Legislature(2021 - 2022)ADAMS 519
03/02/2021 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Consideration of Governor's Appointees: Commissioner Lucinda Mahoney, Dept. of Revenue | |
| Presentation: Savings Account and State Debt and Investment Funds By Department of Revenue | |
| Update on the State's Cash Reserve Funds and State Cash Flows Discussion: 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
March 2, 2021
1:33 p.m.
1:33:25 PM
CALL TO ORDER
Co-Chair Merrick called the House Finance Committee meeting
to order at 1:33 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Kelly Merrick, Co-Chair
Representative Dan Ortiz, Vice-Chair
Representative Ben Carpenter
Representative Bryce Edgmon - Via Teleconference
Representative DeLena Johnson
Representative Andy Josephson
Representative Bart LeBon
Representative Sara Rasmussen - Via Teleconference
Representative Steve Thompson
Representative Adam Wool
MEMBERS ABSENT
None
ALSO PRESENT
Deven Mitchell, Executive Director, Alaska Municipal Bond
Bank Authority, Department of Revenue; Pam Leary, Director,
Treasury Division, Department of Revenue.
PRESENT VIA TELECONFERENCE
Lucinda Mahoney, Commissioner, Department of Revenue; Mike
Barnhill, Deputy Commissioner, Department of Revenue.
SUMMARY
CONSIDERATION OF GOVERNOR'S APPOINTEES: COMMISSIONER
LUCINDA MAHONEY, DEPT. OF REVENUE
PRESENTATION: SAVINGS ACCOUNT AND STATE DEBT AND INVESTMENT
FUNDS BY DEPARTMENT OF REVENUE UPDATE ON THE STATE'S CASH
RESERVE FUNDS AND STATE CASH FLOWS DISCUSSION: DEPARTMENT
OF REVENUE
Co-Chair Merrick reviewed the agenda for the afternoon.
^CONSIDERATION OF GOVERNOR'S APPOINTEES: COMMISSIONER
LUCINDA MAHONEY, DEPT. OF REVENUE
1:34:35 PM
LUCINDA MAHONEY, COMMISSIONER, DEPARTMENT OF REVENUE (via
teleconference), explained that she was appointed to the
commissioner position for the Department of Revenue (DOR)
in February 2020. She had participated in a previous
confirmation hearing with the House Finance Committee
remotely and was pleased to be before the committee in
person. In her comments she would provide a brief overview
of her education and her work history. She would also share
a few of the accomplishments that her team at DOR had
achieved over the prior year. At the end of her remarks,
she would be open to questions.
Commissioner Designee Mahoney had a bachelor's degree in
business administration with a concentration in finance
from the University of Texas. She also had an MBA from the
University of Alaska Anchorage and a couple of
certifications. She was a certified valuation analyst which
enabled her to conduct business evaluations for mergers and
acquisitions. She also studied at Wharton School at the
University of Pennsylvania and received a certificate in
portfolio analysis. As a self-directed learner she
continued to study based on where she worked.
Commissioner Mahoney moved to the topic of her employment
history. She worked in Alaska for more than 35 years in
both the private and public sectors. She began her career
in the oil industry where she spent the majority of time
working for Atlantic Richfield Company (ARCO). She worked
there for 14 years in the areas of finance, accounting,
budgeting, reporting, and information technology (IT). At
one time she was appointed as the onsite Prudhoe Business
Manager as well as the onsite Kuparuk Business Manager
where she was able to learn about the detailed operations
of the fields. Additionally, she did much of the cash flow
forecasting for the company.
Commissioner Mahoney continued that she was recruited to
join KPMG, a big 4 global audit and advisory services firm.
Her title was "Director of Advisory Services." Her goal was
to grow and manage the consulting practice for all
industries in Alaska including Native village corporations,
Alaska regional corporations, publicly traded companies,
and municipalities. She also did a project for the State of
Alaska. She provided entities with advice related to
process improvements, business valuations, litigation
support, forensic investigations, internal controls, and
benchmarking projects. The position was very valuable to
her, as it opened her eyes to the many businesses in
Alaska. She highlighted that while working in the oil
industry she realized her view had been insular. She
appreciated the insights she gained while working at KPMG.
Commissioner Mahoney moved on the Arctic Slope Regional
Corporation where she was the director of shared services
managing the back office operations for the various
subsidiaries. Specifically, she was in charge of
accounting, IT, human resources (HR), procurement,
facilities management, and insurance and risk. After
leaving the Arctic Slope Regional Corporation, she started
her own financial consulting company. In her management
company she provided many of the same services she had
referenced to many of the same companies she had worked
with as an employee and at KPMG.
Commissioner Mahoney received a call from Mayor Dan
Sullivan who asked her to become the chief financial
officer (CFO) of the Municipality of Anchorage. She was
initially hesitant because she did not have public sector
experience but was convinced to give the job a try. She was
responsible for the management of treasury, property
assessment, public finance, debt, procurement, the
controller's department (accounting), IT, cash management,
and the 49th State Angel Fund. She started out in the
position in 2009 and was there until 2014. A few of her
accomplishments while at the Municipality of Anchorage
related to achieving an AAA credit rating. Everyone in the
organization worked together to attain the incredible
achievement. Additionally, she established the 49th State
Angel Fund which was funded by the Obama Jobs Care Act from
2010. She explained that the 49th State Angel Fund helped
the start-up of small businesses. After she left the
municipality, she returned to her financial consulting
firm, Value Solutions. She had her own companies and
invested in other small companies.
1:40:14 PM
Commissioner Mahoney was a family focused mom. She thought
of herself as a working mom. She and her husband had six
children and provided a home to five additional kids in a
foster-like environment. She continued to support them as
they were launching into their careers.
Commissioner Mahoney relayed that when she was first
contacted about her current job as the commissioner
designee of DOR, she was concerned about the potential
conflicts associated with her husband's law practice. As a
result, an ethics screen was established by the chief of
staff and the Department of Law that prevented her
involvement with any potential conflicts. It had been in
place for over a year and was working well. She would
continue to avoid conflicts at all times.
Commissioner Mahoney felt fortunate to be a part of her
team. Her team members were professional, knowledgeable,
and generous with their time. She wanted to share some of
the group's many accomplishments in the past year. First,
the team established an investment advisory committee as
the result of a legislative audit relating to a matter that
occurred prior to her arrival at DOR. She explained that
the commissioner of the Department of Transportation and
Public Facilities (DOT) had fiduciary oversight over the
general government funds which were about $7 billion. It
was a significant amount of money for one person to
oversee.
Commissioner Mahoney reported that the funds were managed
and invested by the Treasury Division. However, the
department had set up some additional external oversight in
governance control over some of the funds. Her team
established an external committee of professional
investment advisors to help provide guidance and insights.
The committee met quarterly and had already met twice since
it was established. The meeting notes would be posted
online and anyone who was interested could read what the
committee was discussing.
Commissioner Mahoney continued that her team had also made
regulation modifications including one that had had a
profound effect on Alaska's communities. It had to do with
online charitable gaming that was implemented as a result
of Covid. It enabled charities to be able to continue to
raise funds for their organizations while most communities
had been shut down.
Commissioner Mahoney relayed another accomplishment by her
team. They updated the department's strategy document in a
collaborative manner involving division managers. As a
result, each division had specific goals, objectives, and
initiatives. The department monitored the results and had
established performance metrics and benchmarks allowing the
department to identify where help was needed and where
things were going well.
Commissioner Mahoney noted that although DOR was a small
department in terms of the scheme of the state, she managed
the department closely. Mr. Fletcher, who managed the
department, could operate in an environment of thrift. She
was available for questions.
Representative LeBon thanked Commissioner Mahoney for her
presentation. He wondered what she noticed about the
department that stood out to her upon her arrival.
Commissioner Mahoney thought it related to the quality and
caliber of the staff who were in the department when she
arrived. She felt very fortunate to have the leaders who
knew their divisions well. They knew the issues and what
needed to be addressed.
1:45:39 PM
Representative Rasmussen asked about the plan for gaming.
She wanted additional information. Commissioner Mahoney
responded that the department issued a request for proposal
(RFP) the scope of which was to hire a consultant to
evaluate gaming in Alaska. She had been talking with
various experts throughout the United States. They advised
that there would be one shot to do it correctly from the
beginning. She asked the consultant to do a comprehensive
socio-economic evaluation of gaming in Alaska. They would
study trends in other states comparing them to Alaska and
determine whether the trends would be effective in the
state. For example, the department would look at the number
of casinos that might benefit the state and the amount of
revenue that could be generated.
Commissioner Mahoney continued that another example would
be the type of games that would be appropriate depending on
the goals of the initiative. The initiative was to
diversify and create a new industry creating new jobs and
potentially new infrastructure in the state. The consultant
would also enable a real discussion with stakeholders about
how gaming would affect them. She would talk to the
charitable gaming industry to try to help them understand
the direction of the governor. They would also assist in
the development of draft legislation as well as regulation.
Representative Rasmussen thanked the commissioner for her
response. She was excited about the opportunity to bring in
additional revenues especially with the drop in the state's
oil revenue. She appreciated DOR's initiative, as it was
important for Alaska to expand its industries. She did not
believe the state would be another Las Vegas, but it was an
opportunity to compliment the state's already strong
tourism industry in typical years. She thanked Ms. Mahoney
for stepping up to serve. She was an accomplished Alaskan
woman. She was honored to have her as the state's acting
commissioner for DOR.
1:48:46 PM
Representative Josephson noted the commissioner mentioned
regulatory changes to the state's current charitable
gaming. He asked if the changes were designed to lay the
groundwork for the governor's interest in expanding to more
sophisticated gaming. Commissioner Mahoney replied that she
had misspoken. The department had not changed the
regulation, rather they adopted online charitable gaming
through the disaster declaration.
Representative Josephson had a question about the
governor's initiative. He asked if she was pursuing it at
his direction. Commissioner Mahoney responded, "That is
correct."
Representative Josephson asked if there were other revenue
measures the department was considering outside of gaming.
Starting next fiscal year, the governor intended to have
$1.3 billion in new revenue, and he did not know what that
was. He wondered if she could share anything. Commissioner
Mahoney answered that as the commissioner she would do
everything she could to work collaboratively with the
legislature to forge a path forward. She opined that the
state was in a pivotable position fiscally, and that action
needed to be taken soon. It would be up to policy makers to
determine a timeline.
Commissioner Mahoney thought the issue needed to be
addressed in a phased approach. First, it was important to
recognize that the state was currently in a recession with
high unemployment. The governor's goal was to stabilize the
economy. The governor proposed $350 million in bonds and
the additional stimulus from the Permanent Fund (PF)
earnings reserve account (ERA). Once the economy was
stabilized, the state would need to look at all potential
revenue sources. She indicated the governor believed that
there was a structural imbalance. As a result, he submitted
a bill for structural changes. There were 3 constitutional
changes relating to the establishment of a spending cap,
enshrining the dividend in the constitution, and requiring
a vote of the people for any new broad-based tax. The state
would be positioned to discuss specific revenue sources
once the legislation passed and was implemented.
Commissioner Mahoney noted that in the previous summer she
had done a presentation to Common Wealth North. In that
presentation the topic was potential new revenue sources.
She was happy to supply the information to members. It
identified revenue sources, different taxes, and dollar
amounts for the taxes.
1:53:31 PM
Representative Josephson replied that he would appreciate
the information. He noted that one of the governor's
proposals, along with a 50/50 split in the percent of
market value (POMV), was to constitutionalize the POMV so
that the overdraws planned in FY 21 and FY 22 did not
happen again. He wondered about the overdraws and the
voters rejecting his proposal. He wondered what the
legislature would do. Commissioner Mahoney responded that
the state would be in a difficult situation. She indicated
the governor had presented options to address the state's
structural imbalance.
Vice-Chair Ortiz thanked the commissioner for her
presentation. He thought the problem with the governor's
suggestion of asking for voter approval was that the
process did not resolve FY 22 and FY 23 because of the
timeline. He asked the commissioner to respond.
Commissioner Mahoney recognized the timeline of the
governor's proposal did not work well. However, the
governor was not supportive of any new tax without the vote
of the people. The state would be spending down the ERA
with any deficit balances in the future.
Vice-Chair Ortiz asked if the commissioner was recommending
an overdraw of the ERA. Commissioner Mahoney responded that
she was not recommending an overdraw of the ERA. However,
she thought it might be the only choice.
Representative Wool asked in a typical year what the State
of Alaska brought in from gambling revenues. Commissioner
Mahoney asked if the representative was asking about
revenues from charitable gaming.
Representative Wool indicated he was not asking about
charitable gaming, as most of those monies went to
non-profits. It was his understanding that the state got
some money but not much. Commissioner Mahoney confirmed
that charitable gaming brought in very few dollars.
Representative Wool clarified he was asking about cruise
ship gambling. Commissioner Mahoney did not have the number
with her.
Representative Wool thought the state received about $5
million to $6 million per year in gambling revenues from
cruise ship gambling in Alaskan waters. Commissioner
Mahoney responded, "Okay."
1:57:47 PM
Representative Wool returned to the subject of additional
revenue. He wondered if gambling would be put to the vote
of the people. Commissioner Mahoney understood that the
intent was for new broad-based taxes to be put before
voters. Representative Wool wondered if gambling would
qualify. Commissioner Mahoney responded that it was
unlikely.
Representative Wool relayed the governor proposed $1.2
billion in revenue in 2023. He also noted he had heard in a
presentation earlier in the day by the Legislative Finance
Division that if the legislature wanted money for 2023,
revenue measures would have to be implemented immediately.
There were things that would have to occur before the
legislature could act. The timeline would be approximately
2 years. He suggested that DOR would likely have to start
ramping. He did not think it was a sound idea to have to
wait for a constitutional amendment to be put to a vote and
put into place.
Commissioner Mahoney responded that the governor was not
comfortable implementing a new tax in the current
recession. He was open to discussions on the matter in the
future.
2:00:38 PM
Representative Carpenter had a longer-term question about
how the commissioner was advising the governor on
additional revenues. There were two types of state revenue:
oil-based revenue and non-oil revenue. In all of the charts
he had seen, non-oil revenue was a small slice of the
state's revenue. Oil had been Alaska's revenue bread and
butter. He wondered where the commissioner saw the
opportunity to grow Alaska's economy outside of the oil
industry.
Commissioner Mahoney replied that the topic was discussed
when her team was developing the 49th State Angel Fund. The
group's goal was to start funding some of the smaller
start-up companies hoping that at least one would hit a
homerun. Some of the things she learned in the process had
to do with challenges such as manufacturing, distribution,
and logistics. The price of goods in Alaska made things
more difficult. However, Alaska had the best cargo airport
with several flights in and out. She saw potential in the
areas of manufacturing and technology. She believed in
Thomas Friedman's book, "The World is Flat," which
indicates that technology companies could be successful
anywhere. She saw it as an area Alaska could grow the
economy.
Representative Carpenter referenced the government's budget
in the current year and believed it would have to be a
partnership between the legislature and the governor. He
did not see any recommendations or asks for growth in the
areas she mentioned. He asked the commissioner what other
advice she had provided the governor to fortify private
sector growth. He wondered if the governor was going to
explore options other than gambling.
Commissioner Mahoney noted that the governor had been
speaking extensively about resource development. The goal
was to try to leverage all of the wonderful natural
resources Alaska had opening up Alaska for business in that
area. The department had internally formed a resource
development group that consisted of some of the resource-
focused departments. They were working together to expand
the state's business.
Representative Carpenter asked the commissioner what she
thought was one of the largest challenges the state faced
that state government could help with in growing resource
development. He was focused on non-oil revenue.
Commissioner Mahoney opined that the state's largest
challenge was federal overreach. The administration was
working diligently with the federal delegation to try to
get Alaska's voice heard at the federal level. The goal was
for Alaska was to be able to develop its own resources and
to become independent.
2:05:35 PM
Representative Edgmon thanked the commissioner for her
presentation. He appreciated her comments about her family
which spoke volumes about her character. He also
appreciated her candidness about the state's revenue
situation. He suggested that there was no plan currently
before the legislature. He also did not believe the
administration had a real fiscal plan to bridge the fiscal
gap going forward. He had made some direct comments to the
Office of Management and Budget (OMB) a couple of days
prior that were similar. He did not see another way of
moving forward without overdrawing the ERA unless the
legislature massively cut the budget. He looked back to the
governor's State-of-the-State address when he talked about
the gaming industry being able to provide hundreds of high-
paying jobs in Alaska. He argued there was an extensive
lead time before implementation and many policy
implications the legislature would have to consider.
Representative Edgmon continued that of all of the
governors he had seen in office since his time at the
legislature had been repeating the mantra about resource
development. However, Alaska remained a one-trick pony in
terms of resource development. In reality, the state was
now a two-trick pony including oil and investment revenues
because of the earnings from the PF. According to the
governor's proposal, the earnings accounted for 72 percent
of of the state's revenue in his proposed FY 22 budget. He
felt compelled to point out that there was no other
proposal to move forward except for overdrawing the PF.
Representative Edgmon thought her agency would be central
to the development of any new revenue measures in terms of
analysis, advocacy, and taking a lead in the internal
discussions. He asked if there had been any conceptual
discussions within the current administration to fill the
proposed $1.2 billion gap. He did not think gaming would
come close to filling the gap. He wondered if internal
discussions had ensued about additional taxes or other new
revenue measures. He asked her to share any important
points.
Commissioner Mahoney responded that the department had been
evaluating different revenue sources internally including
different taxes. However, the governor was not willing to
introduce them because the state was currently in a
recession.
2:11:28 PM
Representative Edgmon suggested the legislature would have
to wait for elections to take place in November 2022 before
the Dunleavy Administration would come forward with any
proposals to address the vexing issue the state faced. He
wondered if he was accurate. Commissioner Mahoney indicated
that the governor had stated on social media that he was
adamant that any new taxes would require the vote of
Alaskans.
Representative Edgmon commented that the legislature was
not doing its job without looking at a comprehensive
picture. He wondered, if a member of the legislature put
something forward, whether her agency would provide the
analysis that it had provided in the past during the Walker
administration and prior. He suggested DOR was the
"quarter-back" of analysis helping by providing the
legislature some direction. He asked if her agency would be
willing to participate. Commissioner Mahoney responded in
the affirmative. The agency would be able to provide the
fiscal impacts of any revenue proposals offered by the
legislature.
Representative Rasmussen reported that she had done some
research about gaming across the nation. She found that
gaming contributed over $260 billion to the economy and
over $40 billion in tax revenues to local governments. The
industry also currently supported almost 2 million jobs
across the country. She thought gaming would have a major
economic impact on Alaska if the legislature took the
governor's proposal seriously. She asked about the
commissioner's contribution to improving the Municipality
of Anchorage's fiscal situation. She thought Commissioner
Mahoney had done a remarkable job of turning around the
municipality's credit rating and overall financial outlook.
Commissioner Mahoney replied that at the Municipality of
Anchorage, she established some fiscal guidelines. She had
7 or 8 key points that she used to guide the fiscal
management of the city. She indicated the guidelines mostly
related to how the city managed expenses and debt. For
example, the city would not issue bonds in a manner where
the amount issued for annual debt service would not enable
the municipality to be flat throughout the period. In other
words, the city's annual debt payment would not increase.
The municipality would refinance where possible to take
advantage of lower interest rates. Devin Mitchell would be
speaking to the committee about refinancing opportunities.
The most important thing that occurred while she was at the
municipality was that she worked with the political body
establishing discipline which the city adhered to. It was
an effective strategy. There were 11 politicians at the
municipality. Whereas there were 60 politicians within the
legislature. Her team put aside politics and did what was
best for the city.
2:16:32 PM
Representative LeBon remarked that the conversation had
touched on the governor's willingness to overdraw the ERA
to send out the stimulus checks in the spring. He asked for
her philosophy around public purpose endowments such as the
Alaska Permanent Fund Corporation (APFC) and holding to the
POMV approach to a public endowment.
Commissioner Mahoney responded that the best practices for
an endowment was to set and follow the rules of the fund.
It was proven that over time and sticking to the rules, the
fund earned the best returns. She reported that the
governor was aware of the rules. However, she believed that
with Covid, the state was in an anomaly situation. It was
the reason the governor was proposing to overdraw the ERA.
Representative LeBon had heard in other presentations that
overdrawing the ERA would impact future revenues and the
5 percent draw which would amount to millions of dollars
going forward. He asked if the current need outweighed the
future benefit to children and grandchildren for the
dollars that would be forever lost.
Commissioner Mahoney commented that the representative
posed a good question. She thought it was something for
policy makers to evaluate by looking at and determining the
needs of their communities. She had learned over time that
there was a tension between the beneficiaries versus the
investors of the fund. She elaborated that the
beneficiaries wanted their benefit whereas the investors
wanted to protect the fund for the long term. She thought
the state was currently experiencing that tension.
Representative LeBon thought that in the current case, the
investors and the beneficiaries were one and the same - the
people of Alaska and future generations. The long-term
beneficiaries were children and grandchildren. He believed
that protecting their interest was an obligation of every
legislator.
Representative Josephson relayed that the sense he got from
the commissioner's testimony was that if the legislature
were to pass a tax measure, the governor would veto it
because the state was in a recession. However, the governor
would support a constitutional resolution to voters seeking
permission to institute some sort of revenue measure. He
assumed that if it was the governor's resolution, he would
campaign for it. He wondered if the governor would support
a measure that was placed in the ballot.
Commissioner Mahoney responded that the governor believed
that any new broad-based tax needed to be presented to
Alaskans for a vote of support. She had not had a
conversation to ascertain whether he would support a new
tax. However, the governor wanted to have assurance that
the citizens supported a new tax.
2:21:11 PM
Representative Thompson was concerned about what might be
created. He opined that no one would vote to tax
themselves. He also suggested that the people who would
vote against a tax measure were the same people who wanted
the largest dividend possible. He surmised that waiting 1.5
years to put the issue on the ballot and having it voted
down would make for real trouble. He asked if the
commissioner agreed. Commissioner Mahoney asked
Representative Thompson to repeat his question.
Representative Thompson thought it would be a formula for
disaster for people to vote no on any taxes yet vote in
favor of a larger dividend. He asked the commissioner if
his hypothetic scenario sounded like a disaster.
Commissioner Mahoney suggested the state needed to educate
Alaskans about its fiscal condition. Alaskans needed to
understand that large dividends combined with deficit
spending placed the state in a difficult long-term
situation.
Vice-Chair Ortiz understood that currently the times were
unique. The governor had a point that if there was ever a
time in which a statutory dividend was needed, the time was
now based on the current economic situation caused by
Covid-19. He asked whether additional federal stimulus
monies would be sufficient to supplant the need for a large
Permanent Fund Dividend (PFD) and an overdraw from the ERA.
Commissioner Mahoney offered that she could have a
conversation with the governor, particularly if the checks
were close to $1400 (the amount she had been hearing). It
could potentially help minimize the draw. The state would
have to see what came out of congress. It was definitely a
consideration. Ultimately it would be the governor's
decision.
2:24:41 PM
Representative Johnson commented that the prior year had
been unprecedented and unusual at times. Alaska oil revenue
had been hit hard last year at one point and decoupled from
the Brent crude price. Much of Alaska's analysis of oil was
made based on the Brent crude price. She asked the
commissioner to comment on why the state's price of oil
separated from the Brent crude price and how it impacted
the state's revenue. Although oil prices had gone back up
to $60 per barrel, she wonder what the revenue forecast
looked like and about stability. She noted a COVID revenue
relief package making its way through the U.S. Congress.
She asked if the commissioner thought Alaska would be
receiving relief funds and wondered how they could be used.
Commissioner Mahoney deferred to Dan Stickel to address the
representative's question about Brent crude and why Alaska
separated from it. Mr. Stickel would be presenting on the
following Wednesday and could address the question at that
time. She asked for clarification on the representative's
third question.
Representative Johnson noted that Alaska's oil prices had
bounced back up to $60 per barrel. She asked how the
department was using the factors of Covid in its
projections and analysis.
Commissioner Mahoney responded that regarding oil prices,
they had increased since it did its fall forecast, which
was great news for the state. She watched the Brent futures
market every day. In the previous week, the outlook had
been in the mid-sixties per barrel. In the current week,
the price had dropped to around $61 per barrel. She was
watching the Organization of the Petroleum Exporting
Countries (OPEC), and the department would be having a
meeting on the following Thursday. She reported that there
was the potential for an increase in supply which could
potentially cause a decrease in price. The items would be
considered when the department released the spring forecast
in the middle of March.
Commissioner Mahoney addressed COVID and how Alaska's
revenues were affected. She replied that for FY 21 and
FY 22 the amount of negative impact was about $570 million.
There was a report that came out by the federal government
showing that in the U.S. Alaska was hit the hardest of any
of the states. Alaska saw a 43 percent drop in revenues.
She responded to the representative's questions about
federal stimulus monies. She was hopeful that some of the
funding could be used for revenue replacement to assist
Alaska in getting through the currently difficult times.
2:29:11 PM
Representative Wool was glad the commissioner brought up
the percentage drop. He understood that there had been
significant federal stimulus money. There was also talk
about additional stimulus money from the state. Since
Covid, individuals making over $75,000 received $1200 and
an additional check for $600. Their children received
checks for $500 and, there was a second round of checks for
$600. He suggested the total was $1800. There was also talk
of an additional $1400 stimulus check which would bring the
total amount of stimulus checks to $3200 per person. The
amount was close to the amount of a full PFD. The governor
also wanted an additional $2000 to go out to each Alaskan
to alleviate the current recession. He asked how long the
current recession had been - the one the state was
currently in.
Commissioner Mahoney responded that in terms of evaluating,
for example, the gross domestic product (GDP), the
department saw it hit Alaska in the second quarter of
FY 20. She asked if his second question had to do with how
long the recession would last.
Representative Wool believed the state had been in a
recession since before 2020. He asked the commissioner how
long it would last. He also wondered how the state would
get out of a recession besides handing out checks for
$2000.
Commissioner Mahoney thought Representative Wool asked a
really good question. She indicated the department would be
evaluating the issue and presenting it in the spring
forecast. The department would be making assumptions as to
when the state would be coming out of the recession. She
was initially optimistic about the cruise lines and
tourists coming to Alaska in the coming summer. She
clarified that with Canada shutting down its borders, it
would negatively impact the state's revenues. The governor
was working with Canada and Canadian officials to try to
get it reopened which would help Alaska's revenues. She had
no idea how long the recession would last. She indicated
folks needed to start spending. Much of the money that was
being provided was being placed in bank accounts. She
indicated that the Wall Street Journal reported that people
were putting money in their bank accounts rather than
spending it.
2:32:03 PM
Representative Wool noted that at the beginning of the
pandemic when the first round of checks went out ($1200 per
individual and $500 per child) people were spending the
money because many of them were out of work. Much of the
second round of funding was put into bank accounts. He also
noted that many Alaskans did not lose their jobs and,
therefore, did not spend their stimulus checks. He thought
that people needing money right away would spend it
immediately. He reported that the federal government
targeted income levels unlike the state.
Representative Wool opined that it was irresponsible to
wait on imposing any revenue measures until the state was
out of a recession. He criticized the department and the
governor for not working on new revenue measures at
present. He commented that by asking the people of Alaska
to vote on a constitutional amendment, they were becoming
the policy makers rather than the legislature. The
legislature would not have a say and would have to wait for
a decision to be made by Alaskans. Legislators were the
people spending their time in committee meetings, looking
at data, crunching numbers, and hopefully making good
decisions. He thought having to wait for a vote of the
people was irresponsible, and he did not want to be
irresponsible. He hoped that elected leaders and others
would take the state's deficit problem seriously. He noted
there was a time lag between when the legislature passed a
law and when it took effect. He hoped the administration
and DOR would play a large part in solving the fiscal
crisis.
Representative Wool reported that 10 years prior in 2010
oil revenue was about $10 billion. In 2020 or 2021, the
revenue was $1 billion or one-tenth of what it was in 2010.
He suggested the state would be waiting a long time if it
continued to rely only on oil to save it from its fiscal
crisis.
2:35:15 PM
Co-Chair Merrick OPENED public testimony.
2:35:31 PM
Co-Chair Merrick CLOSED public testimony.
Co-Chair Foster indicated the House Finance Committee had
reviewed the qualifications of the governor's appointee and
recommended that Lucinda Mahoney's name be forwarded to the
joint session for consideration as the commissioner for
DOR. The recommendation did not reflect an intention by any
member to vote for or against her during any further
session for the purpose of confirmation.
There being NO OBJECTION, it was so ordered.
2:36:33 PM
AT EASE
2:44:59 PM
RECONVENED
Co-Chair Foster brought the meeting back to order and
indicated the committee would hear a presentation then
recess until 7:00 p.m. to hear the second presentation.
^PRESENTATION: SAVINGS ACCOUNT AND STATE DEBT AND
INVESTMENT FUNDS BY DEPARTMENT OF REVENUE
2:46:24 PM
DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL BOND
BANK AUTHORITY, DEPARTMENT OF REVENUE, introduced himself
and indicated he also served as the executive director of
the Alaska Municipal Bond Bank, a public corporation of the
State of Alaska. He introduced the PowerPoint presentation:
"March 2021 Credit Review and State Debt Summary" which had
three sections including credit ratings, outstanding state
debt, and state debt capacity. He would run through the
section in an abbreviated manner to stay within the
timeframe.
Mr. Mitchell began with slide 2: "State of Alaska and Other
49 States' Rating." The three primary rating agencies were
listed including Moody's, Standard and Poor's, and Fitch.
He reported the state's credit rating had suffered over the
course of the last 5 years. Coinciding with the reduction
in the price of oil beginning in late 2014, the state's
credit was put under additional scrutiny with the rating
agencies as revenues decreased and the state had struggled
with how to adjust to a lower level of income. As a result,
the state had gone from the state having the highest rating
possible to one of the states in the lower quartile of
ratings. Alaska had been downgraded ten times. The state
was currently on a negative outlook with all three of the
rating agencies which implied that there was some
percentage of additional negative action on the credit
rating. He had been told generally that if there was not
some favorable action taken in the current legislative
session towards lessening the fiscal gap, the state should
expect it would suffer additional negative credit action.
Mr. Mitchell moved to slide 3: "Rating Challenges in 2021."
The slide showed a summary of some of the discussions that
he generally had with ratings analysts in the current
challenging environment. There had been the political
challenge of reaching resolve on adjusting to the new
revenue paradigm that the state had been living in since
2014. The issue of using the constitutional budget
reserve (CBR) compared to other alternatives and foregoing
making difficult decisions had been a blessing and a curse
simultaneously. It was a blessing in that the state had the
flexibility and a curse because the state's savings was
dwindling. He thought the obvious question had to do with
the gridlock over how to adjust the PF, generate new
revenues, or a combination of the two.
Mr. Mitchell continued to financial policies. The one
bright spot in rating agency conversations over the
previous couple of years had been the POMV shift that
occurred in 2018. The adjustment created a split between
the dividend program and money used for state government
that allowed for the state to have a period of time where
its ratings were stable. However, the exacerbation of the
price environment of oil and the continued reliance on and
the depletion of the CBR had resulted in a return to a
negative outlook.
Mr. Mitchell noted the rating agency concerns, regardless
of whether the state believed them to be true, was the
state's comparatively large net pension liability, a narrow
economy, and the perception that the state's economy and
operating revenues were reliant on petroleum development.
He argued that the state's dependence on oil was
historically true, but much less true at present.
2:51:15 PM
Mr. Mitchell continued to the summary of the most pressing
credit rating challenge the state had on slide 4. He
highlighted the column in red reflecting the unrestricted
surplus/deficit. A deficit was showing in every year from
FY 13 thru FY 21. He pointed to the second column
reflecting the general purpose unrestricted general fund
(UGF) revenue. There was a large increase in FY 19 due to
the POMV shift which contributed $2.7 billion towards UGF
revenue. Even with the large influx of revenue there was a
large use of $1 billion for dividends and $1.7 billion for
government with a deficit remaining.
Mr. Mitchell indicated that another thing the chart teased
out was the change in net position reflected in the final
column on the slide. Even though the state had had a UGF
deficit each year, the state had only experienced a
reduction in net positions in two of the years. He
explained that it was due to the state's historical
practice which continued presently of saving money in good
and bad times. Although the state declared having a
deficit, there was revenue coming in that went into
reserves.
Mr. Mitchell shifted to the topic of outstanding state
debt. He turned to slide 6: "State Debt Obligation
Process." He reported that all state debt was approved by
law. There was no authority of the state to issue
securities or encumber any debt without authority
established in statute. It might be a one-time issuance
such as a General Obligation (GO) Bond or a lease purchase
agreement. It could also be a "not to exceed" amount
authorization that might revolve as in a public corporation
like the housing corporation or the bond bank.
Mr. Mitchell continued that GO Bonds had the requirement
that they be approved by the majority of voters because
they carried the highest pledge available including the
imposition of taxes and the use of any available reserves.
Constitutionally, people on his side of the table would
agree that available reserves included the use of the PF -
even the principle which was protected by the constitution.
He further explained that the PF principle would be
available for the repayment of the state's GO Bonds in the
instance of a failed payment. The court could compel a
payment to occur.
Mr. Mitchell explained that all state debt must be
structured and authorized by the state bond committee which
was comprised of the commissioners of revenue, commerce,
and administration. The method and timing of various
authorized issuances determined by the state bond committee
in consultation with staff, himself, and others within DOR.
The state had established other debt obligations. He
highlighted the School Debt Reimbursement Program which
allowed local jurisdictions to issue GO bonds for school
projects and participated in the repayment of those
obligations. The state had not always paid on that
commitment. In the current year, the state did not have an
appropriation for the reimbursement of local jurisdictions.
There was a greater flexibility at the state level and a
greater risk at the local level from using such a
construct.
Mr. Mitchell relayed that the state paid both its
contribution as an employer and a contribution on behalf of
all of the employers to retain a percentage of payroll for
Public Employees' Retirement System (PERS) that did not
exceed 22 percent and Teacher's retirement System (TRS)
that did not exceed 12.56 percent. It resulted in a large
annual payment that the state made on behalf of the various
PERS and TRS employers.
2:56:35 PM
Mr. Mitchell advanced to slide 7: "Total Debt in Alaska on
June 30, 2020." The slide came directly from the Alaska
Public Debt Book, a publication by DOR's debt management
section. The debts were prioritized as listed on the table
from the highest to the lowest commitment. The first row
was the state's GO Bonds. The outstanding balance as of
June 30, 2020, was $620 million. The state issued
$84.5 million in additional bonds shortly after closing in
August. Currently the state probably had about $680 million
in GO Bonds outstanding because it amortized about
$30 million to $40 million in principle per year.
Mr. Mitchell continued down the list on slide 7 to state
guaranteed debt which included the Veteran's Mortgage
Program, bonds of the Alaska Housing Finance Corporation.
There was state supported debt which was direct issue
support. It included certificates of participation and
lease revenue bonds. There was only one of each that were
presently outstanding. There was state supported municipal
debt which he had mentioned previously - the School Debt
Reimbursement Program. There was also a much smaller
capital project program. Next on the list was the pension
system unfunded actuarial accrued liability which was $4.8
billion for PERS and $1.4 billion for TRS which was
significantly larger than any of the prior obligations of
the state.
Mr. Mitchell continued that there was also state moral
obligation debt which totaled $1.3 billion. In terms of
this section, the state did not pay debt service but
provided a form of credit support to allow lower costs to
be incurred by the entities that issued the debt. State
revenue debt appeared at the bottom of the slide which
included sportfish revenue bonds and international airport
system revenue bonds. He explained that the sportfish bonds
were optionally redeemed, the final $1.8 million in July
2020. There was about $333 million of airport system bonds
outstanding.
Mr. Mitchell continued to review Alaska's total debt in
Alaska as of June 30, 2020, on slide 8. The state had
limited opportunities to issue revenue bonds because of the
constitution's prohibition on dedicating revenues. They had
to be a revenue dedicated prior to statehood, dedicated
under the constitution, or dedicated by federal law. The
University of Alaska had about $270 million of revenue
bonds outstanding. State agency debt included commitments
that were paid for by the various agencies that issued them
including the Alaska Housing Finance Corporation (AHFC),
the Alaska Municipal Bond Bank, the Alaska Railroad, and
the Northern Tobacco Securitization Corporation. There was
also state agency collateralized or insured debt which
included things like collateralized mortgages of AHFC and
the Alaska Industrial Development and Export Authority
(AIDEA) power revenue bonds. It also included the state
capital project bonds of AHFC, a proposal the legislature
would be discussing in the current year for paying capital
projects. He reported that the total state agency debt
equaled approximately $12.5 billion.
3:00:18 PM
Mr. Mitchell advanced to the summary of the current state
paid obligations on slide 9. He pointed to the charts on
the right-hand side which showed that the school bond debt
reimbursement was the largest component of state general
fund paid obligations. The state's GO Bonds were followed
by state supported debt which included certificates of
participation and lease revenue bonds. He reported that for
2020 the school debt reimbursement program and the other
reimbursement program was not funded bringing the state
down to the $100 million mark for annual debt service. The
point of the bottom chart was to show the magnitude of the
PERS and TRS liabilities. The same information on the top
chart was incorporated into the bottom chart which was
difficult to see because of the size of the PERS and TRS
liabilities. They were payments on behalf of PERS and TRS
employers to keep their contribution rates lower.
Mr. Mitchell continued to slide 10 to discuss the UGF
budget impact. He pointed out that GO Bonds carried the
full faith and credit of the state and required legislative
and voter approval. For purposes of the governor's proposed
GO Bonds of $350 million would be issued at the earliest in
September of 2021 if there was a special election in July
in which voters approved issuance. He anticipated there
would be a debt service payment in FY 22, an interest
expense payment. The state would have annual debt service
if the state issued all of the bonds of approximately $22.4
million. It was likely the state would issue something less
than all of the bonds because the projects had to utilize
the proceeds within 2 years of the issue date - unlikely,
based on the nature of projects. At the bottom of the slide
there was a summary of potential payments for AHFC's
capital project bonds, approximately $6.9 million per year
in debt service.
Mr. Mitchell continued to slide 11 which showed a summary
of short term borrowing potential for the State of Alaska
presently. The state had bond anticipation note authority
through AS 37.15.300-390. He explained that the the
structure was such that when the state had GO Bonds
authorized, the state could issue 1-year notes to stay on
the short end of the yield curve and have lower interest
rates while project cash flows solidified. They were used
to maintain flexibility while the state stayed within the
confines of the Internal Revenue Service code to maintain
tax exemption on the bonds. The other short term borrowing
potential was revenue anticipation notes which would be
difficult to issue in Alaska on a tax exempt basis. There
was some potential that it could still be taxable but only
for an intra-fiscal year revenue shortfall. He elaborated
that where there were deficiencies in cash flow during the
year but the receipt of revenues was anticipated prior to
the end of the fiscal year, money could be borrowed to make
up for the shortfall. The state had not used the option
since the 1960s. It was a little cumbersome because the
state had to anticipate what it would need in advance.
Volatility in oil price or other revenues made it difficult
to accurately predict 6 months, 9 months, or longer.
3:04:55 PM
Mr. Mitchell moved to slide 13: "Debt Affordability
Analysis." He reported that statute required an analysis be
provided by January 31st of each year. The analysis
discussed credit ratings, current debt levels, and history
and projections. He tried to provide a summary of where the
State of Alaska was and had been from a debt perspective.
The department's actual calculation for determining
capacity was relatively simplistic. He used a percentage of
unrestricted general fund revenue as a target. He indicated
4 percent was used for direct state paid debt, and
7 percent was used when debt was combined with other
obligations paid by the state. He noted that in 2019 the
percentages were reduced from 5 percent and 8 percent due
to the uncertainty about how revenue would be available in
future years. The state declared in long-term debt capacity
at the current rating level in the publication and did not
include certain state agency obligations or revenue bonds.
He would run through the calculation in an upcoming slide.
Mr. Mitchell turned to slide 14 which provided a summary of
the authorized bonding authority of the state. Currently,
the state did not have a significant amount of bonding
authority. The last series of GO Bonds was sold in August
from the 2012 Transportation Act. There was currently no
remaining outstanding authority. There was the outstanding
obligations he had already summarized in Table 1.1. The
other state general fund paid structures that had been
authorized had been challenged and found unconstitutional.
There were a couple of public corporation structures that
were no longer potential issuers of state paid debt.
3:07:32 PM
Mr. Mitchell reported slide 15 showed the analysis on debt
affordability he had recently referred to. He pointed to
the top portion of the page that showed various payments
made between 2021 and 2030. There could be some slight
adjustments, as the numbers were from June 30, 2020. He
relayed that for FY 21 the GO Bond debt service was
$79.1 million; the lease purchase was $2.9 million; the
capital lease (the Goose Creek Correctional Facility) was
$19.5 million; the school debt reimbursement was $92.7; the
capital projects reimbursement was $3.6 million; and the
PERS/TRS contribution on behalf of employers was
$338.6 million. He noted the magnitude of the PERS/TRS
contributions relative to the other commitments of the
state.
Mr. Mitchell highlighted the chart at the bottom of the
slide which showed the projected debt capacity. He
indicated for FY 21 the projected general fund revenues in
the Fall Revenue Sources Book was $4.3 billion. He reported
that 4 percent totaled $173.3 million, the state's maximum
allowed annual debt service for direct paid state debt. He
relayed that 7 percent of the projected revenues equaled
$303.2 million which was the maximum allowed state direct
paid debt plus other obligations. The currently outstanding
GO debt service was subject to appropriation. The
difference between $101.5 million and $173.3 million was
$71.8 million which generated a capacity. If the state was
to issue bonds in the present day, it would be supported by
$70 million. The state might be able to issue $1 billion to
$1.2 billion in bonds. It created a theoretical capacity.
Mr. Mitchell reported that in one of the following years
the state would have a slight reduction to available
capacity. The calculation generated a total theoretical
capacity of $1.7 billion. However, because of the
uncertainty of the POMV transfer revenues as to whether or
not they really were UGF or whether they should be
characterized some other way because of the need to fund a
PFD program, the state reduced the $1.7 billion down to $1
billion. In the current year, the 10-year capacity of the
State of Alaska was $1 billion. The final point on the page
was the impact on the PERS/TRS state payments. He indicated
that when the payments were added the percentage of UGF
revenue that the state anticipated spending in FY 21 on
just the fixed payments was 12.22 percent which gradually
declined with the currently outstanding obligations to
8.99 percent. He suggested it was a significant commitment
from just outstanding debt in PERS/TRS payments.
3:11:19 PM
Mr. Mitchell had already discussed the content of slide 16.
There was no authorized but outstanding state debt. The
court decision eliminated some of the existing structures.
He moved to slide 17 to discuss the Alaska Tax Credit
Certificate Bond Corporation (ATCCBC) which was the focus
of the constitutional challenge lawsuit. On September 4,
2020, the Supreme Court ruled that it was, in fact,
unconstitutional. The court reaffirmed the state's ability
to issue lease revenue bonds which would allow the state to
finance discreet projects such as buildings using the
structure if the legislature decided to do so. The idea of
the state entering into a contract that would provide a
public corporation a revenue stream it could securitize and
provide a lump sum to the state for some special purpose,
had been taken off the table. As a result, it eliminated
the ability for Alaska Pension Obligation Bond Corporation
to issue bonds.
Mr. Mitchell continued that the final two slides showed the
difference between a subject-to-appropriation debt
structure and a moral obligation debt structure. The
primary difference was that the appropriations to pay debt
service in the state supported debt structure came from the
state directly. If the State of Alaska was going to
appropriate, it would be a commitment that went into the
future but was subject to an annual appropriation.
Mr. Mitchell moved to the final slide, slide 19, which
showed the moral obligation structure. The state's
commitment was such that if a reserve was deficient, the
state would consider replenishing it. He pointed to the
upper right portion of the slide to the municipal bonds box
which actually paid the debt service. The debt service was
paid by a third party source. The state was just providing
credit support to obtain a lower rate to save Alaskans
money. He concluded his presentation.
Co-Chair Foster asked Mr. Mitchell to summarize his entire
presentation into just a few sentences. For example, the
state had fiscal difficulties presently and was on the
higher end of debt. As a result, credit agencies had
downgraded the state over the prior few years and could
expect more if the trajectory did not change. He asked Mr.
Mitchell to provide a summary in his own words.
Mr. Mitchell might characterize things slightly
differently. He reported that when he talked to folks
outside of the State of Alaska including investors and
credit rating agency analysts, he explained that the state
was in a very awkward place. Alaska had gone from being
rich, not having any taxes in place, saving money, paying
for everything out of oil revenues, and giving money away
to its residents to oil revenue not being the wealth
generator it once was. Alaska was arguing about how much
money to give its residents while other states were
debating how much to tax people. He suggested it was a
matter of living within the state's means - having a
balanced budget where revenues equaled expenditures.
3:16:34 PM
Representative LeBon thanked Mr. Mitchell for his
presentation. He referred to slide 17 and revenue bonds for
the Knik Arm Bridge which was determined to be illegal. He
wondered if the legislature should propose a revenue bond
package to voters for a project, whether a bridge or power-
generating dam on the Susitna River, that would generate
revenue to pay back the revenue bond holders. He wondered
if it would require voter approval for such a plan to be
legal.
Mr. Mitchell responded that there could not be a revenue
bond issued by the State of Alaska because it was not
allowed by the constitution, even with a vote of the
people. The state would have to have a vote of the people
to amend the constitution to allow specific revenue to be
dedicated. As in a revenue bond structure, the investor
expected an irrevocable pledge of revenue. It was not
subject to appropriation or the vagaries of any legislative
body. It was 100 percent pledged to the investor every year
and with other caveats in consideration. He suggested that
for the Knik Arm Bridge the state might consider a public
corporation. He explained that a public corporation could
issue revenue bonds where there was real revenue from
third-party sources.
Mr. Mitchell continued that both projects lent themselves
to the idea that the Knik Arm project would be a toll
bridge and the Susitna Dam Project would generate
electricity that could be sold to the grid to pay for debt
services. The difficulty with the Knik Arm Crossing was
that the total revenue would be deficient for the total
financing needs of the project. He formulated the structure
where the state would pay the debt service. The state would
take a subordinate pledge of revenue from toll collections
and would anticipate paying debt service out of the general
fund on a subject-to-appropriation basis. The investor
would not be reliant on the total subordination, it would
be the state's willingness to appropriate revenue. It would
be a structure close enough to the ATCCBC that he believed
a legal authority to sell the bonds would be difficult to
obtain.
3:19:50 PM
Representative LeBon liked Mr. Mitchell's response. He
noted that the governor had a proposed GO Bond package of
$350 million with an annual debt service of about
$23 million. He referred to slide 15. He wondered if the
state could afford such a debt service.
Mr. Mitchell responded that it would fit. He clarified that
the debt affordability analysis was subjective. He wished
it was more analytical and a definitive outcome was
possible. He suggested that it was well within the metrics
the state had established. An additional $25 million of
debt service would not influence any outcomes the state
would expect for its credit rating. However, the state was
on negative outlook with all three rating agencies. There
was a high probability the state would be downgraded
regardless of the GO Bond proposition.
Representative LeBon suggested if the state's credit rating
was downgraded again and, it moved forward with the GO
Bond, the state's interest rates would go up and the debt
service would go up accordingly.
Mr. Mitchell agreed that when the state's credit rating
deteriorated, the perceived risk would increase along with
the rate. The silver lining was that rates were extremely
compressed which meant that the credit spreads between
credit ratings were very narrow at present. He also noted
that because the State of Alaska only had $620 million of
bonds outstanding, there was a significant amount of
investor demand because of portfolio diversification
issues. It was difficult to find the bonds, as there were
only 50 states and they were not around. Even though the
credit was lower, it was a general obligation credit.
Investors could do their own credit work to see the state
having a difficult time and why in order to make their own
informed decision about investing. It was easier than if
selling a revenue pledge of the same caliber. He confirmed
that there would be an increased cos but not to the extent
expected in a different interest rate environment or for a
different credit.
3:23:19 PM
Representative Josephson thought he heard Mr. Mitchell
state that in theory, the state's debt capacity could
withstand $1 billion of GO Bonds. The governor was
proposing $350 million. He asked if he was correct. Mr.
Mitchell responded in the positive.
Representative Josephson thought Mr. Mitchell had stated
that $350 million of projects qualified but would have to
be completed within 2 years. Earlier the legislative
finance director indicated that the que was $1 billion. He
thought there might be qualifying projects that could be
completed in 2 years since the que was so long. He asked
Mr. Mitchell to respond.
Mr. Mitchell replied that the state just funded $110
million of the 2012 Transportation Act funding. There was
still money from the 2008 Transportation Act. The 2010
Education Act funding was not fully expended until about
9 years after the original authorization. He continued that
the final proceeds from the 2003 act was not fully spent
until 12 years after the original authorization. It had
been his experience that project lives were longer than
anticipated. He was a bit pessimistic based on past
experience.
Representative Josephson asked Mr. Mitchell to explain the
2-year stipulation. Mr. Mitchell responded that the state
also staggered issuance for the other issues other than the
2003 issuance. He had been directed to issue all of the
bonds at once. There was an affirmation that the money
would be spent in the allowed timeframe. He continued that
was the reason the state recently sold the last series of
the 2012 act. The tax code required that 15 percent of the
money be spent in the first year, 82 percent in the second
year, and the remaining balance by the end of the third
year. He was using 2 years because that was where his
comfort zone was as far as making projections. He expected
that if an agency or a recipient of proceeds indicated they
could spend money within 2 years, it could be relied upon.
3:27:17 PM
Representative Edgmon referred to Mr. Mitchell's initial
comments that unless favorable actions were taken in the
current session, the state would likely be downgraded in
its credit rating. He asked him to elaborate. Mr. Mitchell
responded that the credit agencies posted different warning
signals about negative outlooks. It was a soft negative
implication. It did not necessarily mean the state would be
downgraded but signaled a heightened level of concern. A
credit watch would indicate a high probability of being
downgraded within 90 days. In the state's instance, credit
rating analysts had discussed the state's difficulty in
transitioning to the lower revenue generation levels. The
use of one-time reserves had led to the near depletion of
the state's normal reserves. Without the state taking any
actions to change the trend, it was likely they would
adjust their rating which was the basis of his comment.
3:29:26 PM
Representative Edgmon thought Mr. Mitchell had summed
things up when Mr. Mitchell responded to Co-Chair Foster's
question. He thought Mr. Mitchell had been eluding to the
fact that unless the state took remedial action, its credit
rating would be downgraded.
Representative Wool suggested that the lack of favorable
action would lower the state's credit rating. He wondered
if an overdraw of the ERA would lower the state's credit
rating.
Mr. Mitchell responded that the credit rating agencies were
well aware of the state's use of the Permanent Fund and the
POMV structure. They had analytics revolving around
endowments. There had already been some criticism of the
percentage level of 5.25 percent and 5 percent of a POMV
draw being too high. He thought a failure to follow the
POMV draw amounts would garner the rating agencies'
attention and concurred it would not be viewed favorably.
3:31:47 PM
Representative Wool appreciated Mr. Mitchell's diplomatic
response. He mentioned the importance of following the
rules relating to sovereign wealth funds. He mentioned the
lawsuit related to oil tax credits. He had heard about the
suspension of any bond bank projects due to the lawsuit. He
asked for clarification around discrete and non-discrete
projects.
Mr. Mitchell clarified that two different things were
occurring. The bond bank program was not what he was
referring to certificates of participation for the State of
Alaska or at least revenue bonds that the State of Alaska
participated with another entity such as a corporation or
municipality that issued bonds. They were essentially a
conduit only pledging the state's lease payments in their
debt issuance - the revenue pledge. The bond bank had some
legal concerns because there were similar statutes in the
tax credit certificate corporation structure to the bond
bank. There was a moral obligation in the tax credit
statutes that the court explored in their decision. The
state's counsel was concerned that it could have negative
implications for the bond bank.
Mr. Mitchell continued that the state went through
something similar to an appeal, a petition for rehearing
with the Supreme Court, asking for clarification that they
did not mean to imply that other credits were impaired by
the decision. The state was awaiting the outcome. He noted
that 2.5 weeks ago the state received a response from the
court that they were not going to consider the petition and
the state could go back to the bond counsel to revisit the
issue. The bond bank was, in fact, no longer in a suspense
mode. Instead, the bank was actively moving forward on
restarting a refinancing transaction for savings he had
been working on when the lawsuit was issued on September
4th.
Co-Chair Foster thanked Mr. Mitchell for his portion of the
meeting. The committee would recess until 7:00 p.m.
3:35:19 PM
AT EASE
7:02:02 PM
RECONVENED
Co-Chair Foster indicated the committee would be hearing
from DOR.
^UPDATE ON THE STATE'S CASH RESERVE FUNDS AND STATE CASH
FLOWS DISCUSSION: DEPARTMENT OF REVENUE
7:03:08 PM
PAM LEARY, DIRECTOR, TREASURY DIVISION, DEPARTMENT OF
REVENUE, introduced the PowerPoint presentation: "Update on
the State's Cash Reserve Funds and Discussion of State Cash
Flows." She began with slide 2 that provided the agenda for
the presentation. There were three topics. First, she would
provide an update of the state's savings and investment
funds. She would then discuss state cash flow followed by
revenue volatility management.
Ms. Leary moved to slide 4: "FY 22 Days that Alaska could
run on Total Balances (Cash Reserve and Other Funds)." The
chart was provided in the prior year with updated changes.
It was called the countdown clock. It showed the number of
days that Alaska could run on total balances. It provided
context in terms of the state's assets not necessarily in
how they should be used. Starting with the CBR, the
estimated balance at the beginning of FY 22 was $900
million and would provide 76 days of coverage of the
proposed operating budget for FY 22 of $4.3 billion. The
coverage amounted to about 2.5 months. Other funds the
state could turn to if the CBR fund was exhausted included
the Power Cost Equalization (PCE) Fund, the Alaska Higher
Education Investment Fund, and other smaller designated
funds. By adding the other funds to the CBR the state would
have about $2.8 billion which would provide 238 days of
coverage or about 8 months. By adding the account balance
of the ERA at the beginning of FY 22 less the potential for
$2 billion in dividends the state would have about $12.7
billion which would cover a $4.3 billion budget for 1078
days or about 3 years. Her figures assumed no new revenues.
Ms. Leary turned to slide 5 that showed a graphic by Pew
Charitable Trust on the number of days that each state
could run on total balances in FY 19. The slide was the
impetus for the department to look at what the state had
available. She reported that even with large draws Alaska
was only second to Wyoming in FY 19 in terms of days of
expenses in the funds. The number of days for Alaska was
170. The median for all 50 states went up from 40 days in
FY 18 to 49.7 days in FY 19. It was an interesting
depiction of state reserves.
7:07:08 PM
Ms. Leary continued to the cash reserve comparisons of
Alaska to other states on slide 6. The National Association
of State Budget Officers (NASBO) supplied the comparison.
It showed how much coverage savings reserve funds provided
as a percentage of budget expenditures. The survey reported
that the percentage increased since 2008 when the median
balance was 4.8 percent of coverage to an expected high of
8.4 percent for FY 21 prior to the pandemic. There was an
increase of coverage and reserve balances. The table in the
middle showed that about a third of the states had a
reserve that covered 10 percent or more of their
expenditures. He noted that Alaska's CBR balance currently
represented about 22 percent of the FY 22 budget.
Ms. Leary advanced to slide 7 that showed another group of
statistics that looked at cash reserves and things to
consider. She pointed to the box at the top of the page
showing the number of days of general funds spending in
reserves that each of the states listed in the left column
showed. The farthest column to the right showed what the
balance of Alaska's reserve account would be if Alaska was
using other state's balance rules. In other words, if
Alaska used North Dakota's rule of capping at 9.5 percent
for general fund appropriations, it would mean that Alaska
would have a reserve of about $500 million. They ranged
from 2 percent to 20 percent of general fund expenditures.
However, the NASBO data indicated it should reflect the
risk of volatility of the revenue stream. According to Pew
Charitable Trust, three factors were most important in
setting targets or reserve accounts. First, it was
important to know the purpose of the fund whether it was to
satisfy cash flow needs, to fill a revenue shortfall, or
some combination between the two. Also important in
determining the reserve size was to look at the state's
volatility of its tax revenue or other revenue. Also, like
an insurance policy, it was important to determine what
level of coverage the state was comfortable with in its
reserve accounts. The most important aspect of the slide
was considering what was available and what made sense for
Alaska as a state. In any of the studies there was no
one-size-fits-all approach. Each state had a different set
of circumstances. It was a challenge to decide what figure
was the right amount of reserves, but each state should do
so for themselves.
7:11:33 PM
Ms. Leary continued that reserve balances had been the
topic of discussion for the previous few years within DOR.
Different models had been identified to estimate reserve
balances. The state had been using its reserve balance for
a number of different purposes to fill cash flow and fill
the budget deficit. She suggested that until there was some
clarity regarding how the reserve was to be used, it would
be difficult to estimate the balance amount presently. She
asked if members had questions.
Vice-Chair Ortiz referred to slide 4. He was looking at the
potential funds the state could access if needed during
difficult times including the PCE Fund. He wondered how the
state determined which accounts with balances were
available to use when necessary.
Ms. Leary replied that the funds that were listed were also
sweepable. They were funds that would be placed into the
CBR. Other funds the Treasury managed were trust or
endowment related funds that had specific purposes that
might not be able to be used for the particular purpose
being discussed. The funds listed on the slide were the
most accessible if the state had to borrow from them. They
were also the funds that would naturally be part of a sweep
provision.
Co-Chair Foster indicated that there was a full committee
in attendance.
Representative Wool saw where 170 days was reflected on the
map on slide 5. However, he could not see the same number
of days on slide 4.
Ms. Leary responded that Representative Wool was correct
for two reasons. First, slide 4 had FY 22 balances whereas
the map showed FY 19. Also, slide 5 was a study from the
Pew Charitable Foundation. It was an assessment where they
pulled the data themselves. They had a very narrow view of
the information they pulled. They took the general fund and
the CBR and deemed them total funds that could be used for
expenses. She wanted to broaden the amount. The funds on
slide 4 were the funds being discussed. She wanted to
provide context to see what was in the funds. She could
certainly change the slides. The purpose was to show what
the state had and long it would take for the state to run
down its assets.
7:15:33 PM
Representative LeBon referred to slide 4. He recalled in
prior discussions regarding the state's working capital
position that at one point it was determined that $1.5
billion in the CBR was a minimum standard. Presently, the
CBR balance was a little less than $1 billion with the
potential for a portion of the amount to be used. He asked
if the administration had a recommendation of a minimum
cash reserve balance should have at all times.
Ms. Leary replied that in terms of a reserve, there was no
official recommendation presently. The last time there was
a suggested reserve balance was in FY 00 and was about
$2 billion. There were fluctuations such that the reserve
went very high, and there was no need to have a reserve
discussion. She explained that when it went lower, a
discussion ensued. The reserve balance had been about $2
billion but really depended on how the reserves would be
used. There had been calculations that her division had
done as well as what the economic research group had
calculated. The Government Finance Officers Association
(GFOA) ideology used 10 percent or any of the other states
listed on slide 7. The reserve amount could be anywhere
between $400 million to $600 million. Without knowing how
the fund would be used, it was difficult to set a reserve
balance. So far, the state had used the reserves for both
cash flow purposes and to fill structural deficits. If the
state ceased using the funds for structural deficits and
only used them for cash flow, the division could come up
with a target figure.
Representative LeBon viewed the analysis on slide 4 as
though the ERA was untouchable. He argued that the ERA was
the fund for the future. It was what generated the income
for future budgets. He opined that the emergency funds were
the other funds that were mentioned including the CBR, PCE,
and the Higher Education Investment Funds. He thought the
funds that were available totaled about $2.8 billion and
were really the state's main reserves.
7:19:03 PM
Representative Josephson suggested that in the circumstance
where the state incurred a cash problem, the legislature
had to tap the CBR rather than the ERA. For emergent draws,
the legislature had to draw from the CBR, not the ERA. Ms.
Leary clarified that his question was whether the CBR was
filling the cash flow imbalance or the structural deficit.
She asked if was correct about his question.
Representative Josephson was talking about the headroom the
legislature passed as part of a three-quarter vote. The
headroom allowed government to draw more from the CBR
during the interim of the legislative session. The state
would not draw more from the ERA.
Ms. Leary indicated Representative Josephson was correct.
She elaborated that in the past few years the state had
transferred money from the CBR first when there was an
expected budget deficit for any given year. For example, in
the current year the state took $960 million from the CBR
first, then began drawing transfers from the ERA so that
the money could stay at the Permanent Fund longer. The
money could be brought over on an as-needed basis. It
tended to occur quarterly and amounts changed. It depended
on what was happening with cash flow.
7:22:33 PM
Ms. Leary indicated that for the next series of slides for
each fund she would talk about she had two slides. The
first was a historical depiction of the invested balances
with general information about the funds. The second slide
would have some statistical information and returns.
Ms. Leary turned to slide 8 showed the CBR historical
invested assets in billions since it was created in 1990.
There were three colors on the chart: Blue was the main
fund; yellow was the sub fund; and grey was the statutory
budget reserve (SBR) fund. The sub fund was created in FY
01 to yield a higher return. It directed the commissioner
of DOR to use it assuming the funds did not need to be used
for other purposes or any purpose within 5 years. The
account was first utilized in 2008 with a $4.1 billion
deposit to the sub fund. It was then folded back into the
main fund in 2015 when it was deemed that the 5-year
threshold was drawing near and seemed in the best interest
of the state to move it back into the main fund. The
statutory budget reserve was shown on the slide to provide
the magnitude of the reserve funds at one time. They were
at their peak in 2017 with a balance of close to
$17 billion. She noted that the SBR was also invested in a
separate account during the period 2013 to 2015. As a
result additional earnings were achieved. Currently the
balance was at $1.1 billion.
Ms. Leary advanced to slide 9: "Constitutional Budget
Reserve Fund Fiduciary oversight: Commissioner of Revenue."
The slide showed that the CBR was currently invested at 100
percent cash equivalence. She suggested that it was a very
low risk targeted with a short investment horizon because
it was uncertain how the funds would be used and when they
would be depleted. The slide showed market values at the
end of December for 5 years. As of December 31, 2021, the
market value was $1.1 billion. In the bottom left corner
the 10-year return was 2.25 percent based on Callan and
Associates' capital markets, assumptions that were used in
developing the target asset allocations - in the current
case, cash equivalents.
7:27:15 PM
Ms. Leary reviewed the PCE historical invested assets in
millions on slide 10. The fund had grown from 2001 to 2020
to about $1 billion. Currently 5 percent of the monthly
average market value of the fund for the previous 3 fiscal
years could be appropriated. If there were prior earnings
that exceeded the amount of the cap, a certain percentage
could go into other funds to support them as well.
Ms. Leary continued to slide 11: "Power Cost Equalization
Fund Fiduciary oversight: Commissioner of Revenue." The
slide showed the investment statistics. It was a high risk
target with an intermediate investment horizon. The fund
was lower reflecting a 60/40 equity to fixed income
targeted asset allocation from 70 percent to 30 percent for
the past couple of years to target closer to the needs of
the funds for appropriations. On December 31, 2021, it had
a balance of $1.1 billion. The 1-year return as of December
31, 2020, was 7.76 percent. Over 5 years it was 8.87
percent and had fairly tracked the benchmark used for the
fund. The Callan projected target return for 10 years was 5
percent.
Ms. Leary moved to slide 12: "Alaska Higher Education
Investment Fund (AHEIF) Historical Invested Assets (in
millions)." The fund was created with $400 million from
Alaska Housing Capital Corporation (AHCC) in order for the
state to pay for performance scholarships and provide
grants to students. The fund's balance was $344 million at
the end of the fiscal year.
Ms. Leary turned to slide 13: "Alaska Higher Education
Investment Fund Fiduciary Oversight: Commissioner of
Revenue." She pointed out that the fund had grown to about
$391 million as of the end of December. The fund also had a
high risk tolerance but was managed to a 70 percent equity
and a 30 percent fixed income asset allocation target. It
was a 1-year return was 15 percent for the period ending
December 31st and the projected 10-year return was 6.37
percent Callan capital market assumptions.
Vice-Chair Ortiz asked about the Alaska Higher Education
Investment Fund. The primary purpose was Alaska Performance
awards and Alaska Advantage Education grants. He asked if
the fund had been used for purposes other than to fund the
two programs recently. Ms. Leary did not know the answer to
the question. She thought Mr. Barnhill could address the
question.
MIKE BARNHILL, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE
(via teleconference), thought it had been used to fund the
additional contribution to the Teacher's Retirement System
3 or 4 years prior.
Vice-Chair Ortiz asked how for the amount that was funded.
Mr. Barnhill would get back to the committee with the
amount. He thought it was close to $100 million. Vice-Chair
Ortiz asked if the draw had been a one-time event. Mr.
Barnhill replied, "Correct."
7:31:23 PM
Representative Wool had been told recently that the PCE
Fund was managed passively in something like a market fund.
He asked if the Higher Education Fund managed in a similar
way.
Ms. Leary replied that the funds that were managed by the
Division of Treasury that were state state funds were
managed in passive funds other than some of the fixed
income which was done in-house. The way the set-up worked
was that the division had a number of managers that it
contracted with to invest some of the state funds. The
division also had internal management, fixed income
investment officers. The division had mandates for each
type of asset class such as domestic equity. Pools were
created with the managers as part of the pools. Each state
fund was invested in pools on a basis determined by the
commissioner (70/30 fund or 60/40 fund). The division had a
variety of funds it could choose from and pools depending
on the needs of a fund, the purpose, the time horizon, and
the risk level.
7:33:18 PM
Ms. Leary reported that slides 14 and 15 had to do with the
general fund and other non-segregated investment (GeFONSI)
funds. She turned to slide 14. There were approximately 185
funds that were managed together in one investment pool
with one asset allocation. They were accounted for
separately in the state accounting system but had the same
asset allocation. Furthermore, the division split the pool
into two different funds, GeFONSI I and GeFONSI II. She
indicated that GeFONSI I had a set asset allocation that
she would look at in the following slide. The GeFONSI II
had a slightly more highly targeted return asset
allocation. It was a subset of funds that could stand a
higher rate of return.
Ms. Leary continued that the general fund itself which was
what was referred to as the state's operating account,
checkbook, or working capital fund was within GeFONSI I. At
the height of 2012, the total was about $9 billion. The
amount fluctuated from year-to-year often due to the
general fund, the largest fund within GeFONSI. At the end
of 2020, the GeFONSI balance was $2.45 billion. She also
pointed out that the SBR was not included in the slide
because she had showed it earlier. However, it was a part
of the GeFONSI in its later years before the fund was
utilized.
Ms. Leary moved to slide 15 which showed the investments of
the GeFONSI I and GeFONSI II were similar. They both had
moderate risk. GeFONSI II was moderately high with a
slightly longer investment horizon in terms of the accounts
managed within it. As a result, it had an asset allocation
that included some equity, whereas GeFONSI I did not. The
combined value of both funds was $2.5 billion at the end of
December 2020. The projected 10-returns for each account
were slightly different: GeFONSI I had a return of 2.38
percent and GeFONSI II had a return of 2.78 percent. The 1-
year return as of December 31, 2020, was 1.49 percent for
GeFONSI I and 3.5 percent for GeFONSI II.
7:37:51 PM
Representative Josephson referred to the chart on slide 14
and spoke about the general fund. It appeared that in 2012
the amount was about $9.1 billion. He suggested that the
amount was housed in the general fund momentarily before it
was committed to paying for FY 13 or sent to the CBR. He
suggested that someone looking at the chart should not
surmise that the general fund had $9.1 billion for an
entire fiscal year because that was not the case.
Ms. Leary responded that at the time the CBR had been fully
repaid. The money that went into the general fund was truly
money for the general fund. There was not the need to
restrict the balances because the state was not borrowing
from someplace else. The general fund was and continued to
be the largest fund.
Representative Josephson spoke of a hearing in the prior
session. He had asked the amount left in the general fund.
There was nothing left in the general funds at the time
because everything was already committed. He was trying to
reconcile Ms. Leary's comments about the balance of the
fund at $4 billion.
Ms. Leary responded that the division targeted a
$400 million balance in the general fund proper in order to
pay bills coming due. Currently, anytime she saw the
balance in the forecast for cash dropping below $400
million for 5 days, the division called cash. The state was
under a paradigm where cash was limited and it was taking
money from either the ERA or borrowing from the CBR while
keeping very tight constraints on the balance. She
suggested that with SB 26 [Legislation passed in 2018
Short Title: APPROP LIMIT AND PER FUND:DIVIDEND;EARNINGS]
the state was getting money from the ERA. Therefore,
balances could fluctuate up and down depending on cash,
receipts, and uses at any particular point in time. For
example, in the prior year there was a much higher balance
in the general fund because the rest of the ERA money was
placed in the fund and the state had borrowed slightly more
than what was needed from the CBR even though there was a
planned deficit. The deficit ended up not being as great as
anticipated. She reiterated that $400 million was the
target balance for the general fund. However, since money
was being taken from the ERA, the division tried not to
take more than what was needed.
7:43:09 PM
Representative Josephson believed it should not be thought
of like money in the Higher Education Investment Fund.
There was not a balance to tap, it was already tapped. The
money was already committed. Ms. Leary agreed that the
money was committed it would be used for expenses.
Representative Wool did not see GeFONSI listed on slide 4.
He suggested it was an account that money was moved through
such as a checking account. It was a holding account of
which a balance was kept. He thought the current balance
was about $2.5 billion. He asked for confirmation that it
was a holding account and was not listed on slide 4. Ms.
Leary responded that he was correct. The division referred
to it as the state's checking account a working capital
account.
Representative Carpenter asked for the balance of the
GeFONSI account after all of the state's expenses came due
at the end of the previous fiscal year on June 30, 2020.
Ms. Leary responded that the balance of June 30, 2020, of
all of the GeFONSI accounts was $2.5 billion.
Representative Carpenter asked if she had stated
$2.5 billion. Ms. Leary responded, "That's correct."
Ms. Leary continued to slide 16 regarding the Public School
Trust Fund (PSTF) and the historical invested assets. The
fund had a long history back to 1978. The current balance
of the fund as of the end of FY 20 was $688 million. She
indicated that with the passage of HB 213 (Legislation
passed in 2018 Short Title: PUB. SCHOOL TRUST FUND;
EDUCATION RAFFLE] it was managed as one fund. It used to
have an archaic principal and interest account. It was
currently more of an endowment POMV method. The allowable
amount that could be appropriated was 5 percent of the
average market value for the 5 years preceding the prior
fiscal year.
Representative LeBon wanted to go back to the answer Ms.
Leary had supplied regarding the GeFONSI balance on June
30, 2020. He asked if she had stated $2.4 billion. Ms.
Leary responded in the affirmative.
Representative LeBon asked if the balance was due to the
sweepable accounts being swept. Ms. Leary responded in the
negative. She clarified that all of the balances she was
speaking to in terms of investments were the actual amounts
sitting in the bank which was very different from what
would be shown on a budget what the balances should be if
all of the money came in and all of the expenses were paid
out at a particular point in time at the end of the year.
She reiterated that it was the actual cash balance sitting
in the bank the amount the division was managing for
investments. Representative LeBon was viewing the account
as an operating account or fund.
7:48:51 PM
Ms. Leary explained that the GeFONSI was comprised of 184
funds. The general fund (operating fund) was only one of
the funds. It was the fund through which the state paid its
bills. She listed several different funds and different
types of funds. At the end of June 30, 202 there was $2.5
billion in total in all of the 184 funds.
Representative LeBon asked if money held in the accounts of
the Alaska Housing Finance Corporation (AHFC), the Alaska
Industrial Development Export Authority (AIDEA), or the
Alaska Energy Authority (AEA) in the accounts as well. Ms.
Leary responded that the accounts Representative LeBon
mentioned did not get invested with the GeFONSI. Unless the
division was managing money on behalf of another
corporation's fund, it was not included in the GeFONSI
balances
7:50:00 PM
Representative Carpenter asked about the current budget
under consideration for July 1, 2021. He had not seen a
line item showing $2.5 billion available for spending or
cash flow. He suggested that at the end of FY 21, if there
was money left over that had not been spent, he could not
find it. The money appropriated for FY 22 was essentially
new money. He was having a difficult time understanding
that at the end of the fiscal year the state was not
looking at a hold over balance. He asked for clarification.
Ms. Leary explained that the accounts that represented the
$2.5 billion included federal funds, designated funds, and
other state funds that had been populated with monies for
particular program services, some of which could be used
without further appropriation and some had been placed
there many years prior and could be used by the programs
accordingly. Many of the funds could not be touched and
brought into the general fund (GF) and used for expense
purposes. At the end of FY 20 there was about $1 billion in
unrestricted funds, the largest of which was part of the
general fund. Some of the designated funds were for the
Alaska Technical and Vocational Education Program, the
Tobacco Use Education and Cessation Fund, some renewable
energy grant funds, other revolving loan funds, and many of
the smaller funded program dollars that had been set aside
over the years and resided in the 184 funds.
Representative Carpenter understood that if the legislature
budgeted a program for several years, the money for such
programs spent in a certain fiscal year would be encumbered
in the following fiscal year and funding for future years
would be held in the GeFONSI account until spent. He
thought the question should be about the unencumbered or
unobligated amount left over in the GeFONSI accounts on
June 30th. He asked if he was accurate.
Ms. Leary responded, "It would be." She added that by far
the largest fund was the general fund in the unrestricted
category. The amount was $955 million of the $1.24 billion
that was part of the unrestricted balance. She explained
that the reason the amount was high was because money was
deposited into the account from the ERA right before the
end of the year. She further explained there was a mismatch
in terms of timing of when the state received revenues and
when it paid expenses. At the beginning of the year there
were several payments that had to be made including
payments into pension accounts. The money that was in the
GF proper at the end of the year was used up quickly and
reflected cash flow and timing issues. When looking at the
money coming in from such as the OMB fiscal summaries or
the comprehensive fiscal reports, the revenue and expenses
were matched in years where there no anticipated deficit.
When money came in and was used demonstrated a cash flow
issue which was the reason the GF balance was large at the
end of FY 20.
7:57:04 PM
Representative Carpenter referred to the last bullet on
slide 8 which indicated that appropriations from the CBR
had to be repaid. He was aware that it was a constitutional
requirement to payback the CBR and was the reason for the
sweep. There was no mechanism in place for the state to
meet its repayment obligation even if there was cash in the
GeFONSI accounts at the end of the fiscal year. He asked
Ms. Leary to comment on the the obligation voters
instituted in 1990 when the CBR was created. He mentioned
the $900 million that was left over in the fund at the end
of the fiscal year. The state had the obligation to pay
itself back and money left over at the end of the fiscal
year. However, there was no mechanism in place unless
agreed upon by the legislature. He asked for the amount
that would need to be repaid to the CBR again referring to
slide 8. He wondered if the amount was the blue or yellow
area on the slide.
Ms. Leary replied that on June 30th every year the sweep
occurred on paper. The reverse sweep language included in
all of the budgets she had seen allowed for the money to
come back out of the account. The funds swept out and were
returned as a paper transaction. All of the sweepable funds
within the GeFONSI swept out and reverse swept back to the
funds. The dynamic was used to avoid taking money out of
one fund that was invested and selling everything and
buying everything back. The transaction was done on paper
and tracked by the Division of Finance and OMB.
Representative Carpenter was aware of the process Ms. Leary
describe. His point was that there was an obligation that
needed to be repaid, and the state had unencumbered excess
funds at the end of the fiscal year that were either not
being used for the following year's budget or for repaying
the CBR.
Ms. Leary commented that the money in the GF account was
being used, on a cash basis, to pay the following year's
budget beginning on July 1. There was an obligation to pay
back the full amount. The combination of the main fund and
the sub fund at its highest point in time of what was
borrowed had to be repaid. She thought the balance owed to
the CBR was about $12.83 billion at the end of FY 20.
8:01:03 PM
Representative Josephson had a bill in play that was
addressing the issue being discussed. In October he began
reading Hickel versus Cowper, the only case that talked
about the meaning of sweep and reverse sweep. He thought
the Wielechowski decision touched in it. There was a
dispute in July 2018 about the CBR and the reverse sweep.
Attorney General Clarkson took the position that all
accounts were sweepable. In the case of Hickel versus
Cowper, it did not say the same. For example it suggested
that PCE, since it was housed in the Alaska Energy
Authority Corporation, it was not sweepable. His bill took
the same position. The last time any legislature looked at
the meaning of the CBR and tried to create a statutory
rubric to reflect what was required by the CBR was in 1994.
The law was tossed out in Hickel versus Cowper. It was a
complicated question.
Representative Josephson continued that in July 2018 there
were important hearings in Senate Finance and the state's
audit division and finance division took a slightly
different view of what was sweepable. He reported that the
Spill Prevention and Response (SPAR) fund could have as
much as $50 million in it and had to be accessible at a
moment's notice in the event of a spill like the Exxon
Valdez spill. The amount was fully committed by the
legislature and could be used at any time. Whereas other
funds, like PCE, were only partially committed. He claimed
it was true that some of the funds, like the Higher
Education Fund, were sweepable. However, there were
legislators that did not want it swept. There were
political elements to the issue. Lastly, in Hickel versus
Cowper the court stated that not everything would be
sweepable because it would use the prudent fiduciary rule.
No legislature would possibly want to spend or sweep away
everything. He reiterated the matter was complicated. The
court looked at how much the legislature appropriated. He
suggested that the sub fund be preserved because the monies
needed to be available.
8:05:43 PM
Representative Carpenter suggested if the money in the
DeFONSI was swept, it was not gone. Rather, it would be
swept into the CBR which was invested. It would require a
three-quarter vote for it to come out of the CBR.
Essentially, whether the money was in a DeFONSI account or
the CBR, it was being invested and the fiduciary
responsibility was being met.
Representative Johnson asked for Ms. Leary to provide a
list of funds and their balances to the committee. Ms.
Leary would be happy to provide the information.
Representative Wool had a question regarding the CBR having
to be repaid to its highest mark which was about $12
billion. He suggested that no matter how much was taken out
it had to be repaid to the high-water mark. He thought it
defied the purpose of a savings account. He did not
understand the logic of having to pay back the CBR. Ms.
Leary responded that it was a law on the books that had to
be followed. She was unsure whether the amount to which the
fund grew was imaginable at the time the CBR was created.
She deferred to the deputy commissioner for further
comments.
Mr. Barnhill responded that the constitution did not
prescribe a specific payback period for when the
legislature appropriated from the CBR. It also did not
prescribe any payment of interest. The matters were
committed to the discretion of the legislature. The
legislature got to administer the payback including the
details of when, how, and how much. There was a precedent
for paying it back. The legislature had done so when it had
the means to do so. There was nothing that required the
legislature to pay back money at any particular time.
8:09:07 PM
Ms. Leary reviewed slide 17: "Public School Trust Fund:
Fiduciary oversight: Commissioner of Revenue." It was a
continuation of the information regarding the Public School
Trust Fund showing the investment statistics. The Trust was
a long-term fund that could handle high-risk investments
and was a 70/30 split in terms of equities and fixed income
in terms of its target allocation. The projected 10-year
return was 6.37 percent and achieved a remarkable return of
15 percent in FY 20.
Ms. Leary moved to slide 18. She noted that the Treasury
managed the state funds she had discussed as well as the
retirement and benefits plan assets of the state. The
Treasury Division invested the assets of 14 different plans
in the 4 retirement systems. The fiduciary of the state's
retirement plans was the Alaska Retirement Management Board
(ARMB) made up of 9 persons. The benefit plans were
currently experiencing net outflows from the funds - about
$900 million in the previous 2 years. The funds continued
to grow. The defined benefit plans were at $30.3 billion as
of January 31, 2021. It was the highest the accounts have
been despite net withdraws. The state had experienced some
great investment returns. She reported that the 36-year
return was 8.91 percent combined for the Public Employees'
Retirement System (PERS) and Teachers' Retirement System
(TRS) defined benefit plans.
Ms. Leary continued to slide 19: "Public Employees
Retirement System and Teachers Retirement System" She
indicated the slide showed a more complex target asset
allocation than seen in previous slides. It was more akin
to how APFC managed their investments with private equity
and real assets including real estate as part of the
investment mix. As of December 31, 2020, the PERS balance
was $19.5 billion and the TRS defined benefit pension and
health balance was $9.5 billion. The returns as of
September 2020 were 7.12 percent and 7.1 percent. There
were slight differences in the returns due to cash inflows
and outflows of the different funds. Both PERS and TRS and
the other defined benefit systems were invested in the same
pools. All 14 plans invested in the various pools.
8:13:07 PM
Vice-Chair Ortiz asked about the unfunded liability of PERS
and TRS. Ms. Leary explained that the unfunded liability
was the difference between the amount of current assets and
the actuarial calculated liability - the amount that was
owed to pay everyone through all of the pension systems
until there was no one else to pay including beneficiaries.
The total as of June 30, 2020, was about $5.9 billion in
unfunded liability which equated to 81.5 percent of
funding. It was different for PERS than TRS. She elaborated
that PERS was less well funded than TRS.
Representative Johnson returned to the subject of the CBR.
She suggested that some of the audits indicated that the
Federal Energy Regulatory Commission (FERC) funds that
should have been deposited into the CBR but was deposited
into the GF instead. She thought there was a difference of
opinion about what Legislative Audit stated and what the
attorney general stated. She asked for comments. Ms. Leary
deferred to Mr. Barnhill.
Mr. Barnhill indicated that it was a persistent and legal
issue. The Department of Law had advised that settlements
under FERC involving Trans-Alaska Pipeline System (TAPS)
tariffs should be deposited into the GF. The Division of
Legislative Budget and Audit disagreed and believed that
such types of settlements should be deposited into the CBR.
The amount at issue was just over $1 billion. The
Department of Revenue would continue to follow the advice
provided by the Department of Law. The Division of
Legislative Budget and Audit had given DOR notice that they
would continue to adhere to their position. It would
continue to be reflected in the state's CAFR as a
disagreement between the legislative auditors and the
Department of Law. He returned to the topic of when and how
much to repay the CBR. It was up to the discretion of the
legislature. In the event the state came into the
$12 billion needed to fully repay the CBR, the legislature
would have the option to do so and to follow whatever
advice it would like to follow.
8:17:33 PM
Representative Carpenter asked where the $1 billion dispute
was presently. Mr. Barnhill indicated that following the
settlements the money was deposited in the GF and spent.
Representative Josephson thought the problem with having
inconsistencies was that federal agencies such as Center
for Medicaid Services and the Department of Treasury, was
that they would look at the state's CAFR and would find
that it was not balanced or that there was a dispute about
the balance. The issue needed resolution.
Mr. Barnhill opined that the issue was a legal dispute and
would not be resolved anytime soon. In his view the
legislature did not have the ability to repay the CBR in
the amount of $12 billion let alone $1 billion. In terms of
how external stakeholders view the entry of qualification
statements in the state's CAFR, the department just issued
the last tranche of General Obligation (GO) Bonds in the
prior summer under the 2012 GO Bond authorization. It was
the department's view that the qualification did not have
any material effect of the state's ability to issue nor on
the rating or interest rate the state obtained.
Co-Chair Foster believed Legislative Legal Services thought
the money should go into the general fund. Legislative
Audit did not agree and brought in outside counsel who
thought the money should go into the CBR. He believed the
the Department of Law believe the money should go into the
GF. He also thought there was an additional entity that had
expressed an opinion. He asked if he was accurate. Mr.
Barnhill was unsure of the number of attorneys that had
weighed in on the issue. He indicated it had been a
persistent issue over multiple audit cycles, attorneys
General, and administrations. He did not know the position
of Legislative Legal on the issue.
Ms. Leary moved to the next section of the presentation
beginning on slide 21: "Cash versus Accrual balances." She
relayed that treasury balances were in cash, what was in
the bank presently. The accrual numbers, where everything
should fall once money came in or out, could be seen in the
budgets and CAFRs.
8:22:20 PM
Ms. Leary advanced to slide 22 which contained a diagram of
the money that came into the cash management GF and what
went out. She highlighted that all of the money that was
flowing into the state came through the GF into the
Treasury Division. The cash management team touched
everything, if only for a moment, before it was sent on its
way to where it was supposed to go. For example, it might
go to debt service payments or school education payments.
The cash management team did an excellent job of putting
the funds into the right buckets.
Ms. Leary turned to slide 23 to review cash flow
deficiencies. The slide also provided some history as to
why the GeFONSI was as large as it was presently compared
to the GF. In the past when the state had unrestricted
revenue, it was deposited into the GF and was used for
various programs. Overtime, many sub funds were created for
particular programs which explains the 184 different funds
within GeFONSI. The general fund had less money in it to
pay for specific things throughout the year. The department
had to control the money that was coming in and out of the
fund more tightly.
Ms. Leary continued that there were mismatches between when
revenue came in and when payments were made. She had
provided an example earlier where the beginning of
appropriations happened at the start of the year. Many of
the state's programs were funded at the start of the year
while at the same time the state did not have revenues
coming in immediately to meet the transfer needs. Some
federal programs required the state to spend money prior to
reimbursement. There were also seasonal cash flow needs
such as in the summer. The first 2 months of any fiscal
year was also the same period of reappropriation. The state
was not only paying for bills for the coming year it was
also settling accounts from the prior year creating cash
flow deficiencies.
Ms. Leary reviewed the cash deficiency memorandum of
understanding (MOU) on slide 24. It was an MOU developed in
the 1990s between DOR, the Department of Administration,
the Department of Law, and OMB. It outlined the procedures
that were followed when there were cash flow deficiencies.
It included developing monthly cash projections in concert
with the Tax Division to know what money would be coming in
from the ERA. Balances were monitored through a forecast
based on expected expenses on a daily basis. The division
tried to make sure it had enough money ahead of time to
meet expenses. The investment staff knew all account
balances to invest or divest. At any given time, all of the
money within the treasury was invested in some capacity.
Ms. Leary continued that as the division went through
timing mismatches outlined in the MOU it allowed for
temporary interfund borrowing. The order of funds had been
the SBR, CBR, and ERA. It outlined steps for the division
to take when there was not enough money. One of the steps
was the division going before the legislature to get access
to additional funding to pay state bills. If it was
necessary, the division would have to prioritize what would
be distributed and to restrict expenditures.
8:27:54 PM
Ms. Leary turned to slide 25 which reiterated the concept
of using budget reserves as an answer to cash flow and
structural revenue shortfalls. The operating budget
contained language allowing for such appropriation
authority. The Treasury Division had relied on the
authority to address cash flow timing issues and revenue
shortfalls. She noted the CBR was repaid by FY 10 and the
legislature started borrowing from it again in FY 14. As of
the FY 20 CAFR just released, the balance owed to the CBR
was $12.6 billion.
Ms. Leary continued to slide 27 on the topic of revenue
volatility. She explained that revenue volatility had been
a significant for the state until a few years prior. The
PEW study did an analysis comparing revenue volatility
across all state, Alaska went off the charts because it was
so reliant on oil prices. It had reversed in recent times.
The Revenue Sources Book reported about 19 percent of the
state's UGF would come from petroleum revenues and
72 percent would come from investment income. She believed
it was a result of the passage of SB 26 [Legislation passes
in 2018 establishing a POMV for the PF] and the amount of
money that was flowing in the POMV from the ERA.
Ms. Leary moved to slide 28 to discuss volatility
management techniques. The state had reserve funds which it
was spending down quickly. There was the possibility of
revenue anticipation notes and a set of bills that had been
introduced to expand the ability to borrow with a line of
credit for cash flow purposes. The line would not be used
to assist with structural deficits. During the pandemic
other states had established lines of credit. She noted
that in general an entity had to pay money to have
accessible funds such as a line of credit. There was
usually a much great percentage cost to actually borrow any
funds. It would be a tool that could be used by the
Treasury Division rather than taking from other funds that
targeted higher rates of return. A line of credit would
allow the state to address cash flow needs throughout the
year.
8:32:50 PM
Representative LeBon asked if the state had ever taken out
an operating line of credit. Ms. Leary responded that
currently, the Treasury was not able to take out a line of
credit. However, it would be a useful tool. Representative
LeBon clarified that the Treasury needed the legislature to
approve establishing a line of credit. Ms. Leary responded
affirmatively.
Ms. Leary reviewed slide 28 regarding volatility management
techniques. One of the ways the division had managed
volatility was through the use of the ERA. The Treasury
Division tried to take the money coming over to the GF in
such a way that it was known, controlled, and had the least
amount of impact to the PF managing its assets. It was a
lever the division could pull. Managing the timing of state
expenditures was important as well. It might be possible to
push certain payments out to help with cash flow. For
example, the division had done so with some of the public
education fund transfers which used to be done at the
beginning of the year. The division discussed how quickly
the money was actually utilized and found that it was
better to make a distribution monthly rather than
quarterly. There were several opportunities for the state
to manage its cash flow needs. There were certain payment
that might be be able to push out.
Ms. Leary reviewed slide 29, the presentation take-aways.
First, cash reserves were declining and would continue to
decline with structural budget deficits. Even when the
state had a balanced budget and all of the revenue was
received, the state would still have cash flow mismatches.
The Treasury was concern with cash management. She
emphasized that cash flow forecasting was always wrong. As
a result, the Treasury Division built in a 5-day
requirement so that if the fund balances were low, the
division could act. She noted that revenue shortfalls might
occur if forecasting assumptions were wrong. However, the
state currently had more assured investment income revenue
coming from the ERA. Forecasts should be better moving
forward under a new paradigm. Higher revenue volatility
required greater cash reserves until the volatility
decreased. Currently volatility was decreasing. Once the
state figured out how to resolve the deficit, volatility
might be reduced. Volatility technics were available. She
concluded her presentation.
Co-Chair Foster reviewed the agenda for the following day.
ADJOURNMENT
8:37:58 PM
The meeting was adjourned at 8:37 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DOR HFIN 030221 -Debt Presentation.pdf |
HFIN 3/2/2021 1:30:00 PM |
|
| DOR HFIN Savings Accounts and Cash Flow presentation March 2 2021_ (003).pdf |
HFIN 3/2/2021 1:30:00 PM |
|
| Gov Appointee Lucinda_Mahoney 02022021.pdf |
HFIN 3/2/2021 1:30:00 PM |