Legislature(2005 - 2006)BELTZ 211
03/31/2005 03:30 PM Senate STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| SB152 | |
| SB121 || SB122 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 121 | TELECONFERENCED | |
| *+ | SB 122 | TELECONFERENCED | |
| *+ | SB 152 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 121-STATE OF AK CAPITAL CORP.; BONDS
SB 122-AMERADA HESS INCOME; CAPITAL INCOME ACCT.
3:57:16 PM
CHAIR THERRIAULT announced SB 121 and SB 122 to be up for
consideration.
CHERYL FRASCA, Director of the Office of Management and Budget,
Office of the Governor, said she would present the bills
together.
3:58:23 PM
The Governor proposes to finance capital infrastructure projects
by issuing bonds and the interest earnings from the "Amerada
Hess" settlement would be used to pay them off. The list of
capital projects that would be funded through this mechanism is
included in the December Capital Budget that was submitted to
the Legislature. This is very similar to state funds in that the
final decision as to which projects are funded is left to the
Legislature through the Finance Committees.
The Amerada Hess settlement relates to a lawsuit the state filed
against the oil companies in the late '70s relating to the
valuation of the state's royalty oil. The oil companies tried to
keep the suit from proceeding in Alaska by arguing that all
Alaskans would be biased. The federal court urged the
Legislature to step in and address the issue. As a result
legislation was passed in both the Cooper and Hickel
Administrations that excluded the settlement proceeds from being
included in the calculation of the Permanent Fund dividend.
A sub-account was established within the Permanent Fund to which
all the settlement precedes have accumulated. In FY 92 $82
million was deposited and at the end of FY 04 the balance had
grown to about $424 million. Unlike the dividend, there has been
no return to the Alaska economy from the earnings. The proposal
is to put those earnings to work. The bond mechanism allows
leverage of the annual earnings over time to finance a larger
package of capital projects.
4:01:24 PM
CHAIR THERRIAULT asked if the initial deposit was 25 percent of
the Amerada Hess settlement and the rest of the money went into
the state treasury.
MS. FRASCA speculated that the 75 percent balance went into the
Constitutional Budget Reserve (CBR) once it was created. At the
time that Amerada Hess was negotiated there was no CBR.
SB 122 creates an account into which the earnings of the Amerada
Hess settlement would be placed and SB 121 creates the
corporation that would issue the debt.
4:03:36 PM
SENATOR KIM ELTON said he assumes the Amerada Hess account is
inflation proofed in the same way as the Permanent Fund.
MS. FRASCA said yes it is and the Legislature appropriates the
earnings into the account.
SENATOR ELTON asked if the inflation proofing is designated to
Amerada Hess or to the pot that includes Amerada Hess.
MS. FRASCA replied it's designated into the Amerada Hess sub
account.
SENATOR ELTON asked if it's correct that under the proposal
there would be no inflation proofing of Amerada Hess.
MS. FRESKA said that is correct. The $424 million in principal
would stay in the account and each year the earnings would go to
pay the debt service on the bond package. The $424 million
wouldn't grow any larger, she said.
SENATOR ELTON declared that is a substantive policy shift and
someone might want to discuss the net effect of no longer
inflation proofing. This isn't just about spending the earnings.
This is about spending principal because inflation would erode
it over time, he said.
4:05:24 PM
DEVEN MITCHELL, Debt Manager, Department of Revenue (DOR),
explained that the historical use of all the earnings has been
appropriation to principal so it's been more than inflation
proofed. As to the policy matter of whether it should be
inflation proofed moving forward or not he said:
There is a slight automatic inflation proofing as much
as the realized return rate of the Permanent Fund is
less than their expected total return rate - to the
tune of 57 basis points. So theoretically your fund
will grow on an accrual or an accounting basis over
time even though you do anticipate removing all
realized earnings from the fund - from this Amerada
Hess account. And so if you looked at it on a balance
sheet it will grow from $424 million if those
assumptions materialize over time.
It's a separate issue as to whether there should be a statutory
requirement that it be inflation proofed, he said.
4:06:48 PM
MR. MITCHELL said there are two distinct things going on with
the two bills. The first bill would create the Alaska Capital
Income Account. It would change the flow of money within the
Amerada Hess settlement from accruing to principal to flowing
into the new Alaska Capital Income sub-account in the Earnings
Reserve. From there the funds would be available for annual
appropriation for any purpose by the Legislature.
The second bill would create a new corporation called the State
of Alaska Capital Corporation. It would have the ability to
issue up to $350 million in revenue bonds. The corporation would
receive funding on an operating basis from agencies that
benefited from capital projects. The operating leases would have
to be renewed every year, which creates a mechanism for the
funds to flow to the corporation. The corporation would have a
variety of security features and financial tools to ensure that
there would be a means to deal with volatility and to avoid use
of any credit enhancements the state might provide.
4:08:56 PM
He drew attention to the schematics in the bill packet [see
file]. They are designed to help explain how the corporation
would work. He suggested the concept of the Alaska Capital
Income Account is fairly easy to grasp.
The second schematic shows how money might flow into the State
of Alaska Capital Corporation. The annual appropriation flows
into a revenue fund of the corporation. It would fund operations
of the corporation; the debt service reserve fund, which would
have a moral obligation pledge of the State Alaska; and the bond
redemption fund, which would advance fund debt service of the
corporation on an annual basis.
Corporate bond payments flow from the bond redemption fund to
investors and investors would purchase bonds from the corporate
bond issue and that cash would fund the construction fund. There
would be an obligation to repay those investors. The obligation
would be made in a flexible manner such as a flexible
amortization bond. They would pay interest only and have
reserves in place to accommodate market volatility on the
earnings side. The model they used results in a 17 to 18 year
amortization of all principal associated with the borrowing.
The construction fund would be managed by the Department of
Revenue under the fiduciary responsibility of the commissioner
and reinvested in fund projects through the existing Alaska
Statewide Accounting System (AKSAS) system so no special
accounting process would be needed to fund projects.
4:13:04 PM
SENATOR ELTON referenced the statement that the anticipated
revenue stream of $30 million would be available to pay off debt
and questioned what the annual revenue stream would be if
Amerada Hess were inflation proofed the same as the Permanent
Fund.
MR. MITCHELL replied it would reduce borrowing power. The
proposal leverages the revenue stream as far as you might want
while maintaining the high probability that it would be repaid
and be stand-alone self-supporting debt rather than a state
obligation.
A key feature of the proposal is that it wouldn't be paid from
the general fund. It has a moral obligation pledge on a reserve
fund, but the expectation is that all debt service would be paid
from the transfers from the Alaska Capital Income Account.
Rating analysts for the State of Alaska have indicated that this
would not impact the state's credit rating and it wouldn't be
included as net tax supported debt of the state.
SENATOR ELTON asked if those problems couldn't be avoided by
simply incurring less debt. If you reduce the revenue stream it
would make sense to reduce the debt obligation.
MR. MITCHELL replied that would probably help the economics of
the transaction but you'd have to pull back from the proposed
project list.
4:16:24 PM
CHAIR THERRIAULT recapped saying the entire Permanent Fund is
inflation proofed and the portion attributable to the Amerada
Hess account currently goes into the "picket fence" too.
MR. MITCHELL said yes.
CHAIR THERRIAULT questioned whether that is required by statute
or whether just the earnings are addressed.
MR. MITCHELL replied, "I believe they're one and the same;
inflation proofing would be earnings, which would be allocable
to this portion."
CHAIR THERRIAULT said he'd ask Mr. Burns the same question.
He compared the tobacco settlement and Amerada Hess. The state
couldn't control the flow of tobacco settlement funds so there
was no assurance that they would continue, but part of the
reason for going that route was so it wouldn't become a moral
obligation of the state. For Amerada Hess there isn't control
because of the vagaries of the market return, he said.
MR. MITCHELL agreed the state doesn't want any tie to the
tobacco bonds because of the potential elimination of that
revenue stream. Therefore the state sold that asset to a
subsidiary of a public corporation that doesn't have other
assets or any moral obligation of the state associated with the
bonds. The investors required interest rates from that
subsidiary that are commensurate with that type risk.
Amerada Hess is different in that the state would establish a
corporation that is closely linked to the state. The corporation
board would be the state bond committee, including the
commissioners of administration commerce and revenue and staff
would come from Department of Revenue personnel. There would be
a moral obligation on the reserve, which is a requirement to get
to that investment-grade rating level.
He reiterated that structural and financial tools would be
included to ensure that there is no draw on that reserve.
Modeling for this has included a Great Depression type down
market to ensure that there is the ability to survive such a
period, because "that's where we want to be at the end of the
day." he concluded.
4:20:11 PM
CHAIR THERRIAULT asked Mike Burns where the Amerada Hess "picket
fence" is located in statute.
MIKE BURNS, Executive Director, Alaska Permanent Fund
Corporation, pointed to AS 37.13.145(d).
CHAIR THERRIAULT said he reviewed the statute and understands
that the earnings are put back into the account. He wasn't sure
whether the statute specifically requires that the inflation
proofing go back into the "picket fence" as well. Inflation
proofing and earnings are two different things, he asserted; the
earnings come from the inflation proofing but it takes an
appropriation.
MR. BURNS responded he didn't think it's a statutory
requirement. He explained that the actual cash settlements were
about $194 million over a number of years. Those have been
inflation proofed over the years by about $77 million. About
$153 million in earnings have been added in bringing the total
to $424 million. The original $194 million is, by definition,
the principal of the fund and is statutorily required to be
inflation proofed the same way as the Permanent Fund.
CHAIR THERRIAULT questioned whether statute required that the
money go into the "picket fence" or could it have gone into the
general principal of the Permanent Fund.
MR. BURNS said all of it's principal and the concept or
existence of the "picket fence" is for accounting purposes so
that the earnings from Amerada Hess don't go into the dividend
calculation. Although reference is made to a sub account it's
really managed together and is indistinguishable.
CHAIR THERRIAULT called a brief at ease from 4:23:34 PM to
4:25:24 PM to provide time to read the statute.
CHAIR THERRIAULT observed that AS 37.13.145(d) doesn't speak to
inflation proofing, but subsection (c) does talk about inflation
proofing the fund. He questioned why there's an accounting
reason that the inflation proofing has to go into the Amerada
Hess sub-account.
MR. BURNS explained that the original $194 million was received
in the same way as any other royalty the state has received.
It's principal when it's received so under (c) it's required to
be inflation proofed. Once it's inflation proofed then the
inflation proofing becomes principal.
CHAIR THERRIAULT referenced the flow chart showing that the
earnings come out of the Amerada Hess sub account and then go
back in and remarked there should be some indication that
inflation proofing goes back into the sub-account. He questioned
why all the inflation proofing doesn't go into the Permanent
Fund.
MR. BURNS replied the arrow showing earnings returned to the
Amerada Hess sub account includes inflation proofing. For a fund
that can't be used for dividends there isn't any difference
between the earnings and the inflation proofing.
CHAIR THERRIAULT said he understands but isn't sure he agrees.
MR. BURNS said that's the reason the sub-fund has grown faster
than all the other funds; the earnings haven't ever been
touched.
4:30:18 PM
SENATOR ELTON said the proposal suggests that when the sub-
account was established the oil companies made a mistake by
assuming that the only way the state would receive benefit and
perhaps prejudice a jury would be through an increased dividend.
If the proposal is successful the oil companies could argue that
a jury could be prejudiced because the earnings would be used
for capital projects.
MR. BURNS acknowledged you could make that argument, but this
was an out of court settlement and the sub-account was created
for something that ultimately never happened
CHAIR THERRIAULT asked Mr. Barnhill to come forward to respond
to Senator Elton's assertion.
MIKE BARNHILL, Assistant Attorney General, Department of Law
(DOL), said if you made that argument then you could say no tax
case could go to an Alaskan judge and jury, but those cases are
litigated all the time.
When the Permanent Fund dividend issue first came up the Alaska
Supreme Court amended the civil and criminal rules to say that
the receipt of a Permanent Fund dividend does not constitute
good cause for disqualifying jurors. He declared the same would
hold true for using the earnings from the Amerada Hess for
capital projects.
CHAIR THERRIAULT acknowledged that the statute was passed in
anticipation of a court challenge. He questioned whether the
terms of the settlement agreement included similar language.
MR. BARNHILL said there are so many settlement agreements that
he couldn't say for sure that any referred specifically to this
language and whether it should stay on the books. Wilson Condon
has looked at the issue and he may have given an opinion. DOL
opines that if the Legislature wants to repeal the statutes and
allow the earnings to flow back into the Permanent Fund
dividends it could do so as a matter of law. Whether it's
advisable as a matter of policy is a different issue.
Of principle concern is that the state said it would segregate
the money so that the earnings wouldn't flow to dividends.
Perception is important here because there might be opportunity
to do that again in future litigation.
SENATOR ELTON suggested you could get beyond that problem in the
future by simply making it part of the settlement agreement.
MR. BARNHILL responded there is no litigation on the horizon
that's the size of the Amerada Hess litigation but it could
happen.
SENATOR ELTON said it'd be interesting to know whether any
settlements mention the "picket fence."
MR. BARNHILL replied he could get the information, but his guess
is that it's not there. DOL has opined that it's legal to repeal
the statute but the legislation does not repeal. It redirects
the earnings from principal to the proposed income account.
CHAIR THERRIAULT said the account has been characterized as a
self-licking ice cream cone in that no one gets to derive
pleasure from it. The proposed mechanism is the only way for the
state to derive benefit. The underlying question is do we have
to continue to allow it to self-lick?
SENATOR ELTON said this might not be the only use of the Amerada
Hess money. If the statute were repealed another use of the
money could be for dividends. In that case the choice before the
committee would be whether to use the money for capital projects
or for dividends.
MR. BARNHILL referenced Wilson Condon's memo that says it's
legal but inadvisable to let the money flow to dividends.
CHAIR THERRIAULT noted the memo was in the bill packet. He asked
if there were further questions.
SENATOR ELTON said it would be helpful to know the annual income
and the size of debt package that is sustainable if the Amerada
Hess account were inflation proofed in the same manner as the
rest of the fund.
CHAIR THERRIAULT asked Mr. Mitchell if that would be possible.
MR. MITCHELL answered yes.
CHAIR THERRIAULT concluded the hearing on SB 121 and SB 122.
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