Legislature(2017 - 2018)ADAMS ROOM 519
04/10/2018 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB385 | |
| HB316 | |
| SB97 | |
| SB107 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 397 | TELECONFERENCED | |
| + | HB 385 | TELECONFERENCED | |
| += | SB 97 | TELECONFERENCED | |
| += | HB 216 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | SB 107 | TELECONFERENCED | |
| += | HB 316 | TELECONFERENCED | |
| += | HB 306 | TELECONFERENCED | |
SENATE BILL NO. 97
"An Act relating to pension obligation bonds."
2:43:49 PM
Co-Chair Foster relayed that the last time SB 97 was heard
was April 19, 2017. At that hearing the committee heard
public testimony and called for amendments. There was one
amendment the committee would be addressing. He invited the
bill sponsor to refresh the committee about the bill.
SENATOR ANNA MACKINNON, SPONSOR, relayed that the bill
before the committee addressed a reduction of pension bond
authority. The bill proposed to move the pension obligation
authority from $5 billion to $2.5 billion. It required
those entities that had the authority to issue pension
obligation bonds (POB) to submit a proposal to the
Legislative Budget and Audit Committee outlining their
proposal. She recalled that the administration proposed use
and started shopping to sell pension obligation bonds.
There was some consternation in Alaska communities and
among legislators in both houses to know whether the sale
would affect the state's credit rating, how it would work
in the market, and what it would do to Alaska's pension
plans. She continued that included in the legislation was a
process that gave the legislature the time necessary to
actually respond and interact with the general public.
Hence, taking the acquisition or proposal that might come
to the Legislative Budget and Audit Committee. The
administration supported the bill before the committee, as
it still left the tool available to the administration to
address pension shortfalls but reduced the authority by
$2.5 billion.
Representative Wilson asked why the bill sponsor settled on
the amount of $2.5 billion. Senator MacKinnon responded
that the number was a compromise. There were some
legislators that thought the possibility of borrowing
should be eliminated altogether. She continued that when
the Senate Finance Committee started looking at the
proposal and the actions of the administration, she went to
the governor asking for his thoughts about available
authority. In conversations with the senate, she had been
talking about what could be done with an in significant
amount available to the legislature to bolster Alaska's
credit standing with outside national credit rating
agencies. Some of the conversations were around reducing
outstanding bonds that Alaska could put out. The idea was
to show the market that the state was going to handle its
debt very responsibly. She indicated that she and the
governor had discussed a number. She chose the number
rather than the governor. The number was close to the
number the administration sought in the market in the
previous year. She believed that they were acquiring around
$2.1 billion to $2.2 billion. She conveyed that $2.5
billion was within the initial figure considered to meet an
unfunded liability.
Senator McKinnon furthered that the second reason was
because currently the state had about a $6.6 billion
unfunded liability in the Public Employees' Retirement
System (PERS) and Techers' Retirement System (TRS)
combined. That was with a criteria of an 8 percent rate of
return and a mortality rate that needed to be changed. If
the percentage currently being used to amortize the state's
debt over a period of time adopted in state statute, $2.5
billion represented almost 50 percent. If the state owed
$6.6 billion then $3.3 billion would be 50 percent of the
unfunded liability handled through debt. In working with
the House Finance co-chairs as well as having conversations
with the administration and the debt service manager, she
recommended to Senate Finance that a $2.5 billion reduction
be sent to the House side. She concluded that there were
multiple reasons for the amount of $2.5 billion.
2:48:46 PM
Co-Chair Seaton MOVED to ADOPT Amendment 1 (copy on file):
Page 3, line 17 following "2,500,000,000":
Insert "or a funding ratio of actuarial assets to
accrued liability greater than 85 percent,
whichever is less"
Representative Wilson OBJECTED for discussion.
Co-Chair Seaton reviewed the amendment. He indicated the
purpose was to make sure the bonds did not take the state's
assets to the 100 percent or 105 percent. There was a
provision in statute that if the state reached 105 percent
of value, the state would have to pay out additional money
into the post-retirement pension adjustment to retirees. He
relayed that it made sense in a situation where retirees
had put their money in and the period that would have
earned money over time. If it earned more than 8 percent,
the funding ratio would be greater. In such an instance, he
suggested it would make sense to bump up retirement by
giving a post-retirement pension adjustment in addition to
the cost of living adjustment (COLA) increase retirees
received. In the case of doing bonds, the state would be
taking general fund monies and putting them into the
retirement system. However, if the state reached the 105
percent funding, it would be required to give the money to
the retiree. The amendment made sure the state kept the
funding ration in a range that was very stable and useful
without passing general fund money for bonds that would be
sold and deposited. He had tried a number of different ways
to insert language so that there would be a waterfall. It
would ensure that the fund grew on its own investments
instead of taking general funds.
2:51:29 PM
Representative Guttenberg wondered if there was an
alternative to increasing the payout once the state reached
105 percent. Once the amount was increased it could not be
reversed. He wondered if the state had the flexibility to
do something different. Co-Chair MacKinnon believed the
retirement pension board had the authority to look at
benefits if the funding went beyond 105 percent. She
referred to the amendment on page 3, line 17 following the
$2.5 billion. She suggested inserting the words "or a
funding ratio of actuarial assets to accrued liability
greater than 85 percent, whichever is less." She asked if
she was looking at the correct amendment copy. She
explained that $2.5 billion would be the maximum allowable
debt to service the unfunded liability. She and Co-Chair
Seaton had talked about the issue that was in state statute
where the state had been paying for a number of years,
specifically on the PERS and TRS side, additional
contributions above 22 percent or the 12.56 or 12.58
percent for TRS. The state had invested heavily in
additional funding of state support for these systems with
the recognition that the state's liability was to about 60
percent of the overall system in its entirety (100 percent
on the TRS side and a percent on the PERS side). The
amendment was a safeguard for all in the scenario that the
outside markets would look at. She continued that for that
reason she would support the amendment and ask for support.
She hoped Mr. Mitchell could speak to confirm whichever
number was lower to avoid decreasing the state's liability
enough to overfund the system.
2:55:12 PM
DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL BOND
BANK AUTHORITY, agreed that the amendment was in line with
the goals of the transaction envisioned by the
corporation's board and the Department of Revenue (DOR)
throughout the various administrations that had considered
POBs. The target he had was a maximum not to exceed amount
of 90 percent. He thought 85 percent was a reasonable
alternative to 90 percent. It was probably slightly more
conservative in the event there were strong returns in the
years following a pension obligation bond issuance. There
could be an outcome of an overfunding situation. He was not
as confident as Senator McKinnon that the ARM Board had the
ability to diminish benefits to past employees. He thought
those benefits were strongly protected. Unfortunately, even
though it made sense if there was extra money put in, it
was his personal belief, that those employees could demand
a post retirement payment if the funding went up 105
percent or greater. He suspected that the court would side
with the retirees.
Co-Chair Seaton thought there was a misunderstanding. He
had heard Senator McKinnon saying the same thing he had
said. They had looked at all of the ramifications but found
that once the amount was there it could only flow to
pensions. A pension plan could not be diminished. The
federal restrictions were tight so that no one could
diminish benefits. Co-Chair MacKinnon clarified that
retired Alaskans were guaranteed their benefits. Her
response was to the 105 percent funding liability that if
the state went above, it could add additional benefits in
response to Representative Guttenberg's question. She
relayed that the retirement board had the ability to add
but not to diminish benefits under existing state law and
supreme court rulings. A vote of the people of Alaska would
be required.
Representative Wilson WITHDREW her OBJECTION.
There being NO OBJECTION, Amendment 1 was ADOPTED.
2:58:53 PM
Co-Chair Seaton MOVED to ADOPT Conceptual Amendment 2.
Page 3, line 17
Delete: "$2,500,000,000"
Insert "$1,500,000,000"
Representative Wilson OBJECTED for discussion.
Co-Chair Seaton had talked with the bill sponsor and with
Mr. Mitchell. He wanted to have them come to the table.
There was general agreement that $1.5 billion was an
acceptable amount and remained a powerful tool that could
be used and also lowered the amount of debt the state had.
Co-Chair MacKinnon responded that she was not opposed to
the change. The only issue she wanted consideration for was
the number she brought before the committee. She had run
the number by the administration and had support for $2.5
billion. She reported that there were members in the Senate
that thought the number should be zero. She agreed that
$1.5 billion was a more conservative number. The bond
rating agencies would see the action favorably because it
was taking another $1 billion away from the state to indebt
itself. She thought it would remain a functioning tool
available to the administration. She also believed it would
bring more comfort to Alaskans in placing the state's
unfunded liability into a bond market.
Representative Pruitt referred to the actuarial worksheet
in members packets (copy on file). He believed the $1.5
billion amount would restrict the state from being able to
use the pension obligation bonds. He highlighted that the
state would cross the 85 percent mark before the $1.5
billion was available. He asked Mr. Mitchell to explain how
the change would affect the state's ability to use the
bonds. He wondered if the state should get rid of them
altogether. Mr. Mitchell responded that he had not recently
reviewed the actuarial worksheets. He explained that it was
based on total liability rather than just the state's
portion. If the total liability was $6.5 billion, he
thought the state would still have the ability to use the
$1.5 billion. He would have to review the numbers. He
thought the system's funding levels were considerably less
than 85 percent even with the infusion in 2015 and the
positive market in the previous year.
Representative Pruitt was having to process and do the math
as the meeting was occurring.
3:04:10 PM
Co-Chair MacKinnon added that in looking at the amendment
the word "or" was included. The amount of $1.5 billion
would remain available.
Representative Guttenberg asked how the bill would affect
the state's other pension bonds, capacity, or ratings. Mr.
Mitchell suggested that there were several factors that
played into the answer to Representative Guttenberg's
question. One of the variables was the concept of going
from a soft liability to a hard liability. Another factor
had to do with payments on behalf of other employers. The
state was locking in the relationship that was a statutory
relationship that theoretically could be modified. Also,
there had been an evolution within the pension obligation
fund corporation to move forward on a transaction since its
inception to the present. The corporation no longer had the
ability to to move forward without the firm support of the
legislature. Firm support meant that an appropriation of
debt service was necessary for market participants to take
the state seriously based on its failed efforts in the
past. He was unsure how the reduction would impact the
state's debt capacity or credit rating. He reported that
when the state was looking at the transaction in 2016 one
of the three rating agencies, Standard and Poors, had a
contingent downgrade for the State of Alaska in the event
the $2.5 billion was borrowed. He indicated that it was
based on sheer magnitude. It was easiest to think of the
situation as a refinancing. The state owed the money and
had a constitutional obligation to repay it. There was a
statutory framework for the payment on behalf of structure.
The least responsible way to refinance would be to avoid
the following year's payment. This was Illinois' method. He
provided a more detailed example. He continued that
reducing the authorization to $1.5 billion would limit the
state's ability to impact the state's credit rating.
Vice-Chair Gara agreed with the amendment.
3:08:51 PM
Representative Pruitt was fine with $1.5 billion. It was a
policy call. He suggested that there might be 3 years where
the 85 percent/$1.5 billion threshold would cross before
the state reached a funding ratio of 85 percent based on
the actuarial. He concluded that $1.5 billion was
substantially more conservative than the 85 percent funding
ratio. He was fine with the amendment.
Co-Chair MacKinnon relayed that, at an 8 percent rate of
return, it had to do with best practice standards for a
pension plan. While the committee was considering $1.5
billion of potential debt against a $6.6 billion unfunded
liability and seeing the state's 85 percent funding ratio
in sight, she cautioned members in thinking that in 3 years
the state would be out of the woods. She continued that a
.25 percent reduction in earnings estimated over the life
of the state's debt would have huge implications on the
unfunded liability number. She highlighted that Alaska's
local communities were carrying that debt on their
financials as well. While the state was at $6.6 billion
presently, she expected (even with positive returns) that
if the ARM Board made a decision to reduce earnings or
accept the new mortality rate (people were living longer),
she did not believe the state would be at 85 percent
funding in 3 years. She was working with the ARM Board to
see if there was another way to adjust the assumed interest
earning down. She would be happy to share that information
at a later time.
Representative Wilson WITHDREW her OBJECTION.
There being NO OBJECTION, it was so ordered. Conceptual
Amendment 2 was ADOPTED.
Representative Guttenberg relayed that on the previous day
the committee had heard a bill on PERS and TRS and the
package options. He thought the bill might correlate with
the senator's bill.
Vice-Chair Gara reviewed the zero fiscal note for SB 97 by
the Department of Revenue. The appropriation was Taxation
and Treasury and the allocation was the Treasury Division.
The OMB component number was 121.
3:13:02 PM
Co-Chair Seaton MOVED to report HCSSB 97 (FIN) out of
Committee with individual recommendations and the
accompanying fiscal note.
There being NO OBJECTION, it was so ordered.
HCSSB97 (FIN) was REPORTED out of committee with a "do
pass" recommendation and with a new zero fiscal note by the
Department of Revenue.
3:13:32 PM
AT EASE
3:14:22 PM
RECONVENED