Legislature(2011 - 2012)HOUSE FINANCE 519

02/09/2012 01:30 PM House FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ HB 283 BUDGET: CAPITAL TELECONFERENCED
Heard & Held
*+ HB 285 APPROP: MENTAL HEALTH BUDGET TELECONFERENCED
Heard & Held
*+ HB 307 SUPPLEMENTAL/CAPITAL/OTHER APPROPRIATIONS TELECONFERENCED
Heard & Held
*+ HB 286 G.O. BONDS FOR PORTS TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 286                                                                                                            
                                                                                                                                
     "An Act providing  for and relating to  the issuance of                                                                    
     general obligation bonds for  the purpose of paying the                                                                    
     cost of  municipal port projects; and  providing for an                                                                    
     effective date."                                                                                                           
                                                                                                                                
2:07:47 PM                                                                                                                    
                                                                                                                                
Co-Chair Stoltze asked for information on the governor's                                                                        
proposal to use general obligation (G.O.) bonds as a                                                                            
funding approach.                                                                                                               
                                                                                                                                
ANGELA RODELL, DEPUTY COMMISSIONER, TREASURY DIVISION,                                                                          
DEPARTMENT OF REVENUE, read from a statement:                                                                                   
                                                                                                                                
     This bill would authorize  the issuance of $350 million                                                                    
     in general obligation debt.  General obligation debt is                                                                    
     backed by the  full faith, credit and  resources of the                                                                    
     State. We currently have  approximately $628 million in                                                                    
     general  obligation bonds  outstanding.  The State  has                                                                    
     the  resources and  capacity to  take  on the  proposed                                                                    
     additional debt.                                                                                                           
                                                                                                                                
     Currently, interest  rates are  at historic  lows. This                                                                    
     has  allowed us  to take  advantage of  the market  and                                                                    
     reduce  our debt  service  obligations.  In January  of                                                                    
     2012,  we sold  $175.56 million  of general  obligation                                                                    
     refunding  bonds (with  more  than $26  million of  the                                                                    
     2012 bonds sold  to Alaskans) and used  the proceeds to                                                                    
     refund $191.410  million of bonds that  had been issued                                                                    
     in 2003.  This transaction has an  all-in true interest                                                                    
     cost  of 1.24%  and saved  the state  $27 million,  net                                                                    
     present value.                                                                                                             
                                                                                                                                
     This  transaction  demonstrates the  attractiveness  of                                                                    
     Alaska's general obligation paper  and also the current                                                                    
     low cost  of borrowing  in the  tax exempt  market. Any                                                                    
     new debt  issued will have the  debt service structured                                                                    
     to provide  a low cost of  funds and a level  burden on                                                                    
     future  state budgets.  As we  move  forward with  this                                                                    
     proposed  legislation, we  would like  to work  closely                                                                    
     with  you  to  ensure  all of  the  projects  meet  the                                                                    
     necessary  tests   for  tax  exemption  and   can  take                                                                    
     advantage of the low rates.                                                                                                
                                                                                                                                
     In November  of 2010, Moody's Investors  Service raised                                                                    
     the state's general obligation rating  to AAA. This was                                                                    
     followed by  S&P raising  our rating  to AAA  this past                                                                    
     December. A  triple A rating is  the highest investment                                                                    
     grade  rating achievable  and expresses  an opinion  of                                                                    
     the rating  agency as  to the ability  of the  state to                                                                    
     honor  its  long-term unsecured  financial  obligations                                                                    
     and contracts. In reviewing  our rating, Fitch, Moody's                                                                    
     and  S&P will  be looking  to the  final dollar  amount                                                                    
     issued and  the overall plan of  finance in conjunction                                                                    
     with other State issues such  as revenues, expenses and                                                                    
     other  commitments   such  as  the   PERS/TRS  unfunded                                                                    
     liability.                                                                                                                 
                                                                                                                                
     We  have  provided  a fiscal  note  which  assumes  the                                                                    
     voters   would   approve   $350  million   in   general                                                                    
     obligation bonds.  We are required  by federal  tax law                                                                    
     to track all  funds to final expenditure  and to ensure                                                                    
     that all funds are spent within  3 years of the date of                                                                    
     issuance. In  order to comply with  these requirements,                                                                    
     we  assumed   the  bonds  would  be   issued  in  three                                                                    
     tranches, giving  an opportunity for funds  to be spent                                                                    
     before  additional debt  is  incurred.  We assumed  the                                                                    
     first issuance  would come in February  2013, following                                                                    
     the November 2012 election.  Debt repayment would begin                                                                    
     in Fiscal Year 2014.                                                                                                       
                                                                                                                                
2:11:39 PM                                                                                                                    
                                                                                                                                
Ms. Rodell continued reading from a statement:                                                                                  
                                                                                                                                
     The  costs  associated  with  issuing  bonds  including                                                                    
     underwriting,   ratings,   legal   counsel,   financial                                                                    
     advisors,    marketing    and   disclosure    services,                                                                    
     administration and  printing, for  a $350  million bond                                                                    
     program would  total approximately $2,965,000  or $8.50                                                                    
     per bond.                                                                                                                  
                                                                                                                                
Co-Chair Stoltze asked whether there were projections that                                                                      
showed how different interest rates would impact the FY 14                                                                      
operating budget and beyond.                                                                                                    
                                                                                                                                
Ms. Rodell replied that interest  rates were not expected to                                                                    
rise   in  the   near-term;  the   department  had   made  a                                                                    
conservative estimate  of 4 percent  if an issuance  did not                                                                    
occur until 2014.  She elaborated that DOR  had raised rates                                                                    
slightly with  the assumption that they  would rise somewhat                                                                    
because  there would  be two  years before  it had  the full                                                                    
issuance.   The   projected    interest   rate   would   add                                                                    
approximately $19 million per year in debt service.                                                                             
                                                                                                                                
Representative Wilson  asked whether investments  would make                                                                    
more than  4 percent. Ms.  Rodell replied that  DOR expected                                                                    
the long-term  funds would exceed 4  percent. Representative                                                                    
Wilson asked  what the same  funds had made the  prior year.                                                                    
Ms.  Rodell  replied  that  the  DOR  Revenue  Sources  Book                                                                    
assumed a 3.2  percent rate for general  funds going forward                                                                    
and a 6.85 percent rate for long-term funds.                                                                                    
                                                                                                                                
Representative Gara asked what  the Statutory Budget Reserve                                                                    
(SBR)  was currently  earning. Ms.  Rodell replied  that the                                                                    
SBR  was   currently  earning  approximately   3.5  percent.                                                                    
Representative Gara  asked whether the amount  was less than                                                                    
the bonds would  cost. Ms. Rodell answered  that DOR assumed                                                                    
a rate  of 3.2 percent  at present with the  assumption that                                                                    
rates would rise on the  bond issuance; it also assumed that                                                                    
rates  would   increase  on  the  SBR   if  borrowing  costs                                                                    
increased to 4 percent.                                                                                                         
                                                                                                                                
2:15:23 PM                                                                                                                    
                                                                                                                                
Representative Gara  surmised that  the SBR was  invested in                                                                    
short-term issuances and that it  could be used more quickly                                                                    
than Constitutional  Budget Reserve (CBR) funds.  Ms. Rodell                                                                    
responded in the affirmative.                                                                                                   
                                                                                                                                
Representative Gara  discussed that there was  currently $16                                                                    
billion  in savings  and  the state  would  have no  problem                                                                    
making long-term  bond payments  in the next  several years.                                                                    
He was  concerned about the possibility  of increased annual                                                                    
payments  of $19  million ten  years out  if state  revenues                                                                    
decreased and  costs continued to  increase. He  thought the                                                                    
state could be  more responsible presently and  know what it                                                                    
could afford to spend.                                                                                                          
                                                                                                                                
Ms. Rodell  replied that there  would be no money  to invest                                                                    
for the  future if  the $350 million  was spent  at present;                                                                    
therefore,  there would  be no  funds to  fall back  on when                                                                    
revenues were on the decline.  Whereas, the state would only                                                                    
need to come up with $19  million to pay the debt service if                                                                    
debt had been issued. She  stressed that once cash was spent                                                                    
it was gone.                                                                                                                    
                                                                                                                                
Representative Gara believed that  the state would be facing                                                                    
a tighter  budget 10 years  in the  future and that  the SBR                                                                    
could be much  smaller if it only earned 3  or 4 percent per                                                                    
year. He opined that DOR's  assumption that the SBR would be                                                                    
the same  size in  ten years was  unlikely. He  believed the                                                                    
state  should work  to protect  future years  from long-term                                                                    
obligation.                                                                                                                     
                                                                                                                                
Co-Chair  Stoltze  commented  that  bonds  had  an  internal                                                                    
discipline and  they had to  be inherently fair  for Alaskan                                                                    
voters  to approve.  He added  that the  governor could  not                                                                    
"cherry  pick"  or veto  certain  sections.  He opined  that                                                                    
perhaps  spending  would even  be  restrained  less than  it                                                                    
would have been through other spending vehicles.                                                                                
                                                                                                                                
2:18:47 PM                                                                                                                    
                                                                                                                                
Representative Doogan  asked whether the bond  issuance cost                                                                    
would come  out of the  general fund. Ms. Rodell  replied in                                                                    
the affirmative.                                                                                                                
                                                                                                                                
Representative  Doogan wondered  whether  the issuance  cost                                                                    
was the only cost that  tax payers were responsible for. Ms.                                                                    
Rodell answered that outside of  the issuance cost, the only                                                                    
other cost  was associated with principle  and interest; the                                                                    
costs were amortized over the life of the debt.                                                                                 
                                                                                                                                
Representative  Doogan queried  the total  cost of  existing                                                                    
bonds. Ms.  Rodell replied that  there were $628  million in                                                                    
outstanding principal.  She asked  for clarification  on the                                                                    
question.                                                                                                                       
                                                                                                                                
Co-Chair Stoltze  clarified that  the question  related only                                                                    
to G.O. bonds.                                                                                                                  
                                                                                                                                
Representative  Doogan verified  that he  was interested  in                                                                    
the current  cost of existing  G.O. bonds. Ms.  Rodell would                                                                    
follow up with the information.                                                                                                 
                                                                                                                                
Representative Doogan  noted that  the current  $350 million                                                                    
was likely  to increase. He  asked for verification  that if                                                                    
the  state's total  indebtedness  was $670  million that  50                                                                    
percent would have been added  to the debt total. Ms. Rodell                                                                    
responded in the affirmative.                                                                                                   
                                                                                                                                
2:21:06 PM                                                                                                                    
                                                                                                                                
Representative  Joule  wondered  how   high  the  state  was                                                                    
willing  to   go  related  to   a  bond  package   with  the                                                                    
understanding  the legislature  would have  an interest.  He                                                                    
observed  that the  governor recognized  needs of  the state                                                                    
through legislation  and that  negotiation would  occur with                                                                    
the state's upper tolerance level in mind.                                                                                      
                                                                                                                                
KAREN REHFELD,  DIRECTOR, OFFICE  OF MANAGEMENT  AND BUDGET,                                                                    
OFFICE  OF  THE  GOVERNOR,  replied that  the  governor  had                                                                    
indicated there  was room for  between $50 and  $75 million.                                                                    
She believed there  was also sensitivity to  what the voters                                                                    
felt comfortable approving.                                                                                                     
                                                                                                                                
Representative  Joule  referred  to talk  about  "one-third,                                                                    
one-third, one-third."                                                                                                          
                                                                                                                                
Co-Chair Stoltze pointed to the  fiscal note that included a                                                                    
sale schedule.                                                                                                                  
                                                                                                                                
2:23:00 PM                                                                                                                    
                                                                                                                                
Representative Edgmon wondered whether  the bond package had                                                                    
been directed at "shovel ready" projects.                                                                                       
                                                                                                                                
Ms.  Rehfeld  answered that  the  projects  were in  various                                                                    
stages;  some  were  more  shovel  ready  than  others.  She                                                                    
explained that the timing of  the bond sales would depend on                                                                    
where the projects' stood. She  pointed out that none of the                                                                    
projects would  be fully funded  for specific phases  and it                                                                    
would  be important  for the  projects to  be able  to reach                                                                    
completion  with the  help of  other financing  options. She                                                                    
restated that the bonds were  not designed to fully fund the                                                                    
projects.                                                                                                                       
                                                                                                                                
2:24:19 PM                                                                                                                    
                                                                                                                                
Co-Chair Thomas  believed that community  projects partially                                                                    
funded  by  bonds  would  need  additional  funding  in  the                                                                    
future.  He wondered  why the  projects would  not be  fully                                                                    
funded with  bond money, given  his belief that it  would be                                                                    
less expensive than using general funds.                                                                                        
Ms.  Rehfeld responded  that  there  were different  funding                                                                    
opportunities for  each project  and some were  working with                                                                    
the  Alaska  Industrial  Development  and  Export  Authority                                                                    
(AIDEA).                                                                                                                        
                                                                                                                                
Co-Chair Stoltze remarked  that it was not  necessary to get                                                                    
into  detail on  specific  projects during  the meeting.  He                                                                    
thought there were  pros and cons to  fully funding projects                                                                    
all at  once. He noted  the issue would  be dealt with  as a                                                                    
policy that was  presented in the budget and  without it the                                                                    
construction of the capital budget  would be different given                                                                    
that  holes  would  be  created.   Ms.  Rehfeld  agreed  and                                                                    
believed the governor had put  the bill forward to work with                                                                    
the legislature on  developing infrastructure along Alaska's                                                                    
coastline.                                                                                                                      
                                                                                                                                
Vice-chair  Fairclough asked  how much  bond debt  the state                                                                    
typically  had  relative  to  the  $627  million  debt.  She                                                                    
relayed that  the legislature had  been working to  pay down                                                                    
debt during her  time in office. She asked  for a historical                                                                    
five to  ten year perspective.  Ms. Rodell replied  that the                                                                    
state had a past history of not issuing bond debt.                                                                              
                                                                                                                                
Co-Chair Stoltze  pointed to bonds  used in 2002,  2008, and                                                                    
2011.                                                                                                                           
                                                                                                                                
Ms. Rodell continued  to reply and explained  that there was                                                                    
$197 million in voter  approved authorized unissued debt for                                                                    
education;  before the  debt was  issued  the Department  of                                                                    
Education and Early  Development would have to  show that it                                                                    
was prepared to  spend the money during  the three-year time                                                                    
frame.  The  $628  million  was  more  than  the  state  had                                                                    
historically had  on its books,  given that the state  had a                                                                    
long period of no G.O. debt issuance.                                                                                           
                                                                                                                                
Co-Chair Stoltze  explained that there had  been securitized                                                                    
loans  and revenue  bonds on  the  books and  that the  G.O.                                                                    
bonds had been  present during the past  three elections; he                                                                    
noted his  preference for the approach,  given its inclusion                                                                    
of voters.                                                                                                                      
                                                                                                                                
Vice-chair Fairclough  noted that Standard and  Poor's (S&P)                                                                    
had recently upgraded the state's  credit rating to AAA. She                                                                    
pointed to the  fiscal note that showed  an expected blended                                                                    
rate of 2.35  percent on the $350 million debt.  The CBR was                                                                    
currently yielding 3.4 percent and  the CBR subaccount had a                                                                    
6.85 percent rate  of return. She surmised  that there would                                                                    
be  a  net  gain  to  Alaskans.  She  discussed  that  small                                                                    
communities  may  not  have  the ability  to  come  up  with                                                                    
matching  funds  that  the   administration  may  want.  She                                                                    
wondered  how the  bond  market would  look  at the  state's                                                                    
fiscal  structure of  $16 billion  per year.  She referenced                                                                    
the decline in  production that had been offset  by the high                                                                    
production value.                                                                                                               
                                                                                                                                
2:33:11 PM                                                                                                                    
                                                                                                                                
Ms. Rodell answered that rating  agencies would primarily be                                                                    
concerned about  the state's  plan to  repay debt,  but they                                                                    
would  not put  a  cap  on the  state's  debt issuance.  She                                                                    
communicated  that the  state  had traditionally  structured                                                                    
its debt very conservatively and  it worked to limit debt to                                                                    
20 years  or less. The  state worked to actively  manage and                                                                    
take  advantage of  current  markets and  had  been able  to                                                                    
frontload a significant  portion of the debt,  to keep near-                                                                    
term  debt  service constant,  and  offer  relief in  FY  22                                                                    
through FY  24 by  over $10 million  per year.  She believed                                                                    
agencies  would  look  at  all   of  the  state's  financial                                                                    
obligations including the unfunded  liability for the Public                                                                    
Employees'   Retirement   System    (PERS)   and   Teachers'                                                                    
Retirement System  (TRS). Agencies would also  look at steps                                                                    
Alaska  was taking  to manage  the obligations,  to increase                                                                    
revenues,  and to  hold budgets  back  in declining  revenue                                                                    
years.  She expounded  that  Alaska had  a  good history  of                                                                    
showing  fiscal restraint  when  revenues  were not  meeting                                                                    
expectations.                                                                                                                   
                                                                                                                                
Vice-chair Fairclough  discussed the  PERS and  TRS unfunded                                                                    
liability.  She surmised  that the  state was  able to  move                                                                    
within  the  current range,  maintain  its  AAA rating  with                                                                    
Moody's and  S&P, and go  forward carrying debt  without too                                                                    
much  of  a burden  on  the  current operating  budget.  Ms.                                                                    
Rodell agreed.                                                                                                                  
                                                                                                                                
Co-Chair  Stoltze believed  the  governor would  communicate                                                                    
his views on the appropriate debt cap.                                                                                          
                                                                                                                                
HB  286  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                

Document Name Date/Time Subjects
HB 307-Supplemental_Spreadsheet_1-31-12.pdf HFIN 2/9/2012 1:30:00 PM
HB 307
HB286-DOR-TRS-NEW FN 01-31-12.pdf HFIN 2/9/2012 1:30:00 PM
HB 286
HB 286 Testimony.pdf HFIN 2/9/2012 1:30:00 PM
HB 286
HB 283-Response to HFC Questions Capital Budget letter dated 2.21.2012.pdf HFIN 2/9/2012 1:30:00 PM
HB 283