Legislature(2021 - 2022)SENATE FINANCE 532
02/02/2021 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| State Debt Summary | |
| Savings Accounts and Cash Flows | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
February 2, 2021
9:01 a.m.
9:01:52 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:01 a.m.
MEMBERS PRESENT
Senator Bert Stedman, Co-Chair
Senator Lyman Hoffman
Senator Donny Olson (via teleconference)
Senator Natasha von Imhof
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
Senator Click Bishop, Co-Chair
PRESENT VIA TELECONFERENCE
Deven Mitchell, Department of Revenue, Debt Manager,
Juneau; Mike Barnhill, Department of Revenue, Deputy
Commissioner, Juneau; Pam Leary, Department of Revenue,
Treasury Director, Juneau.
SUMMARY
STATE DEBT SUMMARY
SAVINGS ACCOUNTS and CASH FLOWS
^STATE DEBT SUMMARY
9:04:37 AM
DEVEN MITCHELL, DEPARTMENT OF REVENUE, DEBT MANAGER, JUNEAU
(via teleconference), presented, "January 2021 Credit
Review and State Debt Summary" (copy on file). He pointed
to slide 2, "State of Alaska and Other 49 States' Ratings."
Co-Chair Stedman asked that the slide be put into rating
order from highest rating to lowest rating. He also
requested the dates of each rating downgrade.
9:07:36 AM
Mr. Mitchell looked at slide 3, "Rating Challenges in
2021":
Political Challenge
?Failure to resolve the ongoing structural
deficit during the 2021 Legislative Session will
likely result in additional
State credit downgrades
?Oil price declines have reduced state revenues
and created significant fiscal imbalance since
2015
?Constitutional Budget Reserve Fund (CBR) allowed
difficult decisions to be deferred over the last
five years, this is no longer an option
?Reductions to general fund spending while
significant, have been difficult to achieve and
haven't eliminated the ongoing structural deficit
?Gridlock over use of Permanent Fund earnings
Permanent Fund Dividend vs. public services
Financial Policies
?Structured 5 percent Percent of Market Value
(POMV) draw insufficient to fully fund the budget
and the dividend
?Statutory conflict between POMV draw and PFD
formula
?Lack of consensus on long term options for
either spending less money or generating more
revenue
Rating Agency Concerns
?Ongoing structural UGF imbalance and reliance on
near depleted one time financial resources (CBRF)
?Comparatively large net pension liability
?Narrow economy that is relatively small
?Perception that the State's economy and
operating revenues are primarily reliant on
petroleum development
9:12:29 AM
Senator von Imhof noted that there were only three states
that had a worse credit rating than Alaska. She remarked
that the governor's proposal had a $350 million GO bond
proposal, but the revenue generated by the state would be
used to pay the dividend. She queried the details of the
examination by the rating agency.
Mr. Mitchell replied that the state's ability to sell GO
bonds was going to be in place whether there was a solution
to the fiscal situation or not.
9:15:40 AM
Senator Hoffman queried the estimated rating from Mr.
Mitchell's perspective. He recalled that the year prior had
a $680 dividend, but the governor was proposing three times
that number. He noted that there was a chart prepared by
the Legislative Finance Division (LFD), which would be the
largest appropriation at 32 percent of the budget. He
stated that it would overdraw the 5 percent by something
larger than 10 percent. He queried any remarks on that
drastic move and its affect on the rating.
Mr. Mitchell responded that the impact of Covid 19 was
recognized in all aspects, so there was some mitigation for
overdrawing of the reserves for the purpose of stimulating
the economy through dividend distribution. He stated that
an overdrawing of the Earnings Reserve Account (ERA) would
not be seen favorably by rating analysts. He stated that
the analysts worked with other agencies that had
endowments, like universities, and there were guidelines
for reasonable withdrawals of the funds. He stated that
there could be an impact on the rating.
Senator Wielechowski queried the debt cost of the
additional downgrade to the state's rating.
Mr. Mitchell responded that the percentages would be
nominal. The cost of capital vs the downgrade may only
result in a small decrease.
Co-Chair Stedman asked about downgrades.
Mr. Mitchell stated that it was different from a mortgage -
there was a rate for every year of the loan. Once the
maturities were sold, they did not adjust for credit
ratings.
9:21:17 AM
Senator Wilson asked about the strength of the Alaska
Permanent Fund Corporation (APFC) overall. He felt that the
strength of APFC should or could result in a more positive
rating.
Mr. Mitchell agreed, and recalled a presentation from the
year prior which showed that the state had been working to
further educate the analysts the strength of the APFC. He
noted that the majority of UGF was coming from a sovereign
wealth fund, so there was not a reliance on the state's
economy. He noted that focusing on the state's economy was
a faulty analysis, because of the more than 3000
investments that were making throughout the world.
Senator von Imhof shared calculations based on the
percentages.
Senator Wielechowski queried the efforts to get the message
out about the credit rating. He noted that the next
presentation had a number of days that each state could run
on total balances. He remarked that Alaska had the largest
savings account in the country, by far at over 170 days. He
wondered whether there could be greater effort to get the
message out that Alaska was in good financial shape.
Co-Chair Stedman felt that the question was better for the
upcoming presentation. He requested that the answer be
brief.
Mr. Mitchell stressed that those points were made in every
ratings presentation. He agreed to provide those
discussions.
9:27:48 AM
Mr. Mitchell presented slide 4, "Alaska's Most Pressing
Credit Rating Challenge":
?The CBRF receives additional dispute resolution
deposits and restricted earnings
?Post FY2019, it was determined that adjustments to
the CBRF account balance was necessary for dispute
resolution deposits originally deposited to the
General Fund
?The Governor's budget has proposed drawing just $39.6
million from the CBRF for FY2022
9:33:23 AM
Co-Chair Stedman requested another POMV column be added to
the slide to clarify the delineation. He wondered whether
there should be a clarification about total revenues versus
total expenditures.
Mr. Mitchell replied in the affirmative, and shared that
the net position would be all revenue not only unrestricted
revenue.
Senator von Imhof believed that there were previous
presentations that showed that the governor's deficit was
larger than $39 million, but rather over $1 billion. She
queried the location of the funds to cover the deficit.
Mr. Mitchell replied that the $39 million draw on the CBR
was prior to the Permanent Fund Dividend (PFD)
distribution. Therefore, any distribution of dividends
would result in a higher deficit. He added that the only
source to fund the PFD was the ERA.
9:35:44 AM
Senator von Imhof surmised that an ad hoc draw from the ERA
would result in a greater amount than the 5 percent
allotted for the POMV. She wondered how the draw of greater
than 5 percent would affect the state's ratings.
Mr. Mitchell replied that it would "run afoul" from a
ratings perspective for the use of an endowment. He stated
that it could make sense, however, from a policy
perspective.
Mr. Mitchell looked at slide 6, "State Debt Obligation
Process":
All Forms of State Debt are Authorized First by law
May be a one-time issuance amount or a not to exceed
issuance limit in statute
General obligation bonds must then also be approved
by a majority of voters
General obligation bonds are the only debt
secured by full faith credit and taxing authority
All State Debt must be structured and authorized by
the State Bond Committee
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 project's
cash flow needs
The State has established other debt obligations
Reimbursement Programs
The School Debt Reimbursement Program or HB
528 reimbursement
Not currently authorized for new debt
and periodically funded (was most
recently partially funded in 2017 and
2020, no appropriation in the FY2021
Budget)
Retirement Systems
Unfunded actuarially assumed liability
(UAAL) for defined benefit employees is
guaranteed by the Constitution
Annual payments on the UAAL of other
employers is reflected as State debt in the
CAFR
Some flexibility in how payments are made
9:41:31 AM
Co-Chair Stedman felt that there should be a focus on the
pertinent working issues in the committee.
Mr. Mitchell highlighted slide 7, "Total Debt in Alaska at
June 30, 2020." He shared that the table was from the
state's debt book. He ran through the details of the slide.
Mr. Mitchell pointed to slide 8, "Total Debt in Alaska at
June 30, 2020." He remarked that the University was listed
under Revenue Bonds, and further detailed the information
on the slide.
9:46:37 AM
Senator Hoffman wondered whether the 2 percent refinancing
interest rates was a possibility, and queried the
administration's position.
Mr. Mitchell responded that the administration was paying
attention to the low interest rates. He explained, however,
that there was a difficulty in refinancing bonds in advance
of the call date. He shared that, when municipal bonds were
sold, they were almost always sold with a ten-year hard
call. He explained that those bonds could not be refinanced
for the first ten years, and only bonds that were mature
after the first ten years could be eligible for
refinancing.
Senator Wilson wondered whether there had been full
repayment of the $39 million for Alaska Industrial
Development and Export Authority (AIDEA) Revolving Loan
Fund, because he did not see it included in the list.
Mr. Mitchell agreed to provide that information.
9:49:54 AM
Mr. Mitchell looked at slide 9, "Current General Fund
Annual Payment Obligation":
GF Payment peaked in 2018 at $225.2 million
Declining payment in every year (50 percent of peak in
PERS/TRS special funding payments grow, but less
dramatically
PERS TRS special funding is many times all other state
commitments
Senator von Imhof asked for a restatement of the graphic in
the slide with an overlay of the GO Bond.
Mr. Mitchell agreed to provide that information.
Mr. Mitchell highlighted slide 10, "UGF Budget Impact":
UGF Budget Impact of $350M GO and $100M AHFC Revenue
Bond Proposals Bond
GO BOND
Full Faith and credit of SOA
Requires Legislative and Voter approval
First bond issuance likely in FY 2023
Revenue Bond
Debt service is paid via revenues generated
9:56:39 AM
Co-Chair Stedman remarked that there would be additional
detail about the slide when the committee considered the
capital budget. He requested a debt service schedule.
Mr. Mitchell looked at slide 11, "Limited State Short Term
Debt Obligation Alternatives":
Bond Anticipation Notes (AS 37.15.300 390)
May be used when long term debt is authorized by law
While short term, it is expected to be a precursor of
long term debt
May be used to avoid negative carry in construction
funds, better match long lived projects and their
financing, or as an additional budget management tool
Directly impacts long term debt affordability
Revenue Anticipation Notes (AS 43.08.010)
May borrow money when it becomes necessary in order
to meet appropriations for any fiscal year in
anticipation of the collection of the revenues for
that year
All notes and interest thereon shall be paid from
revenue by the end of the fiscal year next succeeding
the year in which the notes were issued
May be tax exempt if a bona fide revenue deficit
occurs during the fiscal year
Earnings of the Permanent Fund and other available
fund earnings, will need to be included in determining
if a revenue deficit occurs
The State has not used since the late 1960s
10:00:23 AM
Mr. Mitchell addressed slide 13, "Debt Affordability
Analysis":
Annual analysis required by AS 37.07.045 to be
delivered by January 31
Discusses credit ratings, current debt levels, history
and projections
Relies upon debt ratios, limit of 4 percent for
directly paid state debt, and 7 percent when combined
with municipal debt that the state supports
Beginning in FY 2019 UGF revenue increased
significantly due to reclassification of certain
Permanent Fund earnings. Uncertainty about this
revenue in future years warranted reductions of 1
percent to debt ratios.
Identifies currently authorized, but unissued debt
Establishes refinancing parameters
Determines a long term debt capacity at current rating
level
Discusses, but doesn't define a capacity for short
term debt
Does not include State Agency GO or Revenue Bonds, or
SOA Revenue Bonds
10:04:19 AM
Mr. Mitchell pointed to slide 14, "Authorized Bonding
Authority":
?The State had no authorized but unissued general fund
obligations (post GO Series 2020A issuance)
? As of June 30, 2020, the State had debt obligations
secured and paid by the general fund of approximately
$727.3 million
?$624.9 million of general obligation bonds,
?$20.6 million of Certificates of Participation,
and
?$182.6 million of lease revenue bond conduit
issues of political subdivisions.
?The 2020 A general obligation bonds closed on
August 5, 3030 in the amount of $84.56 million to
generate $110.3 million of project funding.
?The 2020 A bonds annual debt service is
approximately $7 million per year.
Co-Chair Stedman wondered whether there had been issuance
of all authorizations.
Mr. Mitchell replied in the affirmative.
Co-Chair Stedman queried any concerns about being timed out
of the IRS rules about usage of the money.
Mr. Mitchell replied that he did not believe so.
Co-Chair Stedman requested that answers be more succinct.
10:05:23 AM
Mr. Mitchell looked at slide 15, "January 2021 Debt
Affordability Analysis." He explained that there was an
estimated capacity for the state at $1 billion with the
caveat the state might be downgraded anyway. He shared that
there was a belief that the state would not be downgraded
to the level without progress on a fiscal plan as a result
of the issuance of up to $1 billion as part of a ten-year
capital program. He pointed out the details of the slide.
Mr. Mitchell pointed to slide 16, "Authorized but Unissued
State Debt":
Currently there is no authorized but unissued direct
State debt (paid from the General Fund):
The final $110,348,242 in authorized GO bond
funding was issued on August 5, 2020. This was
the final tranche of funding for the 2012
Transportation Bond Act. There is no remaining GO
bond issuance authority at this time.
The authorized $300 million Knik Arm Crossing
State supported bond structure was invalidated by
the September 4, 2020 decision of the Alaska
Supreme Court.
The authorized $1 billion Alaska Tax Credit
Certificate Bond Corporation State supported bond
structure was invalidated by the September 4,
2020 decision of the Alaska Supreme Court.
The authorized $1.5 billion Alaska Pension
Obligation Bond Corporation State supported bond
structure was invalidated by the
September 4, 2020 decision of the Alaska Supreme
Court.
While not State debt, the school debt
reimbursement program is not currently
authorized.
Co-Chair Stedman surmised that all of the bond
authorizations were now moot.
Mr. Mitchell replied in the affirmative.
Senator von Imhof wondered whether there should be a
discussion about the Alaska Railroad Bond debt.
Mr. Mitchell replied that he did not believe that had been
invalidated, and stated that the upcoming slides would
address that question.
10:09:54 AM
Mr. Mitchell highlighted slide 18, "State Supported Debt
Structure ATCCBC." He explained that the structure had the
state committing to pay a sub-entity of the state on a
subject-to-appropriation basis.
Mr. Mitchell discussed slide 17, "ATCCBC and Other Subject
to Appropriation Debt":
?The Alaska Tax Credit Certificate Bond Corporation
('ATCCBC') was created to re finance up to $1 billion
of oil and gas tax cred its using a state subject to
appropriation credit pledge bond structure, but with
statutes that also allowed a state moral obligation
pledge even though it wouldn't likely be used.
?On September 4, 2020, the Alaska Supreme Court issued
a decision that disallowed the structure contemplated
for the Alaska Tax Credit Certificate Bond Corporation
and placed additional limitations on when the State
can issue State Supported debt
?The decision reaffirmed the Carr Gottstein Supreme
Court decision allowing for lease purchase of real
property arrangements like certificates of
participation or lease revenue bonds.
? The expected ATCCBC structure involved the ATCCBC
entering a contract with the State of Alaska,
Department of Revenue to provide funds for the
purchase of the discounted credits in exchange for
future payments (subject to appropriation). The funds
provided would be bond proceeds and the future
payments would be equal to ATCCBC's bonds' debt
payments which would be subject to annual
appropriation.
?Due to similarity of structure it is clear that the
decision also rendered the Pension Obligation Bond
Corporation, and the Toll Bridge Revenue Bonds for the
Knik Arm Bridge, illegal
?The inclusion of the moral obligation construct in
the ATCCBC's statutory structure resulted in certain
broad references in the decision which may impact
other bond programs with constructs that while
fundamentally different from the ATCCBC in both public
purpose and bond structure use moral obligation debt.
n September 28, 2020, the State of Alaska Department
of Law filed a Petition for Rehearing with the Supreme
Court in an attempt to obtain clarity on the scope of
the Court's intent in their decision
?The Court has not yet responded to the Petition for
Rehearing
Mr. Mitchell pointed to slide 19, "Moral Obligation
Structure Alaska Municipal Bond Bank." He pointed to the
pertinent information within the slide.
^SAVINGS ACCOUNTS and CASH FLOWS
10:15:33 AM
MIKE BARNHILL, DEPARTMENT OF REVENUE, DEPUTY COMMISSIONER,
JUNEAU (via teleconference), introduced himself.
PAM LEARY, DEPARTMENT OF REVENUE, TREASURY DIRECTOR, JUNEAU
(via teleconference), discussed, "State of Alaska; Update
on the State's Cash Reserve Funds and Discussion of State
Cash Flows." She looked at slide 2, "Agenda":
1. Update on Cash Reserve and Other Funds
2. State Cash Flows
3. Revenue Volatility Management
Ms. Leary pointed to slide 4, "FY22 Days that Alaska could
run on Total Balances (Cash Reserve and Other Funds)." She
stated that the slide showed the number of days that
"Alaska could run" on the total balances without revenue.
Senator Wielechowski wondered whether there was a belief
that AIDEA could be used when there was an exhaustion of
the CBR.
Ms. Leary deferred to Mr. Barnhill.
Mr. Barnhill replied in the affirmative.
Senator Wielechowski asked why AIDEA was not included in
the slide.
Ms. Leary replied that it was not included because the
slide showed funds that could be turned to by the
legislature in "fairly short order." She agreed to update
the slide to include AIDEA funds.
Senator Wilson asked whether the use of those funds would
cripple AIDEA's ability to bond.
Mr. Barnhill responded that the use of AIDEA funds for non-
AIDEA purposes had negatively impacted their bond rating in
the past, so the use of those funds would likely affect
their rating in the future.
Co-Chair Stedman asked whether that explanation had address
Senator Wielechowski's question.
Senator Wielechowski replied that it adequately addressed
his question for the time being.
10:20:16 AM
Ms. Leary addressed slide 5, "Days Each State Could Run on
Total Balances in FY 2019." She felt that the 2020
comparison would look somewhat different from the
representation on the slide. She noted that, even with
large draws, Alaska was second only to Wyoming in terms of
days that the state could run. She noted that the median of
each state was up from 40.4 days in 2018 to 49.7 days in
2019.
Co-Chair Stedman wondered whether of the other states had a
similar endowment to Alaska, relative to the size of the
state such as the ERA.
Ms. Leary replied that Wyoming had a similar type of
sovereign fund. She added that there were other smaller
sovereign endowments that were in some of the other states,
such as Texas and New Mexico.
Senator Wielechowski felt that the 178 days that Alaska
could function figured approximately $11 million a day. He
remarked that it would total $2 billion in assets. He
queried the accuracy of that calculation.
Ms. Leary replied that the amount was based on a survey of
all states. She felt that number was based on the
accessibility of funds in the CBR.
Co-Chair Stedman requested the data of the slide's basis.
Ms. Leary looked at slide 6, "Cash Reserve Comparisons to
Other States":
Although uneven across states, since the Great
Recession, states have increased cash reserve funds
with a median balance of 7.9 percent in 2019 from 4.8
percent in 2008. Enacted FY21 percentages targeted an
even higher median percentage of 8.4 percent prior to
COVID 19.
Ms. Leary highlighted slide 7, "Cash Reserve
Considerations":
Cash reserves range from 2 percent to 20 percent of
General Fund Expenditures and should reflect the risk
volatility of the revenue stream
According to the PEW Trust, the optimal savings target
of a state depends on three factors:
The defined purpose of funds (cash flow, revenue
shortfall, combination)
The volatility of a state's tax revenue
The level of coverage similar to an insurance
policy that the state seeks to provide for its
budget (how likely is a 10 percent vs. a 50
percent revenue decline).
All but eight states cap the balance of their fund.
The cap is typically based on total general fund
revenues (ranging from a cap of 2.5 percent to 15
percent) or total general fund appropriations (ranging
from a cap of 2 percent to 20 percent).
There is a trade off that needs to be considered in
determining the prudent balance of the fund.
State Revenue since POMV implementation has been as
high as $5.3B (2019) and as low as $4.2B (2020)
Co-Chair Stedman felt that the reserve number would be a
focus, so Ms. Leary should take that into consideration.
Ms. Leary looked at slide 8, "Constitutional Budget Reserve
Fund (CBRF) Historical Invested Assets (in billions)":
Data is at fiscal year end of June 30.
In 1990, voters of Alaska adopted an amendment to the
constitution creating the CBRF.
CBRF is used to fund temporary cash flow
expense/revenue mismatches.
CBRF is used to appropriate/cover budget revenue
shortfalls.
Appropriations from the CBRF must be repaid.
Co-Chair Stedman wondered why the Statutory Budget Reserve
(SBR) was not included in the chart.
Ms. Leary replied that the SBR was a part of the general
fund, and was broken out into portions. She stated that the
SBR was managed separately for a short period of time, but
was then moved back into the management of the general
fund.
10:30:20 AM
Co-Chair Stedman requested that the delineation of the SBR
as a subcomponent of the general fund be incorporated into
the slide.
Ms. Leary agreed to provide that information.
Mr. Barnhill shared that the SBR was depicted on slide 14.
Senator von Imhof queried the consequences of not paying
back the CBR.
Co-Chair Stedman requested the timeframe of the
amortization of the debt.
Mr. Barnhill explained that it reflected the constitutional
requirement for repayment of the CBR. He stressed that
there was no time period or interest rate.
Ms. Leary discussed slide 9, "Constitutional Budget Reserve
Fund Fiduciary oversight: Commissioner of Revenue." She
stated that the slide showed some investment statistics on
the CBR.
Ms. Leary addressed slide 10, "Power Cost Equalization
(PCE) Historical Invested Assets (in millions)":
The purpose of the PCE Endowment fund is to provide
for a long term stable financing source that provides
affordable levels of electric utility costs in
otherwise high cost service areas of the state.
5 percent of the monthly average market value of the
fund for the previous 3 fiscal years may be
appropriated. If prior years earnings exceed this
amount, 70 percent (not to exceed $55M) of the
difference can be spent on related identified
programs.
Ms. Leary highlighted slide 11, "Power Cost Equalization
Fund Fiduciary oversight: Commissioner of Revenue." She
noted the 50 percent equity and 40 percent fixed income
target asset allocation. She noted the projected ten-year
return of 5 percent, and the one-year rolling average.
Senator Wilson wondered why the PCE fund had been flat
since 2018. He also asked why the projection had been
reduced from the year prior.
10:35:38 AM
Ms. Leary replied that since 2016 the fund had been
increasing, because of the returns and the growth rate,
which were just slightly above the appropriations. She
shared that the target date returns were developed with the
team with the commissioner's approval. She stated that in
the recent year, there was a slight change in the
allocation and the target of each asset classes.
Co-Chair Stedman remarked that the funds would be detailed
later in the legislative session.
Ms. Leary pointed to slide 12, "Alaska Higher Education
Investment Fund (AHEIF) Historical Invested Assets (in
millions)":
On September 1, 2012, the AHEIF was capitalized with a
$400 million deposit from receipts of the Alaska
Housing Capital Corporation for use in paying Alaska
Performance Scholarship Awards and AlaskAdvantage
Education Grants.
Ms. Leary looked at slide 13, "Alaska Higher Education
Investment Fund Fiduciary oversight: Commissioner of
Revenue." She noted that the fund had a high risk
tolerance.
Co-Chair Stedman queried the definition of "high risk."
Ms. Leary agreed to provide that information, and explained
that there was a range within the definition of "high
risk."
Co-Chair Stedman remarked that there was a significant
allocation difference.
10:40:37 AM
Ms. Leary pointed to slide 14, "General Fund and Other Non-
Segregated Investments (GeFONSI) Historical Invested Assets
(in billions):
GeFONSI includes the General Fund and Other Non
segregated funds invested in a pool environment (GF
proper= $400 million).
GeFONSI II was created in 2018 to target a higher risk
return profile for a subset of funds.
Co-Chair Stedman requested a chart with the SBR included
with the CBR. He remarked that there were different views
in the committee related to those accounts as savings
mechanisms. He noted that in 2012, GeFONSI had $9 billion,
and was now currently at $3.5 billion. He remarked that the
SBR had been liquidated from $2.6 billion to zero. He asked
about the magnitude of decline in GeFONSI.
Ms. Leary replied that there was a combination of factors
that resulted in the difference. She stressed that some of
the funds in GeFONSI had higher balances, and had since
been managed to a lower amount. She stated that there was
not as "strict an eye" in maintaining the money in the
operating account. She stated that the management had since
been more structural to maintain in terms of calling cash
to the operating fund for payment day to day expenses. She
pointed out that the slide included the Higher Education
Fund, so there was approximately $400 million since its
inception. She remarked that the number was actually
currently $2.5 billion.
Co-Chair Stedman wondered where the funds were distributed.
Ms. Leary replied that the funds were spent, and there was
not as rigorous an effort to maintain a lower balance in
the general fund. She agreed to provide a comparison of the
funds.
10:45:27 AM
Co-Chair Stedman remarked that he was concerned about the
"burn rate of cash." He queried the actual burn rate of the
funds.
Senator von Imhof remarked that there was a cost shift
between undesignated to designated general funds (UGF and
DGF). She remarked that there could appear to be an
elimination of programs, but the fund source had a shift.
Co-Chair Stedman stated that work was done on that subject.
Ms. Leary presented slide 15, "General Fund and other non-
segregated investments (GeFONSI I and II) Fiduciary
oversight: Commissioner of Revenue." She noted that the
combined total was $2.5 billion.
Senator von Imhof feared that the Callan projection was too
high when there was a point of the low rate. She did not
believe that there would be a significant return on the
investment.
10:49:50 AM
Ms. Leary pointed to slide 16, "Public School Trust Fund
(PSTF) Historical Invested Assets (in millions)":
The PSTF was established in 1978, replacing the
territorial era public school land grant originally
created by congress in 1915, by a transfer of the
balance from the permanent school trust.
Following passage of HB 213 in 2018, the fund is now
managed as one fund, under a percentage of market
value method (5 percent of the average market value
for the 5 years preceding the last previous fiscal
year).
Ms. Leary highlighted slide 17, "Public School Trust Fund,
Fiduciary oversight: Commissioner of Revenue." She remarked
that the slide showed a slightly higher risk. The target
allocation included a target of equity to fixed income.
Co-Chair Stedman requested a slide that showed the
allocation to the fixed income with the same risk
allocation.
Ms. Leary agreed to provide that information.
Senator von Imhof recalled that there was a bill passed the
previous year about the lottery for the Public School Trust
Fund. She asked if any of the money would go to that fund.
Ms. Leary replied that it was purely the earnings of fund
offsetting the appropriation. She noted that there were
separate funds set aside for the lottery.
Mr. Barnhill added that the state funds were invested by
the DOR commissioner. He remarked that there had been some
advice to add a layer of governance, and he pointed out
that there had been governance applied to those funds since
that request.
Co-Chair Stedman assumed the governance was used for not
only Public Employees' Retirement System (PERS) and Teacher
Retirement System (TRS), but also to assist the DOR
commissioner in other decisions.
Mr. Barnhill replied that the governance would advise the
commissioner with respect to the investment of the state
funds.
Co-Chair Stedman felt the governance would help the
commissioner to make better decisions. He understood that
decisions might not be the most profitable in hindsight,
but the commissioner could show a rationale to the
decision.
Mr. Barnhill agreed.
10:56:01 AM
Ms. Leary addressed slide 18, " Public Employees Retirement
System and Teachers Retirement System (PRS and TRS) Pension
and Health Defined Benefit Plans Historical Invested Assets
(in billions0":
The Alaska Retirement Management Board (ARMB) is a 9
person board that is the fiduciary of the state's
pension and health systems.
The defined benefit plans currently experiences net
outflows from the funds.
The 36 year return Average for PRS/TRS was 8.91
percent.
Ms. Leary pointed to slide 19, "Public Employees Retirement
System and Teachers Retirement System, Fiduciary oversight:
Alaska Retirement Management Board."
Senator Wielechowski requested a similar pie chart for the
AIDEA account.
Co-Chair Stedman agreed, and would acquire that
information.
Mr. Barnhill replied the Treasury Division did not manage
the AIDEA funds, but would reach out to provide that
information.
Co-Chair Stedman stated that the information would be
helpful if it were correlated together in the presentation.
11:00:02 AM
Ms. Leary looked at slide 21, "Cash vs. Accrual balances":
Cash balance is what you have in the bank at a given
point in time.
Accrual balance is what you have earned and what
liabilities have been incurred at a particular point
in time. It is what you should have at a particular
point in time after all expected receipts and
expenditures come in and out.
Treasury fund balances are cash balances, not what is
available to spend.
Ms. Leary discussed slide 22, "SOA Treasury Cash Flow":
Cash Inflows
?Tax Revenues
?Oil and Gas, Excise, Other
?Federal Dollars
?Grants, Medicaid, FHWA, Education, Other
?Earnings Reserve Funds
?Agency Receipts
?Fees, Licenses, Permits, Fines, Other
Cash Outflows
?School Education Payments
?Payroll and Pension Payments
?Vendor Payments
?Medicaid Payments
?External Program Grant Payments
? Debt Service Payments Cash Outflows
Senator Wielechowski recalled testimony about corporate
income tax payments, and queried the source of that money.
Ms. Leary replied that the money would come from the
general fund.
Senator Wielechowski wondered whether that payment required
a legislative appropriation.
Mr. Barnhill replied that it did not require an
appropriation, but was a reversal of the payment to the
general fund.
Ms. Leary highlighted slide 23, "Cash Flow Deficiencies":
Prior to 1985, most unrestricted revenues flowed into
and stayed in the General Fund for expenditure.
Over time, the legislature has established many
subfunds to segregate cash for budgeting purposes,
resulting in less cash available to pay day to day
operating costs.
Expenditures can occur prior to receipt of revenue,
resulting in cash flow timing mismatches:
Federal programs require expenditures before
reimbursement.
i.e. Medicaid, Transportation, etc.
Beginning of year appropriation transfers do not match
incoming revenue.
i.e. State pension payments, transfers to sub
funds
Seasonal Cash Flow needs.
i.e. Summer is the peak season for construction
projects and seasonal workers.
11:06:49 AM
Senator Wielechowski wondered whether the corporations
would be receiving the same net operating loss refunds on
both the state and federal taxes.
Mr. Barnhill replied that they did not have a line of sight
on federal income tax impacts, but agreed to provide
further information.
Senator Wielechowski was not convinced that the payments
did not require legislative appropriation. He did not
believe that it was a simple accounting issue.
Co-Chair Stedman remarked that the issue would be worked
through for clarity.
Senator Wielechowski recalled that the department was aware
of the issue in the previous May, and wondered why no
action had been taken to fix the situation.
Co-Chair Stedman asked that the department address the
timeline of the approach to the issue.
Mr. Barnhill stated that the payment system had not changed
since he had been with the department.
11:10:18 AM
Ms. Leary pointed to slide 24, "Cash Deficiency Memorandum
of Understanding":
Developed in 1994 between DOR, DOA, OMB and LAW.
Updated as needed.
Targets $400m minimum cash threshold in the General
Fund proper.
Outlines procedures for addressing cash flow timing
mismatches:
Develop monthly cash projections.
Monitor daily general fund cash balances.
Perform temporary inter fund borrowing.
Transfer from SBR, CBR and ERA or sub funds.
In the event of revenue shortfall:
Seek legislative action through the Governor to
access additional funds through appropriation
from other Cash Reserve Funds discussed above.
Prioritize disbursements, restrict expenditures.
Senator von Imhof assumed that the update was between the
legislature and DOR. She asked whether the department would
submit a proposal of the updated memorandum of
understanding (MOU).
Ms. Leary replied that the MOU was between the DOR, OMB,
and LAW. She explained that it was updated as needed
according to changes.
Senator von Imhof wondered whether the legislature would be
involved in the process, or whether it was based on a
threshold.
Mr. Barnhill replied that there was an attempt to draw a
clear distinction between cash flow timing mismatches. The
slide showed the expectation of revenue delivery.
Co-Chair Stedman hoped that the committee would have the
information to anticipate the shortfall.
Ms. Leary commented on the MOU. She stated that the job was
to forecast the cashflow, and she recalled a cap on the
amount of borrowing that resulted in the department asking
the legislature to mitigate the determination of which
expenditures would get payment.
Ms. Leary looked at slide 25, "Cash Flow Deficiencies":
Use of budget reserve funds has been the solution of
cash flow timing mismatches and revenue shortfalls.
Appropriations From Reserve funds
The Legislature includes language annually in the
operating budget appropriating budget reserve
funds for revenue shortfalls.
Treasury has relied on this appropriation to
authorize use of budget reserve funds to
address timing cash flow mismatches as well.
The CBRF was fully repaid by FY10.
Borrowing from the CBRF recommenced in FY14.
Per FY19 CAFR $12.6B is owed to CBRF.
11:19:11 AM
Ms. Leary looked at slide 27, "Revenue Volatility has
transitioned and now comes from":
Commodity Volatility
Petroleum revenues are 19 percent of FY22
projected unrestricted general fund revenues.
Uncertainty exists "in year" for FY22.
Will always have in year uncertainty because we
base budget on in year oil collections.
Investment Return Volatility
Investment earnings are 72 percent of FY22
projected unrestricted general fund revenues.
Certainty exists today for FY22 (lagging POMV
formula).
Uncertainty today for FY23 and beyond.
Mr. Barnhill furthered that through previous 2018
legislation, SB 26, the state had dramatically reduced its
revenue volatility. He stated that there was some certainty
for a fiscal year, and he thanked the committee for that
bill.
Ms. Leary pointed to slide 28, "Volatility Management
Techniques":
Access Cash Reserve and Other Funds (CBR and other
fund balances).
Modernize fiscal tools to include lines of credit in
addition to revenue anticipation notes.
Manage timing of Earnings Reserve Account transfers to
the General Fund.
Manage timing of expenditures.
Senator von Imhof stressed that the money supported the
economy, and people depended on that money.
11:24:00 AM
Ms. Leary highlighted slide 29, "Take Aways":
Declining cash reserves will continue to be a concern
if budget deficits continue.
Even if the budget is balanced, and all revenue is
received, cash flow timing mismatches will occur.
Cash flow forecasting is always wrong.
Revenue shortfalls may occur if forecasted assumptions
are wrong.
Higher revenue volatility requires greater cash
reserves until volatility decreases.
Volatility management techniques are available.
11:25:52 AM
Co-Chair Stedman wondered whether a redefining of
structural deficit could be a solution.
Mr. Barnhill stated that, given the structural deficit the
basic tools were new revenues, budget reductions, and
changing the PFD formula.
Co-Chair Stedman recalled that there had been a
presentation that showed future deficits couched as future
revenues. He did not believe that defining it as revenue
would be helpful for DOR to make its payments.
ADJOURNMENT
11:28:07 AM
The meeting was adjourned at 11:28 a.m.