Legislature(1999 - 2000)
03/30/2000 09:15 AM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
GENERAL SUBJECT(S): OVERVIEW PRESENTATION
GENERAL OBLIGATION BONDS
by SALOMON SMITH BARNEY
The following overview was taken in log note format. Tapes and
handouts will be on file with the House Finance Committee through the
21st Legislative Session, contact 465-2156. After the 21st Legislative
Session they will be available through the Legislative Library at 465-
3808.
Time Meeting Convened: 9:15 a.m.
Tape(s): HFC 00 - 90, Side 1
HFC 00 - 90, Side 2
PRESENT:
X
Co-Chair Therriault
X
Co-Chair Mulder
X
Vice Chair Bunde
absent
Senator Parnell
absent
Representative Austerman
absent
Senator Torgerson
X
Representative J. Davies
absent
Senator Al Adams
X
Representative G. Davis
absent
Senator Donley
X
Representative Foster
absent
Senator Green
X
Representative Grussendorf
absent
Senator P. Kelly
X
Representative Moses
absent
Senator Leman
X
Representative Phillips
absent
Senator Phillips
X
Representative Williams
absent
Senator Wilken
ALSO PRESENT: TIMOTHY RATTIGAN, DIRECTOR, PUBLIC FINANCE DEPARTMENT;
SALOMON SMITH BARNEY; GEORGE W. LEUNG, DIRECTOR, PUBLIC FINANCE
DEPARTMENT, SALOMON SMITH BARNEY; MIKE DALESSI, VICE PRESIDENT-
INVESTMENTS, BRANCH MANAGER, SALOMON SMITH BARNEY.
LOG
SPEAKER
DISCUSSION
TAPE HFC 00 - 90
SIDE 1
000
CO-CHAIR MULDER
Co-Chair Mulder convened the Joint House
and Senate Finance Committee meeting at
9:15 A.M. He noted that the purpose of
the meeting is to provide an overview on
bond financing by Salomon Smith & Barney.
100
TIMOTHY RATTIGAN,
DIRECTOR, PUBLIC
FINANCE DEPARTMENT,
SALOMON SMITH
BARNEY, SEATTLE
Introduced other members present
representing Salomon Smith Barney- Mike
Dalessi, Vice President, Branch Manager,
Juneau & George Leung, Director, Public
Finance Department, New York. A handout
was distributed. [Copy on File].
247
MR. RATTIGAN
Provided a brief overview of the handout.
He noted that the presentation would
include:
1. Bond Market Overview
2. General Obligation Bonds
3. Tobacco Securitization
364
MR. RATTIGAN
Page 1 illustrates the overview of the
municipal bond market. Page 2 represents
the historical municipal market interest
rates. Page 3 provides indicative
interest rates for the State of Alaska
bonds. Mr. Rattigan pointed out that when
short-term rates are increased, that
keeps long term rates in check.
462
MR. RATTIGAN
Page 5 explains the investment grade
rating categories. That area lists the
types of debt instruments and compares
them between Moody's, Standard & Poor's
and Fitch. It is designed to rank within
a consistent framework, the relative
repayment risk of each debt issuer.
581
MR. RATTIGAN
Noted that Page 6 indicates the
investment grade rating categories.
State of Alaska's General Obligation
bonds have been rated
Aa2/AA(prior)/double A and its limited
obligations and certificates of
participation are rated A1/A+/NR. A
majority of state general obligations are
rated prime grade or high grade. Only
three states have ratings in the medium
grade category.
677
GEORGE LEUNG,
DIRECTOR, PUBLIC
FINANCE DEPARTMENT,
SALOMON SMITH
BARNEY, NEW YORK
Introduced Section 2-General Obligation
Bonds, and how these standards affect the
State of Alaska's rating. He stated that
the general obligation bonds are the
strongest form or repayment and generally
lowest borrowing cost. The full faith
and credit of an issuer secure them. The
issuer pledges to repay general
obligation debt without limitation.
780
MR. RATTIGAN
Added that there is recognition of how
the permanent fund rating has been used.
At this time, he noted that it is not a
negative but that there is recognition
that this is declining revenue as the oil
market is declining. The permanent fund
dividend is recognized as a possible use
to supplement those funds.
847
VICE CHAIR BUNDE
Asked the number of states that have the
double A rating.
876
MR. LEUNG
Replied that having the Permanent Fund
available is important to the State's
rating. However, there are concerns with
the nature of that timing.
926
MR. RATTIGAN
Explained that Mr. Leung would address
the State's rating status.
949
MR. LEUNG
Referenced Page 9. He spoke to the
spectrum of security and noted that the
State's general obligation bonds are
frequent financing vehicles for the
state. Forty states currently have
outstanding GO bonds. Ten states that do
not issue GO bonds generally issue other
types of bonds and or lease obligations.
State GO bonds are the highest rated
class of bonds and generally the most
secure debt offered in the municipal bond
market.
1001
MR. LEUNG
Page 10 - rating analysis factors for GO
Bonds. Page 11 & 12 provide detail of
the key factors for rating.
1085
REPRESENTATIVE
WILLIAMS
Spoke to page 11 and the administrative
factor of tax breaks-economic base,
financial analysis, debt analysis,
administrative factors.
1102
MR. LEUNG
Explained that these are general factors
that apply to all issues.
1130
REPRESENTATIVE
WILLIAMS
Interjected the idea of a statewide
income tax.
1143
MR. LEUNG
Spoke about the sophistication of
mitigating the dependency on one revenue
source.
1172
REPRESENTATIVE
PHILLIPS
Commented on the economic base factors.
She noted the income level decline. She
asked if there was an analysis on that
factor.
1202
MR. LEUNG
Explained that a rating provides a
judgement and balancing of concerns. The
rating agency is fully aware of that
concern.
1226
REPRESENTATIVE
PHILLIPS
Inquired if Alaska would be able to
receive that information and requested
that information be made available.
1248
VICE CHAIR BUNDE
Inquired at what point in time would debt
be less conservatively managed.
1300
MR. LEUNG
Explained that the Prudhoe curve is what
the rating agency has used to determine
the analysis. At current time, the debt
can be addressed by the State. He
believed that policy and discussion with
the rating agency should move forward.
The rating agency will look at the rate
of debt and they will then allow 3-5% of
that budget which provides a benchmark to
be used to insure the stability of
finances.
1408
MR. RATTIGAN
Interjected that the rating agency rule
of thumb should concur with that number.
The Prudhoe curve has been extended.
Other considerations are how the
constitutional budget reserve is being
used. That consideration is not as
dependent on the curve as it use to be.
Other possible revenue stability was
discussed. He spoke to what the rating
analysis of 3-5% would include. In
Alaska, that number includes $1 million
dollars of federal aid; the analysis does
not include those monies.
1518
REPRESENTATIVE G.
DAVIS
Asked if a consideration had been made
why choices are made.
1547
MR. RATTIGAN
Noted that the rating agencies have
opened up their process more lately than
they have in the past 20 years. He
commented that there is more dialogue
now.
1617
REPRESENTATIVE J.
DAVIES
Spoke to other investments that the
rating agency should consider. He noted
that production decline has slowed
significantly the past several years.
Representative J. Davies pointed out that
the tax rates in the handout were listed
in the administrative portions. He
proposed the idea of a state income tax.
He questioned if under a diversified
base, would that concept be placed under
a stable income.
1688
MR. LEUNG
Referenced Pages 13-15- the tax debt
comparison with other states. He pointed
out that these numbers do not reflect the
debt reimbursed to state schools.
1728
CO-CHAIR MULDER
Inquired if other states incur debt for
their statewide school system.
1738
MR. LEUNG
Responded "increasingly so" to allow the
cheapest and lowest cost of borrowing.
He stated that this cost is reflected in
the resource development fiscal increase
on the state level. Local governments
are under tax cap limitations and
consequently, the state ends up
supplementing local source funds.
1794
MR. RATTIGAN
Some states have issued their own bonds
and then distribute them to the school
districts. He explained the variety of
mechanisms used to fund education from
state to state.
1822
MR. LEUNG
Page 16-Tobacco Master Settlement
Agreement (MSA), an emerging class of
bonds backs by tobacco settlements.
Currently, there are six states actively
considering this move. The settlement
funds are shared in only two states-
California and New York. The MSA is an
agreement between settling tobacco
companies and 46 states, including
Alaska. The settling companies have
agreed to make payments to the states in
perpetuity, based on domestic cigarette
consumption. The State of Alaska is
entitled to receive 0.3414187% of the
base payments under the MSA.
1911
CO-CHAIR MULDER
Asked what the bonds are going toward.
1918
MR. LEUNG
Replied that in New York, the bond are
being used for schools, hospitals, and
health care.
1935
REPRESENTATIVE J.
DAVIES
Asked about Georgia.
1941
MR. LEUNG
Replied that Georgia is considering the
uses as are a number of other states.
1956
REPRESENTATIVE
PHILLIPS
Commented on the new court ruling
regarding that settlement.
1966
MR. LEUNG
Acknowledged that the issues are
enormous. One of the factors is
litigation. He referenced a case worth a
tremendous amount against the tobacco
companies implemented by individuals.
Additionally, there are class action
suits. All these risks are very
significant.
2020
MR. LEUNG
Added that the settlements are between
states as a class and that currently
lawsuits are winding their ways through
the courts. He noted that essentially,
the tobacco companies have committed
consumer fraud.
2061
MR. RATTIGAN
Noted that factoring in of such analysis,
are all-affordable under these scenarios.
He stressed that tobacco remains a very
profitable industry. The Florida case
brings up an issue of class action. If
appealed, a bond could be posted. For
the tobacco to post a bond, they might
have to declare bankruptcy. The payments
from the tobacco industry to each of the
states are treated as an operating cost
by that industry. At this time, the money
to the states continues to flow.
2150
CO-CHAIR MULDER
Clarified that tobacco money received
through the MSA is treated as an
operating expense. He believed that the
likelihood of continued payment was high.
2168
MR. LEUNG
Agreed. He added that the payments would
probably be continued in the event of
bankruptcy.
2184
MR. LEUNG
Interjected that this risk is not based
on one tobacco company. There are
essentially four companies that make the
tobacco market. The risk would be tied
to the weakest company. The attorney
general noted that the risk was not on
one company going bankrupt, but rather
the volume of cigarette smoking and drop
in consumption.
2242
MR. RATTIGAN
Interjected that the tobacco bonds are
rated higher than any corporate risk.
You would be buying someone's ability to
continue to want and need to buy
cigarettes.
TAPE CHANGE
HFC 00 - 90, SIDE 2.
000
MR. RATTIGAN
Spoke to the volume of consumption. He
questioned if that should be considered a
revenue stream or a risk to diversify.
There are additional revenues expected to
flow. Alaska is anticipating using the
additional revenue to pay back bonding
faster.
107
CO-CHAIR MULDER
Asked if members understood the escrow
agent.
126
MR. LEUNG
Referenced Page 26 - structured credit or
Securitization, which lists the structure
at issuance and ongoing debt service for
the State. The credit risk is separate
from the repayment of the bonds.
217
MR. RATTIGAN
Stated that Alaska Housing Finance
Corporation (AHFC) is the State agency,
which is set up to issue and provide that
service. That is because it is
"insulated" should something happen.
276
VICE CHAIR BUNDE
Inquired which escrow services would be
charged.
312
MR. RATTIGAN
Explained that escrow is set up to
guarantee that the money is distributed
to each state. What each state does with
their money is left up to that state. A
Securitization mechanism helps track the
money. Those fees are not prohibitively
expensive and this is not unlike the
escrow established in other state
accounts.
393
VICE CHAIR BUNDE
Asked if Alaska had the option of using
escrow.
415
MR. RATTIGAN
Replied that escrow is used to track the
tobacco companies. Those companies make
a lump payment to the Tobacco Fund and it
is then distributed to each state.
Separate accounting occurs to pay the
debt service first, which is the state
discretion.
485
VICE CHAIR BUNDE
Asked if the state could use the money
over a long period of time or use right
away. He asked what that would cost.
534
MR. RATTIGAN
Page 27, the difference is quite small.
The only cost is the issuance of the
bonds. The present values of the stream
and is coming back as bond proceeds at
that time. Present value factoring is
the listing of Securitization. That
number is around 1% of the total bonds
issued - $2.5 million dollars.
633
REPRESENTATIVE
PHILLIPS
Asked if anyone anticipates that the
tobacco industry may not be around much
longer.
669
MR. LEUNG
Acknowledged that is a concern. He
referenced Page 21, WEFA forecast a 58%
decline in total US consumption of
cigarette over the next 43 years. He
emphasized that the tobacco industry is
still a profitable industry.
765
CO-CHAIR MULDER
Asked if the MSA was more driven by
consumption.
783
REPRESENTATIVE
PHILLIPS
Questioned the length of time that the
bonds are being held.
797
MR. RATTIGAN
Interjected that the elasticity of the
industry is being studied. He reiterated
that tobacco is still a profitable
industry. In relationship to the WEFA
study, there are still 200 billion
cigarettes sold each year.
852
REPRESENTATIVE J.
DAVIES
Pointed out that was U.S. consumption
only. He noted that there are a lot of
other countries with high tobacco
consumption.
875
MR. RATTIGAN
Agreed. The international consumption
does not factor into the MSA. The
Attorney General has said that if anyone
manufactures cigarettes outside of the
MSA agreements within the United State,
the Department of Law will take it up.
953
MR. LEUNG
Spoke of the force used to sign on and
agree to the MSA, which has worked to
compel non-participating manufacture to
join. A non-participating manufacture
would be required to pay an extra amount,
which would economically compel them to
join.
1020
REPRESENTATIVE J.
DAVIES
Referenced Page 26 and asked about the
residual bond.
1038
MR. LEUNG
The residual bond is the issue of debt
service coverage. There is a level of
excess revenues needed to service that
bond.
1089
MR. RATTIGAN
Stated the bond service payments are set
aside to repay the bonds, which could
come back as a credit positive. The
rating analyst can take into
consideration tobacco revenues and the
risk could be sold off. He noted that non
of the tobacco revenues are factored.
1177
REPRESENTATIVE
PHILLIPS
Observed that in America, our government
has placed a debt to a whole industry.
1208
VICE CHAIR BUNDE
Observed that was the price for doing
business with addicts. He pointed out
the number of cigarette sold. He noted
that income was guaranteed and "shaky".
1261
MR. RATTIGAN
Commented that above the threshold the
income stream will be volatile. Rating
analyst have pointed out that the
anticipated volatility will create
movement.
1302
MR. LEUNG
Commented that it would be consume the
financial factors. This is an uncertain
revenue stream. Rating analyst want to
understand how the state will use the
monies and the implications that has to
the fiscal balance. The revenue is
declining over time and building an
operating deficit. He questioned how the
revenues were being used and future
budgetary balances.
1373
CO-CHAIR MULDER
Referenced Page 27, the real cost of
Securitization in the present value of
$500 million.
1418
MR. RATTIGAN
Agreed that the debt service payments
must be scheduled and the present value
basis stays small. He stated that the
analysis would be the same for any bonds.
Present value is much different. It is
important to consider concepts when
determining how much is actually
available to spend. He spoke to
capitalizing some of the interest. He
pointed out that the net number is about
$250-$260 million dollars which could be
used for capital projects.
1527
CO-CHAIR MULDER
1545
MR. RATTIGAN
Stated that the projects could become
more expensive over time to build and
that should be factored in. This is just
a cash flow analysis.
1574
CO-CHAIR MULDER
ADJOURNMENT
The meeting adjourned at 10:30 A.M.
JOINT HOUSE/SENATE FINANCE COMMITTEES
MARCH 30, 2000
9:15 A.M.
HFC & SFC 9 3/30/00 am
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