Legislature(1993 - 1994)
03/24/1994 09:10 AM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
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.