Legislature(2011 - 2012)HOUSE FINANCE 519
02/09/2012 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB283 | |
| HB286 | |
| HB285 | |
| HB307 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 283 | TELECONFERENCED | |
| *+ | HB 285 | TELECONFERENCED | |
| *+ | HB 307 | TELECONFERENCED | |
| *+ | HB 286 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 286
"An Act providing for and relating to the issuance of
general obligation bonds for the purpose of paying the
cost of municipal port projects; and providing for an
effective date."
2:07:47 PM
Co-Chair Stoltze asked for information on the governor's
proposal to use general obligation (G.O.) bonds as a
funding approach.
ANGELA RODELL, DEPUTY COMMISSIONER, TREASURY DIVISION,
DEPARTMENT OF REVENUE, read from a statement:
This bill would authorize the issuance of $350 million
in general obligation debt. General obligation debt is
backed by the full faith, credit and resources of the
State. We currently have approximately $628 million in
general obligation bonds outstanding. The State has
the resources and capacity to take on the proposed
additional debt.
Currently, interest rates are at historic lows. This
has allowed us to take advantage of the market and
reduce our debt service obligations. In January of
2012, we sold $175.56 million of general obligation
refunding bonds (with more than $26 million of the
2012 bonds sold to Alaskans) and used the proceeds to
refund $191.410 million of bonds that had been issued
in 2003. This transaction has an all-in true interest
cost of 1.24% and saved the state $27 million, net
present value.
This transaction demonstrates the attractiveness of
Alaska's general obligation paper and also the current
low cost of borrowing in the tax exempt market. Any
new debt issued will have the debt service structured
to provide a low cost of funds and a level burden on
future state budgets. As we move forward with this
proposed legislation, we would like to work closely
with you to ensure all of the projects meet the
necessary tests for tax exemption and can take
advantage of the low rates.
In November of 2010, Moody's Investors Service raised
the state's general obligation rating to AAA. This was
followed by S&P raising our rating to AAA this past
December. A triple A rating is the highest investment
grade rating achievable and expresses an opinion of
the rating agency as to the ability of the state to
honor its long-term unsecured financial obligations
and contracts. In reviewing our rating, Fitch, Moody's
and S&P will be looking to the final dollar amount
issued and the overall plan of finance in conjunction
with other State issues such as revenues, expenses and
other commitments such as the PERS/TRS unfunded
liability.
We have provided a fiscal note which assumes the
voters would approve $350 million in general
obligation bonds. We are required by federal tax law
to track all funds to final expenditure and to ensure
that all funds are spent within 3 years of the date of
issuance. In order to comply with these requirements,
we assumed the bonds would be issued in three
tranches, giving an opportunity for funds to be spent
before additional debt is incurred. We assumed the
first issuance would come in February 2013, following
the November 2012 election. Debt repayment would begin
in Fiscal Year 2014.
2:11:39 PM
Ms. Rodell continued reading from a statement:
The costs associated with issuing bonds including
underwriting, ratings, legal counsel, financial
advisors, marketing and disclosure services,
administration and printing, for a $350 million bond
program would total approximately $2,965,000 or $8.50
per bond.
Co-Chair Stoltze asked whether there were projections that
showed how different interest rates would impact the FY 14
operating budget and beyond.
Ms. Rodell replied that interest rates were not expected to
rise in the near-term; the department had made a
conservative estimate of 4 percent if an issuance did not
occur until 2014. She elaborated that DOR had raised rates
slightly with the assumption that they would rise somewhat
because there would be two years before it had the full
issuance. The projected interest rate would add
approximately $19 million per year in debt service.
Representative Wilson asked whether investments would make
more than 4 percent. Ms. Rodell replied that DOR expected
the long-term funds would exceed 4 percent. Representative
Wilson asked what the same funds had made the prior year.
Ms. Rodell replied that the DOR Revenue Sources Book
assumed a 3.2 percent rate for general funds going forward
and a 6.85 percent rate for long-term funds.
Representative Gara asked what the Statutory Budget Reserve
(SBR) was currently earning. Ms. Rodell replied that the
SBR was currently earning approximately 3.5 percent.
Representative Gara asked whether the amount was less than
the bonds would cost. Ms. Rodell answered that DOR assumed
a rate of 3.2 percent at present with the assumption that
rates would rise on the bond issuance; it also assumed that
rates would increase on the SBR if borrowing costs
increased to 4 percent.
2:15:23 PM
Representative Gara surmised that the SBR was invested in
short-term issuances and that it could be used more quickly
than Constitutional Budget Reserve (CBR) funds. Ms. Rodell
responded in the affirmative.
Representative Gara discussed that there was currently $16
billion in savings and the state would have no problem
making long-term bond payments in the next several years.
He was concerned about the possibility of increased annual
payments of $19 million ten years out if state revenues
decreased and costs continued to increase. He thought the
state could be more responsible presently and know what it
could afford to spend.
Ms. Rodell replied that there would be no money to invest
for the future if the $350 million was spent at present;
therefore, there would be no funds to fall back on when
revenues were on the decline. Whereas, the state would only
need to come up with $19 million to pay the debt service if
debt had been issued. She stressed that once cash was spent
it was gone.
Representative Gara believed that the state would be facing
a tighter budget 10 years in the future and that the SBR
could be much smaller if it only earned 3 or 4 percent per
year. He opined that DOR's assumption that the SBR would be
the same size in ten years was unlikely. He believed the
state should work to protect future years from long-term
obligation.
Co-Chair Stoltze commented that bonds had an internal
discipline and they had to be inherently fair for Alaskan
voters to approve. He added that the governor could not
"cherry pick" or veto certain sections. He opined that
perhaps spending would even be restrained less than it
would have been through other spending vehicles.
2:18:47 PM
Representative Doogan asked whether the bond issuance cost
would come out of the general fund. Ms. Rodell replied in
the affirmative.
Representative Doogan wondered whether the issuance cost
was the only cost that tax payers were responsible for. Ms.
Rodell answered that outside of the issuance cost, the only
other cost was associated with principle and interest; the
costs were amortized over the life of the debt.
Representative Doogan queried the total cost of existing
bonds. Ms. Rodell replied that there were $628 million in
outstanding principal. She asked for clarification on the
question.
Co-Chair Stoltze clarified that the question related only
to G.O. bonds.
Representative Doogan verified that he was interested in
the current cost of existing G.O. bonds. Ms. Rodell would
follow up with the information.
Representative Doogan noted that the current $350 million
was likely to increase. He asked for verification that if
the state's total indebtedness was $670 million that 50
percent would have been added to the debt total. Ms. Rodell
responded in the affirmative.
2:21:06 PM
Representative Joule wondered how high the state was
willing to go related to a bond package with the
understanding the legislature would have an interest. He
observed that the governor recognized needs of the state
through legislation and that negotiation would occur with
the state's upper tolerance level in mind.
KAREN REHFELD, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET,
OFFICE OF THE GOVERNOR, replied that the governor had
indicated there was room for between $50 and $75 million.
She believed there was also sensitivity to what the voters
felt comfortable approving.
Representative Joule referred to talk about "one-third,
one-third, one-third."
Co-Chair Stoltze pointed to the fiscal note that included a
sale schedule.
2:23:00 PM
Representative Edgmon wondered whether the bond package had
been directed at "shovel ready" projects.
Ms. Rehfeld answered that the projects were in various
stages; some were more shovel ready than others. She
explained that the timing of the bond sales would depend on
where the projects' stood. She pointed out that none of the
projects would be fully funded for specific phases and it
would be important for the projects to be able to reach
completion with the help of other financing options. She
restated that the bonds were not designed to fully fund the
projects.
2:24:19 PM
Co-Chair Thomas believed that community projects partially
funded by bonds would need additional funding in the
future. He wondered why the projects would not be fully
funded with bond money, given his belief that it would be
less expensive than using general funds.
Ms. Rehfeld responded that there were different funding
opportunities for each project and some were working with
the Alaska Industrial Development and Export Authority
(AIDEA).
Co-Chair Stoltze remarked that it was not necessary to get
into detail on specific projects during the meeting. He
thought there were pros and cons to fully funding projects
all at once. He noted the issue would be dealt with as a
policy that was presented in the budget and without it the
construction of the capital budget would be different given
that holes would be created. Ms. Rehfeld agreed and
believed the governor had put the bill forward to work with
the legislature on developing infrastructure along Alaska's
coastline.
Vice-chair Fairclough asked how much bond debt the state
typically had relative to the $627 million debt. She
relayed that the legislature had been working to pay down
debt during her time in office. She asked for a historical
five to ten year perspective. Ms. Rodell replied that the
state had a past history of not issuing bond debt.
Co-Chair Stoltze pointed to bonds used in 2002, 2008, and
2011.
Ms. Rodell continued to reply and explained that there was
$197 million in voter approved authorized unissued debt for
education; before the debt was issued the Department of
Education and Early Development would have to show that it
was prepared to spend the money during the three-year time
frame. The $628 million was more than the state had
historically had on its books, given that the state had a
long period of no G.O. debt issuance.
Co-Chair Stoltze explained that there had been securitized
loans and revenue bonds on the books and that the G.O.
bonds had been present during the past three elections; he
noted his preference for the approach, given its inclusion
of voters.
Vice-chair Fairclough noted that Standard and Poor's (S&P)
had recently upgraded the state's credit rating to AAA. She
pointed to the fiscal note that showed an expected blended
rate of 2.35 percent on the $350 million debt. The CBR was
currently yielding 3.4 percent and the CBR subaccount had a
6.85 percent rate of return. She surmised that there would
be a net gain to Alaskans. She discussed that small
communities may not have the ability to come up with
matching funds that the administration may want. She
wondered how the bond market would look at the state's
fiscal structure of $16 billion per year. She referenced
the decline in production that had been offset by the high
production value.
2:33:11 PM
Ms. Rodell answered that rating agencies would primarily be
concerned about the state's plan to repay debt, but they
would not put a cap on the state's debt issuance. She
communicated that the state had traditionally structured
its debt very conservatively and it worked to limit debt to
20 years or less. The state worked to actively manage and
take advantage of current markets and had been able to
frontload a significant portion of the debt, to keep near-
term debt service constant, and offer relief in FY 22
through FY 24 by over $10 million per year. She believed
agencies would look at all of the state's financial
obligations including the unfunded liability for the Public
Employees' Retirement System (PERS) and Teachers'
Retirement System (TRS). Agencies would also look at steps
Alaska was taking to manage the obligations, to increase
revenues, and to hold budgets back in declining revenue
years. She expounded that Alaska had a good history of
showing fiscal restraint when revenues were not meeting
expectations.
Vice-chair Fairclough discussed the PERS and TRS unfunded
liability. She surmised that the state was able to move
within the current range, maintain its AAA rating with
Moody's and S&P, and go forward carrying debt without too
much of a burden on the current operating budget. Ms.
Rodell agreed.
Co-Chair Stoltze believed the governor would communicate
his views on the appropriate debt cap.
HB 286 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 307-Supplemental_Spreadsheet_1-31-12.pdf |
HFIN 2/9/2012 1:30:00 PM |
HB 307 |
| HB286-DOR-TRS-NEW FN 01-31-12.pdf |
HFIN 2/9/2012 1:30:00 PM |
HB 286 |
| HB 286 Testimony.pdf |
HFIN 2/9/2012 1:30:00 PM |
HB 286 |
| HB 283-Response to HFC Questions Capital Budget letter dated 2.21.2012.pdf |
HFIN 2/9/2012 1:30:00 PM |
HB 283 |