Legislature(2013 - 2014)HOUSE FINANCE 519

04/15/2014 06:00 PM House FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ SB 218 MUNI BOND BANK; UAF HEAT & PWR PLANT TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
+ SB 191 GENERAL OBLIGATION BOND FUND TRANSFER TELECONFERENCED
Heard & Held
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