Legislature(2007 - 2008)SENATE FINANCE 532
02/29/2008 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB256 | |
| HB13 |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 256 | TELECONFERENCED | |
| += | HB 13 | TELECONFERENCED | |
| + | SB 229 | TELECONFERENCED | |
| + | TELECONFERENCED |
CS FOR HOUSE BILL NO. 13(FIN)
"An Act relating to prepayments of accrued actuarial
liabilities of government retirement systems; relating
to the Alaska Municipal Bond Bank Authority, the Alaska
Housing Finance Corporation, and the state bond
committee; establishing the Alaska Pension Obligation
Bond Corporation; permitting the Alaska Municipal Bond
Bank Authority or a subsidiary of the authority, a
subsidiary of the Alaska Housing Finance Corporation,
the state bond committee, and the Alaska Pension
Obligation Bond Corporation to assist state and
municipal governmental employers by issuing bonds,
notes, commercial paper, or other obligations 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;
authorizing a governmental employer to issue
obligations to prepay all or a portion of the
governmental employer's shares of the unfunded accrued
actuarial liabilities of retirement systems and to
enter into a lease or other contractual agreement with
a trustee, the Alaska Municipal Bond Bank Authority or
a subsidiary of the authority, a subsidiary of the
Alaska Housing Finance Corporation, the state bond
committee, or the Alaska Pension Obligation Bond
Corporation in connection with the issuance of
obligations for that purpose, and relating to those
obligations; relating to revision of the employer
contribution rate in connection with financed
prepayment of unfunded accrued actuarial liabilities of
government retirement systems; and providing for an
effective date."
REPRESENTATIVE MIKE HAWKER, SPONSOR, related that HB 13
would authorize the state to engage in pension financing
transactions in order to fully fund the state's pension
liabilities.
9:50:09 AM
BRIAN ANDREWS, DEPUTY COMMISSIONER, TREASURY DIVISION,
DEPARTMENT OF REVENUE, reviewed a past presentation on
Pension Obligation Bonds (POB's) which covered reasons to
issue the bonds, what risks are involved, the potential
saving that may be achieved, and why POB's are taxable debt,
not tax-exempt debt.
Mr. Andrews pointed out that the mechanics of a POB
transaction are relatively simple. A POB transaction tries
to accomplish the replacement of an existing debt obligation
with another form of debt which has a lower cost. The
concept is the same as refinancing a home mortgage at a
lower interest rate.
The 2006 actuarial report points out that the state has an
$8.6 billion unfunded liability (debt) that it owes to the
state pension plan. It carries a cost of 8.25 percent. Two
weeks ago pricing from three major investment banking
institutions was obtained. A POB transaction deal could be
done for 5.25 percent, a savings that over 25 years on a
billion dollars represents $23 million a year or $323
million over 25 years discounted at 5 percent.
Mr. Andrews reported that the debt markets currently are
exhibiting a lot of instability. He voiced confidence,
though, that a transaction could be accomplished between
5.25 percent and 5.75 percent. The interest rate
environment is the lowest it has been in the past 40 years.
In fact, the ten year treasury at about 3.7 percent has only
been lower 3.9 percent of the time in the past 20 years.
The secret to a POB transaction is to do it at the lowest
possible cost.
Mr. Andrews explained that if the proceeds of a POB
transaction are invested with an earnings rate greater than
the cost, it is a good deal. Over the past 16 years, in
only 2 years, 2001 and 2002, the issuance of a POB
transaction would have proven to be a poor decision. This
is a 25 year transaction, so it will not be known if it was
a good or bad deal until the POB is paid off.
9:53:25 AM
Mr. Andrews addressed the political and market risks. He
turned to the PERS Case Study savings matrix on page 27 from
his previous handout entitled, "Pension Obligation Bonds,
February 8, 2008". He pointed out the annual contribution
rate of 35 percent in PERS - an average of all participants.
He showed how the various bond transactions affect
contribution rates and savings. He explained that the
matrix is unique because it also shows the impact of cash on
the contribution rate. The point is that cash is the best
asset to use. He added that a 5.25 percent cost of debt was
used and the matrix was based on a level percent of pay.
Mr. Andrews pointed out the conclusions on page 31. As long
as more can be earned than the cost of the POB, it is a
better move. It is a very favorable interest rate
environment. Risks associated with POB issuance are
quantifiable and statistically justified by the rewards.
Doing nothing is not a viable option.
9:57:23 AM
Senator Dyson stated his understanding about pension
obligation bonds. He requested information about how the
market uses taxable and non-taxable bonds. He wondered if
bonds should be issued for construction projects, rather
than for debts.
Mr. Andrews spoke of IRS rules which prevent the use of an
earnings arbitrage. He explained how they are marketed at a
higher rate. He talked about tax exempt strategies which
have higher risk. The capital projects amounts are not
sufficient enough to do a $2 billion-plus deal.
Senator Dyson said that investors and managers of the funds
are attracted to tax exempt bonds. He suggested bonding
capital projects to pay down PERS/TRS liability. Mr.
Andrews explained that the state cannot take money and use
it for unfunded liability and qualify for a tax free
exemption.
Co-Chair Stedman added that the state already has the
ability to issue bonds for capital projects. He gave an
example. He requested comments on that possibility. Mr.
Andrews explained that it is fine as long as there is not a
physical connection. If the capital projects are bonded,
which frees up money in the budget, then that money can be
used to pay down the unfunded liability.
Co-Chair Stedman said it is a policy decision.
10:03:42 AM
Representative Hawker added that as large and diverse as the
state is, there is a role for both tax exempt debt for
specific projects and for debt specifically targeted for
reduction of the pension liability. He pointed out that a
balanced program, which is currently in place, is the best.
Co-Chair Stedman requested information about how the bonds
are rated and issued. Mr. Andrews explained that that state
currently has an AA rating - a neutral rating. An increase
to AA1 was requested recently. POV's are appropriation
bonds and the ratings are one notch below other state
ratings - AA minus.
Co-Chair Stedman asked about expectations of the issuance of
$1 billion at today's market at AA minus - an estimate in
dollars. He mentioned the $3.6 billion in savings and a
desire to push the state's rating higher and thereby
reducing the pension debt somewhat.
10:08:51 AM
Senator Dyson asked what an appropriate level of debt for
the state to carry is. Mr. Andrews commented that Alaska is
very unique compared to other states. Tools rating agencies
use to measure other states don't apply to Alaska because of
its dependence on oil for revenue. POB transaction does not
impact the state's rating. He said the state has an
additional capacity for general obligation debt of about
$1.5 billion.
AT EASE: 10:11:23 AM
RECONVENE: 10:12:08 AM
Senator Dyson said he is interested in what the prudent
level of debt the state can carry is, knowing that the $40
billion is off limits. Co-Chair Hoffman thought the
committee should be interested in the answer.
Representative Hawker referred to hangouts from the previous
meeting: Pension Obligation Bonds and Other Post-Employment
Benefits by Roger Davis and published by Orrick, and "Time
May Be Ripe For A POB Revival" by Standard & Poor (copies on
file.) He maintained, in the context of the bill, the
rating agencies do not view POB's as adding to state debt.
Structuring a method to pay off debt can enhance the state's
rating.
Co-Chair Stedman referred to a cash flow analysis sheet from
February 15. He requested additional columns be added to
show the payments assumed under SB 125.
Senator Thomas said he is surprised at the adjustment that
has to be made over the 25-year time period for the net
present value of savings. Mr. Andrews noted that reflects
money's time value.
10:16:35 AM
JEFF URBINA, VICE PRESIDENT, WACHOVIA SECURITIES, SEATTLE,
reported that Wachovia Securities was the number one ranked
underwriter for municipal bonds in Alaska for 2007. He
shared the history of his company's involvement with pension
obligation bonds. He reported that there are only a few
tools to use to address an unfunded pension liability. It
is difficult to compare Alaska to other states. Most POB
programs focus on a three-legged stool approach:
programmatic evaluation, actuarial assumption analysis, and
an evaluation of actuarial investment pool earnings. This
approach frames a solution to unfunded pension liabilities.
Most solutions include POB's. Mr. Urbina summarized that he
feels that Alaska would be successful using POB's.
10:20:32 AM
CAROL SAMUELS, SENIOR VICE PRESIDENT, SEATTLE NORTHWEST
SECURITIES, OREGON, shared Oregon's experience with bond
issuance. Oregon's system is about four times the size of
Alaska. At the end of 2002, there was an estimate of the
unfunded liability totaling $17 billion. The state provided
legislative changes in 2003, which reduced unfunded
liability by about 50 percent. Voters approved the issuance
of $2 billion in state bonds. In addition, local
governments issued $3 billion in bonds. The results have
been very positive. The rate of return was at 8 percent.
It was estimated that savings would be about 25 percent or
$1.4 billion. The highest rate of return was over 20
percent. She related the advantages of the long-term
successes of the bonds. She emphasized that it is important
to structure the financing carefully and have an
understanding as to how bond proceeds will be invested.
Co-Chair Stedman referred to a handout from the Seattle
Northwest Securities company (copy on file.)
10:25:44 AM
ADAM STOLL, VICE PRESIDENT, GOLDMAN SACHS, referred to a
presentation in the members' packets. He related that POB's
are a very common tool used by governments. Since 2003
there have been over $30 billion in POB's issuances. Last
month a Standard & Poor report said POB's have been popular
with issuers and successful for sponsors. He mentioned the
current low interest rate environment and its advantages to
Alaska.
Mr. Stoll referred to page 2 of the handout which depicts
three examples of past POB's: Oregon, Illinois, New Jersey.
He noted that the interest costs of the three plans vary
greatly. He explained the advantage of an investment rate
of return on POV's issued with a low interest cost.
Senator Thomas noticed an extreme amount of activity in
2002-2005, as depicted on page 1. Mr. Stoll said that was
due to unfunded liabilities increasing greatly during those
years because of low returns.
10:28:59 AM
GREG SUNDBERG, MANAGING DIRECTOR, MERRILL LYNCH, reported
that his company has worked on this legislation with a
variety of people in Alaska for the past four years. He
thought the legislation was a good tool and he spoke in
favor of the bill. He offered to answer questions.
Representative Hawker summarized that the legislation is a
prudent measure for the state to undertake.
Co-Chair Stedman suggested working with the Department of
Revenue to expand the cash flow analysis. Representative
Hawker agreed.
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