Legislature(2003 - 2004)
05/06/2003 09:01 AM Senate FIN
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 203
"An Act relating to the definitions of 'net income' and
'unrestricted net income' for purposes of calculating the
dividends to be paid to the state by the Alaska Industrial
Development and Export Authority; and providing for an
effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated that this bill "clarifies the definition of
'net income' in regards to the annual dividend that AIDEA [Alaska
Industrial Development and Export Authority] pays to the State. If
passed, in FY 04 AIDEA dividend would raise somewhere between $9
and $18 million."
REPRESENTATIVE MIKE HAWKER testified on behalf of the House Finance
Committee that this bill addresses a "circumstance encountered" in
AIDEA operations and financial reporting in relation to the
statutory net income of the Authority. Under the provisions of
current statute, he informed that, AIDEA would not contribute "it's
regular" dividend to the State general fund in FY 04. He explained
that current statute provides that AIDEA "shall distribute to the
State a judgmental determination between 25 and 50 percent of its
net income" to the State general fund for "general purposes".
Representative Hawker specified that the definition of "net income
subject to distribution" is the purpose of this legislation, noting
the accounting of net income by AIDEA is "somewhat different than
what the State believes [should be] subject to the dividend
calculation." He explained that current statute exempts inter-
government transfers, capital contributions and grants; opining,
"Clearly, those items that are not part of the operating results of
AIDEA that should be subject to some kind of a dividend."
Representative Hawker shared that this bill proposes including the
"write-down of fixed or hard assets, [i.e.] previous investments
that one would call impairment losses" to the income items not
utilized in the calculation of net income for dividend
distribution. He exampled the write-off in the past year of
substantial investments in the Alaska Seafood International (ASI)
processing plant in Anchorage as well as the Healy Clean Coal
project. He reminded that these investments were made by AIDEA
"many years ago" and that the write-down of those assets had no
affect on the cash flow of the Authority, nor its ongoing
operations during the reporting year. He elaborated that the
investments had not provided a cash return to AIDEA for a number of
years.
Representative Hawker instructed, "these types of impairment losses
are not uncommon; they are to be anticipated in operating an
operation like AIDEA." However, he expressed concern with the
ability of AIDEA to utilize write-downs of past investments as a
devise to avoid payment of a dividend. He noted that AIDEA
currently has $789 million unrestricted net assets, $356 million of
which is unrestricted cash and investments. Therefore, he surmised
this legislation would "facilitate a steady, regular, recurring and
predictable dividend from AIDEA," to the benefit of financial
planning for the State. He furthered that the provisions of this
legislation would not impose an egregious restriction on the
Authority's net income. Rather, he opined, it would provide a
"stable environment" for relations with the Authority's debtor
agencies, lenders, "the financial community and the State and the
Nation as a whole."
Representative Hawker predicted this legislation would result in an
additional $18 million AIDEA dividend for FY 04, which he
considered "appropriate at this time".
Senator Bunde asked if the provisions of this legislation would
comply with generally accepted accounting principles (GAAP).
Representative Hawker replied that this bill would reconcile the
difference between GAAP, the required procedure by which AIDEA
reports financial statements, to a statutory definition of net
income, whereby the Legislature would create a dividend policy.
This policy, he said, would "modify the accountant's definition of
the all inclusive net income to exclude these particular items." In
his professional opinion, as a Certified Public Accountant, he
assured this would be in accordance with GAAP.
Co-Chair Wilken referenced a letter of opposition to this bill
dated April 1, 2003, from AIDEA.
Senator Olson wanted to know why AIDEA opposes this legislation.
SARA FISHER-GOAD, Alaska Industrial Development and Export
Authority, testified via teleconference from an off net location
about the Board's primary concern with the precedence a statutory
change to dividend calculations could set in creating a situation
whereby AIDEA could not pay a dividend.
Senator Olson asked the sponsor if this legislation would result in
the Authority investing in "less than profitable" ventures.
Representative Hawker asserted this would not affect the investment
policy of AIDEA. He recalled legislation passed the prior session,
which significantly redefined net income and unrestricted net
income and was precipitated by "the accounting world's change in
its presentation of financial statements". He characterized the
current legislation is a "finalization" of the changes made in the
earlier legislation and actually a "housekeeping" matter than a
policy direction. He surmised it would not encourage AIDEA to
operate in a manner other than the most prudent and in best
interest of the State.
Senator Taylor asked why the losses on investments, which have been
occurring for some period of time, are only recently reported as
such. He questioned whether the reasons are political. He compared
the practice to the recent national events involving the alleged
dubious accounting practices of the Enron Corporation. He
contended that the previous gubernatorial administration reported
the value of the seafood plant and the clean coal project as higher
than their actual worth. He therefore asked if the current
Murkowski Administration corrected the accounting procedures and
subsequently wrote down the losses.
Representative Hawker was unable to speak to the motives of actions
taken by AIDEA. However, he spoke to the practice of preparing
financial statements, which involves judgment decisions,
particularly judgments to the "realizability" of the value of
assets. He further informed that the impaired value of "long lived"
assets has been a matter of controversy due to inconsistencies. As
a result, he noted, accounting standards have been changed in the
past several years.
Senator Taylor asked if the State regularly audits AIDEA. If so, he
questioned why auditors had not identified the losses in the past
and subsequently require the Authority to account for them. He
pointed out that AIDEA had the ability to pay dividends to the
State during the previous administration.
Ms. Fisher-Goad spoke to a trigger mechanism that determines when
impairment losses are recognized. She informed that losses for the
Healy Clean Coal project have been written down once prior to the
occasion of the previous fiscal year. She noted that because ASI
underwent a process of refinancing and restructuring, the
impairment loss was not "recognized" until the previous fiscal
year. She stated that AIDEA produces audited financial statements
each year and that each legislator should receive copy of the
report.
Senator Taylor requested that financial auditors within the
Division of Legislative Finance review the financial statements. He
was concerned why the losses were not reflected earlier. He assured
he supports the legislation.
Co-Chair Wilken listed considerable discussion on the two projects
as well as pending federal legislation to "bail out" the clean coal
project as possible factors in the timing of the write-downs.
Co-Chair Wilken pointed out that the fiscal note amount indicates
an indeterminate cost to implement this legislation; however the
accompanying analysis estimates the cost to be between $8 million
and $9 million. He asked if a more definitive figure was available.
He also wanted an estimate of future revenues to the State as a
result of the changed dividend amounts.
Representative Hawker responded that the fiscal note is
indeterminate because the statute provides a "range upon which the
dividend may be judgmentally determined." The range, he said, is
between 25 to 50 percent of net income. He calculated a possible
dividend of $9,058,000 at 25 percent and $18,170,000 at 50 percent.
He was unaware of any disputes to the accuracy of these figures.
Co-Chair Wilken surmised that in a year that AIDEA unrestricted net
assets and/or investments was unfavorable, the State has the option
of not receiving a dividend.
Representative Hawker affirmed and clarified that current statute
provides that the legislature would be "statutorily post scribed
from taking any cash from AIDEA."
Senator Taylor suggested that with statutory change, AIDEA could be
liquidated and approximately $700 million deposited into the State
general fund.
Co-Chair Green asked for a definition of impairment losses.
Representative Hawker qualified that accounting terms are defined
similar to the manner in which attorneys define legal terms. He
described impairment loss as an investment in a "tangible hard
asset," such as a building, that has a "productive capacity", i.e.
would generate a return when utilized, but is no longer capable to
do so and subsequently "pay for itself". He exampled a building
fire as an event that could result in an impairment loss because
the value of the building would be less than the investment. He
specified that a major fire would be considered a catastrophic
impairment loss. He furthered that other events could result in an
impairment loss, telling of the investment in a coal loading
facility, with the return on investment dependent upon a contract
for the use of that facility. If the contract is not renewed, he
pointed out, the value of the facility is impaired and an
impairment loss results. He stated that an impairment loss is
reported in financial statements as an estimate of the reduction in
value.
Co-Chair Green referenced a portion of the sponsor statement [copy
on file], which reads as follows.
Under current statute there will be no AIDEA income available
for a dividend in fiscal 2004 as a result of impairment losses
recognized on the Healy Clean Coal Project and Alaska Seafood
International. Still, AIDEA has $789 million in unrestricted
net assets and $356 million of unrestricted cash and
investments from which a dividend could be paid. The dividend
formula proposed in House Bill 203 would make $9 to $18
million of this money available for a dividend to the State in
FY 04.
Co-Chair Green next directed attention to a handout titled
"Management Discussion and Analysis" [copy on file], which compares
assets and liabilities of FY 02 and FY 03. This information is
contained on page 13 of the AIDEA 2002 Annual Report [portions of
which are on file.] She asked if the unrestricted net income and
unrestricted cash figures cited in the sponsor statement reflect
the FY 03 amounts shown on the Analysis, and how the amounts
compare to previous years.
Representative Hawker replied that the amounts listed in the
sponsor statement reflect the amounts current as of June 30, 2002.
For comparison purposes, he referenced page 16 of the AIDEA 2002
Annual Report, titled "Balance Sheet" [copy on file]. He stated
that the figures are based on a two year "back trailing
calculation".
Co-Chair Green requested historical information from 2001 and 2002
for comparison purposes. She wanted to know whether a trend exists
in the "status of AIDEA".
Representative Hawker listed the cash and equivalence component for
FY 02 as $14,415,000; FY 01 as $28,600,000; and FY 00 $27,400,000.
He next listed the current investment securities amounts for FY 01
as $400,000,000 and $352,000,000 for FY 00. He stated that the
reductions were as a result of the write off of the impairment loss
from the two facilities.
Co-Chair Wilken asked the unrestricted net assets of FY 00
Representative Hawker answered $856 [million], qualifying this
amount is an "approximation, recognizing the change in format." He
furthered that the amount in FY 01 was $877 [million], and $789
[million] in FY 02.
Senator Taylor asked whether this legislation must be passed to
ensure the State receives a dividend from AIDEA in the upcoming
fiscal year.
Co-Chair Wilken affirmed.
Senator Olson referenced the June 30, 2002 Balance Sheet and asked
the percentage of AIDEA earnings derived from the Red Dog Mine and
how this legislation would affect that operation.
Representative Hawker deferred to AIDEA
Senator B. Stevens directed attention to pages 20 and 21 of the
AIDEA 2002 Annual Report titled, "Notes to Basic Financial
Statements" [copy on file]. He pointed out note (1) Organization
and Operations, lists the initial AIDEA bond obligation of $85
million for the Healy Clean Coal Project and $48 million for ASI,
totaling $133 million. He noted the write-down of the loss in these
investments is $93 million and he asked if additional write-downs
would occur for the balance of approximately $41.6 million invested
in these projects.
Representative Hawker again deferred to AIDEA.
Senator B. Stevens continued to page 26 and (7) Net Investment in
Direct Financing Leases, Notes and Development Projects [copy on
file] and cited a portion as follows.
The components of the Authority's net investment in direct
financing leases at June 30, 2002 are (stated in thousands):
Minimum lease payments receivable $824,645
Less unearned income (495,031)
Less impairment loss (25,600)
Net investment in direct financing leases
$304,014
Senator B. Stevens surmised the unearned income represents lease
payments or finance payments not collected. He requested an
explanation of the impairment loss in this context as it appeared
to be recorded as a payment not received rather than as an asset.
Representative Hawker explained the two investments made into these
projects, one into a hard asset, the other financing leases for
operations. He furthered that the second investment essentially
created a loan to provide funding to support the project. In this
instance, he said the asset is a loan to be repaid in the form of a
lease. The unearned income, he stated, represents the repayment of
the loan and the impairment loss represents a further reduction in
the value of the investment that would not be recouped.
Senator B. Stevens clarified two forms of impairment losses were
realized, one in the value of the asset, the other in the value of
future revenues from that investment.
Representative Hawker affirmed and noted the loss of value to the
State in this asset is manifested in the leases.
Ms. Fisher-Goad addressed the remaining $41.6 million invested in
the Healy and ASI projects that had not been written down to date.
She first clarified that no bonds were issued for the investment in
ASI.
Senator B. Stevens asked if AIDEA therefore purchased the facility
outright without bond financing.
Ms. Fisher-Goad affirmed. She explained that the value of ASI, for
the purpose of reporting an impairment loss, was determined by
calculating the "alternative use value" of the building.
Co-Chair Wilken again asked the status of the $41.6 million, and
whether it would be reported as an impairment loss in future
financial statements.
Ms. Fisher-Goad was not prepared to answer to the future of the two
projects. She noted that impairment losses were reported for the
projects, but emphasized that assets continue to depreciate and are
reported as such regardless of whether an impairment loss occurs.
Senator B. Stevens noted the potential that impairment losses on
these investments would be reported in future financial statements
would influence his support of this legislation because such write-
downs could impede the Authority's ability to pay a dividend to the
State.
Co-Chair Wilken understood that AIDEA recognizes $133 million in
asset value, and although $91 million has been written down, the
remainder of the investment has not yet "been dealt with".
Representative Hawker rephrased the question to AIDEA: He asked in
the context of future prospects, what is the current book value of
the coal project and of the ASI investments, and the prospects for
further impairment recognitions in future fiscal years.
Ms. Fisher-Goad repeated that she was not prepared to provide the
current book value of these assets nor whether the Authority
expects future impairment loss recognition.
Co-Chair Wilken requested this information be provided to the
Committee.
Ms. Fisher-Goad stated she would provide this information later in
the week.
Senator B. Stevens also requested information regarding the
impairment losses reported over the past five years. He indicated
language on page 14 of the AIDEA 2002 Annual Report, titled
"Management's Discussion and Analysis" [copy on file] referencing a
$10,419 impairment loss recorded in FY 01 for the Skagway Ore
Terminal. He expressed interest in the frequency of impairment loss
reporting by AIDEA.
Ms. Fisher-Goad would provide this information the following day.
Co-Chair Green also requested information regarding the
unrestricted cash investments and unrestricted net assets for the
same five years.
Ms. Fisher-Goad noted significant accounting changes were
implemented the previous year, cautioning that comparison would be
difficult.
Senator Taylor remarked that this legislation provides that if
impairment losses are recognized and allowed as an exclusion from
net income, a dividend would be available to the State in the
current fiscal year. He opined this issue is more important than a
determination of impairment losses in past years. Therefore, he
emphasized the importance of this legislation. He commented that
although he appreciated that the recording of the impairment
losses, as well as changing accounting principles, have "cleaned up
the books". However, he stressed his "attitude toward AIDEA" and
the asset base, is unchanged. He preferred to report the bill from
Committee and address the questions later in the process.
Co-Chair Wilken noted adequate time remained in the legislative
session to address this bill.
Co-Chair Wilken agreed this bill would provide a revenue source
that should be implemented.
SFC 03 # 77, Side B 09:48 AM
Co-Chair Wilken ordered the bill HELD in Committee.
| Document Name | Date/Time | Subjects |
|---|