Legislature(2023 - 2024)ADAMS 519
02/07/2023 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: State Debt Summary & Credit Review | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
February 7, 2023
1:32 p.m.
1:32:35 PM
CALL TO ORDER
Co-Chair Johnson called the House Finance Committee meeting
to order at 1:32 p.m.
MEMBERS PRESENT
Representative Bryce Edgmon, Co-Chair
Representative Neal Foster, Co-Chair
Representative DeLena Johnson, Co-Chair
Representative Julie Coulombe
Representative Mike Cronk
Representative Alyse Galvin
Representative Dan Ortiz
Representative Sara Hannan
Representative Andy Josephson
Representative Will Stapp
Representative Frank Tomaszewski
MEMBERS ABSENT
None
ALSO PRESENT
Ryan Williams, State Debt Manager, Department of Revenue;
Fadil Lamani, Deputy Commissioner, Department of Revenue.
SUMMARY
PRESENTATION: STATE DEBT SUMMARY & CREDIT REVIEW
1:32:41 PM
Co-Chair Johnson reviewed the meeting agenda.
^PRESENTATION: STATE DEBT SUMMARY & CREDIT REVIEW
1:34:32 PM
FADIL LAMANI, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
introduced himself and offered a PowerPoint presentation
titled, "Credit Review and State Debt Summary," dated
February 7, 2023 (copy on file). He began on slide 2 which
included some information on his professional history and
experience.
RYAN WILLIAMS, STATE DEBT MANAGER, DEPARTMENT OF REVENUE,
introduced himself and offered his work history, also
listed on slide 2.
Mr. Lamani advanced to slide 3 and provided the agenda for
the presentation. He quickly moved to slide 5 to discuss
general information about bond ratings. He explained that
bond ratings were a way to measure the creditworthiness of
a bond, which corresponded to the cost of borrowing for an
issuer. The ratings typically assigned a letter grade to
bonds, which indicated the credit quality of the issuer.
Bond ratings were provided by third-party independent
rating agencies and examples of rating agencies were listed
on the slide.
Mr. Lamani continued that the rating agencies conducted a
thorough financial analysis of the issuer based on
published Public Finance Criteria (PFC) that generally
focused on five primary credit factors: governmental
framework, financial management, economy, budgetary
performance, and debt and liability profile of the issuer.
An issuer often produced an official statement disclosure,
which provided contacts of the issuer. After the
information was gathered, the rating agencies would assign
an official rating. An investment grade was considered
anything from a BBB rating to an AAA rating, and a non-
investment grade was considered anything from a B to a BB
rating. Investment graded bonds were considered low risk
and had lower borrowing costs, while non-investment graded
bonds provided for a higher risk and higher borrowing
costs.
1:39:54 PM
Co-Chair Edgmon asked if bond rating agencies factored in
the ten-year budgeting plan for Alaska.
Mr. Lamani responded that the agencies looked at all
aspects of the forecast. The agencies mostly relied upon
the revenue resource book, but they also looked at the
Office of Management and Budget's (OMB) ten-year forecast.
Co-Chair Edgmon commented that it was too early to opine on
carbon tax credits being a primary source of revenue.
Co-Chair Johnson announced that Representative Ortiz had
joined the meeting.
Mr. Lamani continued on slide 5. In the Department of
Revenue's (DOR) recent rating meeting, the rating agency
Moody's Investor Service indicated it was interested in the
governor's vision as it pertained to carbon credits. It was
too early to predict what the actual revenues would look
like, but Moody's was interested in finding out more
information.
Mr. Lamani continued on slide 6 which offered a snapshot of
the state's current ratings from three agencies. Moody's
gave the state a AA3 rating with a stable outlook, S&P
Global gave the state an AA- rating with a positive
outlook, and Fitch Ratings gave the state an A+ rating with
a stable outlook. The slide also showed the history of
ratings given to Alaska. The highest rating the state was
ever given was a AAA rating in 2012. There had been a
significant change to the rating in the last few years due
to the adoption of the percent of market value (POMV) draw
as well as the surplus in FY 22.
Representative Stapp asked if the bond rating agencies
assessed the state's credit rating health on other factors
such as long-term liability.
Mr. Lamani responded in the affirmative. The agencies also
looked at factors like the debt service and the net pension
obligation the state had on its books.
Representative Hannan asked if the Moody's rating of AA3
was worse than AAA. She asked how the ratings compared.
Mr. Lamani responded that Moody's ratings involved adding a
number to the third letter. For instance, AA2 was
essentially equivalent to an AA- rating. The other two
rating agencies were relatively the same.
Representative Hannan asked if AA3 was a better rating than
AA-, but worse than AAA.
Mr. Lamani responded that AA3 and AAA were equivalent.
1:45:02 PM
Mr. Lamani moved to slide 7 which compared Alaska's ratings
to the ratings of all of the other states. Comparatively,
the state had a solid and high credit rating, although some
of the other states had more diverse economies and tax
bases.
Representative Galvin noted that the committee had been
asking many people about various statewide rankings. She
asked if Mr. Lamani had been able to place the state within
the ranking system.
Mr. Williams responded that generally speaking, the state
was under the 50 percent baseline. There were many high
rated states, many of which had a tax base that made it
easy to calculate certain recurring revenues. He thought
Alaska was outside of the box because it derived revenue
from oil and gas and investment income.
Mr. Lamani continued on slide 8 and the long-term impacts
of the bond ratings. He explained that the state was unique
when it came to the rating evaluation. It was quite
different when compared to other states because it was
reliant on oil and gas and the earnings from the Permanent
Fund Dividend (PFD). Other states had more stability as
they trajected their budgets into the future. Many of the
metrics utilized by the ratings agencies were things that
the state did not conform to, such as the net pension
obligations. Alaska's pension plans were well funded
compared to other states, however from a metrics
standpoint, the agencies compared the net pension liability
to gross domestic product (GDP) as opposed to comparing the
plan assets and the plan liabilities. He thought that it
was not a fair comparison given Alaska's population.
Mr. Lamani continued that another concern of the rating
agencies was being able to see a structurally balanced
budget and how much it relied on the POMV from the earnings
reserve account (ERA). The state had made strides since
2013 and had been able to reduce spending. There had also
been an increase in the price of oil and funding levels
within the pension. The goal moving forward was for the
state to mirror its rating approach as it conformed to the
criteria of the rating agencies. Additionally, the state
was planning on engaging another rating agency that would
be responsible for crafting a more comprehensive assessment
on credit quality.
Mr. Lamani moved to slide 10 and an overview of the current
municipal market and noted that there had been some recent
refunding effort for some of the state's outstanding bonds.
The chart on the left side of the slide showed the current
rates that were accurate as of January 26, 2023. The chart
also included a comparison of the rates from week over
week, and a comparison of the rates within the last month.
The slide included the municipal market data as well, which
indicated the yield curves of the various rating types.
1:51:27 PM
Co-Chair Johnson returned to slide 8. She highlighted that
there had been issues with the tax credits in the state and
certain large banks had decided against investing in Alaska
due to climate change. She asked if the issues had an
impact on the ratings.
Mr. Lamani responded that many of the rating agencies had
taken the information into consideration. It was not easily
distinguishable to what degree the information had an
impact on the ratings due to the state offsets. If there
was a concern, the agencies would look at the financial
prudency of the state.
Mr. Lamani moved to slide 12. The Department of Revenue
(DOR) had looked at the possibility of conducting a
refinancing of some of the existing bonds, which were
generally done if there was an interest rate environment
that warranted cost savings. The purpose of refunding for
the state was solely to benefit upon the favorable interest
rates. The department decided to refinance the 2012A bonds
and 2013B bonds, which resulted in a net present value
savings of $1.7 million. It did not change the maturities
of the bonds, however there were some cost savings. The
state had not been in the market for quite some time;
however, within an hour of the state being in the open
market, the state's bonds were all essentially sold. There
was also a lot of interest in the state from large banks
that had a strong view of the environmental, social, and
governance (ESG) framework. Historically, issuers could
receive a greater benefit if bonds included a call option
provision. There was legislation in 2017 that limited the
bond issuers to 90 days to maturity. There were still some
savings for the issuers, but the legislation limited the
savings. He turned the presentation over to Mr. Williams.
1:56:14 PM
Mr. Williams began on slide 14 and detailed the state debt
obligation process. State debt was authorized by law and
could be a one-time issuance amount or a not-to-exceed
issuance limit in statute. General obligation (GO) bonds
were required to be approved by a majority of voters and
were the only debt secured by full faith credit and taxing
authority. The state bond committees authorized the method
and timing of debt in order to best utilize the state's
credit and debt capacity while meeting the authorized
project's cash flow needs. The state had established other
debt obligations reimbursement programs, such as the school
debt reimbursement program (SDRP) and the HB 528
reimbursement program. He explained that SDRP had been
periodically funded in 2017, 2020, and 2022, but there was
no funding in 2021; however, FY 23 budget appropriations
had offset prior year reductions. In the next few slides,
he would speak on the unfunded actuarial assumed liability
for the pension system. The unfunded liability utilized the
June 30, 2022, actuarial report which was in draft form and
would not be reviewed until June of 2023.
Representative Hannan asked if Mr. Williams knew what the
total cost would be to pay off the state's portion of the
SDRP.
Mr. Williams responded that there was approximately $657
million outstanding in the SDRP, which was issued at the
municipal level. After multiplying the percentages of each
individual project within the Department of Education and
Early Development (DEED), the total amount outstanding that
was subject to appropriation was $440.2 million.
Representative Hannan asked how many years of additional
debt would be owed if the state followed the normal payback
ratio and timeline.
Mr. Williams would follow up with the exact information.
The moratorium was in place until 2025, but he believed the
debt service schedule was 2040. He would double check the
information.
2:00:14 PM
Mr. Williams continued on slide 15 and a chart on the
state's GO bonds, certificates of participation (COPs) for
the Alaska Native Tribal Health Consortium (ANTHC), lease
revenue, and SDRP. The state's current outstanding general
obligation was approximately $800 million. The unrestricted
general fund portion of payment in 2023 was approximately
$73.5 million for GO bonds and $22.4 million for bonds that
were subject to appropriation. The charts on the slide on
the lower portion of the slide depicted the total GO debt
outstanding as of June 30, 2022. He explained that GO debt
service was considered an accelerated paydown and
approximately 72 percent of the outstanding principal was
paid down within 10 years.
Co-Chair Edgmon considered the bond rating agencies'
perspectives in terms of measuring Alaska's solvency and
its ability to make debt payments. He asked if it would be
fair to say that there were two ways of measuring Alaska's
indebtedness: the first being how much the state owed on an
annual basis and the second being the percentage of
revenues. Some of the numbers looked daunting, but he did
not think Alaska was so different than other states. He
asked if Mr. Williams could comment on the topic and put it
into perspective.
Mr. Lamani responded that the state had never defaulted on
the repayments of bonds which was why it had a high credit
rating. In 2013 and 2014, the Governmental Accounting
Standards Board (GASB) 67 and 68 were introduced, and the
board took into consideration the state's aggregate
liability. The assessment occurred over a longer period of
time rather than assigning a rating at a specific point in
time.
Co-Chair Edgmon commented that the state had the most able
backstop in the nation due to the Permanent Fund.
Additionally, the state passed the POMV draw in 2019, which
he thought would be reassuring to the bond rating agencies
and any other entity willing to invest in Alaska. He
thought it was worth underscoring that the Permanent Fund
was part of the state's overall portfolio.
Mr. Lamani responded that states essentially had a limited
taxing authority in order to meet the debt obligations of
the bonds. Absent from the general fund being able to
service the debt, the state would look at other means in
order to service its obligations.
2:05:55 PM
Representative Josephson asked if Mr. Williams could
outline the three COPs.
Mr. Williams responded that the three COPs were the parking
garage at Alaska Housing Finance Corporation (AHFC), the
housing facility project for ANTHC in 2014, and the Mat-Su
lease revenue bonds for the Goose Creek Correctional
Center.
Representative Josephson understood that the $440 million
outstanding for the SDRP were applications that were made
prior to the moratorium. He asked if he was correct in his
understanding that the state could not indefinitely have a
moratorium due to the state's obligation to renovate and
build. He understood that the debt could not be stagnant
forever.
Mr. Lamani responded that DOR would not take a stance on
the legal part of the question. He confirmed that the state
had an obligation to ensure that the debt was serviced
through the municipalities. The decision of whether to
continue the moratorium was up to the legislative body.
Representative Stapp asked if there were any potential
benefits in paying off the GO bonds earlier.
Mr. Williams responded that there were different dates
associated with the original issuance of each of the
subsets of outstanding bonds. For instance, if the balance
were paid early, the escrow would need to be legally funded
with principal on interest payments to the redemption date.
2:10:00 PM
Mr. Williams continued to slide 16 and highlighted the
current principal outstanding for the obligations of the
state in descending order on payment from the general fund.
Number one on the list was GO bonds, followed by state
guaranteed debt for AHFC's collateralized bonds. The next
item was state supported debt, which included COPs and
lease revenue bonds with state credit pledges and payments.
He explained that the pension system's unfunded actuarial
accrued liability (UAAL) included the Public Employees'
Retirement System (PERS) and the Teachers' Retirement
System (TRS). The unfunded actuarial accrued liability was
from the actuarial report from June 30 and totaled $3.9
billion. The next item was state moral obligation debt, a
majority of which was through the Alaska Municipal Bond
Bank Authority and had about $993 million outstanding.
State revenue debt included both the state's international
airport system and the University of Alaska (UA). He
continued on to slide 17.
Representative Stapp thought that the outstanding pension
liability might be off by a few billion dollars based on
the prior presentations given to the committee by the
Office of Management and Budget (OMB) and by the director
of the Legislative Finance Division (LFD), Alexei Painter.
He asked when the numbers would be updated and what the
impact would be on the state's overall credit outlook.
Mr. Williams responded that there was a one-year lag and
slide 16 represented the 2021 actuarial report for
outstanding PERS and TRS liability. He explained that DOR
utilized publicly available information through rating
agencies. In December of 2022, the consulting company Buck
Global had presented to ARMB the draft information
regarding the 2022 actuarial report. The department had
utilized the numbers when presenting information to the
rating agencies with the disclaimer that the numbers were
preliminary.
2:14:12 PM
Co-Chair Edgmon understood that Alaska had low debt overall
in comparison to other states. He asked if his
understanding was correct.
Mr. Williams concurred and added that the state had a
modest debt program, especially in comparison to the
current revenue projections. The state's outstanding debt
was somewhat favorable, but agencies reviewed all aspects
of the state's finances.
Co-Chair Edgmon commented that more often than not, the
legislature did not receive the highest marks for financial
management; however, he posited that the legislature had
historically done a reasonable job of putting itself "in
the red." The bond rating agency reports he had read in the
past talked about non-quantitative aspects of the state's
overall financial health. The state had been declining in
population for the last nine years and was losing many of
its younger citizens. The population as a whole was getting
older and there were workforce challenges going forward. He
wondered if population decline had begun to seep into the
verbiage in some of the bond rating agency reports.
Mr. Lamani responded in the affirmative and indicated that
it was one of the agencies' frameworks under the category
of economy. He confirmed that it was taken into
consideration from a ratings perspective.
Co-Chair Edgmon corrected himself and stated that he meant
to say "in the black" instead of "in the red."
Representative Hannan referred to the Northern Tobacco
Securitization Corporation 2021 Tobacco Settlement Asset-
Backed Bonds under state agency debt on slide 17. She
thought the state had received revenue through the tobacco
settlement, but it appeared on the slide that the state
owed money. The interest was substantially more than the
initial debt, and she assumed it was over a long period of
time. She asked for clarification.
Mr. Williams responded that the bonds were refinanced in
2021. Originally, the state divested its position in
tobacco settlement. The bonds were issued through a
subsidiary of the Alaska Permanent Fund Corporation (APFC)
and the state received certain capital project initiatives
within the structure. He would follow up with the committee
with more information.
Representative Hannan commented that there had been a
policy debate about the legal smoking age being raised to
21. She wanted to know if there would be policy
ramifications if the state did not comply with T-21
[federal legislation which raised the federal minimum age
for sale of tobacco products from 18 to 21].
Mr. Williams would follow up with the requested
information.
2:20:01 PM
Mr. Williams advanced to slide 19 which discussed the debt
affordability analysis report. He explained that the annual
update of the debt affordability analysis was required by
AS 37.07.045 to be delivered by January 31. The report
discussed credit ratings, current debt levels, history, and
projections. The debt that was directly paid by the state
was quoted as a percentage of the total revenues and
forecasted revenues, which rolled into the analysis of the
debt over the 10-year forecast horizon. The 2023 analysis
determined that the state conservatively had a debt
capacity of $1.65 billion. Adjustments were made to the
base analysis to recognize that there would be a POMV split
between the Permanent Fund Dividend (PFD) and the state's
budget, special funding for PERS and TRS, and future
budgeted uncertainty and volatility within the state's
revenue sources.
Representative Stapp asked for clarification that the
analysis showed that the state's bonding capacity was $1.6
billion.
Mr. Williams nodded.
Representative Stapp thought that with a $70 billion
investment fund, the state would theoretically have a
higher bonding capacity.
Mr. Williams responded that the analysis was based on debt
ratios of currently available revenue. It estimated an
annual payment of debt service and determined what the
difference would be over time as compared to the current
outstanding debt. When the limit of 4 percent was used for
the outstanding direct pay debt, the current value was
calculated at $1.65 billion. The total would be slightly
less if other state supported payments were combined.
Representative Stapp understood that effectively, the debt
service obligations were already incorporated into the
structure.
Mr. Williams responded in the affirmative.
2:23:10 PM
Mr. Williams advanced to slide 20 to discuss the authorized
bonding authority and outstanding obligations. He indicated
that he had already gone over the majority of the items.
The fiscal year requirement for annual principal payments
over the next five years on GO bonds was in the $40 million
to $50 million range, lease bonds were in the $17 million
to $24 million range, and SDRP outstanding was $440.2
million. There was currently no outstanding GO
authorization.
Mr. Williams continued on slide 21 and noted that the chart
on the slide showed that the state was in somewhat of an
accelerated paydown of debt. The general fund debt service
payments peaked in 2018 at approximately $230 million. The
FY 23 general fund debt service payments included
approximately $95.9 million in state GO debt and state
supported debt, and approximately $81.2 million in state
supported municipal debt. There was about $851.5 million in
remaining debt service.
Mr. Lamani concluded the presentation and asked if there
were any questions.
2:24:46 PM
Representative Ortiz appreciated the presentation. He was
expecting to see Mr. Brian Fetcher at the meeting and asked
if Mr. Fetcher was no longer with DOR.
Mr. Lamani responded that Mr. Fetcher had moved on to other
opportunities.
Co-Chair Johnson reviewed the following day's agenda.
2:25:50 PM
ADJOURNMENT
The meeting was adjourned at 2:26 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| State Debt Summary Credit Review HFIN 2.7.23.pdf |
HFIN 2/7/2023 1:30:00 PM |
|
| DOR Response to HFIN State Debt and Credit Review Presentation on 2.7.2023.pdf |
HFIN 2/7/2023 1:30:00 PM |
|
| Attachment 1 - Official Statement for NTSC Tobacco Asset-Backed Series 2021 Senior Bonds.pdf |
HFIN 2/7/2023 1:30:00 PM |
DOR Rsponse |
| Attachment 2 - NTSC Annual Financial Report as of 6-30-2022.pdf |
HFIN 2/7/2023 1:30:00 PM |
DOR Response |
| Attachment 3 - Table 5.0 - SOA Payments on GF Paid Debt as of 6-30-2022.pdf |
HFIN 2/7/2023 1:30:00 PM |
DOR Response |