Legislature(1999 - 2000)
04/28/2000 09:10 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. 281
"An Act providing for the issuance of general
obligation bonds in the amount of $665,000,000 for the
purposes of paying the cost of design, construction,
and renovation of public elementary and secondary
schools, renovation of state buildings, capital
improvements at the University of Alaska, and capital
improvements to state harbors; and providing for an
effective date."
HOUSE BILL NO. 287
"An Act making and amending capital appropriations and
reappropriations and capitalizing funds; and providing
for an effective date."
Co-Chair Torgerson commented that separating the two
proposed bills would be difficult given the continuity of
the subject matter. He noted that testimony would be
received on both bills at the same time, reiterating that
the issues were closely related. Co-Chair Torgerson
pointed out that legal opinions received from two former
Attorney Generals, Avrum Gross and Charlie Cole, regarding
the use of monies generated from the sale of tobacco, have
indicated that would not be in violation of the dedicated
fund.
REPRESENTATIVE ELDON MULDER agreed that the two issues were
inter-related. He noted that HB 281 was the authorization
for the project and that HB 287 was the request for the
actual appropriation. HB 281 proposes a structure be
created to administer the tobacco securitization acting as
an insurance policy.
Representative Mulder pointed out that the Master
Settlement Agreement (MSA) with Phillip Morris and the
other tobacco companies was driven by consumption of
tobacco. He used an example of three plaintiffs in Florida
who were awarded $5.9 million dollars for actual damages
not including the punitive repercussions. Representative
Mulder stated that those types of cases could force the
price of tobacco to rise and consumption to decline over
time. He believed that the trends could affect the
settlement agreements. For the State of Alaska, that would
mean declining return on the Master Settlement Agreement.
Securitization is based on selling an asset to a third
party, in this case Alaska Housing Finance Corporation
(AHFC) and then in exchange, receive a present day value
for that asset. In turn, bonds would be sold in the market
place based on revenue projections related to the Master
Settlement Agreement. The Bond Council advised the
Legislature that there are a relatively "finite" number of
bonds, which can be sold in that fashion. They could be
volatile. Currently, there exists $14 million dollars
worth of bonds in the market place.
Representative Mulder asserted that the State of Alaska
would be available to experience all of the upside from
such a bond sale. He affirmed that the bonds would be
discounted and were projected to be paid off within a
thirty-year period. Co-Chair Mulder added that if the
resulting revenue stream remains constant, the bonds would
be paid off in a shorter period, possibly twenty years or
less. If that happens, Alaska would receive revenue back.
Co-Chair Mulder informed members that the proposed
mechanism would be an insurance policy to assure that the
revenue stream is maintained as outlined in the Master
Settlement Agreement. He cited that bondholders would
assume risk for a reduced revenue stream.
Co-Chair Mulder referenced a list of proposals from around
the State as outlined in HB 281, including the University
of Alaska-Southeast campus, Pedro Bay School and Norvic
High School. He clarified that there are approximately
$185 million dollars worth of major maintenance projects
related to schools around the State and new construction,
$80 million for University upgrades and new construction
projects, and approximately $36 million dollars related to
ports and harbors, for a total package $350 million
dollars.
Co-Chair Parnell addressed the probable criticism that the
Legislature's approach could expect to receive in taking
the tobacco settlement revenue stream used through the
State's general fund, pulling those funds from the State's
use. He requested that Representative Mulder respond to
that assessment.
Representative Mulder agreed that the Smoking Cessation
Program has been a controversial subject. He noted that
following the Master Settlement Agreement (MSA), the State
did include $1.4 million for tobacco cessation programs.
He noted that as long as the MSA funds have been generated,
the State has established benchmarks for that program. He
referenced language in HB 281, Page 3, which indicates
segregating $1.4 million dollars of the revenue stream from
the funds for deposit into the general fund earmarked for
cessation programs.
Co-Chair Parnell stated that he was more concerned with the
$22 million dollar hole in general fund revenue which would
traditionally be applied to Medicaid for the tobacco
cessation programs. He advised that the Legislature would
be selling the right to that asset and then moving it to
AHFC.
Representative Mulder countered that the bonding system is
based on revenue in and payments out. If the Legislature
chooses this approach, the Master Settlement Agreement
monies would continue to be paid to the State while the
bonds were being paid off, thus, providing present day
cash. Using a General Obligation (GO) bonding mechanism,
it would go into the general fund and the State would then
pay for those Medicaid programs. Using that bonding
method, the current revenue stream would be received and
then making the same payment out.
Co-Chair Parnell pointed out that it would be the same
general fund money.
Senator Wilken pointed out that to date, no state had yet
undertaken bonding. He referred to Page 8, the "Tobacco
Settlement Payment Securitization, March 2000,." [Copy on
File].
Senator Wilken added figures from various lines indicating
the revenue stream for a total amount of $762.5 million
dollars. He then referred to Page 13, the Net Bond
Proceeds column for a total of $268 million dollars. He
inquired if that indicated that the State would be
surrendering their rights to a revenue stream of $762
million.
DANIEL FAUSKE, (Testified via Teleconference), Chief
Executive Officer/Executive Director, Alaska Housing
Finance Corporation (AHFC), Department of Revenue,
Anchorage, explained that the discount rates used are
located in the middle of Page 13, 6.29%, 6.88% and that 5.4
and 5.8 were factored into the spread and out to 2008.
Senator Wilken referenced Table 13, and asked if the State
would normally pay 5.236% interest for the capital bond
projects. He stated that in the proposed case, the cost
would be 6.299%. Essentially, the State will be paying a
1% premium of the cost of the capital given the uncertainty
of the revenue stream. He questioned if that was a valid
assessment.
Mr. Fauske responded that was only partially correct, as
that scenario allows for a shorter maturity on the one side
having the interest rate difference of 5.6% versus a 12.7%
average life on the bonds. He referred to the second line
of the "Sample Bond Issue," chart, which identifies the
more specific Planned Principal Average Life. He noted that
there would be a discount to allow for additional costs
given the nature of the revenue streams related to these
bonds.
Senator Wilken questioned what the actual premium would be
on the payment for the uncertainty of the tobacco revenue
stream to the bondholder.
Mr. Fauske replied it would be approximately 40 basis
points in the current market.
Senator Wilken translated that to ½ percent, plus or minus
10 points.
Mr. Fauske replied that was a fair assessment.
Senator Wilken asked the probability of the $15 billion
dollars being "eaten up".
Representative Mulder replied that there had been testimony
from Solomon, Smith, and Barney regarding that issue.
Under their testimony, advice was provided.
DALE ANDERSON, Staff, Representative Eldon Mulder, pointed
out that within member's packets some of that
correspondence had been included.
Senator Wilken asked if there were other comments on the
possibility of the pool "drying up" without a "rush to
judgement".
STEVE CANTOR, (Testified via Teleconference), Financial
Advisor, Alaska Housing Finance Corporation (AHFC),
Department of Revenue, Anchorage, responded that would be
an issue in moving forward in the "tobacco world". It is
difficult to predict an outcome. Most of the industry
experts believe that the tobacco companies will be able to
honor their obligations regardless of what happens during
litigation.
Senator Wilken asked if Mr. Cantor had a sense if the $15
billion dollars could possibly dry up within the next
twelve months.
Mr. Cantor replied that those were different securities
than what the State or AHFC is accustomed to selling. It
would be a different security and transaction. He stressed
that there is a limited marketplace for that type of
security. It is difficult to predict the marketplace,
however, he noted that there was an advantage to moving
quickly and taking advantage of the current market.
Senator Wilken asked about the corporate structure and how
the tobacco companies would establish subsidiaries and
relinquish their obligation to the MSA.
Mr. Cantor stated that most tobacco companies would be able
to handle their obligation. The manner, in which the
transaction is structured, the revenues to all the parties
to the agreement are on the basis of how many cigarettes
are shipped domestically across the country. As long as
the companies are still producing, they will be liable.
There are various designations of how much each company
will pay. Bond Council has issued extensive opinions as to
what happens when anyone of those manufacturers declares
bankruptcy. By and large, most analysts have agreed that
the where-with-all exists to pay the agreement, and in the
condition of bankruptcy, the agreement remains a vital
obligation.
Senator Wilken voiced concern with the charts-base
payments. He suggested that given the structure of the
MSA, the cost of the flat line could be inflated.
Representative Mulder referenced the document - "Types of
Debt Instruments" which outlines the true cost of doing the
issuance of the programs.
DEVEN MITCHELL, (Testified via Teleconference), Debt
Manager, Treasury Division, Department of Revenue, Seward,
explained that the contemplated structure required to
achieve the target issuance amount which would net $269
million dollars is called "turbo". The way, in which it
works, the nominal debt service schedule, would have a
minimum annual amount, required by the bond and would reach
out forty years. That will provide a projected revenue
stream which would be obligated to extend the funds
received over the nominal debt service up to that
particular project line, and then applying that sum toward
debt retainment. That number would provide additional
security to the bondholders, as they would be more assured
of being repaid. The proposed mechanism would allow the
interest rate to decrease somewhat.
Representative Mulder advised that graph was not accurate.
The graph indicates base payments in paying back the bonds,
while the full structure anticipates receiving the revenues
and applying them against the base payments. He believed
that would provide an advantage in receiving the full
amount of money, however, the issuance would not be based
off that participation.
Co-Chair Torgerson asked Mr. Mitchell if he had seen the
graph provided by J.P. Morgan.
Mr. Mitchell stated he had not. He noted that depending on
to whom one spoke, the response would vary regarding the
revenue stream. There are perimeters within which it lies.
How elastic the smoking demand will be is not yet known.
The base-line structure bond issuance could be more
comparable to the deals which have already come to market
with the City of New York. The Department had checked that
structure early on in the process and decided that it would
provide less security to investors and that it would
ultimately yield a lower issuance amount. That option was
discarded.
Mr. Fauske advised that Mr. Mitchell look at Page 13 of the
handout. He pointed out that under the strategic
contributions, the capital appreciation bond was listed.
Mr. Mitchell interjected what the bond structure had
captured. He pointed out the present value of that
increase was included in the $269 million dollars. He
added that those were bonds in which interest was paid, so
that at maturity, both the principal and accrued interest
would be paid off. He noted that was the structure used
from the income stream ranging from 2008 - 2017.
Senator Wilken explained that he wanted to fully grasp what
was being proposed. He understood that there are three
costs which need considering at this time.
· The first would be the future costs of the
general fund hole which would need filling
during future legislatures.
· The second cost would be that the State
would need to pay a premium for the revenue
flow, established at ½ percent.
· The third cost would be giving up the right
to an increased revenue flow.
Senator Leman asked how the right would be given up for the
increased revenue flow.
Representative Mulder countered that the State would not be
giving up the opportunity to get the increased revenue
stream. If the revenue stream remains the way it currently
is with the MSA, it will become a fully applied structure.
It is anticipated that the bonds will be paid off in an
expedited fashion. He reminded members that all projected
costs are assuming that the State of Alaska will receive
the projected revenue stream. If the State does not
receive that amount, it will then be based on a flat fee.
He advised that was the reason it was a conservative
issuance.
Senator Leman asked if it could become a future obligation.
Representative Mulder stated that it would not.
Senator Leman inquired the differences in the numbers
originally submitted by the Senate.
Representative Mulder emphasized that it will cost more
than anticipated. The current list includes a more
accurate reflection of anticipated costs.
Senator P. Kelly asked the benefit to the State if the
bonds were paid off early.
Representative Mulder replied that the State would get the
MSA funds back.
Senator Wilken questioned the spread which amounts to an
additional payment. He noted that if they were paid back
by the projected date of 2018, the revenue stream shown on
Page 8 would come back to the State of Alaska.
Representative Mulder agreed.
Senator P. Kelly asked the reason to adopt the proposed
plan.
Representative Mulder advised that the graph illustrates
how the State could get the money back. However, on the
other hand, if it does not pay off, then the bondholders
would take the risk. For that insurance policy, the State
pays ½ percent.
Senator P. Kelly mentioned that one of the plans proposed
by the Senate would be to invest the money into a Capital
Budget Reserve (CBR) account so as to produce a revenue
stream. He believed that plan would have similar
advantages to the plan proposed by Representative Mulder.
SCOTT JANKE, (Testified via Teleconference), City Manager,
Seward, noted that he had been listening with interest to
the discussion.
Tape: SFC - 00 #106, Side B 9:57 A.M.
Mr. Janke stated that he was in favor of the revenue bond
from a practical standpoint as a City. In a revenue bond
scenario, the dollars would be available earlier. In the
case of Seward, the identified project would be the East
Harbor expansion and would generate U.S. Army Corp matching
money.
Mr. Fauske indicated that the goal of AHFC was to provide
the best professional service possible. He emphasized that
the proposed legislation was a good idea and a prudent way
for the State to capture revenue that bears some
uncertainty. He mentioned a concern of AHFC is their
ability to have representative projects within the scope of
the overall bond portfolio.
Co-Chair Torgerson asked the price tag associated with that
idea.
Mr. Fauske replied it would amount to about $5 million
dollars, which represents 1% of the overall bonding
package. He stressed that it would be a small price to pay
for AHFC maintaining their own facilities.
Co-Chair Torgerson agreed that appeared fair.
Mr. Cantor recognized that it was a difficult decision for
the Legislature to determine how to spend the tobacco
revenues. Each state is facing the same position across
the country. He commented that the proposed legislation
set forth by Representative Mulder was good for the State.
Mr. Cantor added that AHFC should be the financing entity
to maintain all the projects and requested that AHFC's
capital needs be included in the bill.
Co-Chair Torgerson noted that HB 281 and HB 287 would HELD
in Committee for further consideration.
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