Legislature(2019 - 2020)ADAMS ROOM 519
01/27/2020 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Status Update - State Debt Summary and Credit by Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
January 27, 2020
1:35 p.m.
1:35:43 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:31 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Jennifer Johnston, Co-Chair
Representative Dan Ortiz, Vice-Chair
Representative Ben Carpenter
Representative Andy Josephson
Representative Gary Knopp
Representative Bart LeBon
Representative Kelly Merrick
Representative Colleen Sullivan-Leonard
Representative Cathy Tilton
Representative Adam Wool
MEMBERS ABSENT
None
ALSO PRESENT
Deven Mitchell, Debt Manager, Treasury Division, Department
of Revenue.
PRESENT VIA TELECONFERENCE
None
SUMMARY
STATUS UPDATE - STATE DEBT SUMMARY AND CREDIT BY DEPARTMENT
OF REVENUE
Co-Chair Foster reviewed the agenda for the day and invited
Mr. Mitchell to the table.
^STATUS UPDATE - STATE DEBT SUMMARY AND CREDIT BY
DEPARTMENT OF REVENUE
1:36:41 PM
DEVEN MITCHELL, DEBT MANAGER, TREASURY DIVISION, DEPARTMENT
OF REVENUE, introduced the PowerPoint presentation: "2019
Credit Review and State Debt Summary" (copy on file). He
was asked to give a presentation on outstanding state debt,
the credit rating process, and debt capacity.
Mr. Mitchell began with slide 2: "State Debt Obligation
Process" noting that all state debt had to be authorized by
law, whether it was general obligation debt or municipal
debt. There were some categories of debt such as general
obligation debt (a full faith credit pledge by the state)
that had to be ratified by state voters. There were a
couple of other categories of obligations that the division
historically reported on including the school bond debt
reimbursement program and another capital reimbursement
program in which the State of Alaska reimbursed
municipalities for debt issued by local jurisdictions for
qualified projects and programs. The largest of the two
categories was the school bond debt reimbursement program -
in existence since 1970. The other category the division
stared reporting on more recently, due to the rising
unfunded liability, was the Public Employees Retirement
System (PERS) and the Teachers Retirement System (TRS). It
was one of the largest categories of obligations the state
had to-date.
Co-Chair Johnston asked where Mr. Mitchell would insert
revenue anticipation notes or tax anticipation notes. Mr.
Mitchell responded that he would be covering the
information later in the presentation. He noted they fell
into the short-term category of borrowing. Revenue
anticipation notes were allowed by statute and a form of
constitutional debt. They were short-term obligations that
were allowed to provide for intra-fiscal year funding in
instances of cash deficiencies.
Representative LeBon brought up general obligation bonds
needing voter approval. He drew attention to the bullet
point regarding a state bond committee. He asked if Alaska
had a hard ceiling maximum that could be originated through
a bond sale for whatever purpose approved by voters.
Mr. Mitchell responded that currently there was not a hard
ceiling in the state's governance structure. However, there
were limits from a market perspective. If someone urged the
state to borrow $1 trillion, it would not be possible in
the market place. He suggested there was a balance. He
indicated the state bond committee was the body that
authorized the issuance of all State of Alaska debt. In the
case that the State of Alaska would be at the top of the
prospectus or the offering document, the state bond
committee (comprised of the commissioners of the Department
of Revenue, the Department of Community and Economic
Development, and the Department of Administration) would
authorize a resolution to allow the issuance of debt.
1:41:23 PM
Representative LeBon wondered if there was a level of
review and approval that might change the outcome of a
community voting in favor of a school bond indebtedness.
Mr. Mitchell replied that the issue would be a market
limitation rather than a hard cap. A hard cap was not in
statute. In Alaska's case, it had some of the largest per-
capita debt outstanding even though the state had
relatively modest debt because of the state's oil wealth
and its relatively small population.
Mr. Mitchell turned to slide 3: "Total Debt in Alaska at
June 30, 2019 ($millions)." He indicated there were a
couple of publications his office put out each year per
statute. The first was the Alaska Public Debt Book, from
which the table on the slide came from, and a debt
affordability analysis. Between the two publications, the
debt book described all of the outstanding obligations
within the State of Alaska whether state obligations or
municipality obligations. The debt affordability analysis
included a discussion of the state's potential debt
affordability.
Mr. Mitchell noted the table continued on slide 4. He
explained that the table was categorized by the state's
strongest credit pledge to its weakest credit pledge.
General obligation bonds came first in the amount of $670
million outstanding. He elaborated that in the category of
debt there was a reduction of approximately $50 million
from the previous year. The state had one remaining
authorization to issue general obligation bonds related to
the 2012 Transportation Act in the amount of $110 million.
The funds would be issued as project cash flow dictated.
Mr. Mitchell reported that next category was state
guaranteed debt which was issued by H (AHFC) for the
Veterans' Mortgage Program. The program required a state
back-stop in the bonds to be eligible for tax exemption. In
the 70s' there was an amendment to the state's constitution
to allow the bonds to be issued tax exempt. The tax
exemption benefit was to be passed through to Veterans that
were going to participate in the program to facilitate a
lower interest rate for them. He noted the term "tax
exemption" was something heard frequently when talking
about municipal bonds. It meant that the investors that
purchased the bonds would not have to pay income tax on the
related investment income. As a result, they were willing
to accept a lower yield on the securities than they would
if they had to pay tax.
Mr. Mitchell continued to the next category of debt - debt
supported by the state's general fund on a subject-to-
appropriation basis. It was a lesser credit pledge than
general obligation bonds required. It did not require a
vote of state residents. Rather, it was approved by a
legislative action in combination with administrative
support. The first subcategory was certificates of
participation issued directly by the State of Alaska. The
only outstanding certificate was for a residential housing
facility at the Alaska Native Medical Center in Anchorage.
The lease revenue bonds were ones in which the state
partnered with sub entities. He reported that AHFC was a
partner in the parking garage in Anchorage. The Atwood
Building was formerly funded through the same debt
category. The state was also paying down debt, $14 million
between two authorizations in the prior year, for the Goose
Creek Correctional Facility in the Mat-Su area.
Mr. Mitchell reviewed state supported municipal debt. The
category included the School Debt Reimbursement Program and
state reimbursement capital projects debt that came about
as a result of HB 528 [legislation passed in 2002] and
encompassed a variety of harbor and energy projects. The
table listed the full statutorily allowed reimbursement
amounts. They had not been trimmed based on some of the
recent reductions in the current fiscal year or in a couple
of prior fiscal years. Both of them decreased in the last
fiscal year. He indicated the school debt reimbursement was
down $65 million and $3.5 million in the other program
primarily due to the moratorium on the School Debt
Reimbursement Program that had been in place since 2014.
Mr. Mitchell moved to the next category: The Pension System
Unfunded Actuarial Accrued Liability (UAAL). The Public
Employees' Retirement System (PERS) debt was $5.1 billion
and the debt for the Teachers' Retirement System (TRS) was
$1.5 billion. The increase for PERS was about $50 million
and, TRS had a decrease of $310 million. The changes
resulted from actuarial adjustments made to the actuarial
analysis of health care which benefited the system. He
reported a downward shift in the assumed rate of return
from 8 percent to 7.38 percent. If the state were to assume
it was going to earn less on the prefunded pension funds,
it would have to pay more in the future to make up the
difference. If the state earned 7.38 percent on the
prefunded amount instead of 8 percent, it would create an
additional burden for future payments to pay off the
unfunded liability. However, it was considered more
conservative, in line with many other pension funds, and
viewed favorably from a credit rating perspective.
Mr. Mitchell moved to state moral obligation debt largely
comprised of the Alaska Municipal Bond Bank Program. The
program used the state commitment to borrow money and lent
it to municipal entities. It saved money for borrowing that
would otherwise occur at a local level. For example,
instead of paying 5 percent for a loan, an entity would pay
4.5 percent. The debt for the Alaska Energy Authority (AEA)
of $74.7 million was related to Bradley Lake. The Alaska
Student Loan Corporation had a diminished issuance since
some federal laws changed related to the origination of
student loans. The amount all declined in the prior fiscal
year - $30 million for the Alaska Municipal Bond Bank, $10
million for AEA loans, and $12 million for the Alaska
student Loan Corporation.
Representative LeBon reported that the Alaska Industrial
Development and Export Authority (AIDEA) went to the bond
market to raise capital for projects in Alaska. He asked if
the state's moral obligation fell under the sale of a
bonded debt by AIDEA.
Mr. Mitchell answered that it depended. He explained that a
moral obligation was created with a statutory construct
that required a reserve fund securing bonds to have cash
placed in it at closing. There was also an annual reporting
requirement on the sufficiency of the reserve to meet the
intended security for bond holders to the legislature and
the governor. It implied that if there was a deficiency the
legislature would act to solve it and appropriate money.
The Alaska Energy Authority did not carry most of its
programs. He was only aware of one program for the Interior
Gas Utility in which there was an allowance for $150
million of moral obligation bonds to be issued. He
indicated that AIDEA was a conduit facilitating access to
the market rather than tying its assets to secure
investors. If there was a deficiency, the state would be
obligated to come in and appropriate money to the reserve
fund.
Representative LeBon asked if the backing provided by the
state helped to lower the cost of the bond. Mr. Mitchell
replied in the affirmative.
1:51:48 PM
Representative Josephson asked what had been the largest
amount of state general obligation bond debt historically.
Mr. Mitchell responded that the figure was in the debt
book. He thought it was about $2.1 billion. The state was
below the peak for the 1980s. He further explained that as
oil revenues were coming online there were a number of
general obligation bond issued that were layered on with
shorter amortizations (10 years) because of how the Prudhoe
curve was perceived.
Representative Josephson asked about the amortization on
what was outstanding. He wondered what the state was paying
in annual debt service. Mr. Mitchell responded that
presently the state was paying around $75 million per year
in annual debt service. The amount declined every year. He
relayed that the state had $110 million to issue which
would moderate the decline slightly.
Representative Josephson commented that relative to the
PERS/TRS liability the number seemed lower than he
recalled. The amount was $11 billion and the state paid $3
billion. He thought the amortization was going to increase
the amount because the state's payments were low. He
thought $6.6 billion was low and asked Mr. Mitchell to
comment.
Mr. Mitchell replied that there had been some improvement
partially due to strong financial performance in the
market. Some of the improvement was because of shifts in
actuarial inputs. There had been some extension of the
amortization of the unfunded lability. Also, there had been
healthcare adjustments that had resulted in improvements to
the funding level and to the amounts the state was
obligated to pay. He recalled when the state was looking at
over $1 billion per year due to the amortization being
level dollars meaning level amortization. Presently, the
state had a percentage of payroll which resulted in less
being paid upfront and more paid in the future. It had been
concerning because at one point the state was looking at
going from $200 million to $800 million. More recently the
figure had moderated to about $300 million to $450 million
in the final year of the amortization in 2038. There had
definitely been improvement in the retirement systems.
1:55:21 PM
Mr. Mitchell addressed the final category on the slide for
state revenue debt - sportfish revenue bonds. They were
supported by a pledge of the sportfish fund and paid by a
surcharge on sport fish licenses sold in the state. The
amount was about $13.9 million which was approximately
$3 million less than the previous year. He reported that
the remaining bonds would be payable or optionally
redeemable on April 1, 2020. Based on the balance in the
debt service account and the annual collections on the
surcharge, he anticipated that the state would optionally
redeem those bonds in the current fiscal year and pay them
off.
Mr. Mitchell reviewed another State of Alaska revenue bond,
the international airports revenue bond. He relayed that
the constitution in Alaska had strong prohibitions on
dedicating revenue. However, there were certain exceptions
- if they were required by federal law or if there was a
dedication prior to statehood. He indicated it was
typically where he saw dedicated revenue issues. He
suggested that there was the possibility of a
constitutional amendment to allow dedication post
statehood. The sportfish bonds were allowed because they
were required to be dedicated by federal law. The airport
system was dedicated, as it existed and had debt
outstanding prior to statehood.
Representative Wool understood the licensing fees went
towards paying down the bond. He asked what the
$13.9 million figure was for. Mr. Mitchell responded that
it was part of a $60 million bond issued for sport fish
hatcheries in the state including the Anchorage and
Fairbanks hatcheries. The amount did not turn out to be
enough which resulted in the state appropriating additional
monies for the Anchorage hatchery. He also reported the use
of some surcharge revenues supporting a hatchery in
Petersburg.
Representative Wool referred to the state's general
obligation bonds. He noted the outstanding principle of
$1.1 billion and the interest and maturity of $540 million.
He asked if the interest figure reflected the history of
the bond. He wondered how large of a bond the interest
applied to. Mr. Mitchell thought Representative Wool was
talking about the state moral obligation debt and the
Alaska Municipal Bond Bank Authority. On June 30, 2019 the
bond bank's outstanding principle was $1.111 billion and
had an amortization over future years as long as 30 years.
During the 30-year life span, absent refinancing, the state
would pay $530 million in interest.
1:59:10 PM
Mr. Mitchell turned to slide 4: "Total Debt in Alaska at
June 30, 2019 ($millions)(Con't)." He discussed the debt
related to the University of Alaska. The University of
Alaska sold revenue bonds secured by University revenue
collections. As of June 30, 2019, the University revenue
bond debt was $271.3 million outstanding which was a
decrease of about $12 million in the prior year. The
University also had some smaller categories of lease
commitments and installment contracts that had declining
balances and outstanding principles. The University had a
total decline of $13.4 million.
Mr. Mitchell moved to state agency debt which was not
secured by the state's credit pledge like many of the first
three categories of debt. Revenue debt was not secured by a
state pledge either. Some argued there was a close linkage
between the University and the state that could result in
support but was not a requirement of the bonds or implied
in any way to potential investors in the securities. The
state agency debt that was issued by public corporations in
the next category were similarly not secured by any credit
support from the state.
Mr. Mitchell continued that the AHFC Bond Bank and the
Northern Tobacco Securitization Corporation (a subsidiary
of AHFC) had a total of $40 million of bonds outstanding
which reflected a reduction of about $40 million from the
prior year. He explained that in some instances, like the
tobacco settlement bonds, they were specifically pushed as
far as possible from the state because of the nature of the
risk associated with the settlement agreement itself. The
state was party to a master settlement agreement with
tobacco producers that had some risk of not paying in the
future. He indicated that by selling portions of the
settlement agreement to the tobacco corporation who then
securitized it and sold the revenue stream to investors, it
allowed the state to provide for some capital projects and
take the risk. In some people's view, it took the reliance
on tobacco revenue off the state's balance sheet.
Representative LeBon referred to the subcategory of
commercial paper. He asked for Mr. Mitchell to provide the
story behind commercial paper. He thought the interest to
maturity category on the slide did not apply. Mr. Mitchell
responded that it was an AHFC program. He was unfamiliar
with it. He believed AHFC used it as the linkage into their
longer-term collateralization programs which were in the
next category. They bought mortgages using their commercial
paper program which was a short-term borrowing program.
They would then payoff the commercial paper program as they
issued the collateralized bond issues.
Representative LeBon hesitated asking the question because
in an upcoming subcommittee hearing AHFC would be
presenting. He would direct his question to the
corporation.
2:03:13 PM
Representative Josephson asked if Mr. Mitchell stated he
anticipated the debt burden for the University of Alaska to
be $13.4 million less in FY 21 than in FY 20. Mr. Mitchell
clarified that the amount was only the declining principle
balance outstanding. The University had not been issuing
additional debt in the past year. Rather, it had a payout
of a portion of its outstanding principle balance. The
University had not had an improvement in cash flow.
Co-Chair Johnston asked if the University had been able to
refinance its debt. Mr. Mitchell indicated that the
University was moving in the direction of refinancing in
the coming year. The University's credit rating had been
significantly reduced over the previous calendar year and
was experiencing some challenges. He explained that he was
the debt manager for the State of Alaska and worked for the
Alaska municipal Bond Bank as the executive director. One
of the things the bond bank had done at one point was to
work with the University on the cogeneration facility (the
new coal-fired facility) located at the University of
Alaska Fairbanks campus. He suggested there could be an
allowance provided for the University to take advantage of
the bond bank program in a broader way that would enhance
savings to the University. It would increase the credit
rate at which their debt rate would be sold because the
bond bank currently had a higher credit rating than the
University. It would also decrease the interest rate the
University would pay on refinanced debt potentially
providing savings.
Mr. Mitchell continued to the next category of state agency
collateralized or insured debt. He reiterated the debt was
not secured by the State of Alaska. He spoke of a group of
home mortgages being placed together and the cash flow
being collateralized and used to borrow money from a bond
issuance. He noted that the largest category of borrowing
was AHFC in the state agency collateralized or insured
section both for their mortgage program and state capital
project bonds. He indicated AIDEA was also in the category
with their revolving fund bonds and power revenue bonds
which were related to the Snettisham Hydro project South of
Juneau. He reported an increase of about $73 million in the
category of debt: State Agency Collateralized or Insured
Debt. He relayed that AHFC was filling its mission and
providing a housing financing market.
2:07:05 PM
Vice-Chair Ortiz asked if Mr. Mitchell had stated that the
categories were listed in a prioritized fashion on the
slide in terms of what would be paid off first. Mr.
Mitchell clarified he meant from a state perspective. Some
of the bonds could have AAA ratings on their
collateralization program. They could have a higher credit
rating than the State of Alaska. He relayed that it was not
based on how secure the bond issues were. Rather, it was
based on how much the state had committed to their
repayment.
Vice-Chair Ortiz wondered what category would apply if the
state were to look to a bonding program for the capital
budget.
Mr. Mitchell replied that there was a variety of ways to
fund capital projects. The most transparent or highest
level of commitment was through general obligation bonds.
He continued that state supported debt would typically fund
a specific capital project if there were certificates of
participation, lease revenue bonds or, other public
corporation debt under the category. He noted a couple of
examples. He elaborated that it would apply to a targeted
capital project that might not lend itself to a statewide
election. He also mentioned the use of public corporations
to provide for capital projects such as under the AHFC
Program. The program originally stemmed from AHFC having a
strong portfolio of loans and being able to provide a
substantial annual payment to the state. A portion of the
payment was made into a capital budget in the form of the
state capital project bond program. He noted that the
student loan corporation did something similar in the past.
The Northern Tobacco Securitization Corporation provided
for state capital projects an innovative way of
generating revenue for capital projects at a time when
money was tight. He suggested there were a variety of ways
to fund capital projects depending on the goals of the
projects and what the projects might be within the program.
Co-Chair Johnston asked to return to the University and the
opportunity in the current year to refinance some of its
bonds. She wondered if it was the first year due to the
maturity of the bonds for refinancing. Mr. Mitchell
explained that bonds were typically issued with 10-year
calls at which time they could be refinanced. The state
used to be able to do advanced re-funding but could no
longer do them with the tax reform act. Presently, the
state had to wait until bonds were callable to refinance
them for savings.
2:11:37 PM
Representative Josephson mentioned the 2012 transportation
act and wondered whether a residual amount could be bonded.
He asked if it would have to be related to transportation
or would have to have approval from the state bond
committee. He wondered if it would be a matter of the
legislature, by a simple majority, stating it wanted to
fund capital projects with the $100 million.
Mr. Mitchell replied that there was proposed legislation
for general obligations that did not provide flexibility.
Instead, it had a list of specific municipal capital
projects with defined dollar amounts that could not be
shifted between projects. He explained that for Department
of Transportation and Facilities Maintenance (DOT) capital
projects there were specific amounts but an allowance for
reappropriation within the list of projects. If there was a
DOT project that was on the list that otherwise needed
funding and another project that did not, the monies could
be shifted. The state bond committee would have to approve
all bonds. Representative Josephson commented, "That's a
complication."
Representative LeBon pointed to the term, "Collateralized
home mortgage revenue bonds and mortgage revenue bonds"
under AHFC. He asked if AHFC packaged bonds and sold them
on the market as a mortgage back security. Mr. Mitchell
deferred to AHFC.
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Mr. Mitchell continued to slide 5: "General Obligation
bonds Current Financings" which was intended to graphically
show the amortization of outstanding principal of general
obligation bonds into the future. It was reflective of a
mature program in which the state had had bonds outstanding
since 2003. The issuance in 2003 had an authorization in
2008, 2010, and 2012 that layered on bonds. As the bonds
were issued, they were issued in a relatively level 20-year
series. As a result, the state had declining debt service
and a declining outstanding principle balance moving
forward through time. He reported a net debt service of
$77.8 million in FY 20 and declining to $12.2 million in
FY 28. As the bonds were issued, they were issued in a
level series and, there was a declining balance moving
through time. He had already talked about remaining
authority.
2:14:56 PM
Mr. Mitchell discussed slide 6: "Current General Fund
Annual Payment Obligation," which showed the magnitude of
the pension obligation debt relative to other state debt.
The top chart showed the State of Alaska general fund debt
service. He noted the peek in the current fiscal year to
over $200 million in annual debt service. It assumed that
the state paid the full amount of the school debt
reimbursement program rather than 50 percent (seen in light
blue on the top). The state-supported debt included Good
Creek, the residential housing facility, and state general
obligation debt. He reiterated the maturity of the debt and
the declining debt service payments year-over-year moving
through time.
Mr. Mitchell continued to explain slide 6. He pointed to
the lower chart showing the PERS/TRS payment commitment
layered on top of the other state payments. Other state
payments could no longer be easily seen. The blue took over
the chart and represented the level of difference between
the state's regular debt program and the pension fund
liability payment issue. The slide also noted other
existing authorizations including $300 million for the Knik
Arm Crossing. It was envisioned that the state would take a
subordinate lean position on toll revenue and have a state-
supported structure that would be used to pay a debt
service for some period of time until the bridge had had
traffic to pay the primary debt as well as the subordinate
lean debt. There was $110 million in general obligations
debt, $1.5 billion in pension obligation bonds that could
be authorized by the pension obligation bond corporation,
and the $1 billion tax credit certificate bond corporation
authorization that was currently being considered by the
Supreme Court. He explained that there was a constitutional
challenge to the construct under consideration. The outcome
of the challenge was expected shortly.
2:17:57 PM
Mr. Mitchell detailed slide 7: "Existing State Short Term
Debt Obligation Alternatives." The slide highlighted a
couple of categories in which the state could borrow short-
term bond anticipation notes which were simply a way of
managing a long-term debt portfolio. He furthered that the
state used them relatively recently when it had difficulty
nailing down project cash flow. Instead of borrowing long,
paying higher interest rates, and placing money in an
escrow fund that earned less than the borrowing rate, an
entity could borrow short earning about the same as the
borrowing rate. They could borrow a lesser borrowing
amount, re-enter the market while ramping up a program,
then take it out in long-term debt. He relayed that the
state sold bond anticipation notes in 2013, 2014, and 2015.
Mr. Mitchell discussed revenue anticipation notes towards
the bottom of the slide. He reported that if the state were
to sell revenue anticipation notes, they would most likely
be taxable. In order to avoid the notes being taxable the
state would have to have less resources available to it
than it did including the Permanent Fund (PF) Earnings
Reserve Account (ERA). It could still be a tool that could
be used if there was an intra fiscal year cash deficiency.
For example, if the state had a $200 million cash shortfall
in the fiscal year, it could borrow the funds and pay them
off at the end of the year with revenue that flowed in.
Repayment could be structured for the subsequent fiscal
year but would be a taxable security diminishing the
benefit to the state. There would not be a taxable tax-
exempt gain that was often seen with some regular issuers
of short-term securities.
Mr. Mitchell moved to the next portion of his presentation,
state debt capacity. He turned to slide 9: "Debt
Affordability Analysis." The division produced an annual
publication per statute that included a discussion on
ratings, debt levels, histories, and projections. It relied
on a ratio of current debt service including state-
supported and directly paid state debt service to
unrestricted fund revenue. In 2019, the state had a
significant change in what was considered unrestricted
general fund revenue in the Revenue Sources Book based on
SB 26 passing. As a result, at the time the division
diminished the ratios from 5 to 4 and 8 to 7. The division
tried to become more conservative in projecting potential
capacity. The following slide would highlight the issue. He
reported that it ballooned up with the inclusion of
$3 billion revenue on a $2 billion base. It made capacity
seem so great that it was, in his view, somewhat
unrealistic until there was a greater understanding of what
was actually available on an ongoing basis for the state.
2:21:32 PM
Mr. Mitchell advanced to slide 11: "January 2018 and 2020
Debt Affordability Analysis" which showed the Fall 2017
revenue forecast numbers at the top and the Fall 2019
revenue forecast numbers at the bottom. The chart
referenced $2.0632 billion for 2020 under the Fall 2017
revenue forecast and $5.0494 billion for 2020 under the
Fall 2019 revenue forecast. The change was due to the
transfer under the percent of market value (POMV) payment
from the ERA to the PF. He directed attention to the top of
the chart which showed that under the Fall 2017 forecast
the state was over its metric of 5 percent in 2018 and
2019. In 2020 the percentage was about 5 percent. The
forecast reflected a theoretic capacity in the out years.
He explained that the state used a method of determining
capacity that was used by a wide variety of other states.
Alaska used it because of its small population, small
economy, and relatively large revenue base. It made more
sense than some other management tools. He explained that
if Alaska had a tenth of a percent of capacity in 2020 the
state would assume that the state went to 5 percent for
each of the years that had some differential. It churned
out a capacity of $200 million to $300 million range in
2017 or 2018 based on the 2017 fall forecast.
Mr. Mitchell pointed to the ratio of 1.99 percent, in the
lower portion of the slide highlighted in blue, which
dropped to 1.31. The state had capacity in the first year
of the forecast through the last year of the forecast. It
ended up generating significantly more capacity from a
forecast perspective. The amount generated was $2.8
billion. He suggested that if the transfer from the ERA
that would have been used for the statutory formula for the
dividend, there would be a significant reduction in
capacity. He relayed that from a debt capacity projection
perspective, the concern was that it was unclear what
number should be used. It was a caution the division had
whenever there was discussion regarding capacity. The
change of backing out the dividend dropped capacity to $622
million to $1.2 billion.
2:24:52 PM
Co-Chair Foster asked Mr. Mitchell to use the pointer on
the computer.
Mr. Mitchell pointed to the area he was referring to. He
continued that if the assumption was that the full amount
of the transfer from the ERA through the POMV was available
for payment of debt service and the Permanent Fund Dividend
(PFD) projection was backed out, it increased the ratios to
certain numbers [Mr. Mitchell did not indicate verbally
which column he was referring to] which diminished the
projected debt capacity by about $1.5 billion. It had a
significant impact on what would be reasonable for the
state to consider given the metrics it set for itself. He
relayed that if there were further sideboards, definitions,
or structures to how the transfer from the ERA would be
used, it would make it easier to use the 5 percent and 8
percent caps. Caps could also be discussed if revenue
volatility diminished. He explained that part of why the
caps were set at the levels they were was because,
historically, the state relied on petroleum revenues for 80
percent to 90 percent of unrestricted general fund revenue
the revenue appropriated and spent. Historically, the
volatility in the revenue had been extraordinary.
Volatility meant that the state had to be more conservative
when projecting capacity in the future. If the volatility
was diminished through a new revenue generation paradigm
with some money coming from investments of the PF that
would allow it to be more aggressive on capacity.
Mr. Mitchell continued to discuss the slide. He reported
that the capacity the division arrived at in the debt
analysis for the current year was $2.8 billion. There was
already about $1.1 billion claimed on that capacity. There
was up to $1 billion for the tax credit certificate bond
corporation if the state were to prevail in its litigation.
There was also $110 million needed for general obligation
bonds. As a result of both obligations there would be a
theoretical capacity of $1.2 billion remaining.
Representative Josephson asked Mr. Mitchell what he meant
by a theoretical debt capacity of $1.2 billion. Mr.
Mitchell explained that the state's credit rating had been
under duress since the price of oil went down in 2014. The
state had the highest credit rating: AAA, AAA, and AAA. The
state's credit rating had been downgraded 9 times since
2014. He did not believe the state could authorize and
issue $1.2 billion in additional debt without a change in
the current structure in establishing available revenues
and how the state would move into the future. It made
capacity and the ability to issue less.
2:29:47 PM
Representative Josephson suggested that to the extent it
was used for capital construction without producing its own
taxation, it primed the pump and fueled the economy.
However, it did not help the state's treasury. Mr. Mitchell
agreed. He indicated the state was penalized for having a
small economy and for being perceived as highly reliant on
the oil sector for activity. The goal for those individuals
moving to the state was for the economy to be strong and to
be able enjoy a high quality of life. However, it cost the
state money.
Mr. Mitchell turned to slide 12: "Revenue Forecast & Budget
Outlook." The slide showed how the state classified
revenue. Historically, the state would declare there was a
fiscal gap (insufficient revenue to cover expenditures) and
that a draw on reserves would be necessary to balance the
budget. He relayed that the division had done the same
analysis in the early 2000s' and found that in the 1990s
there were several difficult funding years in which there
were recurring draws on the constitutional budget reserve
(CBR). At the same time there were large deposits to the
CBR. The large deposits, because of the CBR's construct,
were not counted as revenue available for spending. The
money was constitutionally restricted having to be
deposited into the CBR.
Mr. Mitchell continued to explain that once the funds were
in the CBR, the money could be spent with a three-quarter
vote of the legislature. The money was supposed to be
repaid, but the repayment was just a line item in the
coffer. Interest was not charged and there was no hammer
requiring the funding to be repaid if the legislature took
appropriate action each year. He highlighted the section of
the flow chart under state revenue. He explained that in
other states restricted revenue was federally or
constitutionally restricted and unavailable for general
government. The State of Alaska was classifying the funding
as restricted and saving it over several years. Alaska had
an incredibly conservative construct for how funds flowed
into the state, which, he thought, undersold the strength
of the state. He suggested it made the state more cautious
than it might have been in some of the good years Alaska
experienced.
Mr. Mitchell relayed that in looking at the Revenue Sources
Book produced by the Tax Division, there was unrestricted
general fund revenue available including a POMV transfer
from the PF. In looking at the PF projections for FY 21
there was about $1.35 billion of revenue projected in
earnings for FY 21 and categorized as restricted. In
addition, there was about $30 million of earnings in the
CBR and a projection of $75 million for a tax settlement
being deposited into the CBR. Adding up the items in
conjunction with some of the constitutionally mandated
deposits into the PF, it exceeded the state's deficit. He
explained that when he talked to potential investors of the
state or people who were assigning a credit rating to the
state, he tried to highlight some of its nuances.
2:34:36 PM
Co-Chair Johnston asked if Mr. Mitchell had ever looked at
other states that had funds that had a threshold similar to
Alaska's and how their ratings were affected.
Mr. Mitchell responded there were no other states with a
sovereign wealth fund similar to Alaska's. There were
states like Texas that had a higher education fund that was
used to guarantee municipal debt for educational capital
projects. He was aware that Wyoming and North Dakota had
significant reserves. He suggested that on Thursday the
commissioner would provide additional information about
comparisons of sovereign wealth funds in other states. He
was not suggesting that something greater than the
established POMV should be drawn from the PF ERA.
Co-Chair Johnston realized Alaska had a large fund balance.
She argued it was the counter argument to the appropriation
language.
Mr. Mitchell addressed the inputs and outputs on slide 12:
"January 2020 Debt Affordability Analysis." The slide
reflected debt service payments from FY 20 through FY 29
for the different categories including general obligations,
lease purchases, capital leases, and the school debt
reimbursement program. The slide assumed 100 percent
payment based on the program framework. It reflected the
state-expected PERS/TRS payments which were nowhere near
the $1.1 billion payments that were discussed in the past.
He mentioned some escalation, but not nearly as significant
as they would have been in the out years. Using the Fall
2019 Revenue Sources Book, the undesignated general fund
(UGF) revenue in FY 20 was $5 billion growing to $6 billion
by FY 29. The percentages at the 4 percent cap were 1.99
percent in FY 20 to 1.31 percent in FY 29. The output from
the model generated a debt capacity of about $2.8 million.
He pointed to the percentage of UGF revenue committed to
state supported debt. He reported that PERS/TRS was $9.96
in FY 20 and dropped to 7.71 percent by FY 29. He indicated
he had not come up with a way of incorporating the PERS/TRS
liability into the model. However, he looked at other
states and the percentages they had for the combination of
debt and past service liabilities with their retirement
systems. He found that Alaska fell in the middle.
Mr. Mitchell turned to slide 13:" Authorized Bonding
Authority." He indicated he had already covered the items
in an earlier slide.
2:39:12 PM
Mr. Mitchell continued to slide 14: "Alaska Tax Credit Bond
Corporation History." He reported that the corporation
formed in legislation was due to the shift in funding for
the tax credit program. The oil and gas credit program was
formed to incentivize certain activity in Alaska. He
detailed that companies could do work and the State of
Alaska would reimburse them for a portion of the work if
they adhered to certain guidelines. There had been a
general practice of paying the credits as they came in.
However, in 2015 when revenue diminished, the practice
ended. The state reverted to a statutory formula amount
which caught many by surprise, as it was a change in
operating practice.
Mr. Mitchel continued that currently the Fall 2019 Revenue
Sources Book reflected an oil change. The industry had $739
million of accrued credits. He explained that the way in
which corporations were set up, the amount would be
discounted based on the cash flows which were the basis for
the Revenue Sources Book. For instance, if a company was
going to get paid in the fifth year, they would receive 5
years of discounting on future cash flow. The discount was
either 4.5 percent (the state's cost of capital of about
3 percent plus 1.5 percent) or the highest discount rate
the statute allowed which was 10 percent. The input along
with the Revenue Sources Book projections generated a
current day cash value of $583 million to $660 million on
$739 million of accrued credits.
Mr. Mitchell continued to discuss slide 14. He indicated
that the Department of Natural Resources (DNR) would
determine how the discount rate would be established. He
also pointed out opting for the discounted rate financially
benefited the state and the oil companies. The state would
pay a discounted value for credits in exchange for the oil
companies accepting a lower payment in the present rather
than waiting for a full payment. He suggested it was a
win-win scenario. However, the option was yet to be
determined because the court system's current consideration
of a related case. If there was a favorable ruling, it
would take significant work to determine which credit
holders were interested and to apply the discounted rate to
the credits to determine their value.
Mr. Mitchell turned to slide 15: "Alaska Tax Credit
Financing - State Security Structure." He thought the slide
showed a simplification of a more complex state security
structure. The idea was that the Alaska Tax credit
Certificate Bond Corporation would borrow money from bond
holders in exchange for a pledge of all revenues that the
corporation received. The only revenues the state would
receive would be based on an agreement with the Department
of Revenue (DOR) in which it would provide proceeds in the
form of cash to DOR in exchange for that commitment to pay
on a subject-to-appropriation basis. The cash would be used
to pay off credit holders. The concept was allowed in
statute. The legislature passed associated legislation in
2009 which was signed by the governor.
2:44:02 PM
Representative Josephson referred to slide 14. He mentioned
the "028 fund" that captured revenue that then paid tax
credits. He reported Alaska having a perfect score during
other tax regimes and the state paying whatever it was
presented for tax credits. He continued that when times
became difficult, the state decided to pay only what was
required by law - a certain percentage. Following the
decision there was an interpretation that it was only a
percent of severance taxes the state received. Presently,
the legislature was not appropriating anything. He asked if
he was accurate.
Mr. Mitchell reported that there was not an appropriation
in the current fiscal year. He thought it was due to an
expectation that litigation would be resolved and the
corporation would be able to provide an alternative for
credit holders to be paid.
Representative Josephson commented that when Governor
Walker vetoed $200 million that was owed, people were
outraged. Following, the goal post moved and became
something else at which time the halls of the capital
building were filled with creditors asking about their
revenue. He commented that they were no longer in the halls
of Juneau. He believed the changes were not good for the
state's credit rating. He asked Mr. Mitchell to comment.
Mr. Mitchell thought it was an indicator of stress. The
state had gone through the difficulty of providing funding
for credit holders. In some instances, the credit holders
had banks that were relying on the credits for the
repayment of their loans. He confirmed that there was an
awareness of the difficulty. However, there had not been a
direct reference to it in a rating agency report as a cause
for negative credit action.
Co-Chair Johnston acknowledged an impact on the state but
argued that people in the private business sector were also
impacted.
Mr. Mitchell advanced to the section addressing the state
debt rating. He began with slide 17: "State of Alaska and
Other 49 States' Ratings." He reported that the state's
current credit ratings were Aa3 which was the same as
Aa3(Negative) from Moody's, Aa(Stable) from Standard and
Poor's, and Aa-(Stable) from Fitch Ratings. He was not
concerned with the Aa-. However, Fitch Ratings downgraded
the state in the fall without ever shifting from "stable."
Co-Chair Johnston asked about the asterisks next to certain
states. Mr. Mitchell responded that the states with the
asterisks next to them did not receive ratings from all
three rating agencies. He noted that "NR" meant, "not
rated." For example, Arizona was not rated by Fitch
Ratings.
Co-Chair Johnston clarified she was looking at Indiana and
Iowa. Mr. Mitchell corrected himself. He was not sure about
the asterisks.
Co-Chair Johnston noted that Alaska was the only state that
had a Moody's rating of Aa3. She thought Alaska had a story
of instability, but with a large amount of assets. Mr.
Mitchell commented that there were 8 states that had
ratings equal to or lesser than Alaska's rating. States
were relatively highly rated.
2:49:38 PM
Representative Sullivan-Leonard agreed with Mr. Mitchell
that she did not take much stock in the credit ratings. She
asked Mr. Mitchell to review some of the challenges the
state had faced regarding the state's current recension.
She wondered what Alaskans could look forward to as opposed
to the negative behaviors on which the rating agencies were
basing their judgement.
Mr. Mitchell thought the next few slides would address her
questions. He believed that Alaska, generally, did not fit
into the scorecards used by rating analysists. He expounded
that Alaska had a small population. One of Moody's metrics
was the gross domestic product (GDP). If the state's GDP
was about $75 billion, a state would fall in the AAA
category. If it was below $50 billion, a state would fall
under the single A category. He did not think it was a true
barometer of an entity based on size. He continued that
when confronted with issues about diminishing GDP he
rebutted that every sector but oil and gas increased in GDP
in the timeframe. The information was based on a Department
of Labor and Workforce Development Corporation (DOL)
analysis on GDP.
Mr. Mitchell thought when people looked at Alaska, they
tended to overemphasize the oil and gas sector. He had
tried to position the state in different ways to highlight
that it had growth in net position, even when it had a
declared fiscal gap. Alaska had a very conservative
governance structure and a very conservative debt practice.
The state had an endowment that generated annual revenue
not reliant on its economy. He suggested that if it was
added to the state's economy, or a factor for GDP of the
PF, Alaska would likely be in the AAA metric. However, the
rating agencies did not have the means. They could overrate
certain things such as the state's reserve position.
However, within the agencies' construct of their attempt to
have a homogenized analysis for every state, it was a
continuous struggle to try to get appreciation for the
strengths of the state that did not occur in the same way
as other states.
Co-Chair Johnston offered, "Illinois?" Mr. Mitchell did not
think Illinois was a very highly rated state. He suggested
New York might be a better comparison.
2:53:39 PM
Mr. Mitchell turned to slide 18: "Recent Financial
Market/Credit Rating Challenges." The slide was in the
prior year's presentation and was created in direct
response to his attending to an investor presentation and
talking to a group of investors about the state's credit.
It was based on the feedback the state received from the
underwriting and investment community that Alaska's economy
was totally reliant on oil and was in freefall. One of his
responses was the GDP slide where every sector but oil
increased. He noted reserves were dwindling. He regretted
highlighting the use of the CBR fund and the diminishment
of the fund balance. However, while there was a different
threshold for the use of the CBR, the earnings reserve
account was growing. From a net-net perspective the State
of Alaska was in about the same position as when it started
in terms of available reserves. Reserves were not dwindling
to the extent being publicized. The state would not be able
to balance its budget.
Mr. Mitchell disagreed with the perception that the state
did not have the intestinal fortitude or the ability to
make the hard decisions to balance the budget. He argued
that while last year's budget took several sessions, and
everyone was a little unhappy with the budget, the draw
between the CBR and the statutory budget reserve (SBR) was
not really a draw considering the current year's revenue
that went into the fund. Fitch Ratings did not agree with
his perspective and downgraded the state's credit rating
after the end of the second special session.
Mr. Mitchell advanced to slide 19: "Rating Agency
Challenges in 2019/2020" which listed some of the reasons
for the state's credit rating downgrade. The list included
political paralysis, the deterioration in the advancement
of financial policies, and recurring historical concerns.
In his view, the report was written based on feeling rather
than analytics. As a result, Fitch Ratings reached some
negative conclusions assuming that the state would continue
on its current path. He believed other rating agencies
started basing their decisions on feelings rather than fact
as well. He did not think the state was in a position that
warranted an additional ratings action.
Mr. Mitchell highlighted the items under recurring
historical concerns. The first was that the state had a
comparatively large net pension liability. Even though the
state's pension liability situation had improved, there was
a percentage of GDP on a per capita basis. He explained
that because Alaska had a small population, the percentage
was comparatively large. Another concern was an ongoing
structural UGF imbalance and reliance on one-time financial
resources. He elaborated that in Alaska's political process
UGF was discussed to a great extent. The discussions about
the state having budget shortfalls appeared in the press
frequently and was the topic people remembered reading
about Alaska. The state reporting that there was not really
an imbalance, considering all of its revenues, fell on deaf
ears. In other words, the UGF imbalance was the focus - it
did not matter that the state had an increase in its net
position.
Mr. Mitchell indicated Alaska's narrow economy was another
historical concern. It was relatively small and outside the
proportion of operating revenues related to petroleum
development. In Fitch Ratings' report, the 2014 UGF
percentage was used which was over 80 percent for petroleum
revenue. The last year the percentage reached that level
was 2014. He suggested there was a new paradigm in the
works, yet Fitch Ratings was using the same tired
historical concern as a basis for a ratings action.
2:59:23 PM
Representative Wool asked if the credit rating agencies
considered the use of the ERA and unplanned draws. Mr.
Mitchell responded that the agencies definitely looked at
the use of the CBR and considered how the state might move
forward from a flexibility standpoint. He thought the
rating agencies recognized that the options were the same
as Representative Wool suggested. The budget could be cut
or new revenue could be generated through a broad-based
tax, an oil tax, other options, or a diminished PFD.
Increasing the size of the draw from the Era was not a
strong or long-lasting option, as there would be negative
impacts. The rating agencies would not view unplanned draws
in a positive light. He believed there was a cynicism to
the approach of rating analysts.
Co-Chair Johnston recalled in 2008 or 2009 the Municipality
of Anchorage was doing a short-term paper. At the time
there were no credit ratings because the system had blown
up. Some of the credit ratings did not exist the following
day. She suggested there was a reason for trying to
re-establish themselves.
Representative Knopp referred to slide 18 which Mr.
Mitchell had indicated was from the prior year. He
commented that when Mr. Mitchell was trying to defend
Alaska's position with the credit rating agencies, he was
certain it was not helpful that the media advertised a
$1.5 billion deficit in the state's proposed budget. He
also noted the political instability related to the three-
quarter vote for use of CBR funds. He asked if they were
items that created challenges for Mr. Mitchell to defend
Alaska's position with the rating agencies. Mr. Mitchell
confirmed that external entities were concerned with the
issues Representative Knopp had mentioned in terms of how
the state would manage.
3:05:18 PM
Mr. Mitchell indicated the next slides were used by the
department to address some of the concerns he noted. He
continued to slide 20: "Recent Financial Market/Credit
Rating Challenges" which highlighted some of the strengths
the state had that were not always apparent. He drew
attention to the middle of the slide that showed the
unrestricted surplus deficit, general purpose UGF revenue,
and reoccurring and discretionary general fund
expenditures. He noted that some of the figures were red
from FY 13 through FY 18 and would include FY 19 and FY 20.
He pointed to the final column that reflected the change in
net position. Although Alaska's UGF fiscal balance had been
in the red for 6 steady years, the state had only had 2
years being out of balance in terms of growth or a decrease
in net position. Carrying the figures forward in FY 19 and
FY 20 the numbers would be positive again. The slide
highlighted that analysists needed to be looking at all
aspects of the budget.
Mr. Mitchell turned to slide 21: "Revenue Forecast & Budget
Outlook" which addressed the PF. He explained when he
developed the slide, he was suggesting the state should be
rated similar to an endowed university rather than a state.
The state did not directly generate revenue from the
economy for general state expenditures other than from oil
and gas activity. There were other taxes on the economy at
the state level, but they were generally cycled back into
their respective activities. The Permanent Fund was not
reliant on the state's economy to be successful, rather it
was diversified in the world economy. He thought the PF's
type of diversity should be rewarded and recognized.
Mr. Mitchell elaborated that the PF's principle was not
always mentioned in rating analysts' reports because they
were focused on the portion of the earnings reserve which
could be spent. The principle had the inherent strength of
revenue generation different than talking about rainy day
reserves. The principle portion was not intended to be
spent; it was intended to be in place permanently. He had
tried to move the discussions with the rating agencies
towards acknowledging the diversity of revenue stream and
the diminishment in volatility of revenue stream as well.
The slide was generated after the POMV was implemented as a
result of the passage of SB 26 [Legislation passed in 2018
creating a POMV].
3:08:43 PM
Mr. Mitchell moved to slide 22 which demonstrated that
Alaska's economy was not in as bad of shape as the rating
agencies claimed. In recent years, rating agency reports
noted that Alaska had the highest unemployment rate in the
country which was true. However, at the same time, Alaska's
unemployment rate had only moved 1 percent or 2 percent
while the nation's unemployment rate was at 10 percent.
Alaska went from being rated as one of the best to one of
the worst states for unemployment even though its rate had
not moved significantly, whereas, the rest of the country's
had. Alaska's economy was slow but steady in terms of
growth and was ranked third in the nation. He mentioned
that home prices had not dropped which would otherwise
indicate economic distress. He continued that historically,
rating analysists did not consider the PF because they did
not believe any of it could be spent on anything other than
the dividend. He wondered why a rating would be assigned
based on Alaska's economy if the state did not rely on it
for the payment of its bills.
Mr. Mitchell moved to the graph on slide 25: "CBRF/SBRF and
PF Earnings Reserve Balances - Timeline." The slide was a
depiction of the demise of the use of the CBR fund and the
coincidental growth of the PF ERA. He noted the $14 billion
balance in 2013 in the CBR fund which grew to almost $18
billion and currently had a balance of less than $2
billion. During the same period, the ERA went from $2
billion to more than $18 billion. He pointed out the
drastic movement in the current fiscal year with a shift of
$4 billion to the principle for inflation proofing. At the
same time there was $360 million in revenue that went into
the PF principle from royalty revenue. The combined
revenues provided a stable and available reserve which he
thought implied credit strength. He was available for
questions.
Representative Josephson commented on the final slide. He
thought that with the amount of money placed in the
principle in the prior year it would have supported a
better credit rating. He suggested it was a sign of
confidence. The legislature was not compelled to place
additional monies in the principle of the PF, but thought
it was a good idea. He wondered if Mr. Mitchell made the
same argument.
Mr. Mitchell agreed that the deposit was good in the long-
term. In the short-term, an extra deposit diminished
flexibility which was not good for the state's credit
rating. Fitch Ratings had completed some Monti Carlo
simulation work on the ERA and had come up with some
scenarios where some percentage of the time in 2028 the ERA
would be depleted, meaning it would have a zero balance.
The simulation did not account for the possibility that the
state would change course.
3:13:59 PM
Representative Sullivan-Leonard commented that as of
November, the balance of the PF was $68 billion. Currently
the balance was at $67.7 billion. She thought the
corporation was doing well and had fulfilled its mandate.
Representative LeBon asked to return to slide 15. He noted
the chart reflected the credits for oil companies to look
for more production. He indicated that not all of the
credits had been paid. There was currently a challenge in
the Supreme Court to allow the state to go to the bond
market to sell debt to pay for its tax credits. He wondered
if the bond market would view Alaska as a worthy creditor
since the state would be selling bonds to pay for credits
in default of payment. He also wondered if the market would
look at Alaska's PF and its earnings as an assurance that
the state would pay its obligations.
Mr. Mitchell indicated that the structure was state
supported which meant that the debt service on the bonds
would be subject to annual appropriation. It was recognized
by the market as a statutory framework allowing the state
to commit credit. He conveyed that in 2021 there would have
to be an appropriation to sell the securities to provide
investor confidence. If there was an event of a failed
appropriation, the state's credit rating would suffer. It
would create an inability for the state to access capital
markets for a period of time. He thought it was a matter of
the level of commitment the state made and whether it went
beyond that level of commitment. At the end of the day,
people had faith that the state would appropriate money
based on its' past actions.
3:18:43 PM
Representative Wool thought Mr. Mitchell had stated
Alaska's unemployment rate had stayed constant which was a
good thing. Another comment Mr. Mitchell had made was that
Alaska was reliant on oil and, oil was in a freefall. He
thought it was accurate to say that currently Alaska was
reliant on the world economy and the returns on the PF
essentially Alaska's number-one industry. He asked if
rating agencies were concerned about the future of the
world economy looking out 10 years to 20 years.
Mr. Mitchell replied that rating agencies had initiated a
process of looking at the future. He reported that Fitch
Ratings had done the most work by creating the Monte Carlo
simulations of various markets that would result in
increases or decreases in revenue generation. The
simulations also considered potential POMV transfers from
the ERA and whether the balance of the ERA would be
sufficient to make payments in the future. He remarked that
there was definitely a shift towards the concept. However,
it was difficult to turn a large ship. He suggested that
with ratings, it was easy to go down but difficult to go
up. It might take many years to increase the state's credit
rating. He suggested that if some of the current
disagreements could be resolved, it would allow managers to
report a plan to the rating agencies for the future. He
suggested rating analysts were currently watching the
legislature. He believed if there were two or three special
sessions at the end of the regular session, rating agencies
would take additional actions.
Representative Wool mentioned that the committee had heard
from the Office of Management and Budget who referenced the
formula-driven budget items. He asked if the rating
agencies would be more comfortable if the legislature were
to adjust some of the formulas affecting the budget. Mr.
Mitchell replied that it would be beneficial if the state
could declare a balanced budget.
Co-Chair Foster reviewed the agenda for the following day.
3:22:55 PM
ADJOURNMENT
The meeting was adjourned at 3:22 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Debt presentation House Finance 2020.pdf |
HFIN 1/27/2020 1:30:00 PM |
HFIN-DOR Debt Update |