Legislature(2017 - 2018)BARNES 124
03/20/2017 03:15 PM House LABOR & COMMERCE
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| Audio | Topic |
|---|---|
| Start | |
| HJR14 | |
| HB157 | |
| HB119 | |
| HB79 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 79 | TELECONFERENCED | |
| + | HJR 14 | TELECONFERENCED | |
| + | HB 157 | TELECONFERENCED | |
| + | HB 119 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 119-AIDEA:DIVIDEND TO STATE;INCOME;VALUATION
3:54:07 PM
CHAIR KITO announced that the next order of business would be
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."
3:54:26 PM
The committee took an at-ease from 3:54 p.m. to 3:55 p.m.
3:55:51 PM
GENE THERRIAULT, Alaska Industrial Development and Export
Authority (AIDEA), advised that the PowerPoint presentation
titled, "Alaska's Development Finance Authority" discusses
problems corrected by this legislation in the calculation of the
Alaska Industrial Development and Export Authority (AIDEA)
dividend. He turned to slide 2, and explained that AIDEA is a
completely owned entity of the State of Alaska that helps with
economic investment in the state. It was capitalized in the
1980s with approximately $350 million worth of money, and AIDEA
has since paid back approximately $392 million to the state
treasury, he said.
3:57:21 PM
MR. THERRIAULT turned to slide 3, and explained that HB 119
would update statutes dictating how the dividend is calculated,
or the number taken into the dividend calculation to determine
the size of the check written to the state's general fund each
year.
MR. THERRIAULT turned to slide 4, and noted that this slide
references the calculation of the dividend, and AIDEA wants the
dividend to be based upon real transactions that either provides
or deducts a dollar from the AIDEA treasury. Also, he
explained, depreciation on assets is taken into account and
AIDEA would like to continue having those come into account
(coughing) taking into the dividend. Except, he noted, new
issues are being triggered by federal accounting rules which
cause these "mark-to-market adjustments" which, he described,
are paper adjustments that must be done in order to get the
audited financial statement. Alaska Industrial Development and
Export Authority (AIDEA), he said, will still do all of those
things in order to receive its audited financial statement, but
the legislators "get to then tell AIDEA" which of those papers
adjustments it backs out to get back to pure cash and then put
that number into the dividend calculation.
3:58:48 PM
MR. THERRIAULT turned to slide 5, and advised that the slide is
a summation of the existing dividend language. AIDEA is listed
on the second block of text, "you are supposed to take" a number
into the dividend calculation and share 25 percent to 50 percent
of the net income with the state general fund on a yearly basis.
The difficulty is, he explained, in that last block of text the
definition of net income refers to the net income as shown in
the audited financial statement under general accepted
accounting principles. He pointed out that, that is now the
area where the uncertainty comes into the calculation due to a
number of paper adjustments that must be made in order to get
that audited financial statement.
MR. THERRIAULT turned to slide 6-7, and offered that the first
problem AIDEA is trying to correct is called the "market value
adjustments." Under the "Gap Rules," a snapshot must be taken
and "book what your market value is on certain items that are in
your portfolio." When those paper adjustments are made it has
an impact on the calculation of the AIDEA dividend. Sometimes
it over-inflates the dividend and suggests that AIDEA should pay
a larger dividend on cash it did not actually make, and
sometimes it under reports net income and suggests AIDEA should
pay a lower dividend than the cash it actually has to make that
calculation ensure that money. He reiterated that AIDEA is
trying to clean up the statutes so there is clear direction to
back out those paper adjustments and get back to cash on hand
before it calculates the dividend. He explained that slide 7
depicts a snapshot of the front sheet from a personal income
tax, and for instance, the person has $100,000 of real wages, an
investment account, rental property, and a 401K, which
calculates to $109,000. The person would write a check to the
federal government for a percentage of that real cash income
that person achieved within the year.
4:01:45 PM
MR. THERRIAULT turned to slides 9-10, and said, however, if that
person had to follow all of the new Governmental Accounting
Standards Board (GASB) rules as AIDEA must in order to get its
audited financial statement, the person would have to "book
these following adjustments." He turned to slide 10, line 11,
"GASB 31" and explained the rule has been in place for some time
which causes AIDEA to basically book at the end of the fiscal
year, take a snapshot of securities it has within its overall
investment portfolio, and if the securities have appreciated
even though the enterprise has not sold them and captured that
cash, it has to book that increase in estimated value as if in
fact it achieved the cash and had sold those securities at the
end of the fiscal year. He said that line 11 suggests that if a
person had a portfolio of $250,000 and the market is up by 10
percent, that would cause a person to book an extra $25,000 of
income even though they did not sell those securities and did
not really achieve that income.
4:02:50 PM
MR. THERRIAULT referred to slide 10, line 16, "GASB rule 68" and
advised that is an adjustment for retirement or 401K. In the
event a person has investments in a 401K and the market is up,
even though the person had not sold those investments and
actually captured that, the person would book that as if it were
true income. The analogy for the state is "every year AIDEA, as
a state enterprise, has an estimation of their share of the
unfunded obligation for retirement." The enterprise then pays a
portion of money for their share, but it generally is less than
that snapshot of their share of the unfunded obligation for the
state. He advised that AIDEA would like to book those things
that actually are an increase or decrement to true income, but
back out the paper adjustments so it does not artificially over-
inflate or under-inflate the number taken into the dividend
calculation.
MR. THERRIAULT referred to slide 10, line 20a, "GASB rule 75,"
and advised that it is an adjustment for post-employment
benefits, and for the state it would be an estimation of future
health care benefits owed for state employees. For the
individual, it would cause them to actually estimate the value
of their medical coverage in the future and actually capture
that as if it were cash the person could count on right on, and
actually put it on their tax form.
4:04:41 PM
MR. THERRIAULT turned to slide 11, and said that basically,
AIDEA is asking with the passage of this legislation the paper
adjustments ...
4:04:54 PM
REPRESENTATIVE BIRCH referred to slide 10, and opined that the
"mark to market" in the banking industry was when the market was
going down, not up. Basically, he said, in the event a person
has major losses that are not yet realized and have an
obligation, the person may be in a position to make a payment,
but might not want to make a payment because they need to offset
those losses at some point.
MR. THERRIAULT answered that these adjustments are both on the
upside and downside, and the soon to be discussed slides will
show that the swings have been on both the upside of true net
income and to the downside. Alaska Industrial Development and
Export Authority (AIDEA) is trying to back them out on both
sides, get back to true net income, and then take that number
into the dividend calculation.
MR. THERRIAULT turned to slide 11, and explained that with
regard to the "fixed to the mark-to-market adjustments," AIDEA
would like to back out those paper adjustments, get back to the
true $109,000 of real income this individual made, and that is
what they would write their check to the United States
government, or AIDEA would write its check to the state general
fund treasury to share a portion of the true net income it made
in a calendar year.
4:06:39 PM
MR. THERRIAULT turned to slides 12-13, and explained that the
graph on slide 12 is AIDEA's net income over the years and it
moves up and down depending upon the economy and AIDEA's
investments. There is some volatility in the actual cash AIDEA
takes into the dividend calculation. Except, he said, slide 13
has graphed "GASB rule 31," which has been in place for a number
of years, against the true net income. He referred to the
gold/yellow line and said it has periodically spiked the net
income up in some years and has depressed it artificially down
in other years. Early on, he pointed out, the ups and downs
were not as pronounced, but in the most recent years the "zigs
and zags" up above and below the (coughing) line are getting a
bit more pronounced. He reiterated that AIDEA would like to
back those paper adjustments out, get to the green line, and pay
the dividend on that amount.
4:07:45 PM
MR. THERRIAULT turned to slide 14-15, and advised that the
second problem is the "dividend penalty" which results in times
when AIDEA receives money to investigate a project from an
outside source and invests that money when looking at a project.
Although, periodically, AIDEA may determines that a project
would not go forward, and on those occasions, the money from an
outside source, not from within AIDEA's investment portfolio,
must be written off. On those occasions, it would be taken as a
deduction against net income in that particular year. In the
event AIDEA had to show that in the dividend calculation, it
would artificially suppress the dividend in that year, and
Alaska Industrial Development and Export Authority (AIDEA)
believes it is not fair to the state treasury and; therefore,
would like to also back out those periodic, infrequent,
adjustments. He reiterated that problem 2 is a source of
outside money being written off, and if in that year AIDEA was
going to pay a dividend of 50 percent of its net income, that
means it is taking away fifty cents of a dollar that would have
been shared with the state treasury, thereby, making it a
dividend penalty. Previously, he noted, when AIDEA started
getting money from outside sources to investigate projects, the
legislature advised "as that money comes into AIDEA and gets
shown as an increase in net income to bring the money on the
books, that AIDEA was to ignore that money coming onto the books
because if it didn't, it would artificially spike net income in
that year, and then when we got to the end of year we would be
trying to then share back a 50 percent of the money that was
brought to us from an outside entity." He related that the
legislature previously said, "No, that's not what we intend."
If the state legislature gives AIDEA $1 million for a project,
it does not expect AIDEA to share one-half of that money back
with the state at the end of the year. The legislature gave the
money to AIDEA for a specific project, so AIDEA should bring it
onto the books, and shouldn't artificially inflate income in the
year that you bring it onto the books.
MR. THERRIAULT stated that the legislature did not anticipate
periodically having investigated a project. Then AIDEA might
have turned a portion of that $1 million into an asset, and now
it is carrying that work product on the books. In the event the
project did not go forward, ultimately, AIDEA must write that
asset off the books. In the event AIDEA did not also have the
right to exclude it when it comes off the books, the state would
pay a penalty for having investigated that project.
4:10:55 PM
MR. THERRIAULT turned to slide 16, and explained that the slide
takes the previous "mark-to-market adjustment" graph and added
on the dividend penalty. The numbers AIDEA used on slide 16, as
an example, are the funds given to AIDEA to investigate the
Amber Road. That project is currently going forward, and AIDEA
was given approximately $9.3 million to investigate the Amber
Road project. In the event AIDEA invested all of that money
doing work, such as an environment impact statement (EIS),
applications for permits, and turned that money all into assets,
except that ultimately the project did not go forward, AIDEA
would be carrying $9.3 million worth of investment on its books
in assets and at some point, would have to write that value off
of its books. In the event this all happened in one year and
AIDEA was anticipating (coughing) 50 percent of its net income
to the state treasury, that deduction of the $9.3 million would
artificially suppress AIDEA's dividend in that particular year
by $407 million. He advised that AIDEA was previously told that
when it receives money from an outside source to investigate a
project, AIDEA should disregard it and not over-inflate the
dividend in that year. The Alaska Industrial Development and
Export Authority (AIDEA) is basically asking that periodically,
if a dollar from such a source is ever written off the books
that AIDEA does not artificially suppress the AIDEA dividend in
that year.
4:13:10 PM
MR. THERRIAULT turned to slides 17-18, and reiterated that those
are the two issues AIDEA is trying to correct with this
legislation as it wants to remove those mark-to-market valuation
paper adjustments. Alaska Industrial Development and Export
Authority (AIDEA) will continue to "do all of those things" to
get its audited financial statement, but the legislature "gets
to tell AIDEA" what number to take into the dividend
calculation. Due to the dividend penalty, AIDEA is trying to
"levelize" the two sides of a dollar coming from an outside
source, wherein the money is eventually written off, and to not
artificially suppress the dividend in those years.
4:14:04 PM
REPRESENTATIVE KNOPP offered that he understands the intent of
this legislation, but Mr. Therriault was asking the legislature
to exempt it from the GASB rules, which makes it a policy call.
He related that his discomfort is not complying, because every
municipality in the state is complying and following the
standards.
MR. THERRIAULT responded that AIDEA would continue to follow all
of the GASB rules to receive its audited financial statement,
except there are these rules that push the net income number
around. He asked whether the committee directs AIDEA to take
the number incorporating all of those artificial ups and downs
into the dividend calculation, or whether it directs AIDEA to
back out the paper adjustments and take the true net income
number into the dividend calculation before it calculates the
check to the state treasury.
CHAIR KITO opened public testimony on HB 119, and hearing no one
that wanted to testify, left public testimony open.
4:16:46 PM
MR. THERRIAULT referred to page 2 of the color-coded copy of HB
119, and explained it is where the adjustment to the definition
on net income takes place. In response to Representative
Knopp's question, he referred to page 2, line 3, the red box
around the word "excluding," and explained that word is already
in the statutory definition. He said he believes that
highlights that previous policymakers realized there were some
things that should be backed out of the income number before
calculating the dividend. However, he noted, the last time the
adjustment was made, some of these new federal rules were not
anticipated as to how they would push around the adjusted
number. Both in the definition of net income - top portion of
page 2, and unrestricted net income - bottom of page 2, the word
"excluding" already exists in the statute.
MR. THERRIAULT explained that at the beginning page 2, line 6,
the added blue language makes adjustments for sources of non-
AIDEA revolving loan funds, and in the event those monies are
ever written off there will not be a dividend penalty. He
explained, that is where that problem is inserted into the
exclusions.
MR. THERRIAULT noted that the pink language is the mark-to-
market fair market valuation based accounting entries issues.
In the event there are unsold marketable securities and the
market is up, suggesting a paper gain, AIDEA asks to exclude
those paper gains or losses prior to beginning the dividend
calculation. He referred to the green highlighted language, and
explained they are the items adjusted for future retirement
obligations paper adjustments.
[HB 119 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HJR014 Supporting Documents Index 3.17.17.pdf |
HL&C 3/20/2017 3:15:00 PM |
HJR 14 |
| HJR014 Supporting Documents-Support Letters 3.17.17.pdf |
HL&C 3/20/2017 3:15:00 PM |
HJR 14 |
| HJR014 Supporting Documents-Universal Service Disbursements 2015 3.20.17.pdf |
HL&C 3/20/2017 3:15:00 PM |
HJR 14 |
| HJR014 Supporting Documents-Universal Services Fact Sheet 3.17.17.pdf |
HL&C 3/20/2017 3:15:00 PM |
HJR 14 |