Legislature(2003 - 2004)
04/15/2004 09:06 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
SENATE BILL NO. 65
"An Act authorizing the Department of Corrections to enter
into agreements with municipalities for new or expanded
public correctional facilities in the Fairbanks North Star
Borough, the Matanuska-Susitna Borough, Bethel, and the
Municipality of Anchorage."
This was the second hearing for this bill in the Senate Finance
Committee.
State of Alaska Credit Outlook Presentation
Credit Analyst, Standard and Poor's
Co-Chair Green shared with the Committee that she had recently
heard a Standard & Poor's (S&P) report regarding the State's
financial condition and funding mechanism options that might be
available to fund in-State correctional facilities. She noted
that numerous municipalities and boroughs have offered to
participate in a "bonding process" to further the correctional
facility objective; however, she explained, she has received
conflicting reports about how this endeavor might impact "the
State's bonded-indebtedness" or credit rating. Therefore, she
continued, to clarify the information, she requested S&P to
present to the Committee in this regard. She noted that, as
standard, S&P would also provide the members with general
financial information.
ALEX FRASER, State and Local Government Analysts Manager,
Southwest and Western Regions of the United States, Standard &
Poor's, testified via teleconference from an offnet site in
Dallas, Texas, and stated that this is an opportunity for the
Members to ask questions relating to the State's credit ratings
as well as an opportunity for S&P to follow-up on their
presentation to the Conference of Alaskans. He stated that the
focus of that presentation was "to stress the need for the State
to develop, and continue to develop, a long-term strategy to
balance revenues and expenses." That, he attested, "is a very
key credit consideration for any government, particularly a
state like Alaska, where there is such a need to look at some of
those long-term events in the revenue streams." Continuing, he
shared that leasing and public finance are mechanisms that "have
gained acceptance" during the past twenty-five years and have
"become a critical mechanism" for those states that "have
limited ability to issue general obligation (GO) debt." He
disclosed that various authorities have been created with
financing being "dependent on regular, annual appropriations
from the state or other government to meet the debt service
payments."
Mr. Fraser stated that, "it is critical" that any lease-
financing arrangement be supported by both the legislative and
executive branches, as, he stressed, "this adds a large degree
of support to the ultimate credit decision, if we know that the
project being contemplated" has garnered long-term support. He
attested that, while it is expected that the terms of the bonds
would be supported for the life of the bonds, it has been
experienced that a future body questioned a decision of earlier
bodies. He stressed that "any disruption in the lease payment is
taken into account, often taken quite harshly on the general
obligation credit." Therefore, he continued, the development of
a flaw could negatively impact a state's GO rating. He avowed
that rather than endorsing any particular project, S&P usually
becomes involved "at the point" where the financing is about to
be undertaken.
Senator Dyson asked whether a state's implementation of a
Constitutional spending limit might affect its credit rating.
Mr. Fraser "supposed" that, "having mechanisms to enforce fiscal
discipline would be good;" however, he stated that a balance
must be obtained that would allow "flexibility." He stated that
without the complete details of the program, it is difficult to
provide an answer.
GABRIEL PETEK, Primary Analyst for Alaska, Standard & Poor's,
testified via teleconference from an offnet site in San
Francisco, California, and responded that, were a spending limit
in place, S&P would "focus on the progress that the State could
make toward achieving structural balance, whether that were
achieved" as the result of "a change in the State's revenue base
or through spending controls." He acknowledged the efforts the
State has implemented in regards to spending controls over the
past several years. He attested that S&P does "not take a real
pointed position on how it's achieved, it's more our interest
that" structural balance is achieved." He stated that, "the only
caveat about a spending limit is to the extent that the emphasis
or the priority became meeting the policy or meeting the targets
of the spending limit plan as opposed to focusing on the bottom
line of structural balance or the fundamentals." Sometimes, he
shared, states get into trouble when they, in order to
demonstrate an accomplishment in an accounting base, move some
payments from one month into the next month in order to perhaps
"move it into the next fiscal year in order to adhere to some
spending plan that has been put in place." He declared that a
policy like that does not lend to improving the fundamental
credit quality of a state. Therefore, he summarized that S&P's
focus is on the structural quality of the budget in regards to
ongoing revenue and expenditures.
Senator Hoffman asked whether the State's ability to manage the
Permanent Fund and the Earnings Reserve Account (ERA) favorably
affects the State's credit rating.
Mr. Petek replied "absolutely." He shared that 92-percent of all
states' credit ratings range from a AA- rating to AAA rating,
and that of all the states, 34 percent, including Alaska, have
an AA rating. He continued that, while Alaska has "a strong and
high credit rating," it's within the normal range for states. He
opined that were states recognized as a sector, they would be
one of the highest credit quality sectors that S&P follows. At
the same time, he warned, there are issues that Alaska must
address "in the not too distance future" in regards to its
credit; specifically its structural budget gap, which he pointed
out "is much larger than any other state." He stressed that, "if
it were not for the State's Permanent Fund and other underlying
resources and, more recently, the Constitutional Budget Reserve
(CBR) … it would be unlikely that the State's rating would be at
the current level." While noting that the State's prudent
management of its resources is reflected favorably in its AA
credit rating, he communicated that S&P's two-year time horizon
on its bond rating for Alaska would either be stable, positive
or negative depending on the current trend. He specified that
the State currently has a AA rating with a stable outlook;
however, he cautioned that "at the time when the CRB is
projected to be depleted within that two-year horizon, that
stable outlook" could potentially be downgraded to a negative
outlook were changes not made to the budget.
Senator Hoffman asked why "the substantial funds" in the
Permanent Fund Earnings Reserve Account (ERA) would not be a
factor, as he continued, that account could be accessed with a
simple majority vote were the State to have a budget deficit.
Continuing, he asked whether funds like the ERA could be
factored into the rating scenario.
Mr. Petek responded that while such funds are considered, they
would be "treated as a one-time non-recurring resource that
could provide a buffer;" however, he commented that S&P does not
recognize that "as equating to structural budget balance."
Furthermore, he continued, were "the State to rely on the
earnings from the Permanent Fund as an on-going revenue source"
in such a manner as proposed by the Percent of Market Value
(POMV) plan's concept of treating it "like an endowment fund,"
S&P would recognize it as a reasonable idea and "would be
comfortable in analyzing that in the context." He noted that
endowment funds are factored into the ratings of universities
and other institutions and that analysts are comfortable with
including them in the process as procedures have been
established for their inclusion. He stated, therefore, that the
State's incorporation of the POMV would be "one way to approach
this;" however, he qualified that while the POMV could be a
"reasonable approach" to the issue, S&P does not desire to
comment on policy proposals as it desires to remain objection.
He continued that, "absent a defined plan, and just having the
Permanent Fund available… is less desirable," as S&P would
desire some "specific approach to utilizing the earnings."
Mr. Fraser commented that POMV would be viewed as a stream of
payments rather than as one lump sum.
Senator Hoffman clarified that his comments did not pertain to
changing the manner through which the Permanent Fund might be
invested under POMV. Rather, he attested, his comments were that
"the Permanent Fund earnings are not a one-time account" as both
the Permanent Fund and the earnings are permanent. Furthermore,
he attested, the earnings go into the Permanent Fund Earnings
Reserve Account and "the Legislature has not decided to spent
those earnings on government but has spend them on dividends and
inflation proofing." He characterized the account as a re-
occurring account, whose revenues should be viewed accordingly,
and, he stressed that the State's "rating should remain on the
positive note rather than being viewed in a negative light
because the CBR is on the decline."
Mr. Fraser responded that were the Permanent Fund to produce a
predictable flow of funds, or "regular payments based on some
formula" it would be viewed similar to endowments and other
credits. He stated that this would provide a "relatively strong
revenue stream; it would be very predictable from year-to-year,
and would be a strength."
Mr. Petek informed the Committee that in recent internal S&P
committee reviews, there has been an interest "in having a
detailed explanation about where this State stands with this
structural gap and if, there is movement on that front."
Senator B. Stevens asked whether the presenters have taken into
consideration that "it appears" there would not be a structural
budget gap in FY 04.
Mr. Petek responded yes, that they had recently received an
updated revenue trends report. He referenced his earlier
comments regarding the two-year time horizon ratings outlook
forecast, and commented that "that probably won't happen until
the CBR is projected to be depleted within that timeframe, so to
the extent oil prices and revenues remain strong as they are, I
guess it buys a little extra time. But the fact of the matter
is, its probably temporary." He stated that it would not "be
conservative fiscal planning to assume the revenues would remain
at the current levels."
Senator B. Stevens noted that he would "tend to agree with that
statement." Continuing, he asked the presenters their views on
recent State discussions regarding modifying "the existing tax
structure that surrounds the oil industry"; specifically, he
asked how the State's bond rating might be affected were the
State "to restructure the oil industry and generate more money"
from oil even though, he acknowledged, that the State would
remain dependent on this one revenue source.
Mr. Petek responded that the details of the proposal would be a
factor. He continued that the revenues currently being received
from that industry, the State's reliance on that industry, and
future expansions in that industry and other industries such as
tourism and service sectors are currently factored into the S&P
credit reports. He opined that restructuring of the oil
industry's tax structure might align with the current report;
however, he commented that S&P could be more specific once the
details of the proposal were available.
Senator B. Stevens acknowledged the response. He communicated
the understanding that, from comments he had originally heard in
Fairbanks at the Conference of Alaskans and again today, the
CBR, which is not a guaranteed annual funding stream but which
could be accessed by the Legislature, is viewed as a
contributing factor to the State's stable credit rating.
However, he voiced being confused regarding the S&P position of
not factoring into the credit report, the ERA and the unrealized
gain of the ERA "which are statutorily eligible for and
classified as funds available for appropriation." Therefore, he
asked for further explanation regarding why the ERA, which
consists of the realized earnings account that amounts to
approximately one billion and the unrealized earnings account of
approximately $3.5 billion are not factored into the S&P bond
rating analysis.
Mr. Petek supposed that the State could divert the money that is
specified for the Permanent Fund Dividend payments to the
general fund; however, he stated that S&P "looks at things as
they actually play out" as opposed to "what is legally
available," as it is recognized "that there are practical
limitations sometimes to utilizing all resources available."
Mr. Fraser agreed. He noted that were those balances deposited
into the CBR, it might "forestall for a few more years the point
at which the rating could be reconsidered due to the structural
budget imbalance."
Senator B. Stevens voiced that it is difficult to understand why
the CBR, which was established in 1990, and whose balance is
currently near the average balance of those 14 years, "has not
evolved into a funding mechanism instead of a structural
imbalance." Although voicing understanding of the S&P position
on the ERA, he reiterated that, "it is classified as funds
available for appropriation."
Senator Bunde understood that the ERA funds are not classified
by S&P as part of the State's revenue stream because the State
has not previously "shown the interest or the willingness" to
access those funds.
Mr. Petek responded that that "would be a fair way" to state it.
Senator Bunde asked whether implementing statutory language to
provide a regular revenue stream from those earnings would have
a positive impact on the State's bond rating, even though he
admitted, statutory language could be altered from one
Legislature to the next.
Mr. Fraser underscored Senator Bunde's last comment by stating
that S&P has witnessed a number of policy changes pertaining to
such things as rainy day funds in states throughout the country.
However, he voiced that any revenue stream being reviewed as
part of an overall structural budget is evaluated for such
things as "any concentration in one source, its predictability,
its volatility" and other factors.
Senator Bunde surmised therefore that, in order to ensure the
State's high credit rating, the State could constitutionally
institute such things as the POMV program and dedicate those
earnings to State government or it could statutory use some of
the excess earnings of the Permanent Fund. Both of these
avenues, he declared, "would be considered a revenue stream to
government" and would assist in ensuring the State's good credit
rating.
Mr. Fraser stated that the details of these two options would
require review; however, he stated that were the end result to
be "structural balance, regardless of how we got there, that
would be the important thing."
Senator B. Stevens, following-up to Senator Bunde's questioning
voiced the understanding that the State would not be able to
claim the ERA as a stable funding source unless the State
established a law specifying that a specific amount of the ERA
would be used to create a sustainable funding stream for
government. Continuing, he questioned the reasoning behind the
credit rating position that the State would have to spend the
money in order for it to be deemed as a sustainable funding
source as opposed to not factoring that money in, in light of
the Legislature's current ability to access the funds in the
event of a shortfall.
Mr. Petek responded that the difference in the two scenarios is
that one would be viewed as a savings account that would be
considered as a one-time funding source as opposed to one being
treated as an ongoing portion of the revenue base for the State.
He exampled that were "the ongoing revenue base short of the
ongoing expenditures, and the reliance is on an existing reserve
fund, then it's viewed more like sort of plugging the gap verses
having a predictable, projected, and forecasted stream of
revenue from the earnings that would be built into the budget as
an on-going source." Therefore, he stated that the rating is
calculated on how the reserve would be treated.
Co-Chair Green concurred with Senator B. Stevens's understanding
that the State would be required to spend out of a fund in order
for it to be classified as revenue.
[Note: With the exception of the following excerpt, the
remainder of the discussion with Standard & Poor's addressed the
State's prison situation. Those minutes are forthcoming.]
Senator Bunde inquired as to whether the presenters could
comment on how Governor Frank Murkowski's recent POMV proposal
might address the State's credit rating concern.
Mr. Petek stated that S&P is aware of the proposal. He
reiterated, "that the POMV concept is something that we are
accustomed to seeing with institutions that have large
endowments." Therefore, he continued, "it could actually provide
an ongoing source of revenue that could help address this budget
gap." However, he stressed that rather than voicing a position
on public policy issues, S&P would "focus on the bottom line."
Senator Bunde stated that the Governor's proposal includes
dedicating a portion of the POMV funds to the Permanent Fund
dividend, thus making them inaccessible for government spending.
He asked whether this would positively or negatively affect the
State's credit rating.
Mr. Petek responded that the POMV concept would provide
predictability, as it would not "fluctuate dramatically with
market returns from one year to the next." Therefore, he
continued it would be a "credit enhancer." He stated that he
could not comment on the proposal's dividend component.
Senator Bunde asked whether dedicating half of the POMV funds to
a dividend would negatively affect the credit rating as opposed
to the POMV funds being fully utilized to fund State government.
Mr. Petek remarked that due to the fact that none of the funds
have ever been utilized to fund State government, it would be
positive.
Senator Bunde concurred.
Senator Dyson understood that the State's credit rating is
affected by "the lack of economic diversity" in that it is so
dependent on oil revenue. Following up on Senator B. Stevens
earlier questioning in this regard, he asked for further
clarification as to whether the State's credit rating could be
positively impacted were changes made to make the oil industry
more viable with a longer-term future.
Mr. Petek responded that it might; however, he expressed that
the concept is "too general" and that the particulars would be
required.
Mr. Fraser interjected that "on the corporate side," Exxon Mobil
Corporation, which is "a very strong company and very dependent
on oil revenues," has a credit rating of AAA. Therefore, he
stated that the particulars of the proposal would be important.
Senator Dyson voiced the understanding that, regardless of
whether larger oil reserves became available for exploration or
development and transportation route developed that would
guarantee a longer life span and improved delivery methods, it
would not enhance the State's credit rating as the State would
continue to be a "single factor economy."
Mr. Fraser responded that "were the returns to the State so
massive that it really outweighed everything else then there
really wouldn't be any constraint there on the rating."
The bill was HELD in Committee.
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