Legislature(2013 - 2014)HOUSE FINANCE 519
04/15/2014 06:00 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB218 | |
| SB191 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 218 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | SB 191 | TELECONFERENCED | |
CS FOR SENATE BILL NO. 191(FIN)
"An Act relating to the authority of the Legislative
Budget and Audit Committee to approve the temporary
transfer of money from the general fund to
construction funds or accounts; and providing for an
effective date."
SUZANNE ARMSTRONG, STAFF, SENATOR KEVIN MEYER, discussed
the legislation. She announced that SB 191 provided an
administrative fix, established parameters for transferring
general funds to General Obligation Bonds (GO) construction
funds, and enabled better flexible management of GO bond
construction funds and accounts by the State Bond
Committee. She delineated that when the GO bond
construction fund was temporarily exhausted the
commissioner of the Department of Administration (DOA) on
recommendation by the bond committee and Legislative Budget
and Audit Committee (LBA) approval may temporarily transfer
funds from the general fund into the bond fund. Under SB
191, if the transfer did not exceed 25 percent of the amount
of the GO bond, the Commissioner did not need LBA approval.
In addition, SB 191 authorized a 15-month loan period when
advanced funds were transferred from the General Fund to a
GO Bond construction fund. The change aligned with Internal
Revenue Service (IRS) requirements that "advance fund bond
issuance loans were repaid by bond proceeds within 18
months." She noted the proposed shorter timeframe than
required by the IRS. She added that the legislation enabled
more certainty in project schedules and cash flow and
greater capability for the State Bond Committee to "respond
to unforeseen increases in project expenditures." In
addition, SB 191 facilitated greater flexibility in
implementing bond sales. The statute change "eliminated the
negative carry costs of borrowed funds sitting in
construction funds for extended periods of time."
Representative Holmes asked for clarification about how a
transfer from the general fund could occur without any
legislative oversight.
LAURA PIERRE, STAFF, SENATOR ANNA FAIRCLOUGH AND THE
LEGISLATIVE BUDGET AND AUDIT COMMITTEE, replied that SB 191
eliminated the LBA authorization requirement if the amount
of the transfer did not exceed 25 percent of the authorized
bond amount however, notification was still required.
Representative Holmes wondered what amount of money 25
percent of the authorized bond amount typically was.
DEVEN MITCHELL, DEBT MANAGER, DEPARTMENT OF REVENUE,
replied that the authorization required was technical in
nature. The legislature currently granted the
administration the authorization to borrow up to the full
amount of the bond for the same purpose without terms of
repayment. The flexibility currently existed but must be
reauthorized each year in the operating budget. He offered
that a situation could occur where the debt was not sold
over a certain time period and was not included in the
operating budget. He continued that the only outstanding
bond debt authorization happened with the Transportation
Act of 2012 which amounted to approximately $450 million.
Twenty five percent of approximately $110 million could
have been authorized for cash flow purposes for up to 15
months.
Mr. Mitchell discussed instances when the flexibility to
transfer funds without approval would have been
advantageous. He detailed that the state did not issue GO
bonds for a long period of time but had the authorization
in 1984 and 2003. The federal and IRS requirements and
restrictions currently were much more stringent on tax
exempt debt than they had been in 1984. The bill allowed
the state to meet the restrictions; one such restriction
required the state to spend the proceeds from the sale of
tax exempt bonds within three years which, had proven
problematic. In 2003 the state sold approximately $450
million in transportation bonds and did not expend all of
the funds until 2012. The three year limit was
unattainable. In 2008 the Transportation Act was approved,
but a portion of the funds had been replaced with general
funds. The state was only able to sell approximately half
of the bond authorization of $165 million in April 2009 to
fund 18 months of cash flow. The American Recovery and
Reinvestment Act (ARRA) had been approved and the funds
were not expended until 2013. The $165 million was borrowed
at a 4 percent interest rate amortized for 20 years. The
state could not reinvest the proceeds over the long term
therefore; the department was very conservative about the
reinvestment of proceeds. The negative carry associated
amounted to millions of dollars. The department learned
that it needed to approach the bond issues differently and
to the extent possible sell "just in time" rather than
upfront in anticipation of a project.
7:38:02 PM
Representative Holmes ascertained that due to the three
year limit, which the state was not able to consistently
meet, from the time that the state sells the bonds to the
time the state must expend the funds, the state would
rather borrow it from the general fund and pay it back with
bond funds. She asked for verification.
Mr. Mitchell concurred. He elaborated that there was a
potential for certain cash flow issues to arise when
funding projects "just in time." A project can speed up and
the state cannot execute a bond issue in one month; more
time was needed to structure the loan. The legislation
provided the flexibility to meet the need on time.
Representative Holmes wondered if it had been a problem
obtaining Legislative Budget and Audit approval in the
past. She wondered why LBA should be "taken out of the
picture."
Mr. Mitchell replied that the timing element was a factor.
Co-Chair Stoltze asked about the discussion regarding the
issue in LBA committee.
Ms. Pierre answered that prior to the drafting of the bill
Senator Fairclough had met with the Department of Revenue
and Mr. Mitchell to discuss the legislation in particular.
She relayed that Senator Fairclough "had no problem" with
the legislation. She cited page 2, line 8, of the
legislation and related that Senator Fairclough requested
that LBA be notified when such transfers occurred. The
allowance was in line with other funds such as the Disaster
Relief Fund and the DEC Spill Response Fund.
Co-Chair Stoltze asked if the Legislative Budget and Audit
Committee had taken formal action to support the bill.
Ms. Pierre replied in the negative.
Vice-Chair Neuman asked whether the flexibility would allow
the department to save the state money by watching interest
rates and borrowing money later or earlier depending on the
interest rate.
Mr. Mitchell replied that there could be an opportunity to
save money by not borrowing money as quickly and obligate
the negative carry in the construction fund. He exemplified
that if the state lost 3 percent of $100 million the state
would pay $3 million in interest expense just to have the
money sit in the bank. He pointed to another example. He
reported that market disturbances like the crash in 2008
potentially caused losses. At the time of the market crash
he was working on a transaction with the Matanuska Susitna
Borough on a correctional facility. He attempted to "price
the deal" on December 7, 2008. At the time, the statutory
limit on the debt service was $17.8 million annually. The
interest rates were too high at the time to meet the limit.
The design and build contractor was ready to begin and
could terminate the contract on December 31st. The state
ultimately sold the bonds on December 31, 2008 for fewer
than 6 percent and three months later it would have been 5
percent. He believed that the situation led to the state
paying a higher interest rate, and exemplified the need for
granting the department the increased flexibility.
Vice-Chair Neuman surmised that the flexibility to maneuver
had the potential for considerable savings.
Mr. Mitchell answered that that would be a goal of the
legislation. He voiced that the "easily defined" goal was
meeting the IRS code limit for the tax exempt bond issues.
Co-Chair Stoltze wondered why LBA had not taken committee
action on the matter. He believed it would have been
"cleaner."
Representative Gara asked what provision in the state
constitution permitted money withdrawals from the general
fund without legislative authorization.
Mr. Mitchell answered that GO bond debt did not require an
appropriation for repayment. He was not certain whether an
appropriation was required for using general funds as
liquidity for an anticipated general bond issue.
Representative Gara wanted the state to have the
flexibility to borrow as inexpensively as possible but he
thought a constitutional prohibition against general fund
withdrawal without legislative approval existed.
Mr. Mitchell responded that other instances were cited
earlier where authority to use general funds existed. He
reiterated that the AMBB had the authority to borrow from
the general fund. The bond transfer would borrow funds from
the general fund for the purposes of liquidity and the
general fund would be replenished.
Representative Gara restated that general constitutional
rule stated that money could not be withdrawn from the
general fund without legislative approval. He wondered how
the provision was legal. He wondered if the bill would help
reduce the student loan interest rate.
Ms. Pierre answered that the bill he was referring to was
SJR 23.
7:49:39 PM
Representative Munoz asked if there were examples when the
LBA committee had slowed down the process.
Mr. Mitchell replied in the negative. He offered that there
was an instance when timing with the LBA meetings was an
issue in resolving a cash flow matter.
Co-Chair Stoltze OPENED public testimony.
Co-Chair Stoltze CLOSED public testimony.
Co-Chair Stoltze pointed to the zero fiscal note, FN1 (REV)
from the Department of Revenue.
Representative Gara wanted someone to point to the location
in the constitution that authorized the provision.
Co-Chair Austerman cited Article 9 [Finance and Taxation]
Section 13 of the Alaska Constitution and referred to the
words "appropriated by law." He surmised that SB 191 was a
law allowing the appropriation.
Representative Edgmon referred to the previous bill [SB 218
Muni Bond Bank; UAF Heat & Pwr Plant] and asked whether
passage of SB 191 affected SB 218.
Mr. Mitchell replied in the negative.
Co-Chair Stoltze wondered whether the 25 percent was an
absolute maximum or was the 25 percent limit allowed for
each transfer of funds.
Mr. Mitchell replied that it was the intent of the
administration that the limit was up to 25 percent of the
total bond authorization. He exemplified that a $100
million bond allowed borrowing of up to $25 million at any
point in time for to 15 months for the purposes of
liquidity.
Co-Chair Stoltze cited page 1 line 11:
If the amount of the transfer exceeds 25 percent of
the amount …
Co-Chair Stoltze inserted the word "cumulative" in front of
transfer and wondered if that would more clearly indicate
the intent of the 25 percent limit and not "harm" the
legislation.
AT EASE
7:55:40 PM
RECONVENED
7:56:25 PM
Mr. Mitchell pointed out that once employed for a
particular authorization the language would eliminate the
ability to use the provision for future potential bond
issue use. He suggested using language that indicated that
the 25 percent was "rolling."
Representative Holmes wondered whether it was possible to
hold the bill until the proper language could be
identified.
Representative Costello asked if adding the word,
"initially authorized" after amount to read, " If the
amount of the transfer exceeds 25 percent of the amount
initially authorized."
Co-Chair Stoltze wanted to ensure clarity in the language
and thought the issue was a "very important policy" matter.
Representative Holmes believed that the committee needed
more time to find the proper language.
Ms. Armstrong stated her willing to work with the committee
to ensure that the language was correct and that the impact
would affect the intent of the provision.
Co-Chair Stoltze wanted to prevent future abuses of the
provision via clarification and to ensure that the intent
of the sponsor was met.
Co-Chair Austerman asked about the full paragraph on page 1
beginning on line 6. He read:
"When a construction fund or account established to
receive the proceeds of state general obligation
bonds…"
Co-Chair Austerman wondered whether the words "a
construction fund or account" met the intent of the
legislation. He thought that the language was not specific
enough.
Mr. Mitchell answered that when general obligation bonds
were authorized a fund was simultaneously created to
deposit the proceeds. The language referred to that
particular fund. He suggested the amendment language "at
any time" after the word transfer to read:
"If the amount of the transfer at any time exceeds 25
percent of the amount authorized"
Mr. Mitchell explained that the 25 percent limit could not
be exceeded without approval from LBA.
Co-Chair Stoltze asked whether the suggestion matched the
intent of the sponsor.
Ms. Pierre replied in the affirmative.
| Document Name | Date/Time | Subjects |
|---|---|---|
| sponsorstatement.sb218.pdf |
HFIN 4/15/2014 6:00:00 PM |
SB 218 |
| sectional analysis.sb218fin.pdf |
HFIN 4/15/2014 6:00:00 PM |
SB 218 |
| SB 218 Amendment #1 Thompson.pdf |
HFIN 4/15/2014 6:00:00 PM |
SB 218 |