Legislature(2005 - 2006)
03/27/2006 08:59 AM House W&M
| Audio | Topic |
|---|---|
| Start | |
| HB418 | |
| HB492 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 492-NATURAL GAS ROYALTIES TO FUND PERS/TRS 9:44:10 AM CHAIR WEYHRAUCH announced that the final order of business would be HOUSE BILL NO. 492, "An Act relating to the transfer of the state's interest in certain gas to the Alaska Retirement Management Board for the purpose of satisfying the unfunded accrued actuarial liability of the state and employers of teachers in the state to state retirement systems; and providing for an effective date." 9:45:35 AM REPRESENTATIVE MIKE KELLY, Alaska State Legislature, presented HB 492 as a member of the House Finance Committee, sponsor by request. He referred to the discussion of the challenges to HB 492 at the recent meeting with the Alaska Retirement Management Board (ARMB). He summarized some of the main challenges as being the valuation of the gas interest - particularly in advance of a gas pipeline being built - and the risk as to whether the asset could easily meet some of the early payout requirements. 9:47:27 AM BRIAN ROGERS, Chair, Planning and Development Committee, Board of Regents, University of Alaska, informed the committee that the regents advanced this concept of the transfer of a major asset [proposed in HB 492], to balance the systems' liabilities in an effort to address the unfunded liability in the Public Employees' Retirement System (PERS) and Teachers' Retirement System (TRS). He relayed that one of the few assets the state has of sufficient value, and which could produce income in roughly the same timeframe as the needs of the system, is the natural gas assets in Prudhoe Bay. He noted that [using this asset] would free up current funds to meet other state needs while attempting to match the cash flows. He remarked that currently there is no model of these cash flows and opined one is needed to ensure that the pay out is roughly in line with the cash needs of the system. At the recent meeting with the ARMB, he said it became clear that the valuation is the most substantial challenge to this particular asset. The regents recommendation, he highlighted, is that the state attempt to have the Department of Natural Resources (DNR) transfer assets roughly approximating the $5 billion set out in the bill, and that the ARMB obtain an independent, third party valuation to meet its fiduciary responsibility in seeing that asset and liabilities are balanced. He said he is aware that some believe there are constitutional problems to the bill due to a possible dedication of funds. The regents have expressed their belief that this involves "a transfer of assets and not a dedication of the revenues from those assets." He suggested some additional legal analysis would be useful to the committee. 9:50:45 AM REPRESENTATIVE SEATON asked for further clarification on Mr. Roger's comment regarding "freeing up current funds to meet other needs." MR. ROGERS explained: In the FY 07 budget, approximately $125 million will be the aggregate cost to state government, local government, school districts, and the university for the 5 percent increase in the PERS and TRS rates. So, if we freeze rates at current levels, as the bill calls for during the valuation process, that $125 million can either ... represent a reduction to the spending or can represent funds available for other purposes. If we look at the projections as they were prior to Friday, once rates hit their top point, the annual cost to state, local, school district, and university is just over $400 million per year that would be deposited into the funds over the next 30 years to the extent that the passage of an asset transfer allows the freezing of the rates, or even a roll back of the rates to the normal cost rates, that $400 million is available for other purposes. REPRESENTATIVE SEATON referred to the information provided in the March 22, 2006 memo from Susan Taylor of DOR's Treasury Division, to Tom Boutin, DOR's Deputy Commissioner in which it's explained that the cost of assets [such as mineral rights] shall be capitalized as incurred. Additionally, Representative Seaton said the memo specifies that according to the Governmental Accounting Standards Board (GASB), the cost of the recorded asset would be zero. He asked Mr. Rogers whether the effect of these two points wouldn't "be the same as just saying 'we're not going to reduce the unfunded liability and make any payments into it'." MR. ROGERS relayed that this is correct for purposes of the "booked value" of the assets being transferred: it will be booked at a zero value because the acquisition cost is zero. However, for purposes of calculating the unfunded liability, he explained that it's the "market value of assets" being considered rather than the historical value. Furthermore, he continued, it's the market value of the gas assets that the actuaries would need to determine when they address the remaining unfunded liability. He said that it is this determination which [the regents] believe requires an independent appraisal. 9:54:25 AM CHAIR WEYHRAUCH, in noting that the resource [identified in HB 492] is limited to gas, inquired as to why other assets are not considered: coal, rental-producing residential properties, or those state lands being developed, leased, and payments made to the ARMB. MR. ROGERS explained that it is challenging to find other assets that equate to the same kind of value. He relayed that any oil resources of value are already being produced and "spoken for in the state budget." He said that those oil reserves not yet producing might be considered, however, these are included in the budget process as well. Given the interest in gas and the movement toward a gas pipeline, he opined that "we're finally at a point where the gas assets are approaching a real value that can be determined as opposed to a much more speculative value." 9:56:57 AM REPRESENTATIVE KELLY requested clarification from Mr. Rogers on his approach to assigning some value to the gas asset regardless of no pipe in sight [as opposed to] the GASB approach which assigns a zero value until the gas is actually rushing through the pipe. MR. ROGERS relayed that those oil and gas properties commonly bought and sold in the industry are not sold at book value but rather at an amount a buyer is willing to pay to a willing seller. The gas on the North Slope, even if currently stranded, does have value, he opined, and one to which an appraiser could assign a market value. He stated his belief that whereas GASB does require entries to be kept at cost, the state's actuaries would consider market values when determining funding ratios for the unfunded liability. He remarked that "on a book basis, the state would continue to show a deficit, but on a computed actuarial basis of the funding ratio, [the state] would be moving it up toward the 100 percent level." REPRESENTATIVE KELLY opined that the method Mr. Roger's suggested - that of the state transferring a rough estimate of the reserves from DNR into the ARMB and then assigning an appraised value - is somewhat of a "trust us" approach. He inquired as to whether the state could "get a handle on the value" prior to the asset being transferred. MR. ROGERS suggested that the legislature could obtain an independent appraisal of the value and that this alternate approach might result in a closer approximation [in value] than one DNR might assign. He expressed his belief that [the unfunded liability] is a long-term problem requiring a long-term fix and should not be rushed. 10:01:09 AM REPRESENTATIVE SAMUELS opined that with reserves taxes, expansion lease revokes, and different political factions "trying to scuttle any deal that might come forward," it would be difficult to [assign] a net present value to the gas pipeline scenario "until things play out a little bit [more]." He remarked that an additional consideration might be that of lawsuits resulting from passed legislation on either the gas pipeline or a reserves tax. He highlighted that even at the point the Federal Energy Regulatory Commission (FERC) has "project sanction," when booking the value of a resource for company shareholders is allowed, isn't "enough for GASB." Furthermore, should a gas deal be ratified by the legislature and signed by the governor, it would still be five or more years of design and permitting work before the project is sanctioned. MR. ROGERS stated his agreement that the issue of timeline is important and opined that following the correct solution at the right time with any legislation, such as HB 492, involves a major fiscal action. As to the issue of project sanction, he expressed his belief that a value can still be assigned to an asset, regardless of whether one has been assigned by GASB or the industry. "While that value may not be able to appear on your books, it can be part of your long-term plan," he said. He relayed that knowing there is a project "that is moving to sanction and has a likelihood of development, would allow an appraiser to apply that probability of success to a reasonable value." He noted that there are other assets to PERS and TRS with similar valuation challenges, particularly as they move into private equities, and opined that there are multiple ways to address this. 10:07:42 AM REPRESENTATIVE SEATON highlighted that 75 percent of the payouts to the PERS and TRS systems are anticipated to be from interest earned on deposited money for assets that are earning interest in the fund. Then considering the book reserves of a gas asset that is as yet not interest-bearing and would not be generating income until it comes online, he asked Mr. Rogers how not to deplete those assets that are interest-bearing and currently used to pay off the past PERS and TRS service costs. MR. ROGERS informed the committee that the concern regarding the funding ratio could be offset by two effects. The first, he clarified, is that the proposed legislation provides for a freeze at the current rates with annual payments directed toward paying the past service liability. Additionally, he said, there would be some cash coming in every year from employers for the past service liability. Secondly, he explained that to the extent that the valuation of the gas resource is transferred, a discounted cash flow method is used with an appropriate discount rate applied. He highlighted that every year closer to the gas flowing, its value would appreciate; it would not be cash income. Given that it will be at least 10 years until the income flows, the actual asset in nominal dollars that is likely to be transferred, will be significantly in excess of the $5 billion laid out in [HB 492], he said, and would increase in value over time. 10:12:03 AM REPRESENTATIVE SEATON asked if he were correct in understanding that Mr. Rogers is not referring to $5 billion worth of gas assets, but rather to the transfer of what's anticipated to be $10 billion worth of gas assets should it come on line in nine years. MR. ROGERS said that this is correct and added that with some of the income being earned beyond that time, the total value would likely be somewhat higher than that. 10:12:53 AM REPRESENTATIVE KELLY noted two criticisms of the bill: the asset placement being such that it would be difficult to receive the federal government's portion of benefit costs on projects; and that some interpret the proposed solution as a way to postpone debt payment and therefore requiring that future generations pay the debt. MR. ROGERS said that although there may eventually be a future solution to this, he did not know of a method whereby the state can avoid picking up a portion of the federal share. From the university's standpoint, he relayed that it has been losing its competitiveness for federal funding because the benefit rate it can [afford to] offer does not compare with that offered by the competition. He explained that one effect this has is that the university is not able to acquire some of the grants and contracts that would hypothetically pay some of this liability. Secondly, he said the federal government's ability to pay is self-limiting for major portions of the university because of having to reduce the level of staffing within a fixed grant or contract. Either challenge, he opined, is minor compared to the significant challenge that school districts, municipalities, the university, and state face in addressing the "relentless increase in the rates." As for the criticism that suggests the bill postpones payment of the debt, he expressed his belief that it does match "current assets with current liabilities." 10:17:26 AM BOB SHEFCHIK, Chief of Staff, Mayor's Office, Fairbanks North Star Borough, referred to discussions on HB 492 at previous committee meetings and at the recent ARMB meeting. He informed the committee that he would characterize the reception toward this proposed legislation as being positive regarding its creative approach to solving a sizeable problem, to one that is skeptical toward the details of how or even if it will work. He said he identified two threshold hurdles: requests for more thorough analysis of possible constitutional challenges, and requests to pencil out the cash flows "to really show that bills will be paid without eating into the corpus of the funds that are already there." REPRESENTATIVE WILSON noted the possibility that some other energy source might be discovered causing gas prices to drop and leaving future generations with an unfunded liability with no way to pay for it. MR. SHEFCHIK said he agreed with the possibilities of gas prices being volatile and depressed for a period of time. He commented that in doing the cash analysis for either the retirement funds or the state budget, one would want to look at a high, medium, and low range of net prices on gas. In answer to questions regarding whether [this legislature] may result in future generations having to pay the debt, he pointed out that the proposed legislation provides [merely] a different mechanism for paying the debt over the same 25-year period at which it is currently amortized. He expressed his belief that the intent to pay off the debt is unchanged. 10:22:18 AM REPRESENTATIVE KELLY expressed his hope that Mr. Shefchik would address the "fed funding question, problem, opportunity" in addition to the "burden on the payroll of ... over 50 percent now and in the other case, approaching 40 percent of wages." 10:23:17 AM REPRESENTATIVE SEATON, in noting that all the gas income would initially be routed to the general fund [anyway], questioned whether the bill is simply another way whereby the state would "pick up the entire expense [of the $15.6 billion future liability]," transferring funds to the PERS/TRS accounts, and keeping the employers at their same rate. MR. SHEFCHIK clarified that the intent of the bill is not to maintain or pare back [employer] rates. He said that assuming there is an approximated match between assets and past service liability, the ARMB would instead determine rates that gravitate to the normal cost rate of approximately 13.5 percent. He explained that this setting of rates by the ARMB would only occur during the "transition year" after which time the board would continue with its fiduciary responsibility of ensuring that assets and revenues [sufficiently] meet liabilities. He stated that he would somewhat agree with the possibility of the generated gas revenues becoming general fund revenues, to then be transferred by the state to the ARMB, but this would only be part of the picture and not a total absolution of how bills will be paid. REPRESENTATIVE SEATON relayed that there is some question as to whether the bill will actually fix the current rates and that it does not recognize that the PERS system is not currently paying the normal cost. He said that he does not quite understand how, under the scenario proposed in the bill, the employers would be paying any portion of the past service cost given that the ARMB can't book a value [for the gas asset]. Furthermore, he questioned whether the rates could change until a value is actually booked or unless the "legislature comes in and says ... 'we are going to set the rates at below the actuarially computed costs assuming that we'll have value in this asset in the future'." MR. SHEFCHIK said that this is not [the intent of the legislation], that he understands the question posed by Representative Seaton, and will address it in the written explanations he is preparing. 10:27:44 AM REPRESENTATIVE KELLY opined that if the valuation has been accurately determined, it is important not to think that the present value of either cash or gas interest be treated any differently from one another. To this point, he added that whether the state adds $7 billion in cash to the fund or $7 billion in gas interest to the fund, it is still a matter of working with the present value that will hopefully grow over time. He said the hope would be that the gas asset would grow a greater amount than cash, would be valued conservatively, and match cash investments. He then highlighted that within only a year, the liability has grown from $5.7 billion to approximately $7 billion - a growth that completely consumes any excess in this year's revenue. "It completely chewed it up," he said. He opined that some are opposed to simply having the state write checks to pay off the debt but expressed his hope that the [legislature] continues to grapple with alternate ways to address the liability, "because it is massive." 10:30:57 AM MR. SHEFCHIK, in response to Chair Weyhrauch, informed the committee that he would provide them with a written analysis of the issue at hand. 10:31:45 AM MIKE BARNHILL, Assistant Attorney General, Labor and State Affairs Section, Department of Law (DOL), expressed his belief that the main purpose of the bill is to relieve employers of liability for past service costs. In noting that it's the ARMB's charge to examine all possible ideas to solve the debt problem, he opined that the route proposed by the bill is not the sole solution. He informed that committee, however, that the most serious issue with the legislation is one related to dedicated funds. He provided the committee with background information on this issue: In 1975, our office issued an opinion that interpreted the Alaska constitution's prohibition on dedicated funds and it said, "It's our conclusion that the dedication of any source of public revenue - tax, license, rental, sale, bonus royalty, royalty, or whatever - is limited by the state constitution to those existing when the constitution was ratified or required for participation in federal programs." MR. BARNHILL highlighted that it is the source of the revenue that is at issue and not necessarily the revenue itself. He cited an example of a recent Alaska Supreme Court ruling involving the securitization of the tobacco settlement where it was determined that funds were not dedicated because the state has never relied on tobacco lawsuit settlements in the past as a "traditional" source of revenue. In noting that the state has relied almost entirely on oil and gas royalties and taxes since 1977, he opined that this is "obviously" a traditional source of revenue. Regardless of whether a distinction can be made that [the gas asset] is "a future gas interest reduced to present value," he expressed his uncertainty as to how the court would rule [on HB 492]. If the legislature attempts to pass this bill, "we would try our hardest to defend it because that's what we do," he said. CHAIR WEYHRAUCH interjected to ask whether [DOL] could first recommend to the governor that he sign the legislation because it is constitutional. MR. BARNHILL said he would not recommend it because it appears to be more like a "traditional source of revenue" than a tobacco lawsuit settlement and because the state has "extensively relied on oil and gas revenues." If the legislation is passed this year and it goes into litigation, it could take three to four years for the Alaska Supreme Court to issue a decision - a delay that might cost [the state] as much as $1.6 billion. He repeated that should the state pass this legislation, DOL would defend it, but opined that "it's a particularly risky strategy." REPRESENTATIVE SEATON sought confirmation of his understanding that the problem is the "source of the revenue," not the dedication of money. He asked whether money that is appropriated and then put into an account would fall under the same criteria. MR. BARNHILL confirmed that the legislature can certainly appropriate money from the general fund to the pension funds on an annual basis. CHAIR WEYHRAUCH remarked that to say any source of revenue, that is a non-traditional source, shall be transferred to the ARMB for payment of past service liabilities would be an interesting policy question. 10:38:30 AM MR. BARNHILL said that under the tobacco securitization case, the route Chair Weyhrauch suggested could certainly be explored. 10:38:44 AM REPRESENTATIVE KELLY inquired as to whether the annual appropriation of funds to the unfunded liability would result in making the monetization, and use of that as a security instrument in the fund, worth less in value. MR. BARNHILL remarked that perhaps two different issues are being addressed: valuing an asset on a net present value basis and securitizing or monetizing the asset on a net present value basis. He opined that there isn't any constitutional problem with putting all of a securitized or monetized asset into the general fund to be appropriated on an annual basis by the legislature if a way can be found to securitize it consistent with the Alaska Statehood Act. 10:41:15 AM REPRESENTATIVE SAMUELS expressed his belief that just as with the timber industry, Alaska has never relied on gas. He said that at some point in the future, not only would a gas pipeline be built, but Alaska would be extremely dependent on gas revenues. He asked Mr. Barnhill if he differentiated between the hydrocarbons. MR. BARNHILL highlighted that whereas Alaska has received Cook Inlet gas royalties since 1959 or earlier, it has received no significant amount of North Slope gas royalties to date. As to whether the courts would make any geographical distinctions, he said that although he is uncertain, he would bet they would likely not do so. 10:42:46 AM MR. ROGERS, in response to Chair Weyhrauch, said he would work with Mr. Shefchik to prepare written responses to some of the issues raised. REPRESENTATIVE KELLY reminded Chair Weyhrauch that an amendment was drafted to include the municipalities in the bill and asked whether it be put on hold. CHAIR WEYHRAUCH requested Representative Kelly distribute the amendment to the committee members to be discussed at a future point in time. REPRESENTATIVE SAMUELS returned to his earlier mention of the potential conflict between the long-term interests of the ARMB and the state, and requested that Mr. Rogers and Mr. Shefchik address this issue as well. In response to Chair Weyhrauch, he further clarified that the DNR commissioner could be "in-between a rock and a hard place" with the possibility of the governor and the ARMB having conflicting agendas. [HB 492 was held over.]
| Document Name | Date/Time | Subjects |
|---|