Legislature(2017 - 2018)SENATE FINANCE 532
02/01/2017 09:00 AM Senate FINANCE
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| Presentation: State Debt Affordability Analysis and Debt Service | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
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+ teleconferenced
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| + | TELECONFERENCED | ||
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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
None
ALSO PRESENT
Deven Mitchell, Debt Manager, Department of Revenue.
SUMMARY
^PRESENTATION: STATE DEBT AFFORDABILITY ANALYSIS and DEBT
SERVICE
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:
POSITIVES
· 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
depletion
· Strong management of financial operations
NEGATIVES
· 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
capita
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
perspective.
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
branches.
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
solutions
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
appropriation
· 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
decisions.
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
assets.
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
senate.
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
Overview":
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
proofing.
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
Status":
· 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
2015.
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
years.
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
Process":
· All Forms of State Debt are Authorized First by
law
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
bonds
· 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
obligations
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
allowed.
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
funded
· 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
Bonds":
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
diminish.
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
service.
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
RECONVENED
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
percent
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
authority.
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
RECONVENED
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
percent
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
state.
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
RECONVENED
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
outcome
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
day.
ADJOURNMENT
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 |