Legislature(2005 - 2006)CAPITOL 120
03/09/2005 01:00 PM House JUDICIARY
| Audio | Topic |
|---|---|
| Start | |
| HB103 | |
| HB187 || HB188 | |
| HB149 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 103 | TELECONFERENCED | |
| *+ | HB 187 | TELECONFERENCED | |
| *+ | HB 188 | TELECONFERENCED | |
| = | HB 149 | ||
HB 187 - AMERADA HESS INCOME; CAPITAL INCOME ACCT. HB 188 - STATE OF AK CAPITAL CORP.; BONDS 1:28:10 PM CHAIR McGUIRE announced that the next order of business would be a hearing on two bills: HOUSE BILL NO. 187, "An Act establishing the Alaska capital income account within the Alaska permanent fund; relating to deposits into the account; relating to certain transfers regarding the Amerada Hess settlement to offset the effects of inflation on the Alaska permanent fund; and providing for an effective date."; and HOUSE BILL NO. 188, "An Act establishing the State of Alaska Capital Corporation; authorizing the issuance of bonds by the State of Alaska Capital Corporation to finance capital improvements in the state; and providing for an effective date." The committee took an at-ease from 1:29 p.m. to 1:30 p.m. 1:30:01 PM CHERYL FRASCA, Director, Office of Management & Budget (OMB), Office of the Governor, explained that HB 187 is the infrastructure for the [governor's] proposal by which the governor's budget would fund approximately $340 million worth of capital projects. She relayed that others from the administration would speak to the provisions of [HB 187 and HB 188] and to the kind of structure that is necessary in order to issue bonds and then use the earnings from the settlement of the State v. Amerada Hess, et al. 1 JU-77-847 Civ. (Superior Court, First Judicial District) case to pay for the debt. 1:31:09 PM MICHAEL BARNHILL, Assistant Attorney General, Commercial/Fair Business Section, Civil Division (Juneau), Department of Law (DOL), explained that the state filed suit against the oil companies in 1977. The litigation proceeded for many, many years, and when the case was on its way to trial in the late 1980s, objections were raised, on the basis of bias, regarding allowing Alaskans to sit on the jury and as judges on the case, since they could potentially benefit from any judgment arrived at, because a portion of the judgment would go into the permanent fund and in turn be distributed to them via permanent fund dividends (PFDs). This issue was litigated in multiple courts, before multiple judges, and culminated in legislation that altered Title 37 - specifically the statutes pertaining to the permanent fund - and provided that any monies that came from the Amerada Hess litigation would be segregated in the permanent fund so that any earnings on those monies would not flow into the (PFD) program but would instead be rededicated to the principal of the permanent fund. MR. BARNHILL relayed that the issue has been raised regarding whether the state can now change that statute, and the DOL is of the opinion that such can be done, though there are policy implications inherent in doing so. The attorneys that worked on the Amerada Hess litigation are concerned about the [public] perception of repealing the statute if there were to be a big case in the future that could potentially benefit the permanent fund, since the same aforementioned bias issue could again be raised. If the state gets the reputation of enacting "these" statutes and then repealing them, the public's perception of that could be of concern, but that is a policy issue, not a legal issue. In response to questions, he relayed that the aforementioned statute is in Title 37.13.145(d), which was enacted in 1989. REPRESENTATIVE GRUENBERG said he wants a copy of a written legal opinion by the DOL addressing the issue of whether the state can change the statute. He asked whether the DOL or any one else has any opinions to the contrary. MR. BARNHILL said the DOL did not, but he did not know whether others did. CHAIR McGUIRE, noting that the legislature has the authority to change statute, suggested that the issue is really whether the spirit of agreement is incorporated into the statute and how that impacts future negotiations. 1:36:04 PM MR. BARNHILL said that there was never any agreement "to do this," rather it was just a solution to the concern regarding the potential bias of judges and jurors. He relayed that the court also came up with its own solution in 1989, which was to amend both the Alaska Rules of Civil Procedure and the Alaska Rules of Criminal Procedure to provide that the mere receipt of a PFD would not constitute a challenge for cause; these changes took effect in 1990 via Alaska Supreme Court Order 1013, which amended Rule 47(c) of the Alaska Rules of Civil Procedure and Rule 24(c) of the Alaska Rules of Criminal Procedure. He added that because of a later amendment to Rule 47, the change brought about by the aforementioned Supreme Court Order can now be found under Rule 47(c)(13). REPRESENTATIVE GRUENBERG offered his interpretation of the [rule] of necessity as being, "if everybody's disqualified, nobody is disqualified," and said that court systems have used the rule of necessity [when there are] challenges, for example, to the federal judicial retirement system, where every federal judge in the country would be disqualified. He asked whether the DOL has any feeling about having the rule of necessity statutorily enacted. MR. BARNHILL declined to express an opinion on that issue at this time. REPRESENTATIVE GARA opined that it would be a travesty to base policy on what he considers to be a frivolous argument made by oil company attorneys 15 years ago, and noted that the [Alaska] Supreme Court has ruled, via the adoption of court rule changes, that it is okay for somebody to sit on a jury even though he/she gets a dividend. He asked for details regarding the court rulings on the Amerada Hess case. 1:40:10 PM MR. BARNHILL said there were several court rulings and he would provide the committee with a list. In response to additional questions, he offered his understanding that most of the rulings were in favor of not disqualifying the judge, and said he would research the issue further but didn't think there were any rulings favoring the oil company's position. MR. BARNHILL, in response to further questions, relayed that the statutory segregation of funds was done to address the perceived problem regarding bias, so as to enable the case to go forward; that Judge Walter Carpeneti issued a "notice of intention to grant motion for disqualification," indicating that at that point in time he was in favor of the oil companies' position, but he never did grant the motion - it was in the wake of that notice that the aforementioned legislation was enacted; and that the U.S. Court of Appeals 1994 case, Exxon Corporation v. Harold C. Heinze; Charles E. Cole; Ronald Swanson; James E. Eason, did not address the bias issue, but did say, "Because the parties have not yet developed a factual record on the value of the remaining claims or their potential impact - if any - on Alaska permanent fund dividends, we cannot evaluate Exxon's bias claims on their merits." CHAIR McGUIRE noted that that case also says: "We express no opinion on the merits of the parties' arguments regarding abstention and the rule of necessity. The district court order dismissing Exxon's complaint with prejudice is vacated, and the case is remanded to the district court to dismiss without prejudice." REPRESENTATIVE GARA asked how much the state received from the Amerada Hess litigation. MR. BARNHILL suggested that the OMB could better address that question, but offered his belief that the total amount is [in excess] of $250 million and that with interest compounding over the years the amount is now [in excess] of $400 million. 1:45:09 PM DEVON MITCHELL, Debt Manager, Treasury Division, Department of Revenue (DOR), referred to a several-page handout in members' packets and indicated that it contains information regarding both HB 187 and HB 188, the general ideas of which flow in concert. House Bill 187 would allow earnings from the Amerada Hess settlement to flow into the proposed Alaska capital income account. House Bill 188 creates the State of Alaska Capital Corporation, which would have the ability to issue up to $350 million in corporation obligation bonds that would be used to fund the state's capital projects. Further, the potential source of payment of operating leases, which the corporation would enter into with agencies that would benefit from the projects, would be the Alaska capital income account, though initially the Alaska capital income account would also be used to fund the establishment of the State of Alaska Capital Corporation. MR. MITCHELL said that the goal of this proposed structure is to allow the state to move forward and leverage "this" fund and "achieve this project list" in a manner that would allow tax- exempt bonds to be used as the funding source while maintaining the ability to invest money in a taxable fashion. The bond structure proposed [by HB 188] would be a combination of "security features and flexibility features" to allow for the adjustment of annual payments. Initially the DOR was considering a structure that would have a 40-year interest-only structure with a final maturity that would have a bullet, or balloon, payment, and the DOR would have the flexibility in the interim years to retire debt as receipts of the corporation might exceed the nominal interest payment amounts. One key security feature built into the corporation is the "moral obligation" pledge of the state on a debt service reserve fund. MR. MITCHELL suggested that flowcharts on pages 7-8 of the aforementioned handout can help members visualize the governor's proposal, which, in the latter stages, would provide for monies to be appropriated annually into a revenue fund and from there flow into either a debt service reserve fund, a bond redemption fund, or towards the cost of operations. Also, issues of corporate bonds would have flexible amortization and would "fund up" the construction fund, which would be used for the [capital] projects identified in [members' packets] through the normal spending process the state uses for other capital projects. Investors would be repaid from the cycling of money through the bond redemption fund, which would be funded essentially a year in advance of actual amortization requirements, allowing it to [function through] potentially low appropriation years. MR. MITCHELL referred to charts on pages 9-12 of the aforementioned handout, and said they show "some modeling of how this might work, with some assumptions that are currently being used." Referring specifically to page 9, he said monies in the Alaska capital income account would be invested in a manner similar to other Alaska Permanent Fund Corporation (APFC) investments, using the same asset allocation; the anticipated realized earnings rate is 7.04 percent, which is differentiated from the total return expectation of 7.61 percent for "the corporation." He said that at 7.04 percent, there will be an annual transfer of approximately $29.9 million. MR. MITCHELL said page 10 of the handout shows the annual lease appropriation received by the State of Alaska Capital Corporation's revenue fund; that the amount [in column 4] is equivalent to the earnings rate shown on page 9, column 5; that [the revenue fund] has a borrowing rate of 6 percent, which he characterized as high; that [the revenue fund] has a reinvestment rate of corporate assets of 2 percent because they would have been invested in a more liquid fashion. Referring to the column on page 10 labeled, "Outstanding Bonds," he said it might be helpful to look at page 12, which shows a net funding of the project list at $343 million - this is from the amount listed in the aforementioned Outstanding Bonds column beginning in 2006; the $343 million has nominal interest payments associated with it that were derived from the 6 percent borrowing rate. MR. MITCHELL added: We have contributions of earnings on fund balance that go into the calculation, transfers out; the transfer out in 2006 would be to fund up the debt service reserve ... fund - and then an ending balance column. And if [you] look down, you can see the flexible nature, where, in 2008, we begin paying on principal with the $21 million figure, shown in 2008, and that begins diminishing the outstanding bond amount and diminishing the nominal payment requirement. MR. MITCHELL said the DOR anticipates further refinement of the bills' leveraging, security, and structure provisions as they move through the process; as that happens, the DOR would continue to explore structuring possibilities, including variable rate debt, to ensure the highest probability that debt service would be paid from receipts of the State of Alaska Capital Corporation rather than from any other funding source. 1:53:41 PM REPRESENTATIVE GARA offered his understanding that the proposal would "set free" about $30 million, per year, of permanent fund earnings that would then be put into the general fund (GF). MR. MITCHELL replied: The structure would allow for the earnings of the Amerada Hess [settlement], rather than to become principal, to flow over to the earnings reserve. And so it would not go to the general fund, but rather to the earnings reserve [in an account] called the Alaska capital income account ... - available for appropriation. MR. MITCHELL indicated that the amount [available for appropriation] is estimated to be about $30 million a year. REPRESENTATIVE GARA asked whether the bonds that would be issued would be based on the value of the entire Amerada Hess portion of the permanent fund. MR. MITCHELL replied: The idea to leverage is not necessarily linked, specifically, to ... a pledge of principal that resides in [what]... we're calling the Amerada Hess settlement. It would be a leveraging of a public corporation of the State of Alaska, supported by operating leases that that public corporation would enter into, that could be paid from earnings of this settlement that would flow through the Alaska capital income account. MR. MITCHELL characterized this as an important feature of the potential leveraging, because one can't have a pot of money that is pledged to a leveraging, and then issue bonds on a tax exempt basis, since such is not allowed under the U.S. tax code. REPRESENTATIVE GARA asked whether the state would be pledging part of the permanent fund in any way to support the bonds. MR. MITCHELL said no. He reiterated that the corporation's revenues derived from operating leases would be pledged. He indicated that such would be considered a less credit-worthy pledge than the state might otherwise provide through other financing vehicles, but by implementing a "moral obligation" on the debt service reserve fund, even though such won't be relied upon as a funding source, it creates a backstop, or a minimum credit threshold, for leveraging, which is anticipated to be in "the A ratings category." REPRESENTATIVE GARA raised the issue of defaulting on bond obligations. He asked what the bond issuer would attach in case of such a default. MR. MITCHELL said the bond issuer could not attach anything other than the revenues of [the State of Alaska Capital] Corporation. In the event of a failure to pay debt service, the [proposed] statute requires the corporation to request that the legislature replenish the [debt service] reserve fund from other funding sources; that is what constitutes "moral obligation," he explained, noting that other entities in state government already have the authority to issue moral obligation debt. 1:59:01 PM REPRESENTATIVE GARA said he still has questions regarding the bonding portion of the governor's proposal. CHAIR McGUIRE said that HB 187 and HB 188 would be held over and brought back at a future meeting.
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