Legislature(2017 - 2018)ADAMS ROOM 519
04/17/2018 09:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB185 | |
| SB105 | |
| SB92 | |
| HB119 | |
| HB409 | |
| SB105 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 224 | TELECONFERENCED | |
| + | SB 185 | TELECONFERENCED | |
| + | HB 119 | TELECONFERENCED | |
| + | HB 409 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | SB 105 | TELECONFERENCED | |
| += | SB 92 | TELECONFERENCED | |
HOUSE BILL NO. 119
"An Act relating to the dividends from the Alaska
Industrial Development and Export Authority; relating
to the meaning of 'mark-to-market fair value,' 'net
income,' 'project or development,' and 'unrestricted
net income' for purposes of the Alaska Industrial
Development and Export Authority; and providing for an
effective date."
1:13:38 PM
GENE THERRIAULT, DEPUTY DIRECTOR, STATEWIDE ENERGY POLICY
DEVELOPMENT, ALASKA ENERGY AUTHORITY, DEPARTMENT OF
COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, explained
that some committee members who had been on the committee
in 2016 may recognize the legislation, given it had passed
the House Finance Committee with 10 "do pass" signatures
and had passed the House floor with 36 "yes" votes (other
members had been excused or absent). He shared that the
bill had not cleared the final hurdle in the Senate Rules
Committee. The legislation before the committee was
identical to the previously considered legislation. He
referred to page 2, lines 2 and 3 of the bill and explained
that when the Alaska Industrial Development and Export
Authority (AIDEA) dividend had been established, the
legislature had specified it wanted the dividend to be set
on the net income in AIDEA's audited financial statement.
The legislature had also realized that some things needed
to be excluded from the number (line 3 of the bill). The
existing statutory language made it clear that although it
was necessary to follow all the accounting rules in order
for AIDEA to receive its audited financial statement, the
legislature got to specify which number it wanted AIDEA to
use in the dividend calculation. Unfortunately, since the
dividend had been established, some new accounting rules
had kicked in that were bringing unnecessary gyrations to
the dividend. He explained that AIDEA would like to back
those out and base the dividend on true net income.
1:16:09 PM
Mr. Therriault provided a PowerPoint presentation titled
"Alaska's Development Finance Authority: HB 119 - Proposed
Language Changes to Modernize AIDEA's Dividend Statute"
(copy on file) beginning with slide 3. He explained the
bill aimed to fix two problems. The first related to mark
to market changes. There were numerous accounting rules
that required following "real transactions," issues that
generate revenue or real expense that impact that revenue.
Another accounting rule related to estimates and
allocations. For example, an asset depreciated over time
and its economic value eroded. The third accounting rule
pertained to mark to market adjustments for assets that had
fluctuation in their valuation. The mark to market
valuations brought the largest amount of volatility to the
AIDEA dividend calculation.
Mr. Therriault turned to slide 4 and addressed current
statutory language reading that AIDEA shall adopt a policy
for payment of a dividend, which was supposed to be set on
net income. Net income meant the change in net position in
the agency's audited financial statements on an annual
basis.
Mr. Therriault turned to slide 5 and addressed the mark to
market valuation issue that needed correction. He provided
a scenario where an asset's valuation fluctuated because of
market changes. He asked members to imagine they owned the
asset where a snapshot of the asset was taken and then to
pretend they sold the asset at a gain or loss at that
amount. Yet, in reality the asset had not been sold. He
explained it was the type of fluctuation AIDEA was
experiencing.
1:18:02 PM
Mr. Therriault moved to slides 7 and 8 showing an Internal
Revenue Service (IRS) 1040 tax form. He detailed that for
an individual the tax form would show income, perhaps a
dividend from a stock portfolio, income from a rental
property, and other. The example on slide 8 showed total
income of $109,000. He elaborated that income tax would be
based on the real $109,000 the individual had made as
income. However, slide 10 showed how the individual's tax
form would be impacted if the individual had to apply the
Governmental Accounting Standards Board (GASB) rules
including GASB 31 that had been in place for a number of
years and other more recent rules. Line 11 pertained to
GASB 31 - the booking of an unrealized gain or loss on
marketable securities. He expounded that GASB 31 had been
in place for the longest.
Mr. Therriault explained that AIDEA held its cash reserves
in marketable securities (e.g. T-bills and other). When the
stock market was booming, the market for T-bills was
suppressed. There had been a booming stock market in the
past couple years; therefore, AIDEA's cash reserves held in
T-bills were not worth as much. He noted that the T-bills
had not been sold and AIDEA had not suffered a loss. The
example showed that if the market was doing poorly and the
market for marketable securities was booming, AIDEA may
have a paper gain from GASB 31 and even though the asset
had not been sold, AIDEA would have to pretend like the
cash had been realized. He explained that it meant taxes
would have to be paid on money that had not really been
made.
Mr. Therriault pointed to line 16a on slide 10 pertaining
to a value adjustment from a 401k account invested in
stocks. He asked members to consider a situation where an
individual had to take a picture of the valuation on the
last calendar day of the year and pay taxes on gains that
had not been realized. He explained that it was the type of
thing GASB 68 was suggesting AIDEA had to do. He relayed
that AIDEA had to follow all the rules to receive its
audited financial statement. Additionally, AIDEA had to
follow GASB 72 and 75 that had kicked in or would kick in
soon. He returned to the personal tax example and explained
that previously the individual had $109,000 in income to
pay taxes on, but if they had to follow all the same GASB
rules and the economy was booming, it would increase the
individual's income up artificially to $169,000 and they
would have to pay taxes on money they did not receive.
1:21:32 PM
Mr. Therriault continued to slide 11 and explained that HB
119 would mean AIDEA would follow all the GASB rules in
order to get its audited financial statements, but it would
enable the agency to back out the paper adjustments and use
its true cash earnings in the dividend calculation. It
would mean the agency would be basing 25 to 50 percent of
its true cash with the state treasury on a yearly basis
instead of an artificially adjusted number.
Mr. Therriault advanced to a table on slide 12 showing
AIDEA's adjusted true net income since it began paying a
dividend [in 1991]. He pointed out that cash available to
pay a dividend fluctuated depending on the level of
activity AIDEA had. He pointed to a gold line on a table on
slide 13 showing that GASB 31 artificially spiked or
suppressed net income year-to-year, which brought
volatility to the AIDEA dividend calculation. He discussed
that three more GASB rules either had kicked in or would
kick in soon. The agency feared that if the rules were all
driven by the same dynamics in the economy, they would
start stacking up, meaning the swings would become more
pronounced. He continued it may be that from time to time
they offset each other - one may be artificially positive
and one may be artificially negative, but depending on what
was driving things (e.g. evaluation of real estate,
appreciation of stocks, and marketable securities) if they
were all in the same direction they could bring some
substantial swings to the AIDEA dividend calculation.
1:23:53 PM
Mr. Therriault addressed the second problem the bill would
address related to the dividend penalty, which happened
infrequently (slide 15). He referenced existing language
specifying that AIDEA was supposed to exclude certain
things. He explained that when the dividend had first been
created, AIDEA informed members of the legislature that if
it was supposed to pay 25 to 50 percent of its yearly net
income back to the state as a dividend on a yearly basis
and if the legislature gave an appropriation to work on a
specific project, the money was brought onto the AIDEA
books by showing an increase in the income. He continued
that if the language had not been adjusted at the time and
the legislature gave AIDEA $1,000 for a specific project,
at the end of the year AIDEA would have to write the
legislature a check back for half of the money. The
legislature at the time had determined the situation should
be avoided. The legislature had specified if AIDEA received
money for a specific project from the state General Fund by
appropriation or a federal source, the agency was directed
to disregard the money as positive debt to net income when
making its dividend calculation.
Mr. Therriault explained a scenario the legislature had not
anticipated. He provided a hypothetical scenario where the
legislature gave AIDEA $1 million to explore a project
including geotechnical and economic work, and a permitting
process. He elaborated that AIDEA turned some of the
dollars into work product. He continued that if the project
did not move forward, AIDEA would have to write the project
off its books. In order to write the project off, AIDEA
took the expenditures as a deduction to net income.
Previously, the legislature specified that if AIDEA
received money from an outside source, the agency was to
disregard it on the upside. Under the proposed legislation
if AIDEA ever had to write money off because a project was
not going forward, they did not want to artificially
suppress the dividend in the year the write-off was taken.
He stated that the write-offs happened infrequently, but
when they did, they artificially pulled the dividend down.
Mr. Therriault elaborated that the previous year when the
legislation had been proposed, AIDEA had advised the
legislature that because of a booming stock market, it
appeared there would be a paper loss in marketable
securities. He explained that the AIDEA dividend had been
suppressed by about $6.5 million in 2017 because AIDEA did
not have the ability to make mark to market adjustments.
The agency believed it should be sharing with the state
treasury out of its true cash on hand; AIDEA wanted to be
able to back out the paper adjustments and it would follow
all the rules to get its appropriately audited financial
statement, but it wanted to remove the unnecessary
volatility out of the dividend calculation.
1:27:25 PM
Co-Chair Foster referred to the example showing an
individual's 1040 individual income tax. He wondered why
GASB treated companies like AIDEA differently.
Mr. Therriault responded that GASB rules applied to all
corporations. After going through the financial meltdown
Congress and the governing board for accountants wanted to
make sure that if someone was going to invest in a
corporation, they did not want the corporation to be able
to hide liabilities or assets. He expounded that AIDEA
would continue to disclose all the information if the bill
passed. He explained the bill recognized that some of the
items were merely paper adjustments - an asset had not been
sold and AIDEA had not suffered a loss or gain; therefore,
AIDEA should not pay the dividend on money it did not earn
or suffer a loss on a loss that did not take place. For
corporations, particularly corporations where citizens
could invest, the accounting boards wanted to ensure
substantial transparency in the audited financial
statements.
1:29:09 PM
JOHN SPRINGSTEEN, ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT
AUTHORITY, Department of Commerce, Community and Economic
Development (via teleconference), clarified that for
publicly traded corporations regulated by the Securities
Exchange Commission and other related entities there was an
equivalent set of accounting rules set by the Financial
Accounting Standards Board.
Co-Chair Foster surmised the primary reason for the GASB
rules was to increase transparency. He explained typically
a person used the 1040 IRS form to pay their taxes. He
noted that the example included an unrealized gain of
$25,000, but it did not mean the individual had to pay
taxes on the amount. He believed the information on the
form was not for tax purposes, but merely helping to
illustrate the situation AIDEA was facing. He surmised the
$25,000 was shown on the slide because AIDEA was trying to
increase transparency and let investors know it had
unrealized gains and losses.
Mr. Therriault responded affirmatively. The example was
meant to illustrate that if a person had to include the
gain in their tax calculation they would pay the federal
government a larger check. Comparatively, when AIDEA had to
book the gain it went into the dividend calculation; it did
not increase AIDEA's taxes, but it increased the dividend
AIDEA paid on money it did not actually make.
Co-Chair Foster stated his understanding that the GASB
requirement was for auditing and financial purposes, not
tax payment purposes. He believed the goal of the bill was
to fix the system to ensure an accurate dividend was paid,
which was not based on artificial paper.
Mr. Therriault agreed and explained the goal was for AIDEA
to pay the dividend on its true net income.
Co-Chair Foster OPENED and CLOSED public testimony.
1:32:36 PM
AT EASE
1:32:56 PM
RECONVENED
Co-Chair Foster indicated there may be some amendments to
the bill. He asked that amendments be submitted by
Wednesday, April 18, 2018 at 5:00 p.m.
HB 119 was HEARD and HELD in committee for further
consideration.
1:33:55 PM
AT EASE
1:36:42 PM
RECONVENED