Legislature(2015 - 2016)BARNES 124
02/17/2016 03:15 PM House LABOR & COMMERCE
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| Audio | Topic |
|---|---|
| Start | |
| HB268 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 268 | TELECONFERENCED | |
HB 268-AIDEA:DIVIDEND TO STATE;INCOME;VALUATION
[Contains discussion of SB 149]
3:31:17 PM
CHAIR OLSON announced that the only order of business would be
HOUSE BILL NO. 268, "An Act relating to the dividends from the
Alaska Industrial Development and Export Authority; relating to
the meaning of 'mark-to-market fair value,' 'net income,'
'project or development,' and 'unrestricted net income' for
purposes of the Alaska Industrial Development and Export
Authority; and providing for an effective date."
3:32:22 PM
MICHAEL E. LAMB, Chief Financial Officer, Alaska Industrial
Development and Export Authority, Department of Commerce,
Community & Economic Development, provided a PowerPoint
presentation entitled, "Alaska's Development Finance Authority
Proposed Changes to AIDEA Dividend Statutes HB 268/SB 149." Mr.
Lamb said his presentation would address AIDEA's dividend
history, goal, statutory language, and two problems that have
been revealed by annual audits, both of which are corrected by
the language of the bill [slide 2]. Mr. Lamb explained that
AIDEA's dividend program covers three years; slide 3 illustrated
that the year ending 6/30/95 was the first year of actual
results of operations of which the dividend is based. During
the three years of the dividend program, the first year is the
operation, the second year is the audit, and the third year the
dividend is paid. The first dividend was $15 million payable in
fiscal year 1997 (FY97). Further shown was that AIDEA has paid
about $380 million to the state, and the state's capitalization
was about $332 million. Slide 4 stated AIDEA's goal: share with
the state - through an annual dividend that is stable and more
predictable - the financial benefits of AIDEA's actual results
of operations. Slide 5 displayed pertinent language excerpted
from Sec. 44.88.088. Payment of Dividend to State. Slide 6
displayed "Dividend Calculation Stack Visual" as follows:
dividend to the state; based on statutorily defined net income;
based on audited statements of revenues, expenses, and changes
in net position; audit must include market value; generally
accepted accounting principles (GAAP); and adopt applicable
governmental accounting standards board (GASB). Mr. Lamb said
the additional information inserted in the red box is related to
the changes in HB 268/SB 149, which would remove market value
adjustments and/or write-down, or loss, entries in the
calculation of the dividend.
3:39:07 PM
MR. LAMB continued, noting there are three types of financial
transactions: real transactions that actually occurred, such as
booking what was paid for an asset; estimates and allocations,
such as booking depreciation and amortization expenses; and
market value adjustments, which didn't really happen and are
what AIDEA seeks to remove [slide 7].
REPRESENTATIVE JOSEPHSON asked for an example to illustrate
market value adjustments.
MR. LAMB explained components of the first dividend problem
[slide 9]:
· the dividend payment is a cash-based transaction and in
the third year AIDEA writes a check to the state - if
market value adjustments are factored in, AIDEA is paying
the state for operations that did not have revenues, or
the state does not receive dividends on unrealized losses
· over time, GASB continues to make changes to GAAP
· GAAP-based income is derived from results of operations
plus market value entries
· as a result, AIDEA's net income swings and the state's
dividend swings
MR. LAMB described four adjustments to AIDEA's financial
activities that are required by GASB [slide 10]. As a means to
explain the problem, he provided an analogy of AIDEA as a U.S.
taxpayer and how GASB Statements No. 31, 68, 72, and 75 would
affect a taxpayer's income tax return [slides 11-23].
3:47:15 PM
REPRESENTATIVE LEDOUX asked for the purpose of GASB standards.
MR. LAMB recalled that GASB Statement No. 31 originated over 20
years ago after the treasurer in Orange County, California,
pooled money for several cities and when "the market actually
turned," their assets lost liquidity. In further response to
Representative LeDoux, he said the treasurer probably did not
buy junk bonds because when investing at the government level,
officers strive for safety first, then liquidity and yield. Due
to changes in the market, the investments lost value and they
were liquidated at a loss. Therefore, government agencies now
want to know the current market value of securities, and GASB
Statement No. 31 requires AIDEA to establish a market value of
all of its securities on the last day of its fiscal year.
REPRESENTATIVE LEDOUX questioned whether this information would
show in a financial statement.
MR. LAMB explained that most transactions in a financial
statement are historic-based on real transactions; financial
statements show what really happened but will not reflect
billions of dollars' worth of investments, and if there are no
real transactions, their sale value is unknown. So, GASB
Statement No. 31 requires AIDEA to act like it sold its whole
portfolio of marketable securities to determine an unrealized
gain or loss.
3:55:14 PM
REPRESENTATIVE KITO observed that AIDEA statutes allow
AIDEA to pay a dividend of between 25 percent and 50
percent, therefore, AIDEA has flexibility to level the
payment to the state, and there is already a means to
accommodate for items accounted for under the GASB
accounting rules. He gave an example of a dividend that is
paid for an investment that realizes a loss in the
following year. He suggested that the proposed legislation
may result in more money coming to the state over a longer
period of time, or less, or the same amount; in fact, it is
a small amount of money, when considering the billions of
dollars of debt. Representative Kito said, "I'm not quite
sure why this is necessary and what it is actually trying
to accomplish."
MR. LAMB that the AIDEA board of directors has flexibility in
setting the dividend; historically, the amount is 50 percent.
However, it is difficult to determine whether the dividend will
create a problem for AIDEA in the future. Currently, AIDEA has
investment policies that require AIDEA to have two years' worth
of operating cash available; as CFO, he said his job is to be
risk-adverse with public money, especially related to marketable
securities. The proposed legislation will eliminate "swings,"
and another component is to have cash available to pay the
dividend when due; also, he said he was unsure about marketable
securities that are externally managed, and are "constantly"
being bought and sold. Mr. Lamb cautioned that AIDEA does not
have control, and remarked:
The basic question of, "In the end does it even out?"
I don't know the answer to that. And in fact, when
there was a changeover in one of the external
managers, they sold a lot of the portfolio, and there
was actually to, [because] they wanted different types
of investments, and there were losses and so that will
never level itself out. ... We're not in a buy and
hold scenario.
4:02:31 PM
REPRESENTATIVE KITO expressed his concern that making the
proposed change may establish a varied number of higher
dividends paid to the state, over a long period, which would put
too much pressure on AIDEA's liquid cash.
MR. LAMB said he sought these changes to stabilize the dividend
and comport with GASB. He said he was unsure whether AIDEA will
be better off in the future; however, the relationship between
AIDEA and the state is perpetual and calculating dividends is
ongoing. Furthermore, the second problem addressed by the
proposed legislation is related to AIDEA's investment in
projects, and to avoid paying a dividend penalty for investing
in a project. As CFO, he opined that this is the right and fair
thing to do in order for AIDEA to share in operations with the
state, promote economic activity, and be self-sustaining.
REPRESENTATIVE HUGHES inquired as to whether AIDEA has
determined how the proposed changes would have affected
dividends that were paid in past years.
MR. LAMB said no. He added that that information is not
material to the swings in the market today, and remaining is the
problem of insufficient cash on hand for paying dividends. He
restated his intent to remove volatile market swings and
stressed the need to address the impacts of GASB Statement No.
68 - on the pension obligation - and the unknown impacts of GASB
Statement No. 72.
4:08:58 PM
REPRESENTATIVE HUGHES asked how the proposed changes would
affect dividends over the next five years.
MR. LAMB said he did not know. He said he expected that for
2016, if market conditions continue as they are and without a
change to statute, AIDEA will have an unrealized loss and a
reduced dividend to the state. In further response to
Representative Hughes, he said more information in this regard
will be provided later in the presentation.
REPRESENTATIVE LEDOUX noted that AIDEA is owned by the state;
without GASB, how would the legislature know AIDEA is not in a
position similar to that of the public entity in Orange County.
MR. LAMB reminded the committee the statutory language requires
an audit based on GAAP and GASB, and which requires a certified
public accountant opine that the financial statement is correct.
Part of Mr. Lamb's responsibility as a state financial manager,
is to represent that the value of AIDEA's assets are true and
correct, and this statement is validated by the audit.
REPRESENTATIVE LEDOUX asked whether the Orange County entities
were audited.
MR. LAMB pointed out that GASB Statement No. 31 was not in
effect at that time. He restated the requirements of GASB
Statement No. 31.
REPRESENTATIVE LEDOUX surmised that as far as income tax
reporting, AIDEA would not use GASB Statement No. 31, but AIDEA
would continue to use GASB Statement No. 31 for financial
statements.
MR. LAMB said right.
4:16:48 PM
GENE THERRIAULT, Deputy Director for Energy Policy Development,
Alaska Energy Authority/Alaska Industrial Development and Export
Authority, Department of Commerce, Community & Economic
Development, clarified that for purposes of the audited
financial statement, AIDEA would continue to apply all of the
GAAP and GASB rules; however, as policy makers, legislators
determine upon what the dividend paid to the state would be
based, and at that point market value evaluations would be
"backed out."
4:17:49 PM
REPRESENTATIVE HUGHES asked for the original intent of the
legislation as currently written.
MR. LAMB said that GASB Statement No. 31 was not in effect at
that time and since then, three more market value adjusting
entries have been added. There are two questions: (1) what
AIDEA should report on an audited financial statement; (2) what
AIDEA should share with the state in the form of a dividend.
MR. LAMB, in response to Chair Olson, said he did not serve on
the Alaska Retirement Management Board (ARMB), Department of
Revenue. He discussed the impacts of GASB 31, GASB Statement
No. 67 (GASB 67), and GASB Statement No. 68 (GASB 68) to a
retirement fund.
4:23:32 PM
MR. LAMB returned to slide 14, which illustrated the effect of
GASB 31, and proceeded through slide 23, which illustrated the
effects of GASB Statement Numbers 68 (GASB 68), 75 (GASB 75),
and 72 (GASB 72). He said any of the tax analogies could go in
any direction, considering pension and retirement obligations,
which is why he wants to take these factors out of the AIDEA
dividend to the state. Mr. Lamb opined that the dividend should
not be based on the foregoing non-cash transactions. Slide 21
was a graph that illustrated the impact of GASB 31 on AIDEA net
income. The green line represented audited numbers, and in FY
98 - the first fiscal year impacted by GASB 31 - net income went
from about $45 million of income from actual activities, to $52
million, after adding in income that AIDEA really didn't get as
required by GASB, and the dividend was based on 25 percent to 50
percent of $52 million, which included revenue AIDEA really
didn't earn. Whether the state has received more or less in
dividends after the effect of GASB is unknown. All the areas
above the green line were areas where AIDEA would pay dividends
on more than it had earned, and all the areas below the green
line were areas where AIDEA could have paid more to the state.
Whether the state has received more or less in dividends after
the effect of GASB is unknown. Slide 22 was a chart which
illustrated dividend trend information for 2012/2013 through
2014/2015. Mr. Lamb pointed out that the operating revenues and
operating expenses are stable; however, there are huge swings in
unrealized gains/losses. For example, in 2012 there was an
unrealized gain of $7.14 million, and one year later there was
an unrealized loss of almost $22 million, which adds up to a
variance of almost $29 million in two years. He provided
further examples. Slide 23 illustrated the final tax return
analogy. Mr. Lamb stressed that HB 268 and SB 149 would "take
out those [unrealized gains and losses], act like you don't have
to do them."
4:32:57 PM
MR. THERRIAULT said the policy question the proposed legislation
poses to legislators is as follows:
Do you want the AIDEA dividend to be based on real
cash transactions, or do you want them to be, that
number, to be swung by these, these paper
transactions? ... The solution for this first problem
is that those things would just be backed out, still
would all be followed for the GASB compliance, GAAP
compliance, but when it came time for calculation of
the actual dividend, those non-cash things would be
backed out.
REPRESENTATIVE HUGHES inquired as to whether the AIDEA board
supports the legislation, and the time of the origin of the
proposed legislation.
4:34:02 PM
MR. LAMB answered that during the FY 2015 audit, sometime in
July, he talked to the AIDEA executive director, and the board,
and suggested there should be legislative statutory changes. He
assured the committee the board is aware of, and supports, the
proposed legislation. He pointed out AIDEA's mission is
employment, financing, to generate income, and to be self-
sustaining. In addition, it is important for AIDEA's income to
be stable and predictable when it approaches rating agencies for
bonds and financing, and he characterized the changes as "the
right thing to do ... a fair thing to do." Mr. Lamb turned to
the second problem, the dividend penalty effect adjusting
entries, which he said is a complex problem. He said the
problem is again leading to more or less net income - upon which
the dividend is based - and depending on the circumstances,
which may or may not affect the dividend. Although this problem
does not arise frequently, he urged for changes to address both
problems. For a variety of reasons, AIDEA may decide to stop
work on a project and remove the asset from its balance sheet,
which reduces net income, and could have a dividend penalty
effect [slide 25]. He described a hypothetical project to
illustrate the potential effect of an adjustment to a state
funded investment, or to a federally funded project, which
resulted in a $13.2 million loss to the state [slide 26].
4:40:30 PM
REPRESENTATIVE LEDOUX questioned whether the amount taken off
the balance sheet was ever an asset on the balance sheet.
MR. LAMB said yes, the amount was an asset. In the hypothetical
example, the state gave AIDEA $8.8 million to invest in a
project and the funds were converted to pay for preliminary work
to be used in the future for the project. He said, "So you keep
it on the books, on the balance sheet - it has future value."
Mr. Lamb gave another example.
REPRESENTATIVE LEDOUX asked:
If you put it on the balance sheet as an asset and
then it turns out not to be an asset, then wouldn't it
make sense to write it off ... and put it down as a
loss because now it is a loss?
MR. LAMB said yes, although, the next question is whether that
affects the dividend. He returned attention to slide 26 and
restated the circumstances of the illustrated hypothetical
project. He stressed that AIDEA's revolving funds were not
invested in the asset: the state or the federal government
provided the funds, the funds were used, and then written down
which reduced the net income, and thereby reduced the dividend
to the state. He advised that this should not be part of the
dividend calculation.
4:44:38 PM
REPRESENTATIVE LEDOUX questioned whether the initial $8.8
million to AIDEA from the state was part of the dividend
calculation.
MR. LAMB said "it actually gets removed." He added:
Otherwise what would happen is, the state would give
us money, it would show up as a revenue, and then we
would have to give you 25 to 50 percent of it back, so
you wouldn't have money to do the project. So it
comes out - what's missing is the other side of that.
MR. TERRIAULT pointed out that in the example, the funds were a
GF appropriation or a federal grant, outside of AIDEA's normal
revenue stream. When a project is written off, there is a
question of whether that transaction should impact the dividend
to the state that comes from AIDEA's normal operations. He
added:
And the suggestion is that no, those were funds that
were outside the normal course of AIDEA's utilization
of its income stream and so it should not impact the
calculation of the dividend.
MR. LAMB presented slide 27 which was a graph of the impact of
GASB 31 to the state's dividend on the same hypothetical
project. Slides 28 and 29 presented an additional hypothetical
investment to show the reverse impact when a project is sold at
a loss. Slides 31-33 displayed the statutory language changes
included in HB 268 and SB 149. He highlighted that the
substance of the changes sought to correct both "problem number
one" and "problem number two" are in Section 1, paragraphs (2)
and (3) of the bill, which define "mark-to-market fair value"
and "net income." He summarized, noting that the proposed
statutory change achieves the following [slide 33]:
· removes the "market value" entries that impact the
dividend and which will stabilize the dividend
· connects the actual payment of a dividend to actual
revenue earned
· removes the dividend penalty
· aligns statutory language to the fact that the dividend is
a cash-based transaction, and brings the language current
with GASB statutes
[HB 268 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB268 Ver A.pdf |
HL&C 2/17/2016 3:15:00 PM |
HB 268 |
| HB268 Transmittal Letter.pdf |
HL&C 2/17/2016 3:15:00 PM |
HB 268 |
| HB268 Hearing Request.pdf |
HL&C 2/17/2016 3:15:00 PM |
HB 268 |
| HB268 Sectional Analysis.pdf |
HL&C 2/17/2016 3:15:00 PM |
HB 268 |
| HB268 Fiscal Note-DCCED-AIDEA-11-20-15.PDF |
HL&C 2/17/2016 3:15:00 PM |
HB 268 |
| HB268 AIDEA Presentation to HLAC 02-17-16.pdf |
HL&C 2/17/2016 3:15:00 PM |
HB 268 |