SENATE BILL NO. 97 "An Act relating to pension obligation bonds." 9:06:35 AM Co-Chair MacKinnon noted that the bill had been heard previously. She CLOSED public testimony. Senator von Imhof MOVED to ADOPT Amendment 1, 30-LS0486\D.1 (Wallace, 3/30/17) (copy on file): Page 2, line 3, following "Committee": Insert "or obtaining legislative approval by law" Page 2, lines 15 - 18: Delete "shall again review the proposal and, if the subsidiary corporation decides to issue the bonds, the subsidiary corporation shall provide the Legislative Budget and Audit Committee with a statement of the subsidiary corporation's reasons for doing so before issuance under this section" Insert "may not issue bonds without first obtaining legislative approval by law" Page 2, line 25, following "Committee": Insert "or obtaining legislative approval by law" 13 Page 3, lines 8 - 11: Delete "shall again review the proposal and, if the committee decides to issue and sell the bonds, the committee shall provide the Legislative Budget and Audit Committee with a statement of the committee's reasons for doing so before issuance under this section" Insert "may not issue bonds without first obtaining legislative approval by law" Page 3, line 24, following "Committee": Insert "or obtaining legislative approval by law" Page 4, lines 6 - 9: Delete "shall again review the proposal and, if the corporation decides to issue and sell the bonds, the corporation shall provide the Legislative Budget and Audit Committee with a statement of the corporation's reasons for doing so before issuance under this section" Insert "may not issue bonds without first obtaining legislative approval by law" Page 5, line 7, following "Committee": Insert "or obtaining legislative approval by law" Page 5, line 23, following "Committee": Insert "or obtaining legislative approval by law" Page 6, lines 9 - 13: Delete "shall again review the proposal and, if the subsidiary corporation decides to issue the bonds, the subsidiary corporation shall provide the Legislative Budget and Audit Committee with a statement of the subsidiary corporation's reasons for doing so before issuance under this section" Insert "may not issue bonds without first obtaining legislative approval by law" Page 6, line 23, following "Committee": Insert "or obtaining legislative approval by law" 21 Page 7, line 21, following "Committee": Insert "or obtaining legislative approval by law" 24 Page 7, line 31, through page 8, line 3: Delete "shall again review the proposal and, if the bond bank authority decides to issue the bonds, the bond bank authority shall provide the Legislative Budget and Audit Committee with a statement of the bond bank authority's reasons for doing so before issuance under this section" Insert "may not issue bonds without first obtaining legislative approval by law" Co-Chair MacKinnon OBJECTED for discussion. 9:07:20 AM AT EASE 9:07:49 AM RECONVENED Senator von Imhof explained that the purpose of the amendment was to provide oversight by the legislature prior to the issuance of the bonds. The amendment provided a last course of action - a stop gap measure. Generally, when the administration brought forward a pension obligation bond issuance, it was presented to the Legislative Budget and Audit Committee (LB&A). If the committee did not approve, it could request additional information and could write a letter, which was public record. She detailed that typically, the public document triggered a market reaction causing rates to rise to cover the risk associated, making the arbitrage ineffective. Under normal circumstances it meant the administration would not move forward with the deal and would not issue the bonds because the interest rate spread would close. Senator von Imhof elaborated that if the administration decided to continue forward against the recommendation of LB&A or if the market did not respond, the legislature would have a fallback option to meet as an entire body and vote on the proposal. She continued that if the issue occurred during the interim it would trigger a special session, which was costly and problematic. Senator Micciche wanted the committee to understand that existing law did not require the governor to go to LB&A to move forward with a GO [general obligation] bond. The bill would change that process. He explained that the bill would reduce the $5 billion authority in half to $2.5 billion. He stated that he would normally support the amendment, but he was concerned there was a good chance it would prevent the legislation from moving forward. 9:10:27 AM Senator Dunleavy was supportive of the amendment. He stated that his concerns were on the record in past discussions. He continued that GO bonds had to go to a vote of the people. He remarked that it was a large sum of money and he appreciated efforts to whittle it down and box it in a bit. He thought legislators should all be concerned about the state's debt load. He reasoned that the amendment provided another check and left the door open if legislators all agreed they needed to move forward on something. He believed the amendment would require the administration to have a conversation with the legislature to determine where the representatives of the public were on a future bond. Senator Olson asked if the amendment allowed another avenue to get approval for a bond to go through. He surmised that if LB&A was not there, the legislature could have its own hearings and approve the bonds. Senator von Imhof provided a scenario where LB&A wrote a public letter [that disagreed with a bond issuance proposal by the administration] and it impacted the markets. The amendment would enable the legislature to meet as a whole and draft a bill to stop the issuance of the bond. Senator Olson asked if the legislature could approve moving forward with the bond. Senator von Imhof replied in the affirmative. However, she assumed that if LB&A approved the bond there would be no need for the entire legislature to meet on the issue, unless the majority disagreed with LB&A. Senator Olson noted it had happened in the past. He supported the amendment. 9:12:38 AM Co-Chair MacKinnon MAINTAINED her OBJECTION. She explained that all of the options provided by the amendment were currently open to the legislature. The amendment was a compromise between a $5 billion potential liability that had already been provided to the governor. The issue was about power distribution - she believed supporters of the amendment would like the legislature to regain that power. She believed there was a greater risk and that the legislature already had that power. She reasoned that committee members understood that the legislature could call itself into special session any time to take up legislation to approve or disapprove of anything that happened within state government. The bill would reduce the administration's ability to go out for a $5 billion bond issuance to $2.5 billion. The amendment took away authority that the governor would have to agree to. She believed half of the authority was reasonable. She recalled the governor's proposal the previous fall had been $2.1 billion to $2.3 billion. She stated that the legislation was a balance. There were members in both bodies that believed the option should be eliminated. Co-Chair MacKinnon continued that if the bill eliminated the funding entirely the legislature could send it to the governor's desk. She communicated that she was not opposed to the discussion. She pointed to the risk associated with arbitrage. She had heard opposition to the proposal from constituents during the administration's last cycle. She reiterated that the bill represented a balance, which she believed was a step in the right direction. She requested a withdrawal of the amendment. 9:14:58 AM Senator Micciche reiterated his earlier comments that he would strongly support the amendment if he believed the bill would pass with it included. He thought giving the governor the authority to move forward with $5 billion in pension obligation bonds had been a mistake. He recounted that the previous summer the governor had a team dispersed around the world, actively setting up for a bond sale. In response, the Senate Finance Committee had written a letter to the governor and he appreciated that the administration had pulled back and had not gone through with the bond sale. Senator Micciche explained that the bill would cut the governor's authority in half [to $2.5 billion], which would protect the state by $2.5 billion in potential exposure for a pension obligation bond that may or may not be under water in the future. The bill would also require a bond proposal to go to LB&A, which had not been the case in the past. He believed the bill was a balance and had a high probability of passing, whereas eliminating the [administration's] authority had a higher probability of being vetoed [by the governor]. He supported the concept of the amendment but believed it would reduce the chance the bill would pass. He clarified that without formal intervention the committee had been able to turn back the bond issuance the past summer. 9:17:01 AM Co-Chair MacKinnon acknowledged that there were many members of the legislature that had been uncomfortable with the administration moving forward [with a bond issuance]. She had a conversation with the governor and the Department of Revenue (DOR). She believed if pension obligation bonds had been passed in 2007, according to some people, the state could potentially have had billions more dollars in the system to help buy down the pension obligation liability. It had been noted in the current session that if the administration would have advanced forward with bonds under current market conditions, for the short period of time, there would have been additional money to help with the cash flow of the unfunded liability. However, pension obligation bonds were a debt against the state for longer periods of time than experienced thus far. She noted they had seen a positive for ten years and one year. Co-Chair MacKinnon detailed that Deven Mitchell [Executive Director, Alaska Municipal Bond Bank Authority, Department of Revenue] had communicated that the administration had brought forward a much more conservative pension obligation bond than other cities that had experienced negative arbitrage over a bond period. She explained that under the administration's proposal the state would not realize the benefits during current financial struggles, but later on in the life of the loan. She continued that it had been a much more conservative approach, but Alaskans had still been very uncomfortable. Therefore, the committee had entered into a conversation with the governor and asking them not to proceed. She had been asked to reduce the authority to zero. The bill was a compromise. She had communicated to the governor there were legislators in opposition to pension obligation bonds and the associated risk. The amendment proposed to strike a balance for Alaskans who opposed pension obligation bonds. She relayed the amendment could be offered as a standalone bill. She had proposed a bill she believed would make it through the current legislative process. 9:20:11 AM Senator von Imhof thanked the committee for considering her amendment. She stated that pension obligation bonds were a risky venture and hindsight was always 20/20. She detailed that it was possible to look back and identify market trends that may work; however, over the long-term it was proven to be nonperforming. She believed those who tried to time the market ended up getting burned. She thought that Co-Chair MacKinnon had made a good point that amendment was somewhat redundant because the legislature already had the ability to convene a special session at any time for any purpose. She agreed with Senator Micciche on the desire to see the legislation pass the other body. She supported the bill's stopgap measure requiring proposals to go to LB&A for review. Senator von Imhof WITHDREW Amendment 1. There being NO OBJECTION, it was so ordered. Vice-Chair Bishop was amenable to the $2.5 billion compromise. He remarked that when there was cash in the bank, he supported taking the cash and getting 100 percent value on buying down the debt instead of taking the 50/50 option. He supported the bill. Vice-Chair Bishop MOVED to report SB 97 out of Committee with individual recommendations and the accompanying fiscal note. There being NO OBJECTION, it was so ordered. SB 97 was REPORTED out of committee with a "do pass" recommendation and with one new zero fiscal note from the Department of Revenue. 9:22:38 AM AT EASE 9:24:48 AM RECONVENED