dept. of Law  pursue collection should it not                 
  be forthcoming.   The  original contractor  is also  seeking                 
  damages  from  out-of-state  subcontractors.    Due  to  the                 
  complexity  of  the booklet,  Alaska printing  companies are                 
  unable to do the work.                                                       
                                                                               
  Sec. 12.   Provides a $3,195.0  appropriation to the  Alaska                 
  Permanent  Fund   for  additional   equity  management   and                 
  international custody fees.   Senator Kelly sought assurance                 
  that   funding  flow  to  managers  rather  than  additional                 
  personnel  at  the  permanent  fund.   PETER  BUSHRE,  Chief                 
  Financial Officer,  Alaska Permanent Fund, Dept. of Revenue,                 
  came before committee.  He said that the fund has never used                 
  moneys that were not needed  for management or international                 
  custody fees  to  cover any  other  portion of  the  budget,                 
  including personal services.  The  corporation has lapsed as                 
  much as $2.5 million from this item in past years.   Manager                 
  fees and custody  fees are  based upon the  market value  of                 
  assets.  Those  values have increased substantially.   There                 
  is a cost associated with that.                                              
                                                                               
  Mr. Bushre described the restructured investment strategy at                 
  the  permanent  fund.   Passive  management  was  previously                 
  utilized in buying index funds.   During the current  fiscal                 
  year, that  has been  changed.   Index funds  have been  de-                 
  emphasized and management has become active.  The results of                 
  this change have been extremely good.                                        
                                                                               
  Senator Kelly  suggested that, per  the request,  management                 
  costs appear to have increased by a third.  He then asked if                 
                                                                               
                                                                               
  corporate assets  increased by  a like  amount.  Mr.  Bushre                 
  responded negatively, but he further advised that the assets                 
  of the  fund appreciated  by $400  million from  the end  of                 
  November to the end of January.                                              
                                                                               
  End:      SFC-94, #36, Side 2                                                
  Begin:    SFC-94, #38, Side 1                                                
                                                                               
  Senator  Rieger  voiced  support  for  active  over  passive                 
  management.                                                                  
                                                                               
  In  response to a  question from  Senator Kelly,  Mr. Bushre                 
  acknowledged  that  the requested  $3,195  million would  be                 
  added to the $10 million provided  for management for FY 94.                 
  The FY  95 budget  seeks $19  million for  equity management                 
  fees and $3 million for custody fees.                                        
                                                                               
  Sec. 13.  Provides $1.5 million  for the Dept. of Education,                 
  K-12  foundation,  for  increased  enrollment  based  on  an                 
  October  student count.    In response  to  a question  from                 
  Senator Jacko, MS. SLAGLE explained  that the administration                 
  did not expect  school districts  to absorb increased  costs                 
  this year  without advising  them ahead  of  time that  they                 
  would be restricted next year.                                               
                                                                               
  Sec. 14.  Relates to ratification of prior year expenditures                 
  for the Dept. of Education.                                                  
                                                                               
  Sec. 15.   Contains a $244.4  appropriation to the Dept.  of                 
  Health and Social  Services for the permanent  fund dividend                 
  hold  harmless  program.   The  increase  relates  to higher                 
  caseloads in AFDC and other programs.                                        
                                                                               
  Co-chair Frank directed that the meeting be briefly recessed                 
  at this time.                                                                
                                                                               
                       RECESS - 10:00 a.m.                                     
                     RECONVENE - 10:10 a.m.                                    
                                                                               
  SENATE BILL NO. 312                                                          
                                                                               
       An  Act  relating  to school  construction  grants; and                 
       providing for an effective date.                                        
                                                                               
  Upon  reconvening  the  meeting,  Co-chair  Frank  noted the                 
  teleconference  availability of  bond  bank  staff and  bond                 
  counsel to speak to SB  312 and directed that it  be brought                 
  before committee.                                                            
  The  Co-chair  stressed  need to  understand  the  impact of                 
  amendments offered by Senator Rieger,  in terms of municipal                 
  issuance of debt.                                                            
                                                                               
  NORM   LEVESQUE,   Municipal   Bond  Band,   testified   via                 
                                                                               
                                                                               
  teleconference from Anchorage.  He pointed out that language                 
  added by committee is difficult to  comprehend.  It has been                 
  interpreted by those working on  the bill in many  different                 
  ways.  The  language addresses  premiums but not  discounts.                 
  He  referenced  a recent  MatSu  Borough sale  and explained                 
  that, as  a net effect of the sale,  the borough will end up                 
  with a discount of $17.0.                                                    
                                                                               
  Mr. Levesque said that he failed to comprehend the rationale                 
  behind the amendment.  Premium and discount application is a                 
  marketing concept.  What the  state should be most concerned                 
  by is the  net interest cost  for the  issue.  Mr.  Levesque                 
  advised that, this morning, the bond bank had a sale of $3.6                 
  million in bonds.   The net interest cost  was 5.3212.  That                 
  is an excellent rate for the ten-year term.                                  
                                                                               
  ERIC WOHLFORTH,  Bond Counsel,  Alaska Municipal  Bond Bank,                 
  next spoke via teleconference.  He attested to the fact that                 
  the proposed  amendment addresses a problem  "which doesn't,                 
  in fact, exist."   When municipal  bonds are sold, they  are                 
  sold  with both an  original issue  premium and  an original                 
  issue discount.  That means that the maturities are  offered                 
  for more or  less than par.   There  are categories of  bond                 
  purchasers who  desire the high  interest rate bonds  that a                 
  bid for more than par produces,  and there are categories of                 
  investors who  prefer discount bonds.   The bottom  line is:                 
  Has the transaction,  in its  totality, produced the  lowest                 
  net interest cost to the municipality?   When bonds are sold                 
  at  public  or private  sale, the  drive  is to  produce the                 
  lowest  net interest cost.   Configuring  a bond  issue with                 
  premium and discount  bonds is designed  to attract a  broad                 
  category  of  investors  that  prefer  those kinds  of  bond                 
  issues.   The  fact  that they  are  attracted broadens  the                 
  market and tends  to reduce  the true interest  cost to  the                 
  lowest amount.   With  this legislation  pending, the  MatSu                 
  issue,  $16,145,000 for school purposes, may have to bear an                 
  official  statement  for   investors  indicating  that   the                 
  legislation has been approved by committee.  That particular                 
  issue is an example of why  this is not the correct approach                 
  to limiting interest costs and reducing the amount taxpayers                 
  or the state must pay.  The issue contains both  premium and                 
  discount  bonds.  The net  cost of the  issue is basically a                 
  discount when the premiums are added and subtracted from the                 
  discount.   The net  interest cost  was favorable.   If  the                 
  proposed legislation  penalizes an issue for  having premium                 
  bonds,  it would, in like fashion,  have to a have a formula                 
  that  benefits the  issue for  having discount  bonds.   The                 
  bottom line is  that the legislation  is not necessary.   It                 
  does not address a real issue in public finance in Alaska.                   
                                                                               
  Senator Sharp  referenced a  sale with  the majority  of the                 
  bonds due in  four years  at over  9.5% tax-exempt  interest                 
  with  a $15 premium.  He then asked who would receive moneys                 
  over and above the  face value.  Mr. Wohlforth  advised that                 
                                                                               
                                                                               
  the  municipality receives the funds.   With respect to that                 
  particular issue, subsequent  bonds are  being offered at  a                 
  discount so that the premium  produced by the earlier  issue                 
  is  reduced by  the discount at  which later  maturities are                 
  sold.                                                                        
                                                                               
  Senator Sharp noted  legislation limiting bonding  authority                 
  and  suggested  that  issues such  as  that  described above                 
  generate  excess  cash  and  obligate  the  state  to  extra                 
  interest  payments.   Mr.  Wohlforth  reiterated that  later                 
  portions of  the issue are  sold at  a discount so  that the                 
  premium for early maturities is reduced by  the discount for                 
  later  maturities.   Senator Sharp inquired  concerning what                 
  would  prevent   a  large  premium  on  all  the  bonds  and                 
  subsequent higher reimbursement by the state.  Mr. Wohlforth                 
  acknowledged that he could not say  that the foregoing would                 
  be a mathematical impossibility.                                             
                                                                               
  Senator Sharp than asked how often the blend of premiums and                 
  discounts  had  been utilized.    Mr. Wohlforth  attested to                 
  numerous instances in  which issues  have had both  original                 
  issue premium  and discount bonds.   He  said he knew  of no                 
  cases of the  above-suggested abuse whereby an  entire issue                 
  was sold at  a premium.   Senator Sharp reiterated that  the                 
  exposure  exists and  sought  assistance in  development  of                 
  corrective language.                                                         
                                                                               
  Discussion followed between Mr. Wohlforth and Senator Rieger                 
  concerning  the   particulars  of  the  recent  bond  issue.                 
  Senator Rieger concurred  in comments by Senator  Sharp that                 
  language should be  developed to avoid  possible abuse.   He                 
  expressed additional  concern over ability  to shift offsets                 
  for premiums  and discounts over  a shorter period  than the                 
  legislation generally requires.  Senator Rieger acknowledged                 
  that present amending  language does not "get  accurately at                 
  the potential abuse the committee would like to get at or at                 
  least preclude."  Mr. Levesque  concurred.  Senator Kerttula                 
  voiced support for  plugging what appears to  be a potential                 
  loophole.                                                                    
                                                                               
  Co-chair Pearce called for additional  questions.  None were                 
  forthcoming.   She  then advised  that she  would meet  with                 
  Senator  Rieger  prior  to  bringing  the bill  back  before                 
  committee.  SB 312 was thus HELD in committee for subsequent                 
  discussion.                                                                  
                                                                               
  ADJOURNMENT                                                                  
                                                                               
  The meeting was adjourned at approximately 10:25 a.m.                        
                                                                               

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