Legislature(2003 - 2004)
05/09/2004 12:10 PM 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
CS FOR HOUSE BILL NO. 422(STA)
"An Act repealing the special subaccount established in the
constitutional budget reserve fund; and providing for an
effective date."
This was the second hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated that this legislation would repeal the
Constitutional Budget Reserve (CBR) subaccount and, thereby, allow
"the entire CBR to be invested in fixed income securities." He
informed the Committee that the Department of Revenue would be
responding to concerns raised during the first hearing on this bill
regarding the investment policy pertinent to the $400 million
subaccount.
TOMAS BOUTIN, Deputy Commissioner, Department of Revenue, reminded
that Committee that, in the year 2000, legislation was adopted that
transferred $400 million from the CBR into a separate subaccount to
be "invested under the assumption that it would not need to be
available for five years or longer."
Mr. Boutin stated that the Department has determined that this
subaccount "is no longer appropriate" in light of the manner in
which the CRB is currently being utilized. He shared that the
subaccount has experienced "a great deal of volatility" and, in
fact, did not obtain its original investment level until December
2003. He declared that "the fundamental investment policy" of the
Department is that the CBR should be in fixed income accounts
rather than being "market timers."
Senator Olson asked the current value of the subaccount and its
anticipated year-end projection.
Mr. Boutin stated that the current balance of the subaccount is
$419 million, and that no projections have been undertaken.
Co-Chair Wilken recalled that this subaccount was established with
the goal of investing for the long-term in order to achieve higher
yields than those realized by the CBR, which, due to the State's
need to be able to access CBR funds to cover State deficits, "was
invested on a somewhat short-term basis that have lower returns."
He also understood that the revenue generated by the subaccount
investments has never achieved the revenue stream level required to
provide bond support.
Mr. Boutin affirmed that this is correct. He also recounted that
the Department had notified the Legislature that the CBR fund could
not be used as security for the issuance of tax-exempt bonds,
according to Internal Revenue Service (IRS) code guidelines for
"replacement proceeds". Therefore, he continued, a yield
restriction is "placed on the entire CBR and any part of it then
pledged as security for tax exempt debt."
Co-Chair Wilken acknowledged that yield restriction parameters
exist.
JAMES ARMSTRONG, Staff to the bill's sponsor, Representative Bill
Williams, noted that the bond support provisions were removed from
the year 2000 legislation before it was adopted.
Co-Chair Wilken acknowledged the clarification.
Senator Hoffman commented that in light of Governor Frank
Murkowski's position that the CBR should maintain a specified
minimum dollar balance, the Legislature could "contemplate"
designating that the minimum balance amount be invested for the
long-term in order to "potentially" obtain higher yields.
Mr. Boutin clarified that the Governor's position is to maintain a
one billion minimum CBR balance. He informed that projections
indicate that this "threshold amount" might be breached in the
spring of 2006. He stated that, "if and when that one billion
dollar account balance is reached," it should be maintained in
liquid investments as traditionally, in addition to the possibility
that a CBR draw might be required in order to balance the State's
budget, a minimum cash flow of $400 million has historically been
required, annually, to fund fire suppression, highway projects, and
other projects that would later be federally reimbursed or funded
later in the year. In addition, he stated that CBR funds might also
be required were crude oil prices, which are a factor in the
State's budgeting process, to plummet. He stated that the CBR
account balance, including the subaccount balance, is currently
$2,074,400,000.
Senator Hoffman asked the rationale of abandoning this subaccount
prior to its long-term five-year maturity date, as he argued, doing
so would not allow proper evaluation of the concept.
Mr. Boutin responded that, contrary to procedures that were in
place when the subaccount was established, the Department does not
currently maintain five-year time horizon projections.
Senator B. Stevens asked whether the current $2 billion cash
balance is an accrued balance or a cash balance.
Mr. Boutin clarified that it is the cash balance.
Senator B. Stevens asked for further information regarding the
accrued balance, or money owed from reimbursement.
Mr. Boutin stated that there are no borrowings against the CBR, as
it has not been used to provide security or debt. However, he
stated that "suspend account" items such as outstanding warrants
from fire suppression efforts and other reimbursable funds are not
included in the cash balance amount.
Senator B. Stevens asked what the CBR balance would be were suspend
accounts included.
Mr. Boutin stated that each weekday morning a reconciliation of
outstanding warrants is conducted.
Senator B. Stevens informed that, according to a recent Legislative
Finance Division report [copy not provided], $300 million of CBR
funds were allocated to but not utilized by Departments and should
be swept back into the CBR.
Co-Chair Wilken interjected that David Teal, the Director of
Legislative Finance, has informed him that the cash balance of the
CBR is approximately two billion dollars and that were all
outstanding warrants reimbursed, the cash balance would be $2.4
billion.
Co-Chair Wilken commented that reconciling the cash balance of the
CBR is not pertinent to this legislation.
Senator B. Stevens stated that he does not support this
legislation.
Senator Hoffman asked the Department whether a CBR draw is
anticipated this fiscal year due to the fact that crude oil prices
are hovering in the $40 per barrel range.
Mr. Boutin responded that, based on recent calculations, this
year's CBR draw could be between $50 and $70 million.
Senator Hoffman asked whether this draw is factored into the $2.1
billion cash balance.
Mr. Boutin responded in the negative.
Senator Bunde moved to report the bill from Committee with
individual recommendations and accompanying fiscal notes.
There being no objection, CS HB 422(STA) was REPORTED from
Committee with negative $125,000 fiscal note #1, dated February 9,
2004 from the Department of Revenue.
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