Legislature(2015 - 2016)BELTZ 105 (TSBldg)
02/25/2016 01:30 PM Senate LABOR & COMMERCE
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| Audio | Topic |
|---|---|
| Start | |
| SB72 | |
| SB141 | |
| SB127 | |
| SB149 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 127 | TELECONFERENCED | |
| *+ | SB 149 | TELECONFERENCED | |
| *+ | SB 152 | TELECONFERENCED | |
| *+ | SB 118 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | SB 72 | TELECONFERENCED | |
| += | SB 141 | TELECONFERENCED | |
SB 149-AIDEA: DIVIDEND TO STATE;INCOME;VALUATION
2:40:56 PM
CHAIR COSTELLO announced the consideration of SB 149. She noted
that this is the first hearing.
2:41:32 PM
GENE THERRIAULT, Policy Director, Alaska Industrial Development
and Export Authority (AIDEA), introduced himself.
2:41:51 PM
At ease
2:42:26 PM
CHAIR COSTELLO reconvened the meeting.
MR. THERRIAULT directed attention to the word "excluding" on
page 2, lines 3 and 21, of the bill to help explain the
presentation. The exclusions were added by the legislature in
recognition that certain things needed to be excluded from the
determination of available net income in order to calculate the
dividend AIDEA pays the state. Some new accounting rules are
becoming problematic and AIDEA would like the legislature to
consider adding things to the exclusion. He said Mr. Lamb will
have examples of the new rules, the impact they are having on
the dividend, and the proposed solution.
He said the PowerPoint would cover the dividend: history (which
he just summarized), goal, statutory language, and two
accounting problems they are working to solve.
He displayed a chart showing the AIDEA dividends that have been
paid starting in FY1997 since AIDEA was capitalized with a
little more than $300 million. Since then, AIDEA has repaid just
under $380 million. The bill is intended to bring a little more
predictability to that income stream going forward. He turned
the discussion over to Mr. Lamb.
2:46:33 PM
MICHAEL LAMB, Chief Financial Officer, Alaska Industrial
Development and Export Authority (AIDEA), explained that the
state receives an annual dividend based on AIDEA's operations
and SB 149 seeks to make that dividend more stable and
predictable. This has become an issue because accounting rules
have changed since the statute was written. This matters because
the dividend is based on the statutorily defined net income
which is based on the financial audit. As the audit numbers
change, the statutory net income number changes which changes
the dividend.
Three types of transactions affect the financial statements that
affect the dividend. The first type are entries from "real
transactions" that occurred. Examples are booking what was paid
for an asset, revenue that is generated, payroll that is paid,
taxes paid, and what cash was received and why. There isn't a
problem with this type of transactions.
The second type of transactions are entries from "estimates and
allocations." Examples are booking depreciation and amortization
expenses which recognizes and records that an asset used up some
of its estimated useful life over the period of operations.
There isn't a problem with this type of transactions.
The third type of transactions are entries from "market value
adjustments." These are entries related to transactions that did
not happen, but the statute requires them to be recorded for the
audit as though they did occur. [The statute requires compliance
with GASB (Generally Accepted Auditing Standards) and GAAP
(Generally Accepted Auditing Principles).] He clarified that
market value adjustments have a purpose for an audit or to read
a financial statement, but it's a policy decision as to whether
they should be used to compute the dividend or excluded like
other things.
2:50:34 PM
MR. LAMB summarized the pertinent language in the existing Sec.
44.88.088 relating to the payment of the dividend:
The authority shall adopt a policy for payment of a
dividend to the state each year. The amount of which
may not be less than 25 percent nor more than 50
percent of the net income for the base fiscal year.
The meaning of "net income" is the change in net
position, or the equivalent term under GAAP as set out
in the audited financial statements of the authority
for the base fiscal year, excluding amounts
attributable to intergovernmental transfers, capital
contributions, grants, or impairment losses on
development projects financed under AS 44.88.172.
2:50:42 PM
CHAIR COSTELLO asked why "market value adjustment" doesn't
appear in the bill.
MR. LAMB replied it's part of the proposed new language.
He displayed a chart to illustrate how the dividend is
calculated. It is based on the statutorily defined "net income,"
which comes from the audited financial statements that the board
approves. Those board-approved audited statements must include
applicable "market value" and/or "write-down/loss" entries. GAAP
requires those entries and that all applicable GASB statements
are implemented.
SB 149 would modify the existing excluded language such that
"net income" would not include any market value adjustments
and/or state or federal write-down activity when calculating the
dividend.
2:53:01 PM
CHAIR COSTELLO asked how the dividend would have been affected
if this change had been in statute in previous years.
MR. LAMB said he would point that out later in the presentation.
MR. THERRIAULT clarified that AIDEA will continue to follow all
GAAP and GASB rules to get the audited financial statement.
AIEDA is asking the legislature to back out market value
adjustments only for the purpose of calculating the dividend.
MR. LAMB added that the question is whether or not the
components that now make up the audit are appropriate for the
calculation of the dividend.
2:54:37 PM
MR. LAMB restated the problems that arises when market value
adjustments are factored into calculating the dividend. Entries
that did not happen are booked as though they did. This causes
AIDEA's net income to swing, which also causes the dividend to
the state to swing. When the swings are material it makes a
material difference in the size of the dividend. It's a problem
for AIDEA when it has to pay a dividend based on cash it hasn't
actually earned, and a problem for the state when AIDEA pays a
dividend based on unrealized losses, not the cash it earned.
He drew an analogy to an individual taxpayer who has to use
market value adjustments in their tax return. The individual had
W-2 earnings of $100,000, interest and dividend income of
$7,500, and a permanent fund dividend of $1,500 for total income
of $109,000. If the taxpayer's income calculation had to include
hypothetical unrealized GASB 31, 68, 72, and 75 market value
adjustments, the total income would be $169,000. That figure
presumes the taxpayer sold the assets when in fact he did not.
He noted that while the analogy shows more income than was
actually earned, it could just as easily go the other direction.
MR. LAMB displayed a chart showing 25 years of AIDEA's audited
net income pre-GASB 31 market value adjusting entries. He noted
that the year-to-year changes are not large. The next chart
superimposes net income calculations after GASB 31 mark-to-
market adjustments started in 1997. Including unrealized
revenues and losses results in dramatic swings in net income
from year to year. This causes the dividend to swing just as
dramatically. He pointed to the number of times that AIEDA has
paid a dividend based on unrealized income. For example, in 2010
the dividend was based on nearly $20 million in unrealized
income. Assuming a 50 percent dividend, AIDEA would have paid
$10 million more in dividends than it actually earned. The
situation reversed in 2013 when AIDEA paid a dividend based on
about $20 million in unrealized losses. The cost to the state
was $10 million less in the dividend.
3:03:34 PM
CHAIR COSTELLO asked how he would describe the public policy
value of the bill.
MR. LAMB said tying the dividend to the cash that AIDEA actually
earned from its operations provides much more stability and
predictability for both AIDEA and the state.
SENATOR MEYER asked if it's safe to say that this change doesn't
necessarily mean the state will get more of a dividend or less
of a dividend.
MR. LAMB said we could be better off in some instances and not
in others.
3:08:44 PM
MR. LAMB said the bill also seeks to fix the potential for a
dividend penalty. When the value of a project has been
determined to have been permanently reduced, GAAP requires an
adjusting entry to be booked to reduce and/or remove some or all
of the value of the asset or project from AIDEA's balance sheet.
The resulting entry reduces net income, which either reduces the
dividend or stacks the dividend AIDEA pays due to the adjusting
entry reducing value. The dividend penalty for an adjusting
entry could be 25 percent to 50 percent. He discussed a
hypothetical example.
If the state funded a project with $8.8 million and it were to
go away, the $25.3 million in net income that the dividend would
have been based on would be reduced by $8.8 million so the net
income would be $16.5 million. The $8.8 million has no value and
the dividend is reduced by 50 percent or $4.4 million. He
displayed a visual to discuss the same example. AIDEA believes
this should be fixed, he said.
3:14:27 PM
He reviewed the new statutory language proposed in SB 149. The
language on page 1, lines 10-11, would fix the first problem,
and the language on page 2, lines 5-8, would fix the second
problem.
3:16:06 PM
MR. THERRIAU summarized that the bill adds to the excluded
items, accommodates the new GASB rules, and ensures that
projects that are written off won't drag the dividend down. The
policy of the bill is to add predictability to the dividend.
Referring to Senator Meyer's question, he said these changes
will smooth the impact to the dividend.
CHAIR COSTELLO asked what precipitated the bill.
MR. LAMB said part of it was that the board wanted the ability
to explain why the dividend had shrunk to the legislature. Also,
as he became more familiar with the statutory language he
realized it needed to be fixed. The third reason is that new
GASB rules are coming and there is a compounding effect.
3:21:33 PM
CHAIR COSTELLO held SB 149 in committee.