Legislature(1999 - 2000)
05/01/2000 10:35 AM House FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
May 1, 2000
10:35 A.M.
TAPE HFC 00 - 140, Side 1.
CALL TO ORDER
Co-Chair Therriault called the House Finance Committee
meeting to order at 10:35 A.M.
PRESENT
Co-Chair Therriault Representative Foster
Co-Chair Mulder Representative Grussendorf
Representative Austerman Representative Moses
Representative Bunde Representative Phillips
Representative J. Davies Representative Williams
Representative G. Davis
ALSO PRESENT
Senator John Torgerson; Larry Persily, Deputy Commissioner,
Department of Revenue; John Jenks, Chief Investment Officer,
Department of Revenue.
SUMMARY
SB 312 An Act relating to the bond redemption subaccount
in the earnings reserve account of the permanent
fund; and providing for an effective date.
HCS CS SB 312 (FIN) was reported out Committee
with a "do pass" recommendation.
SENATE BILL NO. 312 am
An Act relating to the special subaccount in the budget
reserve fund; and providing for an effective date.
SENATOR JOHN TORGERSON stated that it was the intent of the
Senate Finance Committee to create a subaccount in order to
place $400 million dollars to invest in order to obtain a
higher yield than current funds remaining in the Capital
Budget Reserve (CBR).
Senator Torgerson noted that in earlier discussions with the
Department of Revenue, it was indicated that the CBR had
netted only 1.58% after inflation. He observed that was not
very high. He noted that SB 312 initially started out
setting up a sub account in the Earnings Reserve Account.
The yield in that account is over 10%. It was the intent
that the funds would be directed toward the issuance of the
repayment of any bonds or debt of the State. He pointed out
that language within the proposed committee substitute does
not indicate that the funds be used for debt.
Senator Torgerson added that the Senate had gone through
bonding packages which did not create funding mechanisms for
debt reimbursements. He stated that if the money was placed
into a sub-account with a higher yield, the Legislature
could appropriate that money back into the general fund.
Senator Torgerson requested that language be added which
would stipulate that the Legislature appropriate for the
debt of the State.
Co-Chair Therriault referenced Page 2, Section (b), language
originally linked to Senate language and the issuance of
bonds. He suggested the date was no longer needed. Senator
Torgerson explained that in the initial version of the
General Obligation (GO) bond package with the 10% earned,
that language would be required. He noted that the language
would be subject to legislative appropriation every year.
He did not see the need for an automatic redeposit, as it
would be technically an accounting change, not a legal
issue.
Co-Chair Therriault advised that the concern was that if
this were tied to the repayment of the debt, would there
then be an arbitrage problem with the Internal Revenue
Service (IRS). Senator Torgerson pointed out that he had
"run the language by" the State Bond Council, who then
recommended language to amend the Senate version to address
that concern. He clarified that in stipulating May, there
would be no arbitrage problem or other tax consequences.
Senator Torgerson added that if language were added which
clarifies that the Legislature "may" appropriate for debt
repayment, then the Bond Counsel recommends adding the
language: "For other purposes provided by law". That
language would clearly stipulate that the Legislature could
use the money for anything that they choose to.
Representative Austerman inquired how $400 million dollars
had been determined. Senator Torgerson explained that the
bond package passed from the Senate was for $440 million
dollars. The debt reimbursement portion of that is $38
million dollars. He compared it to the amount of return
received from the investment of the Permanent Fund.
Representative Grussendorf pointed out that the Senate had
moved away from the General Obligation (GO) approach. He
asked if that would take care of the municipal bonds dealing
with harbors and schools. Senator Torgerson stated that the
funds could address such concerns. He noted that there is
other debt the State pays every year. He interjected that
part of the plan was to use a portion of the Tobacco
Settlement money to pay for some of the school projects.
Senator Torgerson acknowledged that the legislation is a
simple accounting mechanism. If the money were aggressively
managed, he believed it would be better for the State. He
pointed out that an 8% return would place an additional $25
million dollars into the State coffers.
Co-Chair Mulder recommended that a sentence be dropped in
order to address the arbitrage concern. He believed that
the proposed language would raise a red flag. Senator
Torgerson disagreed, noting that there is no one indicating
that this is an arbitrage problem. He reiterated that the
Stated Bond Counsel had recommended language to indicate
that it be a dedicated fund.
Vice Chair Bunde agreed that a higher return would bring a
higher risk to the State. The Department of Revenue
recommends that the money not be placed into a higher risk
zone but rather remain as it is so that it will be
available. He pointed out that they base that suggestion on
the expertise of the State hired money managers. He pointed
out that the legislation suggests that we ignore that
judgement. Senator Torgerson responded that it would depend
on the price of oil. He added it is "strange" that the
Department would indicate that they do not want to attempt a
higher return. Vice Chair Bunde argued that the money
should be accessible on a short-term basis and not more
aggressively managed.
Senator Torgerson observed that the only "downside" would be
if the price of oil went down. If the money was obligated
in a long-term situation, then there could be an
appropriation.
Representative J. Davies suggested that the problem is that
there could be a substantial risk and penalty. As employees
get closer to retirement age, the advice is to move into
more conservative investment strategies. The concern rests
with the volatility of the market. He reiterated that there
could be a "huge" loss.
Representative J. Davies noted for the record that if he
supports the bill, it would be because there had been long
discussions in the Committee regarding the investment
horizon of the CBR. He agreed that the House Finance
Committee (HFC) has discussed that they would like to see a
higher return on that account. If the proposed legislation
is a way to single that intent, then it would be
appropriate. Representative J. Davies clarified that the
passage of the bill would effectively create two pieces of
the CBR, a long and short-term investment. It is essential
to recognize that there will be a risk if more money should
be needed from the CBR. He observed that the Legislature
has complete authority to spend the money in any way it
wants with a _ vote. The Legislature does not need to
specify the purpose.
Representative Grussendorf stated that the legislation is a
"statutory picket fence". He added that the Legislature
would be the ones to determine if the fence is crossed or
torn down. The legislation indicates to the Department of
Revenue that they have the ability to invest at a higher
rate.
Representative G. Davis asked the constraints that would be
used in order to pull the money out of the CBR account. He
reiterated the volatility of the stock market at this time.
Representative G. Davis stated that the legislation would be
starting a new account. Co-Chair Therriault interjected
that it would be a "sub-account", not a new account. Any
Legislature would not be able to put constraints on the
appropriation powers of the next Legislature unless through
a constitutional amendment. The only restraints would be
the current _ vote determination.
Representative Phillips referenced Page 1, Section 3, and
Page 2, Section (b). She asked if that language was
acceptable with Senator Torgerson.
LARRY PERSILY, DEPUTY COMMISSIONER, DEPARTMENT OF REVNEUE,
noted that the Department could invest money with a target
of a higher yield. It is important to remember that the
higher yield creates a risk that the money would not be
available and that we could loose on the investment.
Cashing out equities when the market is down could cut into
the principle.
Mr. Persily recommended that the language in the proposed
draft on Page 1, Section 1, should be in statute. The
Commissioner of Department of Revenue has the fiduciary
obligation established in statute and the bill should give
direction in statute. He reiterated that there should not
be a conflict between statute and Section 1.
Mr. Persily noted that in present time, looking at the
spring forecast, the Department determined that November
2004, was the date when the CBR would run dry. As explained
in the spring forecast, the State needs about $300 million
dollars to be available for a cash flow. If that amount was
backed out, and the projected oil prices were over by $2
dollars a barrel, there could be a problem for the
Department.
Co-Chair Therriault inquired the cushion used by the
Department before the CBR was available. Mr. Persily
replied that the CBR has been available for the last 10
years. He did not know what was used before that.
JOHN JENKS, CHIEF INVESTMENT OFFICIER, DEPARTMENT OF
REVENUE, noted that a transition occurred in 1992, when the
Statutory Budget Reserve fund was created. The CBR has been
the State's "shock absorber".
Mr. Jenks pointed out the time horizon and sensitivity in
taking an additional more aggressive investment policy. If
the State was inclined to believe that they had a long time
horizon, they might invest in a policy with 60% stocks and
40% bonds. That would be a balanced long-term investment
policy and could make approximately 8.25% gross expected
return over a five-year period. He reiterated that would be
a gross return and that policy would be substantially
riskier than the shorter policy. That policy would have the
possibility of about a 4% chance that at the end of five
years, you loose money. Ending at 3 years, there is a 9%
chance that money would be lost. He emphasized how
sensitive the consequences of taking risks are. Mr. Jenks
concluded that the critical nature of investing should be
for the long term.
Representative Austerman inquired the amount of money in the
CBR at this time. Mr. Persily replied that there was about
$2.6 billion dollars. Representative Austerman asked what
the FY00 anticipated draw would be. Mr. Persily replied a
little over $300 million dollars.
Representative Austerman requested the Department to comment
on the recommendation proposed by Senator Torgerson. Mr.
Persily responded that it would be a policy call for the
Legislature. Mr. Persily noted that the question is if the
Department could take the $400 million dollars, place it
into a subaccount and then make profitable investment
decisions on the long-term horizon. The State Department can
do what the Legislature wants; however, there will be a
risk. The amount placed into that account would be a policy
call.
Co-Chair Mulder asked if it would be absolutely necessary to
restructure the language. Mr. Persily explained that the
money could be set aside. Commissioner Condon has indicated
that with the language left in the intent section, it would
not relieve him of his fiduciary obligation as it exists in
statute. Mr. Persily emphasized that there needs to be
language in legislation which clarifies that understanding.
Mr. Persily added that if the Legislature decided to pass SB
312 in some form, because the management fees are higher on
equities than they are on fixed income, there would be a
small fiscal cost attached for the management fees. Mr.
Jenks stated that the more aggressive policies have certain
types of assets, where there is more reliance on the
external managers. There is a small fee associated with
the external managers of the equities.
Senator Torgerson interjected that $400 million dollars is
equivalent to only 2 months operating budget.
Co-Chair Therriault stated that before the committee
substitute was adopted, he would propose to delete Section
Co-Chair Mulder MOVED to ADOPT the changed work draft 1-
LS1627\D, Cook, 5/1/00, Cook, 5/1/00, as the version of the
legislation before the Committee. There being NO OBJECTION,
it was adopted.
Representative J. Davies MOVED to AMEND Page 1, Line 8,
delete "the" and insert "A", and Page 1, Line 9, insert the
sentence from the Intent Section and then delete the
remaining portion of Section 1 and renumber appropriately.
Co-Chair Therriault asked if it would be appropriate to
suggest the language added to Line 9, Page 1, to read:
"Money in the sub account shall be invested to yield higher
returns than might be feasible to obtain with other money in
the budget reserve". Co-Chair Therriault noted that would
be Amendment #1. There being NO OBJECTION, the change was
made.
Co-Chair Therriault MOVED to ADOPT Amendment #2 which would
add a sentence which stipulates that the, "Interest earned
on the subaccount may be appropriated for debt repayment or
any other lawful purpose". He noted that the legal drafters
could determine placement of that language. Representative
J. Davies OBJECTED. He responded that the Legislature
currently has the authority to take that action and that the
language should stay as clean as possible.
A roll call vote was taken on the motion.
IN FAVOR: Foster, Phillips, Mulder, Therriault
OPPOSED: Bunde, J. Davies, G. Davis, Grussendorf,
Moses, Austerman
The MOTION FAILED (4-7).
Co-Chair Mulder MOVED to report HCS CS SB 312 (FIN) out of
Committee. There being NO OBJECTION, it was so ordered.
HCS CS SB 312 (FIN) was reported out of Committee with a "do
pass" recommendation.
ADJOURNMENT
The meeting adjourned at 11:20 A.M.
H.F.C. 7 5/01/00
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