Legislature(1999 - 2000)
01/26/2000 01:42 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
GENERAL SUBJECT(S): Overview: General Obligation Bonds
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: 1:42 p.m.
Tape(s): HFC 00 - 17, Side 1
HFC 00 - 17, Side 2
HFC 00 - 18, Side 1
PRESENT:
X
Representative G. Davis
X
Co-Chair Therriault
X
Representative Foster
X
Co-Chair Mulder
X
Representative Grussendorf
X
Vice Chair Bunde
X
Representative Moses
X
Representative Austerman
X
Representative Phillips
X
Representative J. Davies
X
Representative Williams
ALSO PRESENT: TIM RATTIGAN, VICE PRESIDENT OF PUBLIC FINANCE,
SOLOMONSMITHBARNEY, SEATTLE; MIKE DALESSI, BRANCH MANAGER,
SOLOMONSMITHBARNEY, JUNEAU.
LOG
SPEAKER
DISCUSSION
TAPE HFC 00 - 17
SIDE 1
71
Co-Chair Mulder
Convened the meeting at 1:42 p.m.
125
CO-CHAIR MULDER
Noted that SB 74, HB 240, HB 245, HB 319
and HB 281 all deal with general
obligation bonds. The intention of the
meeting is to provide an overview on
general obligation bonds (GO) by private
bond counsel.
255
TIM RATTIGAN, VICE
PRESIDENT OF PUBLIC
FINANCE,
SOLOMONSMITHBARNEY
SEATTLE
Provided members with a booklet, House
Finance Committee, General Obligation
Bond Presentation (copy on file). He gave
a brief overview on SolomonSmithBarney.
449
Mr. Rattigan
Discussed page 1 of the handout. Noted
that $68.4 billion dollars is the overall
issuance of municipal general obligation
bonds.
503
Mr. Rattigan
Discussed page 2 of the handout. Noted
that there have been historically low
interest rates in the last 15 years.
571
Mr. Rattigan
Discussed page 3 of the handout. Noted
that debt service was calculated with a
30-year payoff. Alaska general obligation
bonds have one of the highest rated
credits with one of the lowest interest
rates. They have a rating of AA.
673
Mr. Rattigan
Reviewed the state of Alaska's overall
ranking on pages 4-6 of the handout.
Standard and Poor's is the major ranking
agent. Alaska has low total net tax
supported debt.
790
Co-Chair Mulder
Questioned what the number includes.
Noted that the total net tax supported
debt includes Certificates of
Participation and general obligation
bonds to the extent that they are not
being repaid.
844
Mr. Rattigan
In response to a question by
Representative G. Davis, Mr. Rattigan
explained that debt calculations include
debt of state agencies, but does not
include debt of private entities. Lease
obligations are included in the rating.
892
Representative J.
Davies
Clarified that low tax supported debt is
good.
932
Mr. Rattigan
Alaska is 47th in 1997 standards in net
tax supported debt per capita. Suggested
that the current amount may be less.
958
Mr. Rattigan
Alaska is 48th in net tax supported debt
as a percentage of 1997 personal income.
1001
Co-Chair Mulder
New York is high in all of the
categories.
1017
Mr. Rattigan
New York used to be in the lowest
category of BBB. This is the lowest
acceptable standard.
1052
Mr. Rattigan
In response to a question by Co-Chair
Mulder, Mr. Rattigan explained that the
difference in interest rates between BBB
and AA rated entities depends on the
market. Differences may be between 1
tenth of one percent and a third of a
percent.
1121
Mr. Rattigan
In response to a question by
Representative Phillips, Mr. Rattigan
explained that rating companies take the
Permanent Fund into account, to a limited
extent. The Permanent Fund is deemed to
be the appropriate long term planning
vehicle. The Constitutional Budget
Reserve is considered the model for short
term budget planning.
1175
Mr. Rattigan
Reviewed page 7 of the handout. General
obligation bonds are considered full
faith credit. It is the lowest cost of
borrowing. Other types have limitations.
General obligation bonds almost always
have a higher rating. States are given
priority, as a stronger debt vehicle,
over local government entities.
1269
Mr. Rattigan
Discussed page 8 of the handout. A bond
rating is a signed letter assessing the
ability, willingness and legal obligation
of an issuer to make full and timely
payments of principal and interest. It is
an objective assessment of relative
creditworthiness.
He noted that a bond rating is not a
rating of government. It is a rating of
relative credit quality. It is not an
audit or a measure of the relative worth
of an issuer.
1333
Mr. Rattigan
Discussed page 9 of the handout.
1363
Representative
Foster
Asked why Alaska is not AAA rated.
1392
Mr. Rattigan
Discussed reasons why Alaska is an AAA
rated entity.
1518
Mr. Rattigan
Observed that credit rating agents would
look to make sure that whatever amount is
in the Permanent Fund is sufficient for
the long-term.
1568
Mr. Rattigan
Discussed page 10 of the handout. He
noted that there are four factors for
rating of general obligation bonds:
economic base, financial analysis, debt
analysis, and administrative factors.
1601
Mr. Rattigan
Discussed the four factors as contained
on page 11 of the handout.
The economic base is dependent on natural
resource industries, non-renewable oil
extraction, industries, renewable
resources fishing and timber, tourism,
and military bases.
The financial analysis takes into
consideration trends in expenditures,
revenue dependency and volatility and the
Prudhoe Bay Curve, and reserves
(Constitutional Budget Reserve and Alaska
Permanent Fund).
Debt analysis takes into consideration
low net debt after deductions for self-
supporting and guaranteed debts, and debt
conservatively managed and structured to
the Prudhoe Bay Curve.
1757
Mr. Rattigan
Discussed negotiated underwriting vs.
competitive underwriting on page 13 of
the handout. Negotiated sales are
negotiated with an underwriter.
Negotiated sales occur where size is an
issue. Negotiated sales allow direct
retail marketing. Competitive sales are
submitted by sealed bid.
1927
Mr. Rattigan
Discussed page 14 of the handout. Time of
payoff has an impact on debt service. The
schedule was based on a 6 percent
interest rate. A 10-year pay off would
almost double the amount of debt
services. Rating agencies like aggressive
repayments.
2001
Mr. Rattigan
Provided the Committee with the estimated
debt service for different general
obligation bonds assumptions. Debt
Service was broken out by programs and
the amount issued in each of the next 5
fiscal years. Assumptions were made based
on the type of project being built. There
is no reason a 30-year program could not
be done in 10 or 15 years.
2061
Mr. Rattigan
Referred to page 16, aggregate debt
service schedule. There is a gradual
stepping down of the debt.
2088
Mr. Rattigan
Noted that there are other charts
relating to school construction, harbor
construction, state facilities, and
university debt service
2130
Mr. Rattigan
Discussed page 23 of the handout. He
noted that earlier debt issuance would
result in debt service being laid on
faster. The charts show an all at once
approach and a gradual approach.
2191
Mr. Rattigan
Noted that all general obligation bond
debt would result in an unburdenable debt
service.
2215
Mr. Rattigan
Discussed page 24 of the handout. Noted
that there is a potential for interest
earnings, but emphasized that it must be
offset by the additional debt service.
This assumes that interest can be earned
before the money is spent.
2252
Mr. Rattigan
Stressed that a gradual debt issuance is
better because it allows growth.
2280
Co-Chair Mulder
Questioned how bond capacity would be
established for Alaska, which is deficit
spending.
2306
Mr. Rattigan
Responded that debt capacity looks at
thresholds relating to tax support debt
with general fund revenues. A debt
capacity formula would be applied. This
allows for 5 - 10 percent of general fund
spending.
TAPE CHANGE, HFC 00
-17 , SIDE 2
33
Mr. Rattigan
In response to a question by
Representative J. Davies, Mr. Rattigan
noted that the IRS has shut the door on
arbitrage earning with the exception of
capital spending. Discussed arbitrage
spending.
181
Representative
Foster
Asked how aggregate debt of local
entities would affect the state.
243
Mr. Rattigan
Noted that a bigger pool of population
helps state debt.
280
Representative
Foster
Anchorage and Fairbanks make up half of
the debt in the state. How would they
affect the state of Alaska's debt rating?
308
Mr. Rattigan
Pointed out that during the 1984 collapse
municipalities suffered in their debt
rating, but state's rating remained at
AA. Anchorage recently received upgrades
due to a broader tax base. Municipalities
are more at risk the two can be diverse.
413
Representative
Williams
How would the vote relating to the use of
the Permanent Fund affect Alaska's
rating?
495
Mr. Rattigan
Rating agencies acknowledge that the
Prudhoe Bay Curve has not been as drastic
as anticipated. Emphasized that he would
like to see a conservative debt policy
but did not see the Prudhoe Bay Curve as
a stumbling block to long debt, due to
the Constitutional Budget Reserve and
Permanent Fund.
577
Mr. Rattigan
Discussions with rating agencies indicate
that Alaska could absorb $600 million
dollars in general obligation bonds. It
would bring Alaska to the middle of the
pack. Rating agencies will look at all
factors.
725
Representative
Williams
Noted decrease in timber industry.
739
Mr. Rattigan
Recognized that the oil is the industry
that the bulk of the credit rating is
depended on and accounted for. It is
possible to have debt outstanding past 10
years.
782
Co-Chair Mulder
Echoed concern that future legislatures
would be tied if there $600 to $110
million dollars in general obligation
bonds were issued.
842
Mr. Rattigan
Pointed out that the question is, how
much is tied in relation to flexibility
and what is the annual obligation and how
does it fit into long-term revenue
sources. He emphasized that the numbers
being discussed have not been
demonstrated to be too much debt to
maintain.
930
Co-Chair Mulder
Observed that it is a policy question.
People would be asked to pay for new
schools over their lifetime.
955
Representative
Austerman
Stressed the need to look at other
revenue sources as oil is depleted.
994
Mr. Rattigan
Acknowledged that diversity is important,
but emphasized that rating agencies are
not policy setters.
1039
Representative
Grussendorf
Referred to taxing tools. Asked if rating
agencies look at available tax tools.
1120
Mr. Rattigan
Noted that rating agencies distinguish
between tools that exist and are not
being used and those that would require a
vote.
1130
Representative
Grussendorf
Questioned if rating agencies would look
at the lack of will to implement tax
tools and the political atmosphere.
1159
Mr. Rattigan
Responded that they would look at the
political atmosphere. Rating agencies
look at the availability of tools and the
willingness to use the tools.
1195
Representative
Grussendorf
What if the legislature was serious about
a distribution of the Permanent Fund?
1209
Mr. Rattigan
Responded that he was certain that rating
agencies would have a strong set of
questions about the long-term impact.
They would ask how it would affect the
long-term stability of the state of
Alaska.
1301
Mr. Rattigan
In response to a question by
Representative J. Davies, Mr. Rattigan
noted that saturated tax ability would
have a negative affect on rating because
of the inability to increase the tax
base.
1404
Mr. Rattigan
In response to a question by Co-Chair
Therriault, Mr. Rattigan noted that the
state's backing of their general
obligation bond pledges impacts
municipalities.
1472
Mr. Rattigan
Discussed Anchorage bonds ratings.
1556
Co-Chair Mulder
Pointed out that the handout talks about
the tobacco settlement.
1613
Mr. Rattigan
Reviewed page 1-1 of the handout. The
master settlement agreement allowed an
identifiable revenue stream. There have
been three tobacco-securitized issuances.
1712
Mr. Rattigan
Discussed New York financing. Most states
require legislation to use securitization
financing.
1789
Mr. Rattigan
Pointed out that securitization is a
higher cost debt. Securitization of debt
is sold at one-half to .7 percent higher
than general obligation bonds.
1868
Mr. Rattigan
Stressed that the many debates on tobacco
securitization have indicated that there
is a misconception that the money of
tomorrow is being sold today and no money
would be seen in the future. Clarified
that there is still a difference of
funding beyond the debt service, which
comes back to the state. Money is
forwarded and the risk is sold off that
it would be less than expected.
1943
Representative J.
Davies
Referred to page 1-2 of the handout.
Questioned if the assumption that Alaska
will receive $781 million dollars over
the next 25 years excludes consumption
and inflation.
1969
Mr. Rattigan
Clarified that rates will increase with
inflation. Consumption will have the
biggest impact.
2003
Mr. Rattigan
Forecast of tobacco securitization is
that with decline of consumption there
would still be sufficient money to pay
the debt.
2037
Co-Chair Mulder
New York did issue tobacco bonds because
they were out of debt compactly and this
could get them around their limit. Plus
the concept is it is a narrow market to
sell the bonds.
2080
Vice Chair Bunde
Stated that the GO market has been left
untapped.
2097
Mr. Rattigan
Replied that was a policy issue.
2108
Mr. Rattigan
It is clear that general obligation bonds
would have a lower cost. Stressed that it
is not just a general obligation bond
versus tobacco securitization issue.
General obligation bonds will always be
more favorable.
2138
Co-Chair Mulder
Suggested that there are three other
considerations. All votes do not pass.
There is discussion with the Governor's
Office on buying an inclusion. It is
difficult to get any package through the
legislature without inclusion. There is
an immediacy issue with the GO bond
concern. It takes longer to bring tobacco
bonds to the market than it does GO
bonds.
2188
Co-Chair Mulder
Stated that the difference in timing
might not be as dramatic as it would be
assumed. Does it take 6 to 9 months to
bring that to market?
2212
Mr. Rattigan
Stated that was an estimate with
marketing time being in line.
222
Co-Chair Mulder
Stressed that decisions could be moving
sooner. The third consideration is the
on-budget versus the off-budget issue.
The Governor's approach is off-budget.
2253
Vice Chair Bunde
Spoke to the policy concern and public's
involvement.
2267
Co-Chair Mulder
Estimated that this will be a campaign
issue.
2276
Mr. Rattigan
Discussed Grant Anticipation Revenue
Vehicle Bonds (GARVEE). Stated that
GARVVEE bonds are the excelleration of
money from the federal government for
transportation projects. They allow
leveraging of federal dollars. The
concept is that GARVEE bonds are issued
based on projects that will happen in
three to four years. He listed the
various states that have successfully
used GARVEE bonds. There is evolution in
what these bonds can do. They provide
dollars sooner.
TAPE CHANGE, HFC 00
18,- SIDE 1
012
Mr. Rattigan
Explained Revenue Bonds.
172
Mr. Rattigan
In response to a question by
Representative J. Davies, Mr. Rattigan
discussed airport revenue bonds. He noted
that revenues generated at the airport
secure them.
191
Representative J.
Davies
Noted that they provide a bridge
structure based on anticipated federal
receipts.
219
Mr. Rattigan
Explained that airport revenue bonds are
issued in anticipation of federal
funding.
304
Vice Chair Bunde
Expressed concern that the state of
Alaska not allows itself to "be penny
proud and pound-foolish".
404
Co-Chair Mulder
ADJOURNMENT
The meeting adjourned at 3:22 p.m.
HOUSE FINANCE COMMITTEE
LOG NOTES
January 26, 2000
House Finance Committee 6 1/26/00
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