Legislature(2005 - 2006)SENATE FINANCE 532
05/01/2005 01:00 PM Senate FINANCE
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 24 | TELECONFERENCED | |
| += | SB 156 | TELECONFERENCED | |
| += | HB 182 | TELECONFERENCED | |
| += | HB 91 | TELECONFERENCED | |
| += | HB 119 | TELECONFERENCED | |
| + | HB 136 | TELECONFERENCED | |
| + | SB 135 | TELECONFERENCED | |
| += | SB 108 | TELECONFERENCED | |
| + | SB 121 | TELECONFERENCED | |
| + | SB 122 | TELECONFERENCED | |
| + | HB 35 | TELECONFERENCED | |
| + | HB 75 | TELECONFERENCED | |
| + | HB 132 | TELECONFERENCED | |
| + | HB 156 | TELECONFERENCED | |
| + | HB 230 | TELECONFERENCED | |
| += | SB 46 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| = | HB 19 | ||
| = | HB 15 | ||
SENATE BILL NO. 121
"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."
SENATE BILL NO. 122
"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."
This was the first hearing for these bills in the Senate Finance
Committee.
CHERYL FRASCA, Director, Office of Management and Budget, Office of
the Governor, informed the Committee that these bills contain the
Governor's proposal pertaining to funding provided by the lawsuit
that the State brought in the 1970s against oil companies over the
valuation of the State's royalty oil and gas. The case was
eventually settled in the mid 1990's. During the 15-year appeal
process, the oil companies asked the federal courts to move the
case outside of Alaska. The argument was that because all Alaskans
are potential jurors, they would be biased because they would
potentially benefit from the proceeds going into the Permanent
Fund. The federal court asked the Alaska Legislature to attempt to
resolve this issue.
Ms. Frasca continued that two separate Legislative pieces, one
under the Governor Steve Cowper Administration and one under the
Governor Walter Hickel Administration, were passed to address the
concern. One prevented the interest earnings from the Amerada Hess
settlement from counting toward the calculation of the Permanent
Fund Dividend (PFD). That effort served to remove the potential
bias, and the lawsuit was ultimately settled out of Court.
Ms. Frasca stated that the money from the settlement was deposited
into the Permanent Fund, and its balance, as of the end of FY 2004,
amounted to approximately $424,000,000. The proposal contained in
SB 122-AMERADA HESS INCOME; CAPITAL INCOME ACCT. would establish an
income account and the proposal in SB 121-STATE OF AK CAPITAL
CORP.; BONDS would establish a corporation through which
$30,000,000 in annual earnings would be leveraged to issue bonds to
fund State capital projects. The capital projects that would be
funded by the Capital Corporation bond revenue were included as
such in the capital budget the Murkowski Administration presented
in December 2004.
Ms. Frasca noted that Deven Mitchell with the Department of Revenue
would be presenting information pertinent to SB 121, regarding the
Capital Corporation structure.
3:04:48 PM
DEVEN MITCHELL, Debt Manager, Treasury Division, Department of
Revenue, expressed that tremendous work has been conducted in
regards to the structure of the Alaska Capital Corporation;
specifically in consideration that it's structure should not impact
the State's credit rating. The process would first involve the
establishment of the Alaska Capital Income Account, as specified in
SB 122, as a subaccount of the Permanent Fund Earnings Reserve
Account (ERA). "The money doesn't flow to the general fund and
therefore it can be construed as being self-supporting and not
included in the State's net tax supported debt. This is a very
important feature of the proposal."
Mr. Mitchell stated that, "money in the Alaska Capital Income
Account would then be available for annual appropriation for any
legitimate purpose including to the State of Alaska Capital
Corporation". The Alaska Capital Corporation would be a new public
corporation created in the Department of Revenue. The Corporation's
Board would include the State Bond Committee supported by existing
Department of Revenue staff. "The Corporation would be able to
enter into operating leases that would provide for the annual
transfer of money from the Capital Income Account to the
Corporation, subject to annual appropriation." The bond structure
being proposed is a flexible amortization-type of bond issuance,
often referred to as a "turbo" structure. It would require interest
only payments for up to a 40-year schedule with a final balloon
payment at the end. This structure would also allow for "a paying
down of principal in the short years as you had principal
available". It would allow for volatility in the market. The
historical realized return of the Permanent Fund over the past
twenty years has been 8.94 percent; the current realized return
assumption is 7.04 percent. Were a 7.04 percent return realized,
approximately $29,800,0000 a year would be generated by the
settlement funds. That "anticipated revenue stream" could be
leveraged over 17 years to obtain the $340 million in capital
projects being proposed.
Mr. Mitchell qualified however, that it would be unrealistic to
anticipate "a flat 7.04 percent return a year". Returns have
fluctuated from a low of 1.15 percent to "double-digit percents in
other years"; thus the need to address the volatility issue. The
proposed turbo structure concept has been deemed acceptable by the
State's credit agencies. It has also been discussed with
underwriters, and while the various underwriters "have different
ideas on how the actual implementation of the program might occur,
there seems to be a consensus that there are means of dealing with
the revenue stream, the volatile revenue stream, insuring a high
probability of ability to pay". He noted that "one important credit
feature" of this proposal is that the Corporation would have "a
moral obligation on a reserve fund". A "moral obligation is that
there would be a reserve requirement…"
Mr. Mitchell stated that one component of the tax code "is the
maximum annual service, and, if there is ever a draw on that
reserve fund, then the Board is charged with requesting
replenishment from the Legislature". The State currently has
approximately $1.1 billion in outstanding bonds that have such a
moral obligation associated with them. This in effect would
establish "a floor" in regards to the bond issuance. He explained
how the State's investment grade credit rating could be affected
were bonds sold without such a floor.
3:11:05 PM
Ms. Frasca informed the Committee that further information could be
found in the Office of Management and Budget background paper
titled "Use of the Amerada Hess Settlement to Fund Capital
Projects" [copy on file] included in Members' packets. The
schematics of the two proposals are located on page seven and
eight.
3:11:30 PM
Senator Dyson asked whether it would be possible "to issue too many
bonds and overload the system".
Mr. Mitchell responded that regardless of whether the question
pertained to the State's overall bonding or specifically to this
proposal, the answer would be "yes". To that point, the Department
of Revenue "has a strong desire to maintain the State's" AA credit
rating. In order to maintain that credit rating "outside analysts"
are utilized to review the State's action on a continual basis.
While some states' debt management department might be able to
develop "a debt capacity based on projected revenues for the next
twenty years", such action would be impossible in Alaska as the
State's primary source of revenue is extremely volatile. This is
the reason for requiring large reserves in such funds as the
Constitutional Budget Reserve. Therefore, in response to the
question as to whether there would be a limitation on the State's
ability to leverage, this proposal would be recognized as being
sustainable. It could survive a very negative earnings scenario or
cash flow scenario. On a broader scope, it would provide the State
money that would not impact the State's credit rating.
3:13:40 PM
Co-Chair Wilken voiced being "surprised" that on the 111th day of
the Legislative Session, even though it has been discussed by
Legislators and the Administration, the status of this legislation
is as it was on the first day of the Session. While he has no issue
with utilizing Amerada Hess earnings, he does have a problem with
"the complicated system" being proposed. He would support using
Amerada Hess earnings for the debt retirement account as it would
provide approximately $30,000,000 to support this year's
$140,000,000 debt to fund schools, harbors, and other needs. That
action would be "perfectly defensible".
Co-Chair Wilken deemed the activities associated with the Alaska
Corporation Income Account and the Capital Corporation, as depicted
on the aforementioned schematics, as being "unnecessary". A simpler
solution would be to move the money from the Amerada Hess Fund into
the Debt Retirement Fund.
Co-Chair Wilken shared his objection to some of the projects
proposed to be funded in this manner, because doing so would amount
to committing "15-year money" to fund three-year projects. While he
voiced support for the array of projects, funding them in this
manner would not be considered "good fiscal management". Other
funding sources are available.
3:16:16 PM
Co-Chair Wilken continued that he could not support the
establishment of a new bureaucracy through which to fund capital
projects, as it would not be necessary. The Amerada Hess money
could be deposited into an account that is currently utilized to
fund bonds.
3:16:57 PM
Ms. Frasca appreciated Co-Chair Wilken's comments. She reminded
that the Administration had provided its budget proposal in
December 2004 and that work on it had begun as early as October
2004. The options through which to fund the infrastructure were
uncertain at that time. She recognized that "shifting" the Amerada
Hess funding to the Debt Retirement Fund was an option; however,
that Fund would be utilized to fund prior years' obligations. The
desire with this legislation was to finance and develop future
infrastructure needs. "We share the same goals in terms of where we
want to go, and the question is how best to finance it." At the
time the budget was being developed, this was considered the best
option as it met the criteria and did not jeopardize the State's
credit rating. It is still considered "a good mechanism".
3:18:16 PM
Co-Chair Green stated that the question is how to best balance the
funds that are available. There is a "different feel to this year's
budget" than in previous years, because, other than Department of
Transportation and Public Facilities transportation and federally
funded projects, the amount of capital budget projects was held to
a minimum. There are numerous funds out there and efforts should be
exerted to reach a balance in utilizing the funds that are
available.
Co-Chair Green voiced appreciation for the information that has
been provided.
Senator Stedman voiced that he holds a similar position to that of
Co-Chair Wilken.
The bills were HELD in Committee.
3:20:00 PM
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