Legislature(2003 - 2004)
05/07/2003 09:01 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 256
"An Act relating to a dividend payment to the state made by
the Alaska Housing Finance Corporation each fiscal year; and
providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated that the House Finance Committee sponsors
this legislation, which "amends and codifies the existing agreement
between the Alaska Housing Finance Corporation (AHFC) and the
Legislature regarding an annual AHFC dividend." He continued that
this legislation would provide for a $103,000,000 dividend while
maintaining AHFC's strong bond rating.
Amendment #1: This amendment changes the fiscal year date from FY
2007 to FY 2008 in Sec. 2, subsection (5)(B) on page 4, line 13 in
HB 256, Version 23-LS0838\I. This language would read as follows.
(B) minus the amount of money from the Alaska Housing
Finance Corporation used during fiscal year 2008 for bond
repayments and other costs related to the bonds issued under
Co-Chair Wilken moved to adopt Amendment #1. He stated that this
amendment addresses a technical change in the bill and is offered
at the request of AHFC.
There being no objection, Amendment #1 was ADOPTED.
DAN FAUSKE CEO and Executive Director, Alaska Housing Finance
Corporation, Department of Revenue spoke in support of the bill. He
reviewed that the AHFC dividend transfer plan was established in
1995 as a means of transferring some of the Corporation's net
profits to the State to support, in particular, State capital
projects. He stated that a major concern addressed in those initial
discussions was that the specified transfer amount not affect the
Corporation's credit ratings. For numerous years, he declared, the
total annual transfer amount has been $103 million, based on a
variety of factors including net income levels.
Mr. Fauske expressed that, in recent years, the reduction in
lending interest rates has resulted in a significant increase in
the Corporation's lending activities as well as "investment
earnings on short-term monies." However, he informed that, while
"the business profile is excellent, the Corporation's net income
has fallen."
Mr. Fauske explained that in 2002, in anticipation of continuing
lower net income levels, AHFC requested that the Legislature
readdress the amount of the AHFC dividend paid to the State. He
informed that the Corporation's FY 03 net income is projected to be
approximately $75.6 million; and therefore, he asserted that a plan
must be developed to enable the Corporation to continue to
contribute the $103 million amount "that the State has grown
accustomed to." Additionally, he stressed that the plan must allow
the Corporation to be sustained at a level that would not adversely
affect its ability to conduct its business. He stressed that the
level must also be acceptable to the financial community and
investors.
Mr. Fauske noted that this legislation would address these concerns
by proposing that "a percentage of net program" be implemented that
would allow a gradual reduction in the amount of dividend being
paid to the State. The proposed plan, he explained, would allow the
total dividend that would be paid to the State for the next three
fiscal years to remain at the current $103 million level and that,
by FY 09, the amount of the dividend would be calculated at a 75-
percent of net income level. He reminded that the final payment on
a $50 million debt service that AHFC assumed on behalf of the State
would be paid off in December of 2006.
Mr. Fauske communicated that this proposal would allow the
Corporation to increase its equity position; would allow dividends
to be paid to the State, which is its parental entity; and would
provide the Corporation with sufficient monies to reinvest in AHFC
programs in order to continue its viability and continue to retain
its healthy and predictable profile with financial entities. He
opined that in consideration of the Corporation's current status,
"this is a good bill." He assured that, as the financial market
progresses, the issue could be revisited.
Senator Taylor asked whether a separate proposal for a five-percent
of market value annual dividend program would provide the stability
and continuity that AHFC would require. Furthermore, he asked
whether a program of this type would be more acceptable to the New
York City Wall Street financial market than this legislation.
JOE DUBLER, Chief Financial Officer and Finance Director, Alaska
Housing Finance Corporation, Department of Revenue stated that the
amount of the FY 04 transfer, based on this bill's language, would
amount to 5.8 percent of the Corporation's total liquidity as of
June 30, 2002. He stated that this bill would allow the Corporation
to implement a payout policy based on net income as opposed to a
payout based on net assets. He noted that this predictable payout
would be acceptable to Wall Street investors and would, therefore,
enable AHFC to continue to fulfill its mission of providing access
to housing for Alaskans. He opined that paying a dividend "based on
percentage of net income is the appropriate approach" for AHFC.
Senator Taylor acknowledged that a dividend based on a percent of
net income would be more appropriate program as, he calculated that
a percent of asset formula "would eventually, significantly erode"
the Corporation's asset base.
SFC 03 # 79, Side B 09:49 AM
Senator Taylor furthered that a dividend program that might erode
the Corporation's asset base would negate the ability of the
Corporation to lend money, which is the basis of the Corporation's
mission.
Mr. Fauske agreed.
Senator Hoffman stated that the proposal specifies that the
dividend to be paid in fiscal years 2007 through 2009 would be 95,
85, and 75 percent of net income, respectfully, based on the "prior
year's income minus debt service." He asked for a recap of the
formula specified for FY 04 through FY 06.
Mr. Dubler clarified that the annual dividend for fiscal years 2004
through 2006 would be $103 million rather than a percentage of net
income.
Senator Hoffman asked how $103 million would equate to a percentage
of net income basis.
Mr. Dubler explained that the annual dividend determination would
be calculated as a percent of the net income of the base fiscal
year, which is the fiscal year ending two years before the end of
the current fiscal year. In response to Senator Hoffman's question,
he calculated that the $103 million dividend in FY 04 would equate
to 147 percent of the FY 02 net income; the FY 05 dividend would be
150 percent of the projected FY 03 net income, and the FY 06
dividend would equate to 147 percent of the projected FY 04 net
income.
Senator Hoffman asked how these dividend levels, which are higher
than 100 percent of net income, would affect the Corporation's bond
ratings with consideration given that, as of FY 07; the dividend
would be determined at a lower percentage of net income rate.
Mr. Fauske qualified that the Corporation has been paying out more
than it has been earning for several years. He asserted that the
dividend program specified in this legislation recognizes that AHFC
is a strong financial institution and that, while the FY 04, FY 05,
and FY 06 dividends would exceed net income, "relief" would be
forthcoming in later years.
Mr. Fauske relayed that "there has always been apprehension" in the
Stock Market that the State would request dividends in excess of
$103 million. He communicated that "the strength" in this
legislation is that it "would place in statute a predictable and
sustainable payout to the State." He communicated that while the
investment market is unpredictable, expectations are that, in
contrast to the current refinancing trend, the next market "cycle"
would allow the Corporation to experience an increase in net
profits due to an increase in conventional loans to first-time home
buyers and an increase in the interest levels earned on
Corporation's investments. He stated that during discussions with
the rating agencies, it is recognized that AHFC must begin making
contributions into its "equity positions" over time.
Mr. Dubler commented that this legislation is based on AHFC's
historical financial projection methodology that takes into
consideration such things as the Corporation's long-term bonds. He
noted that while AHFC's longer-range financial projection mode is
atypical to the normal State financial projection methodology, it
"has worked very well" for the Corporation.
Co-Chair Wilken asked the Corporation to distribute to Committee
members a pro forma document titled "Summary of Projected Amounts
Available for Appropriation" [copy on file] that was developed
during initial discussions on this bill. He stated that this
document would provide Members with projected dividend amounts
based on a percent of net income formula.
Co-Chair Wilken pointed out that other material in the Members'
packet includes a Moody's Investors Service report [copy on file]
dated March 2003 that specifies that, of the 15 states with a
Housing Finance Corporation (HFC), Alaska's program is ranked
number two "in its contribution back to the State." Furthermore, he
noted that the report highlights the concern that states are
demanding higher levels of contribution from their HFCs. He called
to the Committee's attention the fact that AHFC contributes a
"significantly" higher amount per capita than other HFC programs.
Co-Chair Green voiced that the sponsor's statement "implies" that
the AHFC dividend would fund debt service for certain bonds and
capital projects. However, she noted that language in Section 1,
page 1, beginning on line 7, specifies that, "the legislature may
appropriate the dividend for capital projects." She questioned
whether this language should be changed to include the phrase debt
service.
Mr. Dubler responded that debt service is addressed in Section 1,
subsection (2) that reads as follows.
(2) minus the amount of money from the corporation used during
that current fiscal year for bond repayment and other costs
related to the bonds issued under
(A) ch.26, SLA 1996, up to a maximum of $1,000,000;
(B) sec. 10(b), ch. 130, SLA 2000;
(C) sec. 1, ch. 1, SSSLA 2002; and
Co-Chair Green surmised, therefore, that this language provides for
the inclusion of the debt service in the calculation.
Mr. Dubler concurred.
Co-Chair Green noted that separate legislation being entertained by
the Committee contains a different definition of the term "net
income." Therefore, she questioned "the appropriateness" of there
being multiple definitions of this term in State regulations.
Mr. Dubler explained that the difficulty in arriving at a single
definition of the term net income arises from ongoing changes in
the nationally recognized General Accounting Standards. He stated
that programs have been formulated using whatever definition was in
effect at the time. Therefore, he attested that to adjust to one
terminology would be tedious; and therefore, each situation
involving net income is defined accordingly.
Co-Chair Green continued to voice concern that State statutes
incorporate numerous definitions of net income. She asked whether
crafting one definition would be possible.
Mr. Dubler stated that a goal of financial accountants is to
develop one definition. Unfortunately, he stated, the process might
be lengthy due to the multitude of entities and terminologies that
would be affected.
Co-Chair Green voiced frustration at being required to determine
which net income definition is specific to each piece of
legislation being addressed.
Senator Hoffman asked the present AHFC financial rating as well as
what bond rating projections the Corporation expects after FY 04.
Furthermore, he asked what type of housing loans would be expected
based on State population growth forecasts.
Mr. Fauske stated that currently the Corporation has an AA and AA+
rating by two major rating agencies; however, he voiced that were
the ratings determined by statistical analysis, AHFC would be rated
AAA as it is one of the strongest performing HFAs in the nation. He
voiced that the official rating is affected by subjective criteria
based on such things as the State's economy, the State's fiscal
gap, the activity in Prudhoe Bay, and the fishing industry in
Bristol Bay. He credited the Legislature for honoring the intent
language specified in every AHFC appropriation bill, as he stated
that that action has allowed AHFC to maintain its high credit
rating.
Mr. Fauske predicted that were this legislation adopted, AHFC's
credit rating would further improve and that the Corporation would
be able to contribute more to the State without jeopardizing its
ability to carry out its mission or negatively affecting its credit
rating.
Mr. Fauske continued that AHFC tracks the economy closely in order
to effectively anticipate future business opportunities. He
attested that such things as unemployment and demographics changes,
including an aging population, are monitored. He stressed that the
job market is critical to a healthy economy, as jobs are necessary
to attract younger people who might purchase homes and require
loans. He avowed that because AHFC is a strong entity with a good
market share, financial programs such as Fanny Mae and Freddie Mac
and other major lenders are able to operate in the State. He voiced
confidence that the Legislature would adequately address the
State's fiscal situation, as he qualified that a healthy State
fiscal plan is important to the State and to the success of AHFC.
Mr. Fauske stressed that the housing market must be sustained, as
it is a "big player" in the State's economy in that it "occupies 25
percent of the State's domestic product."
Senator Hoffman concluded therefore, that AHFC does not anticipate
a drop in their bond ratings through FY 09.
Mr. Fauske affirmed.
Senator Taylor voiced that this legislation would establish policy
regarding AHFC dividends today and for the future. He allowed that
while the proposed formula could be changed in the future, the
proposal currently "gives an illusion to the market and to the
people of Alaska" that the State "would not get so desperate as to
liquidate an asset" that provides funds to the State. "As a fiscal
conservative," he argued that the legislation should be altered to
eliminate the requirement of a $103 million dividend in FY 04, and
immediately set in motion the proposed percentage of net income
payout as, he declared, that continuing the status quo dividend for
three years would be an invasion of the Corporation's corpus.
Co-Chair Green asked regarding the recurring phrase "unrestricted,
unencumbered money of the corporation" in Sec. 2 subsection (2)(C)
located on page 3, lines 1 3 and Sec. 2, subsection (3) (C) on
page 3, lines 25-27 that reads as follows
(2)(C) minus any appropriation of unrestricted,
unencumbered money of the corporation during fiscal year 2005,
other than an appropriation for the corporation's operating
budget;
(3)(C) minus any appropriation of unrestricted,
unencumbered money of the corporation during fiscal year 2006,
other than an appropriation for the corporation's operating
budget;
Mr. Dubler responded that this language is included "in an attempt
to make an all encompassing reference" to all funds transferred to
the State by the Corporation in order to prevent the Legislature
from classifying some of those funds as non-dividends, and saying
that "they don't count."
Co-Chair Green asked whether this language is a change from the
historical recognition of transferred funds, and she asked whether
it would allow funds to be "manipulated."
Mr. Dubler responded that the concept of this language is to define
which funds being transferred from AHFC to the State should be
recognized as "a dividend."
Senator Taylor ascertained, therefore, that other funds the State
might receive from AHFC would be classified as "operating
expenses."
Mr. Dubler reiterated that the intent of the language is to clarify
which of the funds being transferred to the State would be
considered dividends. He communicated that the bill could be
amended to provide further clarification.
Senator Taylor moved to report the bill from Committee with
individual recommendations and accompanying fiscal note.
There being no objection, SCS HB 256 (FIN) was REPORTED from
Committee with zero fiscal note #1 from the Department of Revenue.
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