Legislature(2001 - 2002)
03/29/2001 02:06 PM 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
HOUSE FINANCE COMMITTEE
March 29, 2001
2:06 PM
TAPE HFC 01 - 66, Side A
TAPE HFC 01 - 66, Side B
TAPE HFC 01 - 67, Side A
CALL TO ORDER
Co-Chair Williams called the House Finance Committee meeting
to order at 2:06 PM.
MEMBERS PRESENT
Representative Bill Williams, Co-Chair
Representative Con Bunde, Vice-Chair
Representative Eric Croft
Representative John Davies
Representative Richard Foster
Representative Bill Hudson
Representative Ken Lancaster
Representative Jim Whitaker
MEMBERS ABSENT
Representative Eldon Mulder, Co-Chair
Representative Carl Moses
Representative John Harris
ALSO PRESENT
Dan Fauske, Executive Director, Alaska Housing Finance
Corporation (AHFC), Department of Revenue, Anchorage; John
Bitney, Legislative Liaison, Alaska Housing Finance
Corporation (AHFC), Department of Revenue, Anchorage; Joe
Dubler, Chief Financial Officer, Alaska Housing Finance
Corporation (AHFC), Anchorage, Department of Revenue; Steve
Kantor, ARIMAX Financial Advisors, Alaska Housing Finance
Corporation (AHFC), Anchorage, Department of Revenue; Les
Campbell, Director, Budget, Alaska Housing Finance
Corporation (AHFC), Department of Revenue, Anchorage; Robert
Brean, Director, Research & Rural Development, Alaska
Housing Finance Corporation (AHFC), Department of Revenue,
Anchorage.
PRESENT VIA TELECONFERENCE
None
GENERAL SUBJECT(S):
GOVERNOR'S CAPITAL BUDGET
Alaska Housing Finance Corporation (AHFC)
Tobacco Securitization
The following overview was taken in log note format. Tapes
and handouts will be on file with the House Finance
Committee through the 22nd Legislative Session, contact 465-
2156. After the 22nd Legislative Session they will be
available through the Legislative Library at 465-3808.
LOG SPEAKER DISCUSSION
TAPE HFC 00 - 66
SIDE A
000 Co-Chair Williams Called the House Finance Committee
meeting to order and noted that the
Committee would hear an overview
provided by the Alaska Housing
Finance Corporation (AHFC) and the
Tobacco Securitization.
ALASKA HOUSING FINANCE CORPORATION
064 DAN FAUSKE, Noted that AHFC's Capital
EXECUTIVE Improvement Projects (CIP) reflects
DIRECTOR, ALASKA the needs of the Corporation and
HOUSING FINANCE the pursuit of its mission through
CORPORATION, the goals and objectives of the
DEPARTMENT OF corporation's strategic plan. The
REVENUE corporate departments have reviewed
prior year's budgets to determine
if there are any unfinished
projects/programs that are on the
on going need additional funds to
be completed or should be extended.
190 Mr. Fauske Stated that the CBR was developed
by AHFC staff and recommended for
inclusion in the Governor's budget
submission to the Legislature.
Each project/program has been
reviewed and prioritized by the
Budget and Housing Policy committee
and presented to the Board of
Directors for approval. .
266 Mr. Fauske Noted that there are no line item
increases requested in this year's
budget.
291 Mr. Fauske Proceeded with an overview of the
"Draft FY2002 Capital Budget".
[Copy on File].
405 LES CAMPBELL, Noted that he would provide an
DIRECTOR, BUDGET, overview of each fourteen-budget
ALASKA HOUSING request. He referenced the
FINANCE handout (*).
CORPORATION
(AHFC),
DEPARTMENT OF
REVENUE,
ANCHORAGE
495 Mr. Campbell Spoke to the items in the draft
request:
* The Supplemental Housing
Development Program
Stated that the purpose of the
program was to supplement federal
housing funds provided to Regional
Housing Authorities to ensure safe,
decent, affordable housing
throughout Alaska.
575 Mr. Campbell * Low-income weatherization
program.
The purpose of the program is to
provide cost effective energy
improvements to homes of low-income
families.
626 Representative Asked what type of heating systems
Hudson would be used.
644 Mr. Campbell Explained the entire range of
systems.
658 ROBERT BREAN, Added that in the Bush areas, AHFC
DIRECTOR, is encouraging the use of monitor
RESEARCH & RURAL stoves. He referenced the basic
DEVELOPMENT, operations manual used so that
ALASKA HOUSING there are no safety hazards.
FINANCE
CORPORATION
(AHFC),
DEPARTMENT OF
REVENUE
752 Representative Acknowledged the importance of the
Foster program.
768 Representative Commented that the monitor stoves
Hudson have cut his oil bill in half. He
supported this program in
particular for Rural Alaska.
804 Co-Chair Williams Asked who paid for the maintenance.
816 Mr. Bream Noted that was part of a grant
program. He reminded members that
AHFC was dealing with low-income
families. He commented on the
importance of education.
862 Mr. Brean Interjected that there is no one
under contract that does furnace
maintenance.
896 Mr. Campbell * Paxton Manor Replacement
The purpose of the program is to
provide funds for the replacement
of 24 units of family housing in
Sitka.
973 Mr. Campbell * Chugach View Renovation - Phase 2
The purpose of the project is to
complete the major renovation,
including building improvements,
and to ensure code compliance, for
120 senior housing units.
1040 Representative Asked about the funding history.
Davies
1049 Mr. Campbell Noted that this was federal receipt
from FY01.
1065 Mr. Campbell *Senior Citizen's Housing
Development fund (SCHDF).
The purpose of the program was to
provide funds for the development
of senior citizen housing.
1115 Mr. Campbell * Senior and Statewide Deferred
Maintenance and Renovation.
The purpose of the project is to
reduce deferred maintenance and
address small renovation projects,
in accordance with AHFC's 10-year
plan, at several facilities
utilized by senior citizens.
1176 Representative Asked about the bond receipts
Croft associated with the request.
1189 Mr. Campbell Replied those would be General
Obligation (GO) Bond receipts.
1210 Representative Asked who would manage the senior
Lancaster housing.
1226 Mr. Campbell Advised it would be private
operators building and managing
these places.
1243 Mr. Campbell * Housing and Urban Development
(HUD) Capital Fund Program
(formerly CGP).
He noted that the project would
renovate and modernize public
housing units.
1294 Mr. Campbell * HUD Federal HOME Grant Program
The purpose of the program is to
expand the supply of affordable,
low and moderate income housing and
to strengthen the ability of the
State to design and implement
strategies to achieve an adequate
supply of safe, energy-efficient
and affordable housing.
1372 Mr. Campbell * Federal and Other Competitive
Grants
The purpose of the program is to
allow AHFC to apply for HUD, other
federal agency, and private
foundation grants that target the
housing needs, and supportive
services, of low-income and special
needs groups. AHFC will also apply
for energy related grants as they
relate to housing. When required,
AHFC will provide the needed
matching funds. Some of the funds
received will be passed through to
local non-profit sub-grantee
organizations that deliver housing
and/or services.
1433 Representative Inquired how much HUD money does
Hudson the State currently receive.
1446 Mr. Campbell Believed it was around $480 million
dollars. He noted that not all of
that money comes to AHFC.
1463 Mr. Campbell Added that some of the funds go to
the regional housing authorities
and others to private developers
and the project-based programs. He
added that AHFC is one of the main
sources of those funds.
1501 Mr. Campbell * Competitive Grants for Public
Housing
He noted that the purpose of the
program was to allow AHFC to apply
for HUD, other federal agency, and
private foundation grants that
target the housing needs of low-
income and special needs groups.
AHFC will also apply for grants to
prevent crime and substance abuse
in public housing and assist public
housing families attain economic
self-sufficiency. When required,
AHFC will provide the needed match.
1556 Mr. Campbell * Energy Efficiency Monitoring
Research
The purpose of the project is to
conduct research, analysis,
information dissemination and
interchange among members of the
industry, as well as between the
industry and the public.
1605 Mr. Campbell * State Energy Program (SEP)
Special Projects.
He noted that the purpose of the
project is to allow the State to
participate in special project
grants offered by the Federal
Department of Energy to promote
energy related technologies and
research.
1637 Mr. Campbell * Homeless Assistance Program-
Mental Health Bill
The purpose of the program is to
support programs that prevent
homelessness by providing
assistance to families in imminent
danger of becoming homeless, or
those who are currently homeless.
1669 Mr. Campbell * Beneficiary and Special Needs
Housing - Mental Health Bill
The purpose of the program is to
provide funds for Alaskans non-
profit service providers and
housing developers to increase
housing opportunities to Alaska
Mental Health Trust beneficiaries
and other special needs population
throughout Alaska.
1728 Representative Noted the sum total of the projects
Davies was $22.9 million dollars. He
voiced his concerns with the 1st
time homeowners program.
1760 Mr. Fauske Explained that the mortgage program
and the arbitrage program are
separate programs. The arbitrage
program totals about $170 million
dollars. Those dollars are
separate and must be spend by
mirroring the intent of the
original bonds issued. Those bonds
are mortgage bonds. The bond yield
must stay within a certain amount
for the rate of the life of the
bond. AHFC has been buying down
interest rates so that the earnings
stay within those parameters.
1858 Mr. Fauske Emphasized that dollars do affect
programs. He referenced the
subsidized portion of the bonds -
the arbitrage portion of the loans.
The economy has changed and AHFC is
attempting make homeowners out of
those that cannot otherwise
purchase homes. He pointed out
that most of the money is used by
the urban areas because that is
where most of the State's people
live. As the monies dwindle, he
stated that there is only one
source of revenue.
1935 Mr. Fauske Pointed out that AFHC is attempting
to be competitive. The bonds are
being structured to maximize
arbitrage, thus maximizing yield.
Taxable, first time homebuyers have
used the arbitrage program the
most. The goal of AHFC is to
provide a dividend to the State.
It is difficult to do that at this
time.
2011 Mr. Fauske Spoke to the low-income borrower,
which often times needs, a subsidy
to get the other programs to work.
2038 Mr. Fauske Responded to questions if the State
had created programs that are not
necessary. He stated AHFC had not.
He emphasized the incredible need
in the State programs. He noted
that if business can be generated
through State agencies, then the
State could receive a dividend.
2110 Mr. Fauske Believed that AHFC could not
continue at the current level. He
addressed the affordability issues
across America and how the
discussions are occurring about
arbitrage. Alaska has utilized
funding for affordability. He
spoke to changes to the FY98
format. He recommended that
restriction be lessened.
TAPE HFC 01 - 66, Side B
010 Representative Asked if when the agreement was
Davies made between the Legislature and
AHFC, was arbitrage taken into
consideration. He questioned if
the $103 million dollars should be
revisited.
096 Mr. Fauske Spoke to maintenance and how to
spend corporate receipts. He
agreed that it should be revisited.
254 Mr. Fauske Addressed fiscal planning and how
important AHFC's investments have
been for the State's economy. He
pointed out that was a compliment
not only to the Board, but also the
Legislature by recognizing the
needs and then factoring that into
the program.
276 Mr. Fauske Pointed out the low default rate
that AHFC has had.
309 Representative Asked about the arbitrate surplus
Croft as being corporate receipts. He
asked what had shifted.
350 Mr. Fauske Replied that there are several
different types of applications.
383 STEVE KANTOR, Addressed the bonds and the
ARIMAX FINANCIAL Internal Revenue Service (IRS)
ADVISORS, ALASKA involvement. He commented that in
HOUSING FINANCE the nature of housing, it is
CORPORATION difficult to predict interest
(AHFC), rates. It is pre decided over the
DEPARTMENT OF life of the bond issue. He spoke
REVENUE more on the arbitrage earnings.
501 Representative Clarified that the range should be
Croft an appropriate charge so that it is
not given away.
530 Mr. Kantor Replied that the corporation wants
to guarantee that the money would
be used for what it was intended.
558 Representative Spoke to the low interest loans.
Davies
570 Mr. Fauske Noted that nowhere in the United
States is there an arbitrage
program like the one that exists in
Alaska. He noted that market
conditions have been capitalized.
Alaska has utilized $40-$60 million
dollars a year. The State has been
very fortunate.
638 Representative Asked what has changed.
Croft
664 Mr. Kantor Explained that the corporation has
been able to land mortgages at a
fixed rate and borrow at a variable
rate. He added that earnings have
increased on bond mortgage rates.
AHFC was concerned with the rate of
earnings. He pointed out that the
interest rates have now been fixed,
which resulted in a limited amount
earned.
793 Representative Inquired if that amount related to
Davies the total amount available.
TOBACCO SETTLEMENT SECURITIZATION
844 JOE DUBLER, CHIEF Provided an overview of the Tobacco
FINANCIAL Settlement. He referenced the
OFFICER, ALASKA Alaska Housing Finance Corporation
HOUSING FINANCE -Tobacco Settlement Payment
CORPORATION Securitization, March, 2001"
(AHFC), handout. [Copy on File].
DEPARTMENT OF
REVENUE
898 Mr. Dubler Overview of the Tobacco Settlement:
* The Master Settlement Agreement
(MSA)
* Options for spending the
Settlement Money
* How Securitization works
* General Obligation vs. Tobacco
Revenue Bonds.
943 Mr. Dubler Stated that the MSA was signed on
November 23, 1998 and included 46
state and the four largest
cigarette manufactures. The
agreement requires the
Participating Members (PM) to make
unadjusted payments exceeding $6.2
billion dollars over the next 40
years, with additional payments in
perpetuity. Payment is for the
recovery of all claims and costs of
the states.
956 Mr. Dubler Stated that most cigarette
manufacturers are now parties to
the MSA. In total the Pm's
comprise approximately 99.7% of the
domestic cigarette market,
indicating that the MSA is
acceptable to the tobacco industry.
Mr. Dubler advised that there are
benefits of the MSA from the
State's perspective:
· Alaska should receive large
cash payments annually in
perpetuity;
· The MSA is an industry-wide
settlement with payments based
on total domestic cigarette
shipments nationwide;
· The MSA has been financed by
higher cigarette prices,
making it similar to an excise
tax on cigarettes.
994 Mr. Dubler MSA Payments:
* MSA Payments are based on
domestic cigarette shipments.
* Payment is adjusted annually for
several factors, including
inflation and volume of domestic
cigarette shipments.
* Payments are allocated to states
based upon percentages specified in
the MSA. Alaska's initial and
annual payment percentage is
.3414187%.
1056 Mr. Dubler MSA Payments:
* Initial Payments - made up front
by the OPM through 2003;
* Annual Payments - made by the OPM
and SPM based on market share, in
perpetuity; and
* Strategic Contribution Payments -
are payments in 2008-2017 to
reimburse states for their
contributions to the legal costs
associated with the MSA.
1079 Mr. Dubler Commented on the MSA Payment
adjustments, which are adjusted
each year for a number of factors.
The adjustments apply to certain
payments. Some adjustments are
expected to have little or no
impact on Alaska's payments. He
noted that other adjustments could
be significant.
1100 Mr. Dubler Referenced Page 8, the Total MSA
Payments to the State of Alaska.
The aggregate amount of payments
expected through 4/15/2025 is
$788.471 million dollars.
1146 Mr. Dubler Spoke to the options for spending
the settlement money:
* Spend as you go
* Trust built over time which would
work like the Permanent Fund, with
the MSA payments deposited to the
Trust and a portion of income from
the Trust used in future years for
targeted expenditures; or
* Securitization, which involves
borrowing money with the MSA
payments as collateral and source
for repayment of bonds. The
proceeds from the issuance of the
bonds could be spent or put into a
trust fund/endowment.
1184 Co-Chair Williams Inquired if the money could be
spent any way the State decides.
1200 Mr. Fauske Acknowledged that was correct.
1216 Mr. Dubler Referenced page 10 - The Tobacco
Transactions completed and
anticipated.
1233 Mr. Dubler Noted Page 11, the Tobacco
Settlement Asset-backed bonds,
Series 2000. The first payment
would be in FY03. The final
projected payment would be in FY23,
which would make better value of
the bonds.
1307 Representative Inquired the percentage of Alaska's
Hudson total receipts that would authorize
this.
1327 Mr. Dubler Explained that 40% of the bonds
were purchased; the payments will
dwindle off.
1350 Vice-Chair Bunde Asked when the next bonds would
mature.
1364 Mr. Dubler Replied that the State has sold 40%
of the bonds off, making the
structure good until fiscal year
2023. He added that this year
would not include the extra.
1408 Representative Understood that the State was
Croft selling some of its risk.
1426 Mr. Dubler Explained that the State sells all
or a portion of their expected
tobacco payment-funding stream to a
special-purpose entity, whose sole
purpose is to issue bonds backed by
those payments. Northern Tobacco
Securitization Corporation (NTSC),
not the State or AHFC, would be the
sole entity legally responsible for
paying the debt service on the
bonds. be effectively
transferred.
1458 Mr. Fauske Questioned additional costs.
1466 Mr. Kantor Commented that the State and AHFC
are legally separate from NTSC and
would not put their own credit
ratings at risk through the tobacco
bond issuance. The mechanism
affords the State and AHFC
protection from problems resulting
from reduced, stalled or halted
payment streams from the MSA.
1511 Mr. Fauske Noted that even when backed by a
GO, it is still based on a revenue
stream, which would under utilize a
better-perceived revenue stream.
He indicated that a small premium
would be paid for that security.
He emphasized that there is no
benefit to the State to use up its
GO credit.
1570 Representative Commented that last year, the
Hudson Legislature had authorized $176
million.
1601 Mr. Kantor Explained that had been projected
out from what the 40% would look
like over time, and thus, placing
$93 million dollars in proceeds
back to the State.
1629 Representative Asked if there were other
Hudson opportunities.
1636 Mr. Kantor Advised that there is no certainty
on how the expected amount, which
would be coming back from the
bonds.
1658 Representative Asked the balance.
Hudson
1664 Mr. Kantor Reiterated that 40% had been
allocated.
1673 Representative Questioned if the $116 had been
Hudson determined this year, would the
State then be able to appropriate
into that fund.
1695 Co-Chair Williams Asked what was happening with
smokers at this date.
1704 Mr. Kantor Replied that the AHFC consultants
have updated their projection to be
good for over the next forty years.
1737 Vice-Chair Bunde Interjected that this year, the
tobacco industry had put $8 billion
dollars into tobacco advertising.
1773 Representative Added that these concerns are the
Hudson same as the GARVEE.
1785 Mr. Fauske Added that the tobacco industry is
doing very "well" these days. He
acknowledged that was a strange
irony. However, the State wants
the continued payment.
1813 Mr. Dubler Explained how securitization works
- Page 12.
* Securitization, in the case of
the tobacco settlement is the
process of issuing bonds that are
backed by the MSA payments.
* Securitization provides a
sizeable up-front payment, rather
than smaller payments spread over a
number of years. For immediate
pressing needs or special projects,
securitization provides access to
cash now. The approach is no
different than borrowing money
based on your future earnings to
purchase a house, and paying it
back over the next 30 years.
1854 Mr. Dubler Addressed the Benefits of
Securitization - Page 14
* Securitization transfers the
risks associated with the MSA
payments to the buyers of the
bonds, including the reductions in
cigarette sales; bankruptcy of any
or all of the Pm's; invalidation of
the MSA; a possible increase in the
federal cigarette tax; individual
lawsuits against the industry and
states; and the impact of the
additional volume reductions
attributable to national smoking
prevention and public education
campaigns and significant
additional restrictions related to
the tobacco industry's marketing,
advertising, and lobbying.
1870 Representative Asked the maximum timetable
Croft
1881 Mr. Dubler Believed it would be 2030.
1888 Representative Asked the reduction in the payments
Croft expected to stretch?
1915 Mr. Kantor Suggested the number was close to
75%.
1938 Representative Commented that if the only risk
Croft sold was that it would be over 75%,
and then there was not much of a
risk.
1964 Mr. Kantor Advised that investors still felt
that the risk was too great.
1982 Mr. Fauske Interjected that at this point, the
market place is better. There are
dropping interest rates and more
investors with a better perception
on the bonds. He commented that the
day bonds were priced; there had
been a dip, due to the sale of a
major coal company.
TAPE HFC 01 - 67, Side A
19 Mr. Dubler Observed that judgments against the
tobacco companies could bankrupt
companies, affecting the bonds.
104 Representative Summarized that there is $5 million
Hudson dollars of equity. He asked if the
60 percent could be available on
the time schedule if it were not
used.
226 Mr. Kantor Stated that it would be available
on the time schedule and as
indicated.
248 Mr. Dubler Discussed page 15 - The Uses of
Proceeds
· On what and how the money s
spent determines the tax
status of the bonds. Tax-
exempt bonds generally have
lower interest costs than
taxable bonds, reducing the
cost of the financing to the
State.
· If Bond Proceeds are spent on
qualifying capital projects or
other qualifying expenditures,
interest paid on them will be
exempt from federal income
taxes.
· If Bond Proceeds are spent on
operating items, or the
earnings of a trust/endowment
fund created with Bond
Proceeds are invested in
taxable securities yielding
above the cost of the bonds,
the interest paid to holders
of the bonds will be taxable.
300 Mr. Dubler Discussed page 16- General
Obligation versus Tobacco Revenue
Bonds. He noted that even though
GO Bonds have lower interest costs
than Revenue Bonds, there are
compelling reasons to use Revenue
Bonds. The State has a limited GO
bond capacity. By note selling the
bonds, he maintained that the State
is holding an investment in the
tobacco industry. Revenue bonds are
an attractive source when revenue
is restricted.
385 Representative Referred to page 7.
Davies
405 Mr. Dubler Explained that MSA are payments
that reimburse the State for their
tobacco litigation fees.
474 Mr. Dubler In response to a question by
Representative Davies, he stated he
could not give an example of a
capital project not using their
tax-exempt status.
520 Mr. Kantor Suggested that private capital
projects would be questionable.
595 Representative Observed that the endowment
Davies consideration had been discussed
and he asked if that would be a
qualifying expense.
637 Mr. Kantor Explained that would depend on the
structure. It is possible if it is
related to health related
cessation.
670 Mr. Dubler Noted that the IRS has checked the
issue of proceeds, scrutinizing
those programs closely.
690 Co-Chair Williams ADJOURNMENT
The meeting was adjourned at 3:45
P.M.
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