02/15/2010 09:00 AM Senate FINANCE

SENATE BILL NO. 270                                                                                                           
                                                                                                                                
     "An Act relating to the dividend paid to the state by                                                                      
     the Alaska Housing Finance Corporation; and providing                                                                      
     for an effective date."                                                                                                    
                                                                                                                                
BRYAN  BUTCHER,  DIRECTOR,  GOVERNMENT   AFFAIRS  AND  PUBLIC                                                                   
RELATIONS, ALASKA HOUSING FINANCE  CORPORATION, DEPARTMENT OF                                                                   
REVENUE, explained that sponsor statement.                                                                                      
                                                                                                                                
                     SPONSOR STATEMENT                                                                                        
                                                                                                                                
                                                                                                                                
     Senate Bill 270 will modify the Alaska Housing Finance                                                                     
     Corporation's transfer plan statutes to reflect federal                                                                    
     changes in generally accepted accounting principles.                                                                       
                                                                                                                                
     House Bill 256 passed in 2003 that set in statute a                                                                        
     transfer plan for AHFC to pay an annual dividend to the                                                                    
     state of Alaska. The yearly dividend would be lesser of                                                                    
     $103 million or 75 percent of the Corporation's net                                                                        
     income for the previously completed fiscal year minus                                                                      
     bond repayments for state capital projects.                                                                                
                                                                                                                                
     In 2006, Senate Bill 236 passed that made the first                                                                        
     adjustments to the transfer plan. This bill changed the                                                                    
     definition of "net income" to "adjusted change in net                                                                      
     assets", which reflected federal changes to generally                                                                      
     accepted accounting principles.                                                                                            
                                                                                                                                
     SB 270 will make another modification due to federal                                                                       
     changes in generally accepted accounting principles. It                                                                    
     will add to the definition of "adjusted change in net                                                                      
     assets" to include "temporary market value adjustments to                                                                  
     assets and liabilities made during the base fiscal year".                                                                  
     This change will allow for a true dollar figure for the                                                                    
     Corporation's dividend to be calculated from rather than                                                                   
     inaccurately high or low numbers based on how interest                                                                     
     rate swaps are now considered.                                                                                             
                                                                                                                                
Co-Chair  Stedman asked  for an explanation  of the  interest                                                                   
rate swap.                                                                                                                      
                                                                                                                                
JOE  DUBLER,  DIRECTOR  OF FINANCE,  ALASKA  HOUSING  FINANCE                                                                   
CORPORATION,  explained  that  an  interest rate  swap  is  a                                                                   
derivative financial instrument  where the corporation enters                                                                   
into a contract  with a counter  party where they are  paid a                                                                   
fixed  rate in  exchange for  a variable  rate. The  variable                                                                   
rate is  based on an  index. This allows  for the  selling of                                                                   
variable rate  bonds to  hedge the  change of interest  rates                                                                   
over the  30 year time period  bonds are typically  sold. The                                                                   
Alaska Housing  Finance Corporation has lowered  the costs of                                                                   
funds by entering these interest swaps.                                                                                         
                                                                                                                                
Mr. Butcher remarked  that SB 270 is a simple  bill. Co-Chair                                                                   
Stedman inquired  if there have been any  problems collecting                                                                   
on the swaps.  Mr. Dubler responded that currently  the swaps                                                                   
are marked  to market every  quarter for financial  statement                                                                   
presentation. If the swap out  was closed today than it would                                                                   
require a payment to the counter party.                                                                                         
                                                                                                                                
Senator Olson  asked who would  want an interest  rate switch                                                                   
in light of the  low interest rates on the  world market. Mr.                                                                   
Dubler answered  that these swaps  were entered into  in 2001                                                                   
through 2006  when the  corporation saw  the majority  of the                                                                   
mortgage activity  was from home buyers. The  mortgage market                                                                   
started  offering very  sophisticated  loan  products to  all                                                                   
borrowers that caused the Alaska  Housing Finance Corporation                                                                   
concern.  The  corporation  decided   to  take  on  the  risk                                                                   
themselves because  they had the  expertise to take  on these                                                                   
types of transactions  and pass the benefit  to the borrowers                                                                   
in  the  form  of a  lower  interest  rate.  Most  for-profit                                                                   
corporations enter into some sort of interest rate hedge.                                                                       
                                                                                                                                
9:49:27 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  remarked that  many parties were  caught by                                                                   
surprise by the derivative market.  Mr. Butcher remarked that                                                                   
the corporation  had three  swaps with  Lehman Brothers,  but                                                                   
when  Lehman Brothers  went bankrupt,  the corporation  wrote                                                                   
them  a check  to purchase  out  of the  position. The  three                                                                   
swaps were  rebid and  several million  dollars were  made in                                                                   
the transaction.                                                                                                                
                                                                                                                                
9:50:38 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  reported  a  zero  fiscal  note  from  the                                                                   
Department of Revenue.                                                                                                          
                                                                                                                                
Senator  Thomas asked  if  this was  being  made during  base                                                                   
fiscal year or on an annual basis.                                                                                              
                                                                                                                                
Mr.  Butcher   responded  that   the  adjustments   are  made                                                                   
annually.  This  makes  an  adjustment   from  the  financial                                                                   
statements to what  was originally agreed to  in the transfer                                                                   
plan.  Accounts have  made a lot  of changes  over the  years                                                                   
that have  affected the agreement  with the legislature  over                                                                   
what the  dividend would be on  an annual basis.  The general                                                                   
accounting principals have been  modified to require      the                                                                   
corporation  to  include  changes  in  the  market  value  of                                                                   
certain  interest  rate  swaps.  This  was not  part  of  the                                                                   
original deal with the legislature.  SB 270 asks to back this                                                                   
modification out.                                                                                                               
                                                                                                                                
Senator  Thomas inquired  if  it would  be  broader with  the                                                                   
changes.                                                                                                                        
                                                                                                                                
Mr. Butcher explained there was  another motivation from 1997                                                                   
that  required the  corporation to  bring booking  marketable                                                                   
debts securities to market. The  change was immaterial to the                                                                   
corporation's financial statements.  The swap situation could                                                                   
have large  swings in value from  quarter to quarter  and the                                                                   
corporation did  not want a $10  million net increase  in one                                                                   
year  affecting  the  dividend,  then  maybe  a  $10  million                                                                   
decrease for the following year  also affecting the dividend.                                                                   
                                                                                                                                
9:53:53 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  questioned the  corporation's intention  of                                                                   
going forward with derivatives.                                                                                                 
                                                                                                                                
Mr. Butcher  responded that they  would not be  entering into                                                                   
any more in the near future. The  corporation's debt issuance                                                                   
for this  calendar year will  consist mainly of  some federal                                                                   
bonds through 2010.                                                                                                             
                                                                                                                                
Co-Chair  Stedman  questioned the  reason  for  not doing  it                                                                   
anymore.  Mr. Butcher  replied that the  interest rate  swaps                                                                   
entered to date  have been swaps that change  a variable rate                                                                   
debt into  a fixed  rate obligation  of the corporation.  The                                                                   
variable rate  debt market in  the world has had  some issues                                                                   
with liquidity in  the past year and a half.  There have been                                                                   
a  lot  of bond  holders  putting  the  bonds back  into  the                                                                   
corporation and  they have  had to come  up with the  cash to                                                                   
pay  off their  position.  The  variable rate  interest  rate                                                                   
today  is  almost   non-existent  due  to  the   shortage  of                                                                   
liquidity.                                                                                                                      
                                                                                                                                
Co-Chair  Stedman asked  if these  are  standardized or  non-                                                                   
standardized  contracts.   Mr.  Butcher  remarked   that  the                                                                   
general terms are  standardized, but each firm  has their own                                                                   
way of doing business. Co-Chair  Stedman asked Mr. Butcher to                                                                   
explain  the  difference  between  a  standardized  and  non-                                                                   
standardized contract.                                                                                                          
                                                                                                                                
9:57:04 AM                                                                                                                    
                                                                                                                                
Mr. Butcher  explained that the  liquidity facilities  are an                                                                   
agreement  where  the  provider   supplies  liquidity  for  a                                                                   
variable rate  debt obligation.  Bond holders have  the right                                                                   
every seven days to put the bonds  back into the corporation;                                                                   
therefore the  corporation must have  the money to  pay those                                                                   
bonds off. Since  the corporation does not usually  have that                                                                   
large a sum  of money available an agreement  is entered into                                                                   
with a bank to provide liquidity  in case a bond holder wants                                                                   
their money.  There are then  further agreements  between the                                                                   
corporation and the bank.                                                                                                       
                                                                                                                                
9:59:22 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  understood  the standardization,  but  the                                                                   
transparency was  not as apparent  as many thought  hence the                                                                   
world financial  situation. The state  of Alaska did  not get                                                                   
hit as bad as  many areas in the country,  but comfort levels                                                                   
are still not high.                                                                                                             
                                                                                                                                
SB270   was  HEARD  and   HELD  in   Committee  for   further                                                                   
consideration.