Legislature(2005 - 2006)CAPITOL 106
01/19/2006 08:00 AM House STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| HB273 | |
| HB278 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 34 | TELECONFERENCED | |
| = | HB 278 | ||
| = | HB 273 | ||
HB 278-RETIREMENT SYSTEM BONDS 9:25:43 AM CHAIR SEATON announced that the next order of business was HOUSE BILL NO. 278, "An Act relating to the Alaska Municipal Bond Bank Authority; permitting the Alaska Municipal Bond Bank Authority or a subsidiary of the authority to assist state and municipal governmental employers by issuing bonds and other commercial paper to enable the governmental employers to prepay all or a portion of the governmental employers' shares of the unfunded accrued actuarial liabilities of retirement systems and authorizing governmental employers to contract with and to issue bonds, notes, or commercial paper to the authority or its subsidiary corporation for that purpose; and providing for an effective date." 9:26:10 AM CHAIR SEATON noted that he had listened to tapes that had been presented to the Alaska Retirement Management (ARM) Board and would share highlights from them. He stated that the workforce influences the investment strategy. For example, a young workforce would have an aggressive investment strategy, a workforce that is "going along with the system" would have a more intermediate investment strategy, and a system that is ending because of an older workforce getting ready to retire would have a more conservative investment strategy. He said the committee has been talking about a 25-year amortization, but many of the payments need to happen in the next 20 years for all the retirees for which the state did not collect enough money. He explained that consideration needs to be made regarding the amount of money that needs to be pulled out of a pension bond for the schedule of payments, because there can be no long-term strategy if payments are needed right away for the past service cost. He said it is a balancing act. He suggested one possible solution would be to make a balloon payment. He added, "And I think that that is what we would be looking at, scheduling something of a balloon payment on a mortgage, if we were going to have lower payments at the beginning. Currently, he noted the contribution can go up no more than 5 percent a year. He said, "If we issued amortized pension bonds, you would immediately go to the higher rate; it's going to be lower than the overall rate under the current system by about 3 percent, but you immediately jump to it." He said balloon payments have their own problems. 9:29:15 AM REPRESENTATIVE GARDNER said she would like to hear from experts regarding the immediate jump that Chair Seaton just mentioned. 9:30:07 AM CHAIR SEATON said there is also a possibility of making a balloon payment at the end. He said Seattle Northwest talked about variable versus fixed rates. He concurred with Representative Gardner regarding getting more information. 9:31:03 AM JULI LUCKY, Staff to Representative Mike Hawker, Alaska State Legislature, on behalf of Representative Hawker, sponsor, agreed that it would be a good idea to hear from experts. She said: What I have been discussing with them is that you can pretty much structure it how you want to structure it, but that would be something ... down the line that the person that's entering into the agreement would ... [discuss] with their financial advisor. Basically, you'll ... sell the bonds and get a lump sum of money, and how that is repaid would be a structure that would be able to be worked out in the financial agreements. 9:32:02 AM CHAIR SEATON offered to loan the previously mentioned cassette tapes to any legislators or staff who may want to listen to them. 9:32:43 AM REPRESENTATIVE GARDNER asked Ms. Lucky if an employer who switched to a POB would automatically be converting a soft debt to a hard one. 9:32:58 AM MS. LUCKY stated her understanding that that is not necessarily the case. She said with a lump sum liability, the bond is being repaid rather than the unfunded liability. She said it is her hope that a more official answer to that question will be made available. 9:33:58 AM REPRESENTATIVE GARDNER responded that that would assume that the bond covers the entire amount of the liability, which is not necessarily the case. 9:34:22 AM MS. LUCKY said discussion is taking place on the specifics of what a particular plan might look like, but there is not necessarily a plan. 9:35:06 AM CHAIR SEATON reiterated his comments about the information on the tapes for Representative Hawker who had just arrived in the committee room. 9:35:18 AM REPRESENTATIVE MIKE HAWKER, Alaska State Legislature, testifying as sponsor of HB 278, explained as follows: The transactions contemplated are a structured debt transaction. A public entity borrows money on the international capital markets. The terms for the repayment of that a money can be structured in ... [a] myriad of choices for how to structure that payment. In fact, frankly, some of the structures would not be advisable in this circumstance. ... But a structure that allows the repayment curve not to - ... in all cases - be less than our current 5 percent annual incrementing normal pension contribution can be structured. ... You could structure these so that they pay off in their entirety in one balloon payment 25 years down the way. That, of course, would be ... a very inappropriate decision for someone to make. But the point is that the markets are extremely adaptable, extremely flexible, very creative, ... limited only by the creativity of both bond council, the borrowing organization, the public entity that might be interested in pursuing this, and their financial advisors. 9:37:13 AM CHAIR SEATON said the other issue highlighted by the tape is that when less is paid up front, not as much is saved. He clarified that the previously mentioned 5 percent [cap for contributions] is not the same as interest rates. He said an issue discussed by the State Bond Council was in relation to Article 9, Section 11, which read as follows [original punctuation provided]: The restrictions on contracting debt do not apply to debt incurred through the issuance of revenue bonds by a public enterprise or public corporation of the State or a political subdivision, when the only security is the revenues of the enterprise or corporation. The restrictions do not apply to indebtedness to be paid from special assessments on the benefited property, nor do they apply to refunding indebtedness of the State or its political subdivisions. CHAIR SEATON said there is question regarding whether municipalities would be allowed to take debt without a vote of the people. 9:39:51 AM REPRESENTATIVE HAWKER said the state, municipal, and school district employers have, in fact, already entered into a debt contract via the employees' pension plans, which they have a constitutional obligation to provide. He said the inner structure by which municipalities manage themselves and choose what goes before their public is certainly adequate. He advised against opening up the issue of the state usurping local decision-making authority. Representative Hawker stated his belief that the existing statutory structure at both the state and local levels is adequate to provide an appropriate protection for the public good. 9:43:00 AM CHAIR SEATON suggested that Representative Hawker might like to listen to the tapes, as well. He reiterated the subject of differing requirements for investment strategies for various types of pension plans. He stated that the committee is in somewhat of a conundrum, because the bill proposes issuing pension bonds, but the investment strategy that would be employed either "makes it work or makes it not work." He said it is necessary to ascertain when the structured payments on past service costs accrue. He continued: It's not like we have the principal and we can just leave it there and invest it, and have it grow over 25 years. Because we are going to be making payments - in 8 or 10 years - of that money; we've got to take that principle out and make ... scheduled payments on that. 9:46:14 AM REPRESENTATIVE HAWKER emphasized that the bill before the committee authorizes nothing; "it grants empty authority for the investment banking community to work with the state's public employers to find a way to ... ultimately save our taxpayers money through a potential transaction." He continued: Essentially, the decision was made last legislative session to terminate the previous plan, which means ultimately there will be a final payout, the last employee will die, and the plan will be liquidated and it will be no more. The sensitivity of ... the investment decision will be driven very much by when ... this new money being put into the plan [will] be needed. I would offer that if we were in an extraordinarily underfunded position and we needed the money immediately in order to meet payments to beneficiaries - the money that we would be potentially securing through [an] issuance of [an] obligation bond, we very definitely would have to invest that money short, and ... truly the transaction would not be viable, because we wouldn't be able to invest for the arbitrage that is what this is all about. However, the State of Alaska's plans - both PERS and TRS - on aggregate are truly exceptionally well funded today. ... I can't tell you the numbers right off the top of my head, but despite the fact that we are arguably, actuarially $6 billion underfunded today, we still have a tremendous amount of money in those plans. That money is there invested, will remain invested to meet obligations that are going to go -- we've got an employee that started today that's 18 years old; they will vest in that plan .... Potentially, if they become a permanent state employee, that plan will be in existence for the ... actual lifetime of employees today that may be as young as 16 or 18 years old. So, again, we have the luxury before us today of time: time to manage these investments, time to achieve what is again we've demonstrated over and over again is the ability of the State of Alaska's investment managers, whether they be Department of Revenue, whether they be the pension managers, or whether it be the permanent fund, to obtain a 10-year return in excess of 8 percent. And again, ... we're looking a ... potentially bonded indebtedness transaction that would be designed to work over a 20-25 years period that is still well within the expected anticipated existence of our current pension plan structure. So, again, we could create ... hypothetical transactions or circumstances, but facts are that to make a transaction contemplated under this bill work, you will have the best and the brightest financial counselors from Wall Street, the best and the brightest bond council, and, quite, frankly, as we certainly like to think of ourselves, we have a very competent public administration of all municipalities and the state making judicious decisions. ... I have faith in the markets, the legal community, and the elected officials statewide. 9:50:14 AM REPRESENTATIVE RAMRAS expressed his appreciation of Representative Hawker's abilities and efforts. He said, "I hope that as we go forward with this you don't see these people from the state of Washington trotting around here, flipping out their business cards from Merrill, et al, and that we look further south or further east for counsel in how to structure a POB program should we go forward with that." 9:50:57 AM REPRESENTATIVE HAWKER, regarding the investment bankers that have been providing counsel through this process, stated that Merrill Lynch is a global, credible, and major Wall Street firm. He said the credibility that Seattle Northwest Securities brings is that it has been very active and successful in this type of transaction, having represented the State of Oregon. He said Representative Ramras brings up a good point. He said investment banking is a competitive market and the best and brightest will be vying for the work. 9:52:25 AM CHAIR SEATON said the committee will take up the bill again when it gets the information back that it has requested. 9:53:52 AM REPRESENTATIVE HAWKER said he wants to regroup with Chair Seaton when all the information is gathered to ensure all issues have been covered. He said the bill was originally crafted to focus on the larger, more sophisticated municipalities; however, if the committee decides it would be appropriate to expand that authority, he would be amenable to the idea. Regarding Chair Seaton's previously stated concern about cash flow, he said he is working on getting professional comments on that issue. 9:55:50 AM CHAIR SEATON said if it's structured so that less money is up front, he wants to know if there will be the same percentage drop, regarding the 2.6 percent of wage-base contributions by the employers. He mentioned a presentation from Jeff Sinz, which showed two scenarios with a decrease in payroll contribution of 2.6 percent or 3.8 percent. He said he would be interested in finding out whether that was structured on an amortized payment that frontloaded up to 26 percent of payroll as soon as the bonds are issued, or whether that would be the collared payment. 9:57:15 AM REPRESENTATIVE HAWKER answered, "They structured their amortization for a hypothetical issue ..., and yes, they did in fact incorporate into that a ramping up paralleling the deferred structure of the current state system that did not immediately jump into a fixed amortization period." He offered further details. [HB 278 was heard and held.]
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