Legislature(2017 - 2018)SENATE FINANCE 532

02/01/2017 09:00 AM FINANCE

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Audio Topic
09:03:45 AM Start
09:04:37 AM Presentation: State Debt Affordability Analysis and Debt Service
10:55:12 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentation: State Debt Affordability Analysis TELECONFERENCED
and Debt Service
Deven Mitchell, State Investment Officer
Department of Revenue
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                     February 1, 2017                                                                                           
                         9:03 a.m.                                                                                              
9:03:45 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair  MacKinnon  called  the  Senate  Finance  Committee                                                                    
meeting to order at 9:03 a.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Anna MacKinnon, Co-Chair                                                                                                
Senator Click Bishop, Vice-Chair                                                                                                
Senator Mike Dunleavy                                                                                                           
Senator Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
Senator Natasha von Imhof                                                                                                       
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Deven Mitchell, Debt Manager, Department of Revenue.                                                                            
^PRESENTATION:  STATE DEBT  AFFORDABILITY ANALYSIS  and DEBT                                                                  
9:04:37 AM                                                                                                                    
DEVEN  MITCHELL,   DEBT  MANAGER,  DEPARTMENT   OF  REVENUE,                                                                    
discussed  the PowerPoint,  "2017  Credit  Review and  State                                                                    
Debt  Summary" (copy  on  file). He  would  discuss how  the                                                                    
credit rating  was established,  reviewed, and  portrayed to                                                                    
analysists outside of the state.                                                                                                
9:05:25 AM                                                                                                                    
Mr.   Mitchell   highlighted   Slide  2,   "Alaska   Ratings                                                                    
Timeline." The slide charted  savings accounts, general fund                                                                    
unrestricted revenue  (UGF), along the ratings  timeline. He                                                                    
pointed out to the committee that  in the past the state had                                                                    
enjoyed  a  high credit  rating  and  high revenue,  but  as                                                                    
reserves had diminished over time  due to lower revenue, the                                                                    
credit  rating had  lessened.  He said  that  there was  the                                                                    
expectation  that the  reserve position  of the  state would                                                                    
continue to progress downward, with  a stabilization of UGF,                                                                    
with potentially  slight growth, predicted in  the Fall 2016                                                                    
Revenue  Sources Book.  He related  that the  rating outlook                                                                    
for the state was pessimistic at the current moment.                                                                            
9:06:34 AM                                                                                                                    
Mr.  Mitchell  addressed Slide  3,  "Rating  Agency Views  -                                                                    
State of  Alaska." The slide  included ratings  from Moody's                                                                    
(Aa2), Standard  & Poor's Ratings  Service (AA+),  and Fitch                                                                    
Ratings (AA+), all had a negative outlook:                                                                                      
        · Large Reserves provide time to determine what                                                                         
          fiscal future will look like                                                                                          
        · Some combination of re-casting the treatment of                                                                       
          various available revenue streams currently                                                                           
          restricted, creating new revenue, or reducing                                                                         
          expenditures can resolve funding gap                                                                                  
        · Baseline assumption that the State will correct                                                                       
          deficit trend before coming close to reserve                                                                          
        · Strong management of financial operations                                                                             
        · Future of Alaska's creditworthiness hinges on the                                                                     
          ability of its political leaders to reach                                                                             
          agreement on substantive fiscal reforms during                                                                        
          the 2017 Legislature                                                                                                  
        · Narrow revenue sources continue to reflect                                                                            
          economic volatility                                                                                                   
        · Alaska's share of the PERS/TRS net pension                                                                            
          liabilities translates to a very high $7,402 per                                                                      
Mr.  Mitchell  noted  that  the  earnings  reserve  and  the                                                                    
permanent fund  were considered as  a reserve of  the state,                                                                    
available  for  expenditure,  when   viewed  from  a  credit                                                                    
9:08:14 AM                                                                                                                    
Co-Chair MacKinnon  queried the  past practice of  not using                                                                    
the earnings reserve in debt analysis.                                                                                          
Mr. Mitchell  responded that  rating analyst  perspective an                                                                    
opinions were evolving concerning  the question of using the                                                                    
reserve,  but  that credit  describers  for  the had  always                                                                    
included the earnings reserve; the  permanent fund could not                                                                    
be ignored  as a  credit strength, and  the choice  could be                                                                    
made to appropriate from the  earnings reserve. Mr. Mitchell                                                                    
related that,  historically, the UGF had  been sufficient to                                                                    
pay for the needs of the  state, but that at current numbers                                                                    
the  UGF  was  coming  up   short,  resulting  in  a  fiscal                                                                    
imbalance  noted in  rating agency  reports. He  highlighted                                                                    
that there  were alternative funding avenues  that the state                                                                    
could  take  in  order  to achieve  a  balanced  budget.  He                                                                    
reiterated   the  sentiment   that  the   Legislature  would                                                                    
possibly need to  agree on new ways of  balancing the budget                                                                    
through new taxes or revenues.                                                                                                  
Co-Chair  MacKinnon  opined  that  the  Governor's  proposed                                                                    
budget did not reflect the  sentiment from his recent State-                                                                    
of-the-State  address in  which he  referred to  the state's                                                                    
budget  situation   a  "crisis."   She  lamented   that  the                                                                    
administration  had  control  in  proposing  a  budget  that                                                                    
contained significant  reductions, and had failed  to do so.                                                                    
She wondered why the Legislature  was being taken to task by                                                                    
the rating  agencies when the  administration had  failed to                                                                    
present a smaller budget.                                                                                                       
Mr.  Mitchell  replied that  the  ratings  reports had  been                                                                    
written before the  release of the Governor's  FY 18 budget.                                                                    
He thought that the ratings  agencies were suggesting that a                                                                    
combination  of  budget  reduction,  new  revenues,  or  the                                                                    
reclassification  of  existing   revenues  could  solve  the                                                                    
state's  fiscal imbalance.  He stated  that if  the Governor                                                                    
proposed a budget  that relied on new revenue  that would be                                                                    
an alternative, but not the only solution.                                                                                      
Co-Chair  MacKinnon hoped  that  the  rating agencies  would                                                                    
notice that the  administration had put forth  a budget that                                                                    
did  not reflect  reductions that  responded to  the current                                                                    
fiscal crisis.                                                                                                                  
Mr. Mitchell thought  that it would prove  difficult for the                                                                    
ratings   agencies   to   make  determinations   until   the                                                                    
legislative  process had  concluded. He  said that  analysts                                                                    
from  each service  had followed  the state's  struggles for                                                                    
the  past several  years, and  understood  that the  process                                                                    
between the executive and legislative  branches needed to be                                                                    
collaborative, which  meant that they would  be watching the                                                                    
current legislative  session closely.  He stressed  that the                                                                    
fiscal  situation of  the  state simply  came  down to  hard                                                                    
choices  and  should not  be  considered  a "now  or  never"                                                                    
situation,  but  that the  2017  legislative  session was  a                                                                    
proverbial  line in  the sand  for  potential rating  action                                                                    
against the state.                                                                                                              
Senator Olson  spoke of the year  and a half of  warning the                                                                    
state  had received  before the  drop in  credit rating.  He                                                                    
wondered  how  long   it  would  be  until   the  state  was                                                                    
downgraded again.                                                                                                               
Mr.  Mitchell  replied  that  it would  depend  on  how  the                                                                    
legislative session  unfolded. He  felt that if  there could                                                                    
be a recognition  that the budget could not  be funded using                                                                    
one-time savings,  but by using  resources that  recur, that                                                                    
would be an accomplishment towards a stable credit rating.                                                                      
Senator  Olson assessed  that the  burden to  facilitate the                                                                    
recognition   towards   accomplishment   rested   with   the                                                                    
legislature rather than the administration.                                                                                     
Mr. Mitchell noted that the  Governor would have to sign the                                                                    
legislation.   He   reiterated   that   it   should   be   a                                                                    
collaborative process between  the executive and legislative                                                                    
Senator Olson  asked whether the  state would  be downgraded                                                                    
if a budget were passed without new revenue sources.                                                                            
Mr. Mitchell  believed that the state's  fiscal rating would                                                                    
be downgraded if a budget were  to pass that did not include                                                                    
new sources of revenue.                                                                                                         
Co-Chair MacKinnon  wondered whether  the past two  years of                                                                    
oil  tax credit  vetoes  by the  Governor  would affect  the                                                                    
state's credit rating.                                                                                                          
Mr. Mitchell  responded that  the agencies  had acknowledged                                                                    
the possible liability in vetoing  the tax credits, but that                                                                    
they had not  been focused on the issues as  they are unique                                                                    
to Alaska.  He spoke to  the positive bullet point  on Slide                                                                    
3,  strong  management  of  financial  operation,  which  he                                                                    
stated  included  the  Legislature.  He  remarked  that  the                                                                    
Legislature  had historically  demonstrated fiscal  prudence                                                                    
with  the  funding  of  reserves   and  the  use  of  excess                                                                    
revenues. He shifted to the  last two negative bullet points                                                                    
that  indicated  that the  state's  economy  was narrow  and                                                                    
volatile, and  that the  state's long-term  liabilities were                                                                    
high at $7,402 per capita.                                                                                                      
Co-Chair MacKinnon spoke to the  "Three Legged Stool" nature                                                                    
of  the state's  economy; one-third  oil and  gas, one-third                                                                    
federal spending, and one-third everything else.                                                                                
Mr. Mitchell  clarified that  the one-third  attributable to                                                                    
government included local, state, and federal government.                                                                       
9:21:15 AM                                                                                                                    
Mr. Mitchell  looked at Slide 5,  "Executive Summary", which                                                                    
was an example of a slide  the department recently used in a                                                                    
presentation  to  ratings  analysts  on  the  strengths  and                                                                    
weaknesses of the state:                                                                                                        
The  State  continues to  make  progress  in implementing  a                                                                  
sustainable fiscal plan.                                                                                                      
Fiscal and Budget Update                                                                                                    
   · Budget   passed   with    substantial   reductions   in                                                                    
     operations and capital spending                                                                                            
   · The Governor showed strong fiscal discipline, cutting                                                                      
     costs and exercising his veto powers to significantly                                                                      
     reduce state spending                                                                                                      
        o Unrestricted General Fund expense reductions from                                                                     
          FY2015: $1.2 billion                                                                                                  
        o Oil and gas tax credits: $430 million                                                                                 
        o Paused capital projects totaling $250 million and                                                                     
          closed down mega-projects                                                                                             
        o Permanent Fund Dividend: $665 million                                                                                 
   · The State is continuing to drive towards long term                                                                         
Substantial Reserves and Resources                                                                                          
   · General Fund balance: $3.5 billion                                                                                         
  · Constitutional Budget Reserve ("CBRF"): $7.3 billion1                                                                       
   · Permanent Fund: $52.8 billion, comprised of $44.2                                                                          
     billion corpus and $8.6 billion Earnings Reserve                                                                           
   · Oil, gas and other resource-based industries provide                                                                       
     substantial annual revenue that is available for                                                                           
   · Alaska has taken extraordinary steps to improve                                                                            
     pension funding over the past ten years including $3                                                                       
     billion deposit from its CBRF in FY 2015                                                                                   
He pointed out that the Legislature had not overridden the                                                                      
Governor's previous vetoes of the oil tax credits.                                                                              
9:21:58 AM                                                                                                                    
Senator Dunleavy stated that, over the previous two years,                                                                      
the administration had not been helpful or cooperative in                                                                       
reaching a sustainable fiscal plan.                                                                                             
9:22:42 AM                                                                                                                    
Co-Chair MacKinnon interjected that the problem effected                                                                        
the Operating and Capital budgets.                                                                                              
9:23:03 AM                                                                                                                    
Mr. Mitchell addressed Slide 6, "Revenue and Expenses: The                                                                      
Status Quo and Future Flexibility." The slide used the                                                                          
Spring Revenue Forecast:                                                                                                        
   Absent other action, the State will continue to draw down                                                                  
   substantial accumulated reserves.                                                                                          
     · Short-term balances reflect "status quo" projections                                                                     
        (i.e., no change in dividend payout, General Fund                                                                       
        expense, or reserve drawdown)                                                                                           
          o Earnings Reserve balance 2017 and beyond                                                                            
             assumes dividend is based on statutory formula                                                                     
             and total return of 6.9 percent                                                                                    
     · However, under the "do-nothing" scenario, the State                                                                      
        would still have access to substantial incremental                                                                      
        revenue that is currently restricted by custom only                                                                     
        and is not included in the analysis above                                                                           
          o Includes (i) additional royalties beyond 25                                                                         
             percent   Permanent   Fund   dedication;   (ii)                                                                    
             Designated  General  Fund  Revenue;  and  (iii)                                                                    
             annual  investment  income  currently  used  to                                                                    
             inflation proof  the  Permanent  Fund, pay  the                                                                    
             Dividend and fund the Earnings Reserve                                                                             
Mr. Mitchell  offered that  the numbers  used for  the slide                                                                    
could have changed since the  Fall Forecast was released. He                                                                    
stated  that   the  "Surplus/Deficit"  line  on   the  slide                                                                    
represented the crux of the  state's difficulty when dealing                                                                    
with  rating analyst;  the line  reflected  a deficit  every                                                                    
year,  from  $3.9 million  in  FY  16  to a  projected  $2.8                                                                    
million  in  FY  21.  He  noted  the  Constitutional  Budget                                                                    
Reserve  (CBRF) was  reflected to  disappear by  FY 19,  and                                                                    
that  the earnings  reserve balance  would shrink  from $8.6                                                                    
million to $3.5 million by  FY 21. He reminded the committee                                                                    
that the numbers  on the slide were based on  the status quo                                                                    
and did  not make  assumptions about  changes that  could be                                                                    
made. He pointed to the  bottom of the slide and highlighted                                                                    
that  there was  revenue  available  for appropriation  that                                                                    
could  help with  the  deficit, if  necessary,  which was  a                                                                    
credit strength.                                                                                                                
9:25:06 AM                                                                                                                    
Senator  Micciche  requested  that Mr.  Mitchell  recap  the                                                                    
positive information listed on Slide 5.                                                                                         
Mr. Mitchell recapped Slide 5.                                                                                                  
9:28:03 AM                                                                                                                    
Senator Micciche  wondered what the state's  rating would be                                                                    
if the legislature had passed SB 128, in 2016.                                                                                  
Mr. Mitchell  responded that  if actions  had been  taken at                                                                    
the table that would have  reduced deficits then the results                                                                    
would have been positive.                                                                                                       
9:29:06 AM                                                                                                                    
Senator Micciche wondered whether  the reductions would have                                                                    
still be  considered positive by  raters if the  deficit had                                                                    
been  brought  down  to approximately  $1  billion,  thereby                                                                    
demonstrating the  willingness to move forward  on difficult                                                                    
Mr. Mitchell  reiterated that a  lower deficit  number would                                                                    
benefit  the  ratings  number.  He  said  that  a  shift  to                                                                    
recognize a new revenue source  on an annualized basis would                                                                    
have positive effects.                                                                                                          
9:29:58 AM                                                                                                                    
Vice-Chair  Bishop   asked  whether  the  agencies   used  a                                                                    
consistent matrix  for weighting  and measuring  the state's                                                                    
Mr. Mitchell said that he  could provide further information                                                                    
pertaining  to  how  the rating  agencies  looked  at  state                                                                    
ratings. He added  that he could provide  information on how                                                                    
Alaska compared to  other states. He stated  that Alaska had                                                                    
a small  population and  a lot of  wealth, which  meant that                                                                    
the state  received "extra credit" for  the reserve position                                                                    
of the  state relative to  other states. He opined  that the                                                                    
state  does not  have  stable and  diversified economy,  and                                                                    
that that was what the rating companies preferred.                                                                              
9:32:16 AM                                                                                                                    
Senator Dunleavy  asked whether  the governor  would support                                                                    
the  $750  million  in budget  reductions  proposed  by  the                                                                    
Mr.  Mitchell  asserted  that  he  did  not  know  what  the                                                                    
governor  would support.  He predicted  that a  $750 million                                                                    
budgetary  reduction would  not  go  unnoticed. He  believed                                                                    
that the  senate would  need to weigh  how those  cuts would                                                                    
impact activities in  the state, but felt  that the sizeable                                                                    
reduction  would result  in a  strengthening of  the state's                                                                    
credit score.                                                                                                                   
9:33:19 AM                                                                                                                    
Co-Chair MacKinnon  stressed that FY  18 was the  final year                                                                    
that  the state  could draw  from the  constitutional budget                                                                    
reserve (CBR). She  asked how long it would  take the credit                                                                    
agencies to recognize action taken by the state.                                                                                
Mr.  Mitchell said  that he  did not  believe that  it would                                                                    
take much time.  He restated that they would not  be slow to                                                                    
notice significant cuts or additional revenue streams.                                                                          
9:36:05 AM                                                                                                                    
Senator  Micciche spoke  to  post  employment costs,  noting                                                                    
that  prefunding  those cost  had  always  been included  in                                                                    
funding  ratios. He  asked  whether  that forethought  would                                                                    
improve Alaska's outlook or drag  down other states outlooks                                                                    
that currently did not include those costs.                                                                                     
Mr. Mitchell believed that it  would drag down other states.                                                                    
He  said  that  states  that   had  yet  to  identify  those                                                                    
liabilities  would have  additional issues  to face,  rather                                                                    
than Alaska receiving a benefit.                                                                                                
9:37:17 AM                                                                                                                    
Co-Chair  MacKinnon  reinterpreted  that  Alaska  recognized                                                                    
health benefits  and the pension  obligation in  its funding                                                                    
ratios, but that other states did not.                                                                                          
Mr.  Mitchell agreed  that Alaska  was  better prepared  for                                                                    
accounting changes  in the future  because of  the attention                                                                    
to pension obligation, and would  fare better as the changes                                                                    
were implemented that states that had not.                                                                                      
9:38:33 AM                                                                                                                    
Mr. Mitchell  highlighted Slide 7,  "FY 2017  Enacted Budget                                                                    
     Spending has been significantly reduced over the last                                                                      
     five years from $8 billion to less than $4.4 billion                                                                       
     while maintaining essential services.                                                                                      
Mr. Mitchell pointed out to  the committee that the top left                                                                    
chart showed  that the  UGF spending  had been  reduced each                                                                    
year  since 2013;  the chart  below illustrated  composition                                                                    
funding sources, the  largest part of which is  the UGF. The                                                                    
upper right chart showed the  Capital Budget. The lower left                                                                    
chart detailed the  spending by funding type.  He noted that                                                                    
federal funds  had grown in  2017, while the  permanent fund                                                                    
had  diminished due  to the  governor's  veto and  inflation                                                                    
9:40:21 AM                                                                                                                    
Co-Chair MacKinnon  explained the committee's  leveraging of                                                                    
designative funds  that could  be redeployed.  She expounded                                                                    
on the uses of designated and undesignated general funds.                                                                       
9:42:10 AM                                                                                                                    
Mr.  Mitchell  addressed  Slide 8,  "PERS  and  TRS  Funding                                                                    
          · FY2015 valuations illustrate the State's                                                                            
             improved funding status across all areas of its                                                                    
             PERS and TRS programs(1)                                                                                           
          · FY2015 figures reflect the impact of the                                                                            
             State's $3 billion transfer from the CBRF                                                                          
               o $1 billion PERS / $2 billion TRS                                                                               
          · Defined Benefit OPEB funding is near or above                                                                       
             100 percent for both PERS and TRS                                                                                  
          · FY2015 final valuations were adopted by the ARM                                                                     
             Board in June, were used for the purpose of                                                                        
             determining the FY2018 funding amount, and will                                                                    
             be included in the FY2016 CAFR                                                                                     
        Preliminary FY2016 Results                                                                                            
          · Preliminary FY2016 returns were -0.36 percent,                                                                      
             well   below    actuarial   assumptions,    but                                                                    
             consistent with other national pension returns                                                                     
               o Estimated funded ratio of approximately                                                                        
                  76.9 percent (PERS) and 81.9 percent (TRS)                                                                    
          · Draft FY2016 actuarial valuation incorporating                                                                      
             FY2016 returns is expected to be available in                                                                      
             early 2017                                                                                                         
Mr. Mitchell  relayed that the slide  showed pension funding                                                                    
from  2014 to  2015, for  both PERS  and TRS,  delineated by                                                                    
actuarial  accrued liability,  valuation assets,  and funded                                                                    
ratio based on valuation assets.  He noted the PERS increase                                                                    
from 70.1 percent  in 2014 to 78.3 percent in  2015, and the                                                                    
TRS increase  from 61.2 percent  in 2014 to 83.3  percent in                                                                    
9:43:51 AM                                                                                                                    
Senator  Micciche harkened  back  to Slide  3, which  listed                                                                    
Alaska's share  of the PERS/TRS  net pension  liabilities at                                                                    
$7,402  per  capita.  He  wondered  which  metric  was  more                                                                    
important, the  one on Slide  3, or  on Slide 8.  He assumed                                                                    
that current  funding ratios were  healthy in  comparison to                                                                    
other states,  but wondered which  numbers the  state should                                                                    
evaluate as a priority.                                                                                                         
Mr.  Mitchell thought  that the  pension funding  had become                                                                    
the  largest single  liability of  the state,  and the  only                                                                    
liability that  increased from year  to year after  2018. He                                                                    
noted that  the state had  hired private consultants  in the                                                                    
fall  of 2015  to  analyze the  unfunded  liability and  the                                                                    
concern had been raised that  the pre-funded pension program                                                                    
could  end up  costing  the state  an  unsettling amount  in                                                                    
future payments  to employees. He believed  that the biggest                                                                    
risk the state took was in managing the future liability.                                                                       
9:48:00 AM                                                                                                                    
Co-Chair Hoffman wondered how  the rating agency viewed past                                                                    
legislative action to close the system.                                                                                         
Mr. Mitchell  replied that the  rating agency  report likely                                                                    
had reference  to the state's  attempt at  restructuring the                                                                    
pension  system.  He  remarked  that  employers  of  defined                                                                    
contribution employees, or  Tier 4, paid 22  percent to fund                                                                    
the  employee's retirement  and  a portion  of the  unfunded                                                                    
liability. He  did not think  that the payment  had impacted                                                                    
the  payments  that otherwise  would  flow  to the  unfunded                                                                    
liability as a result of the Tier 4 structure.                                                                                  
9:50:09 AM                                                                                                                    
Co-Chair  Hoffman clarified  that  the  rating agencies  had                                                                    
acknowledged the closure of the system by the legislature.                                                                      
Mr. Mitchell replied that the  agencies had acknowledged the                                                                    
closure, and saw it as a credit positive.                                                                                       
9:50:28 AM                                                                                                                    
Senator von  Imhof queried other ideas  an opportunities the                                                                    
administration had to  offer in discussion of  the future of                                                                    
the unfunded liability risk.                                                                                                    
Mr.  Mitchell  replied  that  he  was  not  aware  of  other                                                                    
alternatives  offered by  the administration.  He felt  that                                                                    
the  alternatives  were  apparent;   the  state  could  make                                                                    
additional cash deposits  into the system or pay  more on an                                                                    
annual basis.                                                                                                                   
9:52:06 AM                                                                                                                    
Vice-Chair  Bishop noted  that budget  cuts would  result in                                                                    
less employees that could pay into the system.                                                                                  
9:52:39 AM                                                                                                                    
Senator Micciche  wondered whether increasing  payments over                                                                    
time  by $50  million per  year;  or a  one-time large  cash                                                                    
infusion would be better over time.                                                                                             
Mr.  Mitchell  replied  that the  assumption  was  that  the                                                                    
invested  funds would  earn 8  percent,  which would  likely                                                                    
result  more of  a return  on  a large  cash deposit  early,                                                                    
rather than contributions over time.                                                                                            
Senator Micciche wondered what  happened if the funds failed                                                                    
to earn 8 percent.                                                                                                              
Mr. Mitchell  responded that that  in that case it  could be                                                                    
prudent to  have deposits that were  staggered, over several                                                                    
9:54:23 AM                                                                                                                    
Senator  Dunleavy   questioned  the  achievability   of  the                                                                    
targeted 8 percent return.                                                                                                      
9:54:47 AM                                                                                                                    
Co-Chair MacKinnon interjected that  there would be a future                                                                    
conversation in  committee regarding pension  and liability.                                                                    
She shared that the 8 percent  return rate was a policy that                                                                    
had been  adopted by the Alaska  Retirement Management Board                                                                    
(ARM). She felt that the  question should be directed to the                                                                    
board, and  believed that  conversations about  lowering the                                                                    
interest rate return assumption had  been held by the board.                                                                    
She  noted that  the current  rate was  optimistic, but  had                                                                    
been achieved  over the past  30 years. She added  that cash                                                                    
flow was  an issue for the  board, and when they  had assets                                                                    
in  their portfolio  that could  generate a  higher rate  of                                                                    
return above 8 percent, the assets  may need to be sold. She                                                                    
stressed that the  issue of unfunded liability  needed to be                                                                    
addressed by the state.                                                                                                         
9:57:52 AM                                                                                                                    
Mr.  Mitchell discussed  Slide  10,  "State Debt  Obligation                                                                    
          · All Forms of State Debt are Authorized First by                                                                     
               o May be a one-time issuance amount or a                                                                         
                  not-to-exceed issuance limit in statute                                                                       
               o General obligation bonds must then also be                                                                     
                  approved by a majority of voters                                                                              
          · All State Debt must be structured and                                                                               
             authorized by the State Bond Committee                                                                             
               o Includes general obligation bonds, subject                                                                     
                  to appropriation issues, and state revenue                                                                    
          · The State Bond Committee determines method and                                                                      
             timing of debt issues to best utilize the                                                                          
             state's credit and debt capacity while meeting                                                                     
             the authorized projects cash flow needs                                                                            
          · The    State   has   established    other   debt                                                                    
               o Reimbursement Programs                                                                                         
                    ƒThe School Debt Reimbursement Program                                                                     
                       or HB 528 reimbursement                                                                                  
                    ƒCommunities issues bonds and the                                                                          
                       State agrees to reimburse at a                                                                           
                       certain level                                                                                            
               o Not currently authorized for new debt and                                                                      
                  periodically partially funded                                                                                 
          · Retirement Systems                                                                                                  
               o Unfunded actuarially assumed liability                                                                         
                  (UAAL) for defined benefit employees is                                                                       
                  guaranteed by the Constitution creating a                                                                     
                  state debt                                                                                                    
               o Annual payments on the UAAL of other                                                                           
                  employers is reflected as State debt in                                                                       
                  the CAFR                                                                                                      
               o Some flexibility in how payments are made                                                                      
9:59:48 AM                                                                                                                    
Co-Chair  MacKinnon shared  that  the  State Bond  Committee                                                                    
consisted  of   the  Commissioners  of  the   Department  of                                                                    
Revenue,   the    Commissioner   of   the    Department   of                                                                    
Administration, and  the Commissioner  of the  Department of                                                                    
Commerce, Community and Economic Development.                                                                                   
Mr. Mitchell replied in the affirmative.                                                                                        
9:59:58 AM                                                                                                                    
Co-Chair MacKinnon surmised that decisions made concerning                                                                      
changes in the debt affordability analysis, or Alaska                                                                           
public debt, would be made by those commissioners.                                                                              
Mr. Mitchell agreed.                                                                                                            
10:00:20 AM                                                                                                                   
Mr. Mitchell  looked at Slide  11, "Total Debt in  Alaska at                                                                    
June  30, 2016."  He  shared  that the  table  was from  the                                                                    
"Alaska Public Debt"  book (copy on file).  He stressed that                                                                    
the  chart   had  been  reorganized   for  2016,   based  on                                                                    
conversation  with  the  banking  community,  to  provide  a                                                                    
fairer  characterization  of  each monetary  commitment.  He                                                                    
detailed the line items listed on the table.                                                                                    
10:04:42 AM                                                                                                                   
Co-Chair MacKinnon  jumped ahead  to Slide 19,  which showed                                                                    
that the state  was noting for debt  obligations the ability                                                                    
to further  encumber itself. She wondered  whether having $5                                                                    
billion  available  for  pension obligation  bonds  was  the                                                                    
right  amount to  have  written into  the  books. She  asked                                                                    
whether there  would be an  advantage to the state  to lower                                                                    
the number to the $2 billion range.                                                                                             
Mr. Mitchell looked ahead to  Slide 19. He responded that he                                                                    
was  not  sure whether  lowering  the  number would  make  a                                                                    
difference  to the  ratings agencies.  He stressed  that the                                                                    
general obligation  bond obligation  could not  be rescinded                                                                    
without a  public vote. He  said that the Knik  Arm Crossing                                                                    
(subject to  appropriation) had an uncertain  future. He did                                                                    
not  believe  that the  pension  obligation  bonds would  be                                                                    
double  counted.   He  stated  that  the   ratings  agencies                                                                    
acknowledged that  if the  state were  to issue  bonds under                                                                    
that authorization, liability  would be diminished elsewhere                                                                    
on the  balance sheet.  He relayed  that any  governor could                                                                    
choose  to  issue  bonds  with   either  of  the  previously                                                                    
mentioned authorizations.                                                                                                       
10:08:00 AM                                                                                                                   
Mr. Mitchell  addressed Slide 12,  "Total Debt in  Alaska at                                                                    
June 30, 2016." He detailed the table on the slide.                                                                             
Co-Chair  MacKinnon   relayed  that   she  had   observed  a                                                                    
significant differences in ratios  of the principal interest                                                                    
and total debt reflected on Slides 11 and 12.                                                                                   
Mr.  Mitchell  suggested  that  individually  examining  the                                                                    
average life of  each obligation could be  helpful. He noted                                                                    
that some obligations had longer  life spans than others and                                                                    
that the bond bank currently had  an AA bond rating for a 20                                                                    
year loan  and achieve  a rate  of approximately  3 percent,                                                                    
but some loans went out for 40 years.                                                                                           
10:11:12 AM                                                                                                                   
Vice-Chair Bishop referred  to a 2008 bond  package that was                                                                    
passed by voters  for a road project in  Fairbanks. He asked                                                                    
if the debt on the project  was sold on the project in 2008,                                                                    
or would it encumbered in 2016.                                                                                                 
Mr. Mitchell recounted that the  2008 Transportation Act was                                                                    
unusual because the state sold  half of the authorization in                                                                    
2009, which  provided funding for  a little over  two years.                                                                    
In 2012, an  appropriation of general fund  dollars was made                                                                    
to replace  the general  obligation bond  authorization. The                                                                    
Fairbanks  in project  was being  funded with  general funds                                                                    
based on the 2012 appropriation.                                                                                                
Vice-Chair Bishop asked whether bonds  had been sold for the                                                                    
total cost of the project.                                                                                                      
Mr. Mitchell answered in the  affirmative, and expanded that                                                                    
bonds would not  be sold for the total cost  of the project,                                                                    
because the  project would  be paid for  out of  the general                                                                    
fund based on the 2012 appropriation.                                                                                           
10:12:53 AM                                                                                                                   
Co-Chair  MacKinnon mentioned  funds for  a bridge  in Eagle                                                                    
River that was included in  the bond package, which could be                                                                    
reallocated to finish the second bridge.                                                                                        
Mr.  Mitchell  relayed  that  there  were  rules  about  how                                                                    
general  obligation bonds  could be  reallocated. The  funds                                                                    
were  limited  to the  project  list;  if the  project  list                                                                    
included  the  project that  the  state  wanted to  transfer                                                                    
funds  to, it  would most  likely  be possible,  but if  the                                                                    
project  was  not  on  the  list s  transfer  would  not  be                                                                    
Co-Chair MacKinnon  confirmed that  the project had  been on                                                                    
the list.                                                                                                                       
10:13:38 AM                                                                                                                   
Mr.  Mitchell discussed  Slide 13,  "State Debt  Obligations                                                                    
Outstanding." He noted  that Slides 11 and 12  had come from                                                                    
the  state  Debt  Book,  and  Slide 13  was  from  the  Debt                                                                    
Affordability  book.  He  thought  the  FY  18  UGF  Payment                                                                    
column, which reflected $85 million,  was the most important                                                                    
information on the slide.                                                                                                       
10:14:46 AM                                                                                                                   
Mr. Mitchell  looked at Slide 14,  "General Obligation Bonds                                                                    
Current Financing":                                                                                                             
     G.O. bonds outstanding gradually decline                                                                                 
     Recent Activity:                                                                                                         
        · To date, $342.8million of the State's 2012 GO                                                                         
          bond authorization ($453.2 million) has been                                                                          
        · Remaining $110.4 million won't be issued before                                                                       
          fiscal year 2018                                                                                                      
Mr. Mitchell commented that the  state expected to have less                                                                    
of an outstanding principal balance in the coming years.                                                                        
10:15:07 AM                                                                                                                   
Mr.  Mitchell   displayed  Slide  15,   "General  Obligation                                                                    
     Existing G.O. debt service stable and expected to                                                                        
     gradually decline                                                                                                        
        · Annual debt service remains well below the 1985                                                                       
          peak of $169.5 million                                                                                                
        · G.O. debt service represent 5.4% of projected                                                                         
          unrestricted revenue for FY 2017, but declines to                                                                     
          2.5% by 2026                                                                                                          
Mr. Mitchell  stated that the  state would face a  hurdle in                                                                    
2018 and 2019  with annual debt service, but  the trend line                                                                    
for  principal interest  would maintain  itself, even  after                                                                    
the  issuance of  the $110.4  million,  and would  gradually                                                                    
Senator von Imhof spoke to  her time on the Anchorage School                                                                    
Board. She wondered what would  happen if the state reissued                                                                    
new  debt,  and whether  a  refinancing,  rate lowering,  or                                                                    
changing of  terms was possible  at some point.  She queried                                                                    
whether the  state could  sell assets in  order to  pay debt                                                                    
Mr.  Mitchell  relayed  that  there  was  more  regular  and                                                                    
routine usage  of geo  bonds on the  city level,  versus the                                                                    
state. He  shared that the  state's portfolio  was regularly                                                                    
scrutinized for refinancing opportunities,  but at this time                                                                    
had no additional  long term bonds that  would be candidates                                                                    
for refinancing for several years.                                                                                              
Co-Chair MacKinnon  commented that the issue  of refinancing                                                                    
was twofold when looking at  debt reimbursement for schools.                                                                    
She  stressed  that  Anchorage  could  make  a  choice  that                                                                    
benefitted them in  the cost for refinancing  that might not                                                                    
benefit the state. She mused  that if the state was covering                                                                    
a 70  percent debt  reimbursement, it would  be advantageous                                                                    
from  the  state's  perspective,  for  the  bond  holder  to                                                                    
refinance. But  to the  bond holder, the  cost would  not be                                                                    
worth the refinance. She believed  that the state could look                                                                    
into  refinancing for  the benefit  of the  state, but  that                                                                    
action would impact the cost to municipalities.                                                                                 
10:19:33 AM                                                                                                                   
AT EASE                                                                                                                         
10:21:18 AM                                                                                                                   
10:21:28 AM                                                                                                                   
Mr.  Mitchell noted  that G.O.  debt  service represent  5.4                                                                    
percent  of projected  unrestricted revenue  for FY  17, but                                                                    
declines to  2.5 percent  by 2026. He  remarked that  it was                                                                    
built  into the  primary debt  capacity calculator  that the                                                                    
state used for  determining debt capacity. He  said that the                                                                    
slide reflected outstanding payments.                                                                                           
10:22:02 AM                                                                                                                   
Mr. Mitchell  looked at Slide  16, "Bonds Authorized  by Law                                                                    
and Paid from General Fund":                                                                                                    
     Existing State debt service stable and expected to                                                                       
     gradually decline                                                                                                        
        · Annual debt service remains well below the 1985                                                                       
          peak of $182.2 million                                                                                                
        · debt service represent 7.5 percent of projected                                                                       
          unrestricted revenue for FY 2017, but declines to                                                                     
          3.7 percent by 2026                                                                                                   
        · Currently exceeds Debt Affordability Policy of 5                                                                      
Mr.  Mitchell noted  that  the  unrestricted revenue  number                                                                    
being  greater   than  5  percent   was  not  due   to  debt                                                                    
increasing, but rather revenues declining.                                                                                      
10:22:57 AM                                                                                                                   
Co-Chair  MacKinnon  asked  whether  the  use  of  currently                                                                    
approved   bonds,  or   something  new,   would  cause   the                                                                    
previously mentioned uptick in 2018.                                                                                            
Mr. Mitchell  replied that he  was referring to  annual debt                                                                    
service increasing  from 2017 to  2018, due to  the issuance                                                                    
of bonds  issued in 2016,  which totaled  approximately $330                                                                    
million  and  are  a  significant amount  of  the  2012  Act                                                                    
10:24:27 AM                                                                                                                   
Co-Chair MacKinnon understood that  that was approximately a                                                                    
$330 million difference.                                                                                                        
Mr. Mitchell replied yes, of  long term outstanding debt. He                                                                    
furthered  that  it was  nearly  $160  million of  increased                                                                    
outstanding debt.                                                                                                               
10:25:13 AM                                                                                                                   
Co-Chair MacKinnon recalled  a presentation that highlighted                                                                    
that the  bond bank  kept a reserve  for different  types of                                                                    
bonds. She asked  whether the department was  asking for any                                                                    
funding for a bond bank reserve.                                                                                                
Mr. Mitchell replied no. He  furthered that the reserve fund                                                                    
was required  by statue for the  moral obligation commitment                                                                    
of the state,  there was an annual  reporting requirement on                                                                    
the reserve,  as well. He said  that there had never  been a                                                                    
draw  on the  reserve  due  to a  default  of an  underlying                                                                    
borrower.  He  added that  the  bond  bank had  received  an                                                                    
appropriation of  $13 million from the  legislature in 2012,                                                                    
which was part of how the reserve was currently funded.                                                                         
10:26:27 AM                                                                                                                   
Mr.   Mitchell   highlighted    Slide   17,   "Bonds,   Bond                                                                    
Reimbursements and Statutory UAAL Debt":                                                                                        
     Bonds/Bond Reimbursements are Stable and declining                                                                       
     versus Volatile and Growing UAAL Debt                                                                                    
        · The impact of UAAL debt dwarfs other debt and                                                                         
          reimbursement commitments                                                                                             
        · Annual payments grow by 108 percent over the next                                                                     
          23 years                                                                                                              
        · Annual payments represent 28.7 percent of                                                                             
          projected unrestricted revenue for FY 2017, and                                                                       
          remain over 25 percent through 2026                                                                                   
        · Exceeds Debt Affordability limit of 8 percent                                                                         
Mr. Mitchell relayed  that the state bond  committee had not                                                                    
convened to take  formal action on how  to address exceeding                                                                    
the 8 percent, but that the issue should not be ignored.                                                                        
10:28:06 AM                                                                                                                   
Co-Chair MacKinnon  noted that language had  been changed in                                                                    
the description  of the state's fiscal  situation to ratings                                                                    
agencies  to  accurately   describe  the  state's  financial                                                                    
circumstance.   She  pointed   to   Page  7   of  the   Debt                                                                    
Affordability  Analysis  (copy  on  file),  which  reflected                                                                    
those  changes.  Co-Chair   MacKinnon  asked  whether  those                                                                    
changes provided a more accurate reflection.                                                                                    
Mr. Mitchell replied in the affirmative.                                                                                        
10:29:19 AM                                                                                                                   
Senator  von  Imhof  queried   the  unfunded  liability  for                                                                    
pension payments compared to payments for health benefits.                                                                      
Mr. Mitchell  said that  the majority  of the  payments were                                                                    
for pensions.                                                                                                                   
10:29:57 AM                                                                                                                   
AT EASE                                                                                                                         
10:30:25 AM                                                                                                                   
Co-Chair MacKinnon directed committee attention to Slide 8.                                                                     
10:30:36 AM                                                                                                                   
Mr.  Mitchell stated  that the  slide reflected  the funding                                                                    
ratios questioned  by Senator von  Imhof. He pointed  to the                                                                    
middle  of  the chart,  Mr.  Boyle  - Healthcare,  c,  which                                                                    
showed the 99.1  percent funding level for 2015,  as of June                                                                    
30, 2015; the TRS level was  100.3 percent. He said that the                                                                    
unfunded  actuarial  assumed   liability  currently  resided                                                                    
primarily within pensions.                                                                                                      
10:31:18 AM                                                                                                                   
Senator Micciche  spoke to Slide  17. He queried  the effect                                                                    
of adjusting  for inflation. He  thought that over  23 years                                                                    
the line would be flat, or  reduced, and at some point would                                                                    
cross over below the debt affordability limit of 8 percent.                                                                     
Mr. Mitchell  agreed that,  absent the  revenue projections,                                                                    
if  reliable revenue  was incoming  then Senator  Micciche's                                                                    
scenario would be plausible.                                                                                                    
10:32:40 AM                                                                                                                   
Co-Chair MacKinnon  looked at Slide  8. She  recognized that                                                                    
the state  had infused  $3 billion in  assets, a  portion of                                                                    
which  was and  annual  due payment  and  not an  additional                                                                    
expense.  She  wondered  why  the  payment  went  to  health                                                                    
benefits  and  not pensions.  She  offered  a recap  of  the                                                                    
debate that had  occurred in 2014 concerning  the $3 billion                                                                    
transfer from  the CBR.  She requested  a response  from the                                                                    
ARM board.                                                                                                                      
10:36:40 AM                                                                                                                   
Vice-Chair Bishop referred to the bullet on Slide 16:                                                                           
     · Currently exceeds Debt Affordability Policy of 5                                                                         
He asked whether the state was over sold by 5 percent.                                                                          
Mr.  Mitchell replied  that the  state has  a policy  of the                                                                    
debt  service  should  not  equal  greater  than  a  certain                                                                    
percentage of unrestricted general  fund revenue; 5 percent.                                                                    
For example, if  the state had $100  million of unrestricted                                                                    
general fund  revenue, debt service  should be no  more than                                                                    
$5 million per  year. He said that the  slide reflected that                                                                    
the state  was above  the 5 percent  target at  7.5 percent,                                                                    
but in  the 10 year  forecast period in the  Revenue Sources                                                                    
book, the  number drops  to 3.7 percent  by 2026.  He shared                                                                    
that   the  state   was  above   7.5  percent   because  the                                                                    
unrestricted general  fund had  declined. He thought  that a                                                                    
more  stable   revenue  stream  would  help   to  raise  the                                                                    
percentages because the state  would have a more predictable                                                                    
annual payment from year to year.                                                                                               
10:38:27 AM                                                                                                                   
Co-Chair MacKinnon  directed committee  attention to  Page 3                                                                    
of the Debt Affordability Analysis  (copy on file). She said                                                                    
that she had compared the  current report to the reports put                                                                    
out  over  the  past  three   years  in  order  to  see  the                                                                    
consistency and differences  of the ways the  state had lost                                                                    
revenue  coming into  the state.  She noted  Page 14  of the                                                                    
report, which  reflected that short  term debt  capacity for                                                                    
the state  was approximately  $50 million. She  relayed that                                                                    
Page 3 reflected  that over the next 10  years debt capacity                                                                    
only  increased to  $100  million. She  agreed  that if  the                                                                    
state could do something to  fix revenue, the opportunity to                                                                    
look  at debt  as a  resource  could be  there, but  current                                                                    
conditions required an  aversion to debt in  order to remain                                                                    
attractive  to credit  rating agencies.  She noted  that the                                                                    
state  had  lost $75  million  in  debt opportunity  in  the                                                                    
recent  year.  She praised  the  report  as a  resource  for                                                                    
working towards a sustainable fiscal plan.                                                                                      
10:40:57 AM                                                                                                                   
Mr.  Mitchell  looked  at  Slide  18,  "Largest  State  Debt                                                                    
Payment  Volatility." He  stated that  the slide  showed the                                                                    
state assistance  payments that  the state was  obligated to                                                                    
make  on the  actuarially determined  percentage of  payroll                                                                    
for  PERS,  above  22  percent, and  for  TRS,  above  12.56                                                                    
percent.  He  said  that  current  payments  totaled  $11.23                                                                    
billion through 2039,  including FY 17. He relayed  that a 7                                                                    
percent return raised the total  to $19.6 billion. He stated                                                                    
that  the  impact would  be  mild  in  the short  term,  but                                                                    
further down  the line the payments  increased significantly                                                                    
under 7 percent. The table offered  projections at a 5 and 6                                                                    
percent return.                                                                                                                 
10:43:43 AM                                                                                                                   
Co-Chair  MacKinnon reiterated  that there  would be  a PERS                                                                    
and TRS  discussion the  following day.  She hoped  that the                                                                    
conversation  would  be  focused  on  the  cost  drivers  of                                                                    
benefits and contracts. She urged  the committee to generate                                                                    
questions  for  the  presenters   in  advance  in  order  to                                                                    
expedite the conversation.                                                                                                      
10:44:39 AM                                                                                                                   
Senator Micciche  wondered whether the  administration could                                                                    
provide the  probability matrix using the  8 percent number.                                                                    
He  was interested  in determining  the actual  risk to  the                                                                    
Mr. Mitchell deferred  the question to the  ARM Board staff,                                                                    
because  they made  the  investment  decisions. He  asserted                                                                    
that  the  intent of  the  slide  was  not to  question  the                                                                    
assumptions.  He  said  that  history  had  shown  that  the                                                                    
targeted  8  percent  return  was  reasonable,  but  from  a                                                                    
budgetary  perspective, new  revenue would  be necessary  in                                                                    
the future.                                                                                                                     
10:47:08 AM                                                                                                                   
Mr.  Mitchell addressed  Slide 19,  "State Debt  Obligations                                                                    
Authorized  But  Unissued."  He solicited  further  question                                                                    
concerning the slide.                                                                                                           
10:47:15 AM                                                                                                                   
Vice-Chair Bishop  queried the  reasonable level  of general                                                                    
obligation  bond  debt  needed  to begin  dealing  with  the                                                                    
state's deferred maintenance schedule.                                                                                          
10:47:49 AM                                                                                                                   
AT EASE                                                                                                                         
10:48:52 AM                                                                                                                   
Co-Chair  MacKinnon   pointed  to   Page  20  of   the  Debt                                                                    
Affordability  Analysis(copy  on  file). She  spoke  to  the                                                                    
heading  of "Consideration  Debt Structuring  Elements". She                                                                    
listed the  different types of instruments  available to the                                                                    
state  for restructuring.  She queried  whether any  changes                                                                    
had  recently   been  made   to  the   paragraph  concerning                                                                    
negotiated sales.                                                                                                               
Mr.  Mitchell replied  that he  was unaware  of any  changes                                                                    
that had been made to the document.                                                                                             
10:50:27 AM                                                                                                                   
Co-Chair MacKinnon expressed interest  in the language under                                                                    
the "Negotiated Sales" heading, number (4):                                                                                     
     (4) if the State feels that a negotiated financing                                                                         
     would enhance the financing marketing process and                                                                          
Co-Chair MacKinnon wondered what  was meant by the marketing                                                                    
and negotiated sales.                                                                                                           
Mr. Mitchell replied  that any changes would  have been made                                                                    
based  on the  judgment  that a  better  description of  why                                                                    
negotiated sale  would be used.  He offered a  comparison of                                                                    
competitive  and negotiated  sales.  He  explained that  the                                                                    
rationale   for  one   sale   method   versus  another   was                                                                    
simplicity, market  understanding, and  potential volatility                                                                    
and credit stress.                                                                                                              
10:53:25 AM                                                                                                                   
Co-Chair  MacKinnon  recalled  that  the  report  previously                                                                    
contained language ensuring evaluation  by an underwriter or                                                                    
third party.                                                                                                                    
Mr. Mitchell replied that there  was a financial advisor who                                                                    
represented the  state in interactions  with the  market and                                                                    
with bankers, who made recommendations on method of sale.                                                                       
10:54:38 AM                                                                                                                   
Co-Chair  MacKinnon  hoped  for further  discussion  of  the                                                                    
process of negotiated sales.                                                                                                    
10:54:49 AM                                                                                                                   
Co-Chair MacKinnon discussed housekeeping for the following                                                                     
10:55:12 AM                                                                                                                   
The meeting was adjourned at 10:55 a.m.                                                                                         

Document Name Date/Time Subjects
020117 Senate Finance - DOR Debt Presentation - 2.1.17.pdf SFIN 2/1/2017 9:00:00 AM
Operating Budget FY18