Legislature(1995 - 1996)
03/02/1995 09:15 AM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SENATE BILL NO. 40 An Act making appropriations from the Alaska Housing Finance Corporation revolving fund to the general fund; and providing for an effective date. Co-chairman Halford directed that SB 40 be brought on for discussion. SENATOR SHARP, sponsor of the legislation, noted that last year the legislature sent a signal to Alaska Housing Finance Corporation (AHFC) that the legislature expected a scheduled return on over a billion dollars in equity placed in the corporation over the years (particularly 1980 through 1984). Simple five percent interest applied over the last ten years to the $1,073,515,000 should not be too much to expect from the investment. If extended out, it would amount to an increase in equity to $2.2 billion. Up to this time, AHFC has returned $316 million. Senator Sharp referenced February 1, 1995, correspondence (copy appended as Attachment A) and said he took exception to the $250 million claimed as a return since that amount represents a transfer of assets, upon which the corporation will earn a return, rather than an equity return to the state. Audit analysis conducted last year indicated approximately $500 million in available equity that could be transferred without affecting the bonding rating of the corporation. An updated audit report dated February 9, 1995, (copy on file in the SFC original file for SB 40), contains slight adjustments to estimated available equity. Senator Sharp noted that the updated audit suggests that the committee might want to consider amending SB 40 to provide a $200 million draw down each year for the next two years. Senator Sharp referenced lack of oversight at AHFC over the last year or two and suggested that it amounts to "gross malfeasance" in management. He noted that over $4 million has been paid in liability suits relating to employee problems, gold parachutes for departing executive directors, five percent loans spread over thirty years, etc. The Senators voiced concern that that amount of subsidy severely disrupted the real estate market, and he cited examples whereby prices increased when the subsidies were announced and sellers rather than buyers received the benefit. In his concluding comments, Senator Sharp stressed that AHFC should be considered a continuing source of return of equity to the state general fund. RANDY WELKER, Legislative Auditor, came before committee. He advised that, last year, the division of legislative audit identified $535 million available to the legislature over the period of three fiscal years: FY 94 $200 million FY 95 $214 million FY 96 $121 million The legislature appropriated $200 million in FY 95. At the request of the Legislative Budget and Audit Committee, the division updated and revised the foregoing numbers and identified $295 million for FY 96 and $150 million for FY 97. In considering the numbers, Mr. Welker cautioned that members should be aware that all number come from cash flow statements prepared by AHFC. Funds are in excess of cash flow needs over the next several years. The primary adjustment made by the division of legislative audit was elimination of AHFC's capital budget (from corporate receipts) from cash flow projections. That was intended to identify the maximum amount. If a capital budget is appropriated for AHFC based on corporate receipts, division numbers would have to be adjusted accordingly. AHFC has a "very aggressive capital budget over the next five, six years, to the tune of . . . $50 to $60 million a year . . . ." Cash flow activity for the current fiscal year indicates that AHFC is using approximately $24 million. Mr. Welker reiterated that AHFC has an aggressive capital budget plan laid out "well past the year 2000." Mr. Welker further cautioned that in reviewing bond covenants and legal documents associated with AHFC activity since prior division review, the division found a "poison pill" in underlying documentation on a line of credit agreement for a November bond issue. The provision says that should the legislature take any action to transfer assets away from the corporation, the $235 million in bonds would be considered in default. That agreement was for a short-term funding arrangement. AHFC is of the opinion that the short-term funding will be rolled over into long-term funding within the FY 96 time frame. Once that roll over to long-term financing occurs, the default provision would no longer be applicable. Mr. Welker advised that the agreement provides for AHFC to request a waiver of the default provision. That is one alternative that could be pursued. AHFC believes it will be out from under that provision by the end of FY 96. Should the legislature decide to appropriate, the division of legislative audit does not believe the provision would impact an appropriation, but it might impact timing of the transfer of cash from AHFC to the general fund. Again addressing the corporation's capital budget, Mr. Welker reiterated that numbers developed by Legislative Audit are derived from the corporation's cash flow projections that show that the corporation would be able to maintain current programs even with the proposed withdrawal of cash. However, the withdrawal would not bode well should there be a major economic downturn and AHFC needed to rely on surplus assets to bail out bond issues. In his concluding comments, Mr. Welker noted credit rating concerns that would be raised by withdrawal action by the legislature. Standard & Poors has issued a negative outlook on certain AHFC bonds because of continued legislative interest in the assets of the corporation. There is no way of knowing what impact a further appropriation would have on AHFC's credit rating. Standard & Poors has put the corporation on a negative outlook pending a downgrade should a transfer occur. There is no indication how significant or insignificant that downgrade might be. If downgrade was from investment grade to below investment grade, that would make the market "almost unreachable for AHFC." There are numerous opinions on how drastic the bond rating change might be. Co-chairman Halford inquired regarding the effect of triggering the "poison pill" provision, asking if AHFC would go to the market and borrow moneys to cover the bonds. Mr. Welker acknowledged that AHFC would "have to come up with some means of repaying those bonds." Whether the corporation could go to the market to accomplish that is unsure. Mr. Welker further advised that while the default provision remains in place, he could not say how ready the bank would be to trigger that provision. There is a cost to the bank to do so. If the bank does not anticipate a risk to the bonds, there may be a reluctance to declare them in default based on a technicality. Co-chairman Halford asked if the legislature could appropriate directly from AHFC to a department for operational costs. Mr. Welker said he was unaware of any prohibition. He added that default provisions speak to transfer of "any asset away from AHFC." In response to a further question from the Co-chairman, Mr. Welker advised, "I believe the legislature could designate AHFC as the funding source for any appropriation." Senator Sharp raised a question regarding a rating downgrade, suggesting that a system of various levels is in place. Mr. Welker acknowledged that there are several levels of investment bond ratings to go through before ratings reach below investment grade. Referencing the "poison pill" provision, Senator Sharp asked if it places AHFC's capital budget in jeopardy for authorizing expenditures from the equity account. He further inquired regarding corporate ability to build assets for its own use without legislative approval. Mr. Welker suggested that the resulting conclusion would be that the corporation is not transferring but merely converting from a cash asset to a physical or structural asset. The total asset value of the corporation has thus not been reduced. Mr. Welker acknowledged that such action impacts corporate liquidity. Co-chairman Frank voiced his understanding that the "poison pill" provision represents a technical default that might result in the lender being able to demand immediate repayment. He further advised that the arrangement is temporary and intended to be refunded with "some type of longer-term debt instrument." If the legislature withdraws moneys from the corporation, the financing bank, should it choose to do so, could demand payment, and AHFC would have to provide repayment. In making that demand, the lender would forego much of its interest earning. End: SFC-95, #9, Side 1 Begin: SFC-95, #9, Side 2 Co-chairman Frank then stressed that the lender that provided funding with the "poison pill" proviso should "absolutely never be part of a new financing or a rolling financing agreement that would allow them to get more fees and interest . . . ." He attested to competitiveness in financial markets and need to deal with "financing entities that would treat us right as opposed to trying to blackmail us into those kinds of terms." Co-chairman Halford concurred but questioned whether the "poison pill" provision was invented by the lender or AHFC. In response to a question from Senator Sharp concerning bond counsel oversight when the questioned provision was agreed to, Mr. Welker said that correspondence regarding the provision indicated it was a demand by the bank. It did not appear to be generated internally at AHFC. It was reviewed by legal counsel on contract to AHFC as well as AHFC staff. The end result was that the provision prevailed and remained a part of the line of credit. Senator Sharp referenced AHFC capital budget matching of HUD funds as an example of a situation where AHFC assets are not retained. Match funding flows from AHFC to regional housing authorities. Those buildings are not owned by AHFC. Mr. Welker concurred. In response to comments regarding lack of downgrade as a result of last year's appropriation from the corporation, Mr. Welker acknowledged that downgrade did not occur. He noted, however, that Moodys placed AHFC on a negative outlook. Standard and Poors has given earlier warning than the state had the benefit of last year. Senator Rieger voiced his recollection that the questioned loan covenant is within a borrowing used to finance the $200 million payment to the state. Mr. Welker advised that the two are not related. Senator Rieger then asked if the source of the funds and administrator of the loan are the same entity or is the bank a pass through for other lenders. Mr. Welker advised that he did not know. He told members that the lender is a major bank out of Germany. He further surmised that a bank of that size is the primary entity involved and is lending its own capital rather than providing administrative services for another lender. Co-chairman Frank directed attention to AHFC's combined balance sheet within the 1994 annual report. He noted assets of $4.4 billion and combined equities and liabilities of $4.4 billion. Total fund equity as of June 30, 1994, amounts to $1.7 billion. That is 39% equity. The Co- chairman voiced his assumption that the foregoing numbers reflect the status before withdrawal of last year's $200 million. When that appropriation is subtracted, the equity percentage is 37%. Equity capitalization for banks ranges from 7 to 10%. He then suggested that if AHFC equity is reduced from 39% to 33%, by subsequent withdrawals, the corporation remains "hugely capitalized." The corporation has received contributed capital of $1,085,000,000 and has retained earnings of $686. Co-chairman Halford noted that while the title of SB 40 speaks to "An act making an appropriation," language in the body of the bill relates to an amount "anticipated to be transferred by the direction of the Alaska Housing Finance Corporation Board." He then asked if the legislation is an appropriation or something less and suggested that the question be put to the drafter. Co-chairman Halford further noted that the Governor's balance sheet evidences $70 million from AHFC. He then inquired concerning the amount of the corporation's proposed capital budget. Mr. Welker answered that the draft capital budget shows $52,749,600 from corporate receipts. The total is $72,275,000, including federal funds. Co-chairman Halford asked if the Governor's proposal and that of the corporation itself are different from legislative appropriation, in terms of impact on the bond covenant. Mr. Welker said that if the $70 million proposed by the Governor consists of $50 million in the capital budget and an additional $20 million from AHFC's established dividend program, it would be viewed differently by rating agencies. Rating agencies recognize AHFC's dividend program as an acceptable way of returning capital. A $70 cash extraction from AHFC to the general fund would have the same implication as SB 40. Senator Rieger referenced testimony before the Legislative Budget and Audit Committee indicating that anticipated FY 95 earnings would be "in the $90 million range." There is thus a distinction between withdrawing earnings and withdrawing capital. Mr. Welker stressed the importance of bearing in mind that many of the assets within the "new AHFC" result from combination of the old AHFC and ASHA. Many of the ASHA programs are federally funded. He then voiced his understanding that it is not the intent to impair those low- income housing programs. It is the equity in old AHFC, that generates surplus assets, that is addressed in the proposed bill. Co-chairman Frank voiced his understanding that the $70 million proposed by the Governor is in addition to AHFC's capital budget. The Governor's proposed capital budget is $135 million. Referencing earlier comments by Senator Rieger regarding earnings of the corporation, Co-chairman Frank stressed need to examine the purpose of AHFC and what equity is needed to maintain that purpose. When AHFC received large capital injections in the early 1980s, its purpose was to subsidize housing for many state residents. Over time, the legislature changed AHFC policy to limit subsidy to that which can be achieved through pass through of federal subsidies. Ratcheting down has eliminated subsidies to those who do not qualify for federal programs, yet a billion in contributed capital remains within the corporation, plus $500 million in retained earnings. The legislature is now looking at AHFC's ability to contribute to the state general fund on an ongoing basis. An assessment must thus be made as to the amount the corporation needs as a capital base to maintain existing programs. It cannot be assumed that the corporation needs everything it now has. A fresh economic look is needed. The Legislative Auditor has identified "what their clear excess appears to be." Co-chairman Frank voiced his belief that the purposes of the corporation could be accomplished with "much, much less." The fund contains $1.7 billion and is earning approximately $70 million. That is not a good return on investment. Placement of the fund balance in 30-year treasury bonds would be yielding "close to 8% . . . ." The state is facing a fiscal gap of $500 million. A $1.7 billion corporation could be an important part of Alaska's long-term fiscal plan. Senator Sharp referenced an earlier inquiry by Co-chairman Halford regarding wording in both the title and body of SB 40. He explained that it is patterned on language in the budget last year. Language which allows the AHFC board of directors to transfer the funds and make decisions on surplus moneys was intended to be more acceptable to Wall Street. Co-chairman Halford voiced his belief that the proposed bill is not an appropriation since there is no mandate to deposit. Mr. Welker concurred. Senator Rieger reiterated remarks by Co-chairman Frank regarding the purpose of expansion of AHFC in the early 1980s. The ultimate result was that the average Alaska homeowner benefitted. The first of a series of mistakes by the corporation was resistance to a dividend payout and the fact that payouts have been low. Senator Rieger advised that, in addition, the legislature made a further mistake in merging AHFC and ASHA. The present perception is that this $1.7 billion equity institution does not serve the vast majority of Alaskans. It instead serves special interests "out on the fringes" who are getting special 5% programs, etc. If AHFC is to retain support in the legislature, it will "have to do something for all Alaskans." The corporation is noncompetitive at 10% when the market is 8.5 to 9%. Testimony before the Legislative Budget and Audit Committee was that the corporation could have used its assets to reduce its interest rate. It did not have to use arbitrage earnings in the manner in which they were used. Senator Rieger asked that the committee "entertain resplitting AHFC from ASHA and let this corporation do some good for its original purpose." He suggested that the legislature should support AHFC in a workable manner or dissolve it entirely. Withdrawing $200 million annually is not likely to create beneficial interest rates for Alaskans. It will, however, perpetuate fringe programs until the agency collapses. Senator Zharoff echoed Co-chairman Halford's concern regarding language in the body of the bill. Mr. Welker advised that as currently written, it is up to the board of directors of AHFC to decide whether or not any of "this money would be transferred to the general fund." Senator Zharoff asked if the unrestricted cash is subject to sweep to fill the void in the constitutional budget reserve. Mr. Welker voiced his understanding that the assets of AHFC are not subject to sweep. He acknowledged that if removed from the corporation and placed in the general fund, they would become vulnerable. The sweep is a fiscal year-end calculation. Further discussion of the sweep, calculated for the end of FY 96, followed. Senator Donley concurred in comments by Senator Rieger that AHFC no longer serves the majority of Alaskans. He questioned why it was continued once discounted rates were no longer part of the program. He suggested that the recent 5% program was a fiasco. He voiced need to redefine the program so that the corporation serves more Alaskans. DAN FAUSKE, CEO and Executive Director, Alaska Housing Finance Corporation, came before committee. He advised that he had been on the job only two days. Prior to joining AHFC, he served for ten years as chief financial and administrative officer for the North Slope Borough. Mr. Fauske advised that he has extensive experience in dealing with bond issues and ratings. He cautioned that questions of bond ratings are serious issues. He explained that he had spent the past ten years at the North Slope Borough "getting one back." In a teleconference last Friday, Standard and Poors indicated they are seriously concerned by the uncertainty. That is the natural hesitancy and paranoia of rating agencies which have a reputation to uphold in terms of the ratings upon which investors rely. Another key consideration is that AHFC, unlike any other organization in the United States, is a general obligation in and of itself. It is backed by the full faith and credit of AHFC. Other housing organizations are backed by the full faith and credit of the resident state. AHFC assets are pledged for the payment of debt. Mr. Fauske said that he was not suggesting that there is not room to "work within those numbers." There is a concern, however, as to how much money is going to be taken out and the subsequent reaction of bond rating agencies. Mr. Fauske explained that he had discussed presentation of numbers and scenarios with Standard and Poors in an attempt to determine what rating agencies might be comfortable with. He stressed the importance of maintaining the rating, saying that AHFC is one of the strongest assets owned by the state. Protecting the corporation and maintaining its ability to access capital markets is important. Mr. Fauske spoke to AHFC assistance in providing North Slope residents access to loans. Senator Phillips asked if a commitment by the state to withdraw specific amounts ($200 and $100 million were cited) each year over a two to three-year period and then terminate withdrawals at the end of that time would satisfy bond market concerns. Mr. Fauske responded that the methodology would be correct, but he advised that he was unsure what amounts might be acceptable until numbers were presented to rating agencies. Co-chairman Frank spoke to legislative attempts, over the past six years, to elicit a meaningful dividend return to the state from AHFC. Those attempts have been frustrated by "stonewalling" by the corporation. As an alternative, the legislature took action under its power to do so. Legislative action was not done without justification and analysis. Legislative auditors provided information on excess reserves, and the appropriation were consistent with that report. If AHFC and the legislature were to develop a meaningful program of return of excess capital to the state, that return could become an important part of how the state meets its ongoing fiscal gap, could alleviate pressure to appropriate from AHFC on an ad hoc basis, ensure long-term viability of AHFC for its statutory purposes, and send the right signals to the bond market. The Co-chairman reiterated that legislative action is the direct result of "the absolute stonewalling attitude of AHFC." Senator Sharp concurred in comments by Co-chairman Frank. He further commented that the purpose of AHFC, over the last five years, has not been to provide first home buyers an opportunity to purchase a home (one of the original purposes of the corporation). AHFC has instead found a niche in refinancing its own mortgages and funding low-interest programs. He suggested that sale of the $115 million, 5%, 30-year mortgage portfolio would yield only $85 per $100. That represents a great loss of equity. Co-chairman Halford voiced concern over the fact that AHFC's $50 million capital budget is half as large as the "entire capital budget for the whole rest of the state in all other functions." He then asked how the legislature could reduce the program from $1.8 billion down to $500 million while maintaining its health and function. He suggested that if that could not be done, the corporation should be done away with. Senator Sharp suggested that commercial banks have not been financing housing through AFHC, aside from special interest projects. The federal housing market is much more feasible. AHFC is not serving the general mortgage market for Alaskans. It is being manipulated by special interest groups. End: SFC-95, #9, Side 2 Begin: SFC-95, #11, Side 1 JAN SIEBERTS, Senior Vice President, National Bank of Alaska, and member, legislative committee, Alaska Bankers Association, came before committee. He referenced passage of a resolution by the Association in support of AHFC, but advised that his comments at this time would be made on behalf of NBA which services $2.4 billion in residential loans throughout the state. NBA's impact and involvement in housing issues surpasses the combined efforts of all other financial institutions statewide, excluding AHFC. Mr. Sieberts voiced support for AHFC, saying that it serves an important purpose in Alaska. In much of the state there would be no long-term home financing without the corporation. He acknowledged legislative frustration and suggested that recent reorganization is partially to blame as well as need to restructure the board to provide for ongoing legislative involvement. National Bank of Alaska envisions AHFC's role, over the long term, to be low to moderate-income financing. That involves multifamily housing and rental units for that segment of the public. Involvement in rural Alaska is absolutely essential. Never before addressed special-needs financing is an important function. He cited the St. Vincent DePaul facility for the homeless in Juneau as an example. Mr. Sieberts said that the owners and managers of NBA could not sustain the operating scrutiny applied to AHFC. He voiced his belief that AHFC is headed in the right direction in terms of meeting state needs. He further advised that NBA has long advocated a sustained dividend program to meet legislative needs. On the other hand, taking 20% of the capital from the corporation in one appropriation could have devastating effects. Any corporation losing 20 to 25% of its equity over a twelve-month or twenty-four-month period would provide cause for alarm in terms of ratings. Mr. Sieberts voiced his belief that if that happens, there will probably be no ratings. Rather than ratcheting down AHFC's rating, rating agencies would withdraw the rating because the impact of removal of capital would be unknown. Mr. Sieberts urged the legislature to develop a long-term sustainable dividend program for the corporation. He further encouraged the committee to change the directorship of the corporation to allow for more direct involvement of the legislature. As an aside, Mr. Sieberts advised that through attendance at AHFC board meetings, he had observed that "more low-income, moderate-income people show up at their board meetings than are showing up for these hearings." There is thus a constituency and great interest by that constituency. Co-chairman Halford reiterated need to reduce the size of the corporation while maintaining its health. WES CLUBB, PRESIDENT, ALASKA HOMEBUILDERS ASSOCIATION, voiced need to define AHFC's role before determining what it is to accomplish. He suggested that no one in attendance at the present meeting knows what AHFC does, how its programs are funded, matching needs, etc. It is important that the committee have a good understanding of that and from there define the direction in which the corporation is to go. Co-chairman Halford advised that legislators understood AHFC's function before the merger. He acknowledged lack of information concerning what "the other pieces that we're trying to do out there." Mr. Clubb concurred that AHFC has changed its role and direction over the last few years. The corporation is "doing more volume in rural Alaska than DC&RA did." That is definable. AHFC is "taking care of more special needs housing:" seniors, homeless, weatherization, etc. Mr. Clubb cautioned that "the impacts from the standpoint of bond rating, and that type of thing, are very real." The person that will pay the price is "going to be the people of Alaska . . . ." It is very important that the committee be "cautionary" and attempt to develop a long-term contribution program. A wholesale taking is "one of the most dangerous things that this body can do." Alaska has created the finest housing agency in the country. It would be wrong to destroy it at this time. Mr. Clubb stressed the importance of AHFC to the state homebuilders' association. He said that housing needs in rural areas are very real. Hundreds of thousands of dollars have been spent in housing needs assessments. Those assessments evidenced that over 10,000 housing units are necessary in rural Alaska in addition to needed weatherization and improvements to existing homes. That need can only be met by something like AHFC. Mr. Clubb again urged caution. He voiced support for the Governor's proposal for a contribution program that is sustainable over time. The ability to obtain approval of such a program by bond rating agencies is very real. Co-chairman Halford asked if Mr. Clubb thought AHFC should have a capital budget equal to half the capital budget for the entire state. Mr. Clubb said he could not speak to the issue since he did not know specifically what AHFC's budget entails. AHFC is a $4.4 billion company. A $50 million capital budget does not appear unreasonable. Co-chairman Halford advised that he was not willing to support a corporation twice the size of the state budget. Mr. Clubb noted that the $4.4 billion is a function of "over 30,000 loans out there . . . to say nothing about the special interest housing, the senior housing projects . . . ." Senator Randy Phillips advised that over two-thirds of his constituents want money withdrawn from AHFC to fund government. Mr. Sieberts said that from NBA's perspective, many statewide housing needs have not been met. Congress is constantly asking federal housing programs to do more. Much more needs to be done in Alaska. He voiced his hope that with restructuring, AHFC would be encouraged by the legislature to do more. Much of the housing stock in much of Alaska is beginning to deteriorate rapidly. Alaska has the tools to deal with the problem. However, it cannot be effectively dealt with if AHFC changes management and directors every two years, and the corporation remains a political football. Mr. Clubb concurred, advising that AHFC needs to stop having "rent execs." The stability of a $4.4 billion company is at risk. It is important that some of the politics of the position be taken away. Co-chairman Halford referenced a proposed constitutional amendment that might be of assistance. He then voiced his belief that executives and board members of the permanent fund, board members of AHFC, and board members of the Alaska Railroad should not be subject to removal each time a new governor is elected. Those board members should also come before the legislature for confirmation. Mr. Clubb voiced support for that approach, advising that wholesale change through the political process destroys both credibility and ability to plan on a long-term basis. Discussion of the makeup of the AHFC board followed between committee members, Mr. Sieberts, and Mr. Clubb. Co-chairman Halford queried the testifiers concerning their thoughts on reseparation of AHFC. Mr. Clubb voiced his opinion that it would be a big mistake. He noted that the legislature used to fund $20 to $25 million a year in general funds to operate the previously existing agencies. Today that operation is within the parameters and earnings of AHFC. He again stressed the detrimental effect of lack of management stability and staff who work in constant fear of losing their jobs. Mr. Sieberts acknowledged concern over consolidation by some at NBA. However, the transition has worked "fairly well." He said that if the corporation was again to be separated, he would recommend leaving rural housing and low income urban programs together and moving out ASHA management. Greater leverage of moneys for rural Alaska could be achieved if housing aspects remain intact. Co-chairman Frank asked if Mr. Sieberts would support a professional review of the corporation, its statutory mandates, and capitalization to determine whether it is adequately or over capitalized. He suggested that review might highlight techniques the corporation is not now using that might allow for an increase on the rate of return on assets and equity. Mr. Sieberts advised that NBA constantly brings consultants in to evaluate internal performance. That process is ongoing and could be conducted for AHFC as well. Mr. Sieberts stressed need to develop a long-term sustainable program rather than a "knee-jerk" withdrawal. Mr. Clubb acknowledged the complexity of issues surrounding the corporation. He again stressed that AHFC is a stand- alone entity. It is not guaranteed by the State of Alaska. Speaking to appropriation from the corporation, Mr. Clubb raised a historical question concerning whether in doing so without the approval of the board of directors the state incurs a liability to guarantee the bonds. ADJOURNMENT The meeting was adjourned at approximately 11:15 a.m.