01/12/2006 08:00 AM House STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| HB23 | |
| HB278 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 23 | TELECONFERENCED | |
| *+ | HB 278 | TELECONFERENCED | |
| += | HB 273 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE STATE AFFAIRS STANDING COMMITTEE
January 12, 2006
8:06 a.m.
MEMBERS PRESENT
Representative Paul Seaton, Chair
Representative Carl Gatto, Vice Chair
Representative Jim Elkins
Representative Bob Lynn
Representative Jay Ramras
Representative Berta Gardner
Representative Max Gruenberg
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Mike Kelly
COMMITTEE CALENDAR
HOUSE BILL NO. 23
"An Act relating to construction of a legislative hall."
- HEARD AND HELD
HOUSE BILL NO. 278
"An Act relating to the Alaska Municipal Bond Bank Authority;
permitting the Alaska Municipal Bond Bank Authority or a
subsidiary of the authority to assist state and municipal
governmental employers by issuing bonds and other commercial
paper to enable the governmental employers to prepay all or a
portion of the governmental employers' shares of the unfunded
accrued actuarial liabilities of retirement systems and
authorizing governmental employers to contract with and to issue
bonds, notes, or commercial paper to the authority or its
subsidiary corporation for that purpose; and providing for an
effective date."
- HEARD AND HELD
HOUSE BILL NO. 273
"An Act relating to the dividends of individuals claiming
allowable absences; and providing for an effective date."
- SCHEDULED BUT NOT HEARD
PREVIOUS COMMITTEE ACTION
BILL: HB 23
SHORT TITLE: CONSTRUCTION OF LEGISLATIVE HALL
SPONSOR(s): REPRESENTATIVE(s) ROKEBERG
01/10/05 (H) PREFILE RELEASED 12/30/04
01/10/05 (H) READ THE FIRST TIME - REFERRALS
01/10/05 (H) STA, FIN
03/19/05 (H) STA AT 9:30 AM CAPITOL 106
03/19/05 (H) <Bill Hearing Postponed>
04/23/05 (H) STA AT 9:30 AM CAPITOL 106
04/23/05 (H) Heard & Held
04/23/05 (H) MINUTE(STA)
01/12/06 (H) STA AT 8:00 AM CAPITOL 106
BILL: HB 278
SHORT TITLE: RETIREMENT SYSTEM BONDS
SPONSOR(s): REPRESENTATIVE(s) HAWKER
04/19/05 (H) READ THE FIRST TIME - REFERRALS
04/19/05 (H) STA, FIN
01/12/06 (H) STA AT 8:00 AM CAPITOL 106
WITNESS REGISTER
REPRESENTATIVE MARK NEUMAN
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Offered information relating to HB 23.
REPRESENTATIVE NORMAN ROKEBERG
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented HB 23, as sponsor.
REPRESENTATIVE MIKE HAWKER
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented HB 278, as sponsor.
DEVEN MITCHELL, Executive Director
Alaska Municipal Bond Bank Authority ("Bond Bank")
Juneau, Alaska
POSITION STATEMENT: Answered questions on behalf of the Bond
Bank during the hearing on HB 278.
GREG SUNDBERG, Managing Director
Merrill Lynch
Seattle, Washington
POSITION STATEMENT: Presented information and answered
questions on behalf of Merrill Lynch during the hearing on HB
278.
MARK PRUSSING, Vice President
Seattle-Northwest Securities Corporation
Seattle, Washington
POSITION STATEMENT: Answered questions on behalf of Seattle-
Northwest Securities Corporation during the hearing on HB 278.
ACTION NARRATIVE
CHAIR PAUL SEATON called the House State Affairs Standing
Committee meeting to order at 8:06:37 AM. Present at the call
to order were Representatives Elkins, Lynn, Ramras, Gruenberg,
and Seaton. Representative Gatto and Gardner arrived as the
meeting was in progress.
HB 23-CONSTRUCTION OF LEGISLATIVE HALL
8:07:59 AM
CHAIR SEATON announced that the first order of business was
HOUSE BILL NO. 23, "An Act relating to construction of a
legislative hall."
8:08:04 AM
REPRESENTATIVE MARK NEUMAN, Alaska State Legislature, stated
that through discussions with John Duffy, Manager, Matanuska-
Susitna (Mat-Su) Borough, approximately 1,000 acres have been
identified within that borough as available to give any
developer rights to construct a legislative hall. He said he
envisions hotels and shopping areas that would emerge there in
what he described as the fastest growing areas in the state. He
indicated that about 60 percent of the state lives nearby and
approximately 75 percent of the state would have access by road
to the area.
REPRESENTATIVE NEUMAN clarified that he is not proposing a move
of the capital; the legislative hall would just serve as a place
for the legislature to meet during its session. He said he
thinks this is a good option that would not cost the state a lot
of money. He noted that there is a fast ferry slated to operate
next year. He said part of the bill requires that there be
access to an airport. He indicated that legislators from the
major population areas could go home at night, thus saving the
state money in the cost of transportation. Those legislators in
Southeast, Alaska, he noted would have to do the traveling that
the rest of the legislators are already doing.
8:11:07 AM
REPRESENTATIVE LYNN moved to adopt the committee substitute (CS)
for HB 23, Version 24-LS0164\F, Cook, 1/9/06, as a work draft.
There being no objection, Version F was before the committee.
8:11:48 AM
CHAIR SEATON asked if Representative Neuman is suggesting that
the developer would work within the specifications created by
Legislative Council.
8:11:57 AM
REPRESENTATIVE NEUMAN answered that's correct. He said, "I
think that it would assist [Legislative] Council tremendously to
have a developer there to help them work through this process."
He said he thinks it may save the state money and time.
8:12:22 AM
REPRESENTATIVE LYNN noted that there is a small light plane
landing field there, but he said he doesn't know how close that
is to "the anticipated terminus of the proposed Knik Arm Bridge
on the north side which could be used."
8:12:50 AM
REPRESENTATIVE NEUMAN said he believes it's a private airstrip,
but he noted that there are plans for the development of a
commercial airstrip. He noted that there is natural gas and
electricity in the area.
8:13:24 AM
REPRESENTATIVE LYNN said the original bill limits participation
to boroughs with 30,000 residents and he suggested that would
need to be changed so that the area Representative Neuman is
describing could participate.
8:13:49 AM
REPRESENTATIVE NEUMAN clarified that it would be the
municipality of Mat-Su Borough that would be involved.
8:14:08 AM
REPRESENTATIVE LYNN said he wondered if legislative/staff
housing would be provided close to the hall. He clarified that
he is describing some sort of annex that would be owned by the
state.
8:14:27 AM
REPRESENTATIVE NEUMAN indicated that some type of housing units
may be built; however, he noted that Anchorage is not far away.
8:15:51 AM
CHAIR SEATON clarified that the committee is not hearing a
specific plan right now; Representative Neuman is just coming
forward to show that there is an area interested in bidding on a
legislative hall.
8:17:05 AM
REPRESENTATIVE LYNN said his idea for housing would work
anywhere in the state.
8:17:18 AM
REPRESENTATIVE NEUMAN said the Mat-Su Borough would donate the
land to a developer that would like to build a legislative hall,
which he said would cost the state virtually nothing for the
construction of the building.
8:17:51 AM
REPRESENTATIVE ELKINS said he is pleased to hear that the
economic engine is working in Mat-Su, but he thinks it's
inappropriate for the legislature to consider taking economic
sanctions against another community.
8:19:01 AM
CHAIR SEATON asked Representative Elkins to hold that thought
for the sponsor of the bill.
8:19:23 AM
REPRESENTATIVE GRUENBERG noted that the [Fiscally Responsible
Alaskans Needing Knowledge (FRANK)] Initiative is repealed on
page 5, Section 6 of Version F. He asked Representative Neuman
if he supports the repeal of the FRANK Initiative.
8:20:20 AM
REPRESENTATIVE NEUMAN said he would like to withhold his
response until he is further versed regarding Version F, but he
said he would get back to Representative Gruenberg on that. In
response to Representative Elkins' previous remarks, he asked
that legislator to keep in mind that he believes that "it is a
major calling by the majority of the state of Alaska to have
access to their legislators while they're in the legislative
session." He said [if a legislative hall was closer to the
majority of the population], school children could visit the
legislature and learn its process. He said he recognizes
Representative Elkins' concern.
8:22:14 AM
REPRESENTATIVE NORMAN ROKEBERG, Alaska State Legislature, as
sponsor of HB 23, referred to the sectional analysis included in
the committee packet and reviewed the requirements of select
sections of Version F. He said Section 2 would require
Legislative Council to develop specifications by December 15,
2006, changing the term "uniform building code" to
"international building code," as well as some other
administrative changes. Section 3, he said, sets the [date by
which the hall must be completed] to June 30, 2009. Section 4
states that Legislative Council must [select or reject]
proposals by June 30, 2007. Section 5, he confirmed, would
repeal the provision of the FRANK Initiative, included in AS
44.06.050, 055, and 060.
REPRESENTATIVE ROKEBERG said the FRANK Initiative requires that
the public be informed in advance of all costs involved in
relocating the capital or the legislature. He explained that
the repeal provision was added "in order to, in a more timely
manner, proceed with the activities of the legislature and
Legislative Council on this." He said it is going to be
extremely difficult to meet the requirements [of the FRANK
Initiative]. He said the way [HB 23] is designed, the
legislature would only pay $1 a year rent [for a legislative
hall]; however, there would be other costs for relocation, for
example. He said there would be other "modest costs," which he
estimated would be "somewhat less than $10 million maximum." In
other words, he explained, the FRANK Initiative is not necessary
under the terms of the bill.
REPRESENTATIVE ROKEBERG said the FRANK Initiative was designed
by "the citizens of this fair city to protect their position as
holding onto the capital." He said the attorney general (AG)
found that the requirements of the initiative were that all
bondable costs be part of the costs of either relocating the
capital or the legislature. He said in 1982, voters rejected a
ballot proposition to relocate the capital to Willow, Alaska,
after the FRANK Initiative had been adopted. The estimate for
that move was $2.8 billion, which he said was an absurd figure
that the people of the state naturally rejected.
8:27:55 AM
REPRESENTATIVE ROKEBERG revealed his strong background in
commercial real estate development. He said it's always been
his contention that a construction of a new capital could be
accomplished for little or no cost to the state, because
"private sector real estate developers would lust after the
chance to build a new capital building." He mentioned a
building in Anchorage that, for example, could be converted to a
capital for under $35 million, but he said he's not recommending
that. In regard to the previous comments of Representative
Elkins to Representative Neuman, he stated:
I believe in my heart of hearts that the only way
we're going to get a new capitol building - and I
strongly advocate that - is to have this type of
competition ... throughout the state on the level
playing field that everybody has a chance to make a
proposal. That includes Juneau. I thoroughly believe
... that building could be in this community. I
believe the people in this community would have ... a
very good chance of winning that proposal. They've
been reluctant to agree to the financing arrangements
under this legislation; they want the legislature to
pay for their new capitol building. That's the
distinction here. I think that they need to make the
commitment to the legislature if they want to have a
legislature here ... to pay for that building
themselves - not expect us to pay the bonding rent to
amortize the debt on a new structure. That's the
distinction. So, the folks here in Juneau need to get
off their money and prove to the people in the rest of
the state that they deserve to have this legislature
here. That's the issue, and that's why I'm asking
that the FRANK Initiative be repealed, because it's,
frankly, intellectually dishonest the way it's been
used in the past to scare the people of this state.
8:31:47 AM
REPRESENTATIVE GARDNER noted that in 2002 there was an attempt
to repeal the FRANK Initiative through a ballot proposition, and
that attempt failed. She asked, "Does that not give us pause
for repealing it legislatively?"
8:32:15 AM
REPRESENTATIVE ROKEBERG asked Representative Gardner to consider
that the man in charge of that initiative dropped the ball mid-
way through.
8:33:08 AM
REPRESENTATIVE GARDNER said nevertheless the initiative failed
in a public vote.
8:33:17 AM
REPRESENTATIVE ELKINS said that in essence, moving the
legislature would "trickle down" to moving the whole capital,
because there are many support agencies in Juneau. He reminded
Representative Rokeberg that former Governor Bill Sheffield
moved 200 jobs to Anchorage, which crippled [Juneau] in respect
to real estate until recently. He added that Ketchikan also
felt the impact from the loss of the economy in Juneau.
8:34:03 AM
REPRESENTATIVE ROKEBERG replied that he tends to disagree with
that analysis. First, he said Anchorage has historically had
more state employees than Juneau. Regarding the historical
impact, he said he questions the "economic ripple effect of
Juneau and Ketchikan." He said it's clear that the
environmental lobbies and the impacts of the closure of the
Tongass National Forest to timber, and the closure of the
Ketchikan Pulp Mill has had negative impacts to Southeast
economy. He added, "I would be the first to admit, however,
that if, in fact, the ... legislature were to move out of
Juneau, it would have a negative impact. I would agree with
that. That's one reason I wanted to pursue just the legislative
activities and not the entire capitol building."
8:36:52 AM
REPRESENTATIVE ROKEBERG referred to a letter from director of
the Bureau of Education written to a United States Senator on
May 3, 1890, which states that moving the capital from Sitka to
Juneau would be a bad idea for many of the same arguments that
still exist today. He stated his belief that what is not going
to happen is to have a new capitol built in Juneau that is paid
for by all the citizens of the state. He emphasized the need
for a new capitol building and said he voted against the recent
remodel on the House and Senate chambers because the cost was
$.75 million for an ineffective and poor design.
8:38:46 AM
CHAIR SEATON stated that impacts do occur when changes are made.
He gave an example of the move of the ferry system to Ketchikan.
8:39:53 AM
REPRESENTATIVE GRUENBERG said he agrees that this capitol
building is substandard. He said the repeal of the FRANK
Initiative troubles him because that initiative strengthens the
initiative process in the state. The public's right to know and
participate in this issue is something that the people prize, he
said, and repealing the initiative would "cloud the issue."
Regarding Representative Rokeberg's comments about costs being
lower than stated, he suggested that, in that case, more
disclosure is better than less.
8:42:04 AM
REPRESENTATIVE ROKEBERG responded that philosophically that is
true. Conversely, he pointed out that there have been 10 or 11
initiatives in 40 years of statehood. He said the community of
Juneau rightfully does everything it can to hang on to the
legislature. He stated that the people of Alaska have expressed
their will in "some of these votes" approving a new location.
Furthermore, he said the Alaska State Constitution provides that
the legislature can provide its own home. He said HB 23 would
allow the legislature to do that through the repeal of the FRANK
Initiative.
8:43:32 AM
REPRESENTATIVE GRUENBERG noted that the Alaska State
Constitution also specifically provides that the people of the
state can adopt initiatives, which they have done through the
FRANK Initiative.
8:44:30 AM
CHAIR SEATON stated:
My understanding is that the repeal of this provision
... addresses the dollar lease to the state, whereas
the FRANK Initiative would require the analysis of the
total value of the land - the total cost of the
buildings, even though we're not going to pay for
those buildings - we're not going to pay for that
land, but that would be the bondable cost of the
capitol .... I think that this is what Representative
Rokeberg was talking about was the bondable cost of a
building that we're not building actually gives us a
false picture of what we're doing. And the FRANK
Initiative was based on us building a new capitol.
8:45:24 AM
REPRESENTATIVE GRUENBERG directed attention to AS 44.06.055,
which read as follows:
Sec. 44.06.055. Relocation expenditures.
State money may be expended to relocate physically the
capital or the legislature from the present location
only after a majority of those voting in a statewide
election have approved a bond issue that includes all
bondable costs to the state of the relocation of a
functional state legislature or capital to the new
site over the twelve-year period following such
approval. The commission established in AS 44.06.060
shall determine all bondable costs and total costs
including, but not limited to, the costs of moving
personnel and offices to the relocation site; the
social, economic, and environmental costs to the
present and relocation sites; and the costs to the
state of planning, building, furnishing, using, and
financing facilities at least equal to those provided
by the present capital city.
REPRESENTATIVE GRUENBERG said the only thing that has to be
given to the voters in a referendum under the FRANK Initiative
is "the bondable issue." If, in fact, there are not state
bonds, he observed, then the FRANK Initiative "would not require
that the voters approve it." He added, "So, we should not
repeal it." He said the question in his mind is whether the
FRANK Initiative would apply to the deal. If it does not, he
reasoned, then it does not have to be repealed. He concluded,
"That just clouds the issue."
8:46:18 AM
REPRESENTATIVE ROKEBERG noted that there is an attorney
general's opinion that drove the issue pertaining to the
definition of all bondable costs. He stated his understanding
of that opinion is that "anything that could be bonded was to be
part of the dollar amount."
REPRESENTATIVE GRUENBERG said his interpretation is that that
means "bondable costs to the state, not the citizens of Juneau."
REPRESENTATIVE ROKEBERG responded, "It doesn't say that, and
that's how the AG's opinion is."
8:47:07 AM
CHAIR SEATON said this is a question that needs to be resolved,
and he asked Representative Rokeberg to get the AG's opinion to
the committee.
8:47:30 AM
REPRESENTATIVE ELKINS asked if the state would be required to
underwrite any of the bonds.
8:47:45 AM
REPRESENTATIVE ROKEBERG answered no, not the way HB 23 is
drafted. He noted that he recently had served on the committee
for capitol planning at the request of Juneau's Mayor Bruce
Bothello. The cost of that proposal, under the FRANK
Initiative, should have gone on the ballot for the approval of
the public.
8:48:56 AM
CHAIR SEATON, after ascertaining that there was no one to
testify, closed public testimony. In response to a request from
Representative Gardner, he said he would reopen public testimony
at a later date for anyone who just received the committee
substitute and wishes to testify.
8:50:19 AM
REPRESENTATIVE GRUENBERG said whether the capital is ultimately
moved "under the rest of the bill" is a potential issue, whereas
the repeal of the FRANK Initiative would occur immediately;
therefore, he said he agrees with Representative Gardner that
there may be people who want to testify.
8:51:14 AM
CHAIR SEATON stated his interest in obtaining an opinion from
Legislative Legal and Research Services regarding the
applicability of bonding.
8:51:44 AM
REPRESENTATIVE GRUENBERG asked that someone from the Office of
the Attorney General be prepared to testify.
8:52:05 AM
CHAIR SEATON announced that HB 23 was heard and held.
HB 278-RETIREMENT SYSTEM BONDS
8:52:41 AM
CHAIR SEATON announced that the next order of business was HOUSE
BILL NO. 278, "An Act relating to the Alaska Municipal Bond Bank
Authority; permitting the Alaska Municipal Bond Bank Authority
or a subsidiary of the authority to assist state and municipal
governmental employers by issuing bonds and other commercial
paper to enable the governmental employers to prepay all or a
portion of the governmental employers' shares of the unfunded
accrued actuarial liabilities of retirement systems and
authorizing governmental employers to contract with and to issue
bonds, notes, or commercial paper to the authority or its
subsidiary corporation for that purpose; and providing for an
effective date."
8:52:59 AM
REPRESENTATIVE MIKE HAWKER, Alaska State Legislature, as sponsor
of HB 278, said in the first half of the Twenty-Third Alaska
State Legislature much time was spent discussing the state's
pension funds, which are underfunded. He said almost every
public entity in America is facing similar circumstances. He
said it is the responsibility of the legislature to find a way
to pay off that obligation in the most expedient manner and with
the least possible costs to the taxpayers of the state. He told
the committee that he is presenting a high-level, broad
discussion of a vehicle that could allow the state to pay off
that liability. He said that the amount of the liability is
approximately $6 billion. All the public employers that pay
into those plans owe that money, he explained. He said the
state does not have a bank account with $6 billion in it to use
to pay off that liability.
8:56:41 AM
REPRESENTATIVE HAWKER reviewed that that liability accrues
interest each year at about 8.25 percent. He said the crux of
the bill is paying off the liability or a portion thereof
immediately, getting money into the system to start [earning
interest]. He said if the state could find a way to borrow the
money for 5 percent, for example, the state would, over time,
save 3 percent while paying off the debt. He indicated that
that is what a pension obligation bond (POB) would do, and he
said HB 278 would be the vehicle to allow participants in the
retirement plan to investigate the possibility of using POBs.
He said if the state executes such a transaction the potential
exists of saving the taxpayers of Alaska $1.5 billion.
8:59:33 AM
REPRESENTATIVE HAWKER turned to the sponsor statement and
reviewed the three components of the bill, which read as follows
[original punctuation provided]:
HB 278 authorizes the Alaska Municipal Bond Authority
to consider issuing pension obligation bonds (POBs) at
the request of the state or a municipal governmental
employer. POBs are a proven and acceptable tool to
manage pre-existing liabilities for state and local
pensions. Bond market participants are receptive to
POBs, including bond insurers, rating agencies and
investors.
HB 278 expands the authority of the Alaska Municipal
Bond Authority to support the state or a municipality
that wishes to include POBs in their strategy to
reduce the cost of meeting unfunded pension
liabilities.
This bill does not authorize any debt instruments to
be issued. The state or a municipality would need to
take a separate specific action to utilize this new
ability of the Municipal Bond Bank Authority.
REPRESENTATIVE HAWKER referred to a handout included in the
committee packet, entitled, "An Introduction to Pension
Obligation Bonds." He noted that the document was prepared by
Roger Davis of Orrick. He encouraged the committee members to
review the document, stating his belief that doing so would give
them a comprehensive understanding of the pros and cons that
must be considered. He said Orrick is an experienced,
professional bond counseling firm. Attached to the same handout
are two written "what if" discussions - one from Merrill Lynch
and one from UBS Financial Services, Inc. He noted that also
included in the paperwork are research papers provided from
Standard & Poor's (S&P) - a bond rating agency, entitled: "POBs
surging after brief hiatus"; "Managing State Pension Liabilities
- A Growing Credit Concern"; "U.S. Public Pensions Face
Uncertain Times"; and "Pension Obligation Bonds - Were They A
Good Bet?" The last item in the package of information, he
noted, is a resolution from the Alaska Municipal League (AML)
asking that the authority be granted for public employees in
Alaska to consider "these financing vehicles."
9:05:20 AM
REPRESENTATIVE HAWKER directed attention to page 8 of the Orrick
report, which shows that the POBs are better than the
alternatives, which are: to pay more into the pension fund; to
ask employees to pay more into the pension fund; to reduce
benefits; or to do nothing and hope the gain on investments will
ultimately solve the problem. He noted that the disadvantages
are listed on page 9 of the Orrick report. He said the state
could write a check for $6 billion out of the constitutional
budget reserve (CBR), the earnings of the permanent fund, and
this year's surplus, but he doesn't see that as a viable
alternative. He said he sees the mechanism [that HB 278 would
allow] as less objectionable as a means of mitigating the
state's cost than writing that check and taking every penny the
state has off the table.
REPRESENTATIVE HAWKER said some will warn that POBs will injure
the state's credit rating. He directed attention to page 13 of
the Orrick report, which includes extracts of rating agency
comments about the concept of using pension obligation bonds to
reduce the ultimate cost of satisfying the pension obligation.
He said the rating agencies essentially endorse the concept.
The comments generally say that a properly structured
transaction is endorsed and would potentially enhance the
state's credit rating, because the state would be taking
positive, proactive steps, recognized and acceptable to Wall
Street, to address the existing large, unfunded obligation.
REPRESENTATIVE HAWKER noted that Moody's Investors Service,
Standard & Poor's, Fitch, Inc., and [Duff &] Phelps are the
major rating agencies. He pointed to the comment on page 13
written by Fitch, Inc., which read as follows:
Fitch believes that POBs, if used moderately and in
conjunction with a prudent approach to investing the
proceeds and other pension assets, can be a useful
tool in asset-liability management.
REPRESENTATIVE HAWKER said the key is the word "moderately." He
said anyone who has ever lost money investing in the stock
market understands that it is possible to lose money in a
financial transaction.
9:11:02 AM
REPRESENTATIVE HAWKER said some will say a constitutional issue
may exist. He said, "Our constitution has a provision that
basically, on the surface, says the state can only borrow money
for capital development projects." He stated that it is
possible to structure transactions that comply with that
constitutional guideline. He said the Merrill Lynch company
addresses constitutional issues and a "legal structuring that
would comply with" the Alaska State Constitution. He proffered
that if the legislature grants the authority, there are smart
lawyers and investment bankers that will be able to work with
the public employers of the state to create transactions that
will be constitutionally sound. He asked committee members to
not close their minds to something that has the potential of
saving the taxpayers of Alaska $1.5 billion or more.
9:13:14 AM
REPRESENTATIVE HAWKER stated that the entire decision in
considering POBs revolves around the risk and reward trade off.
He said he wants to empower public employers and the competent
professionals they would work with to propose specific financing
structures for consideration by the appropriate authoritative
body. That body would assess the risks and find a structure
within a risk tolerance level. The easiest thing for public
employees to do, he said, is to not make a decision that entails
risk. The private sector, on the other hand, takes calculated
risks. Representative Hawker said the public sector needs to
"take a lesson" from and merge with the private sector. He
reminded the committee that HB 278 is not about making the
decision about what risk will be tolerated or what specific
mechanism of approach to use; it is simply a bill that
authorizes public employers across the state, the investment
banks, and the legal community to get together and bring to the
appropriate authority a proposal to evaluate.
9:16:37 AM
REPRESENTATIVE HAWKER stated, "The ultimate control is in the
evaluation of a specific transaction, but we can't even look at
the specific transaction until we, as a legislative body, allow
people to think out of the box." He asked the committee not to
get bogged down in the details of any possible transaction.
9:17:53 AM
CHAIR SEATON asked where in the bill it is written that the
public entity would come back to the legislature.
9:18:26 AM
REPRESENTATIVE HAWKER answered that each entity would go through
its particular authority. For example, the school district
would go through the school board. He said, "Specifically, this
grants the ... Bond Bank [the] authority to set up the structure
to facilitate these transactions."
CHAIR SEATON responded:
Right, I just want to clarify that, because I thought
I heard you saying that they would come back to us
with proposals. But really ... this bill actually
authorizes them to develop and go through their public
process to issue pension obligation bonds.
REPRESENTATIVE HAWKER interjected, "Or to undertake such a
transaction."
9:19:29 AM
REPRESENTATIVE GARDNER expressed her appreciation in
Representative Hawker's bringing the bill forward. She said
that sometimes the state's public liability for the pension
system is compared to a mortgage. However, she said if she were
to buy a $200,000 house, she would know exactly what the debt
is, and she would have full use of the entire value of that home
during the time she owns it. The pension liability is not
concrete, she noted. She stated her understanding that the
state has enough money in its accounts to pay for "everything
that falls due today." She surmised that the problem is "out
into the future." She asked if that is correct.
9:20:52 AM
REPRESENTATIVE HAWKER said there is a lot of money in the
pension funds today. There is also an obligation that the funds
in the bank today must satisfy in the future. The calculation
shows that, over time, there is not enough wealth in the fund to
meet the obligations that exist today. Doing nothing, he
explained, would result in less money in the pool to earn the
compound interest that is factored into meeting the total
obligations and, thus, in a "more expensive solution." Using a
mortgage analysis, he said if a person makes a large principal
payment up front, that payment is reduced, with less to pay in
the long run. He said the situation is similar for the state.
He said, "We would have more money in the pot to invest, so we
get a greater investment return."
9:23:23 AM
CHAIR SEATON stated as a reminder that three quarters of the
money paying those obligations comes from investment earnings.
He said:
For every dollar we don't have in the bank now, it
takes basically $4 in the future. ... You're not
just underfunding a dollar. ... The 75 percent that
that dollar is supposed to earn to pay those
obligations isn't going to be there, because it hasn't
been in there earning from the present dollar to the
obligation dollar.
9:24:31 AM
REPRESENTATIVE GARDNER concluded that that's a missed
opportunity cost. She clarified her previous question. She
noted that an interest of 8.25 percent had been mentioned. She
asked, "Where does that come in? Are we already paying interest
on what we don't have for the future?"
9:24:48 AM
REPRESENTATIVE HAWKER explained that all the actuarial
evaluations are predicated on: "We put money in, and when the
money's there it makes 8-plus percent. If the money's not
there, it's not making the 8-plus percent and we're getting
deeper in the hole every day."
9:25:38 AM
CHAIR SEATON remarked that there is a sort of reverse action
that exists. He explained that if the state calculated that it
would only be earning 5 percent, instead of 8.25 percent, then
the current obligation, instead of being approximately $6
billion, would be $10-12 billion. He offered further details.
9:27:03 AM
REPRESENTATIVE HAWKER said the POB solution is not a short-term
fix, but works only because of averages in the market over time.
He cited the 10-year returns for the following: PERS
investments at 8.1 percent; TRS at 8.2 percent; and the Alaska
Permanent Fund Corporation at 8.7 percent. He said the State of
Alaska has had extraordinary amounts of money to invest in the
capital markets of the world and has developed proven investment
structures through the use of successful management. He said an
8 percent return is "achievable, valid, and a parameter that we
don't have to question in this analysis."
9:29:43 AM
REPRESENTATIVE GRUENBERG offered questions that need to be
asked: The first question is whether the state should do
anything. The next question is whether the state should use
POBs and, if so, whether the Bond Bank should be used. He noted
that Representative Hawker has chosen the Bond Bank to be the
issuing authority. He stated his understanding that the Bond
Bank typically issues bonds for municipalities and the bill
would significantly expand its authority. He asked
Representative Hawker to comment.
9:31:04 AM
REPRESENTATIVE HAWKER deferred to representatives from Merrill
Lynch. He proffered that the use of the Alaska Municipal Bond
Bank Authority ("Bond Bank") as part of structuring a
transaction is constitutionally acceptable. It is a facility
that has a lot of competent, qualified professionals for
"issuing debt."
9:32:14 AM
REPRESENTATIVE GRUENBERG said he would like that question
answered in the future. He noted that the final paragraph of
the sponsor statement read: "This bill does not authorize any
debt instruments to be issued." He said it appears to him that
the text of the bill does exactly that.
9:33:12 AM
REPRESENTATIVE HAWKER clarified that the bill authorizes
transactions to occur, but it does not authorize any specific
transaction.
9:34:14 AM
REPRESENTATIVE GRUENBERG said Representative Hawker has alluded
to certain constitutional issues. Traditionally, if there are
constitutional issues in a bill, that bill is heard by the House
Judiciary Standing Committee. He said he is interested in
solving those issues in the House State Affairs Standing
Committee for the sake of expediency.
9:35:02 AM
REPRESENTATIVE MIKE KELLY, Alaska State Legislature, said the
bill would offer municipalities some choice in their own destiny
and "some level of acceptance of risk." Regarding the previous
comparison to a mortgage, he suggested using that comparison,
but adding things into it such as the cost of fuel and
electricity, which may double along the way, and an uninsured
risk. He explained that Representative Hawker's situation is
that he is trying to estimate what the total cost of 25 years
paying off an obligation is, but there are a lot of variables
along the way. He stated that there is a great misunderstanding
regarding the 8.25 percent.
9:38:35 AM
CHAIR SEATON asked, "Where does the state come in ... to back up
that bond for that municipality that we're authorizing in the
bill to go forward and issue a debt instrument?"
9:39:22 AM
REPRESENTATIVE HAWKER responded that the question of who is
obligated would be determined by the terms and conditions of the
bond indenture itself. He emphasized that the state would not
accrue any new liability; the state would just be allowing
employers to pursue and choose transactions.
9:40:17 AM
REPRESENTATIVE KELLY noted that "last year" a conversation took
place with Mr. Boutin regarding the possibility of involving the
state "in some fashion that would probably lower the cost and
increase the delta between 8.25 percent and some (indisc. --
coughing) number, which is what this would attempt to do." He
asked if the bill addresses some of what Mr. Boutin was talking
about.
9:41:04 AM
REPRESENTATIVE HAWKER replied that he is not familiar with what
was discussed, but he remarked that the less risk on a loan that
the lender perceives, the lower the rates that can be executed.
He reminded the committee that that level of detail is not the
focus of this discussion; the legislature just needs to decide
whether to allow the markets to "go forward and ... work."
9:42:27 AM
CHAIR SEATON surmised that Representative Kelly wants to know if
there is an alternative to having the state bonding authority do
the work. He said there may be an alternative, but that would
require an amendment to the bill.
9:43:01 AM
REPRESENTATIVE HAWKER asked the committee to remember that the
bill would not force anyone to take a risk, but would allow all
the different public employers to make their own risk
determinations.
9:44:01 AM
DEVEN MITCHELL, Executive Director, Alaska Municipal Bond Bank
Authority ("Bond Bank"), disclosed that he is also the Debt
Manager for the Treasury Division, within the Department of
Revenue. Mr. Mitchell reviewed that the Bond Bank is a public
corporation of the State of Alaska that was created in 1976. He
said the reason for its creation was because at that time,
generally all communities in Alaska were penalized in the
capital market because of the perception of Alaska as a Third
World country. He said there was "an Alaskan penalty when we
went to market," and [the Bond Bank] "offered an opportunity to
create a more efficient means of access in the capital markets
for Alaskan communities." Over the last five years, he noted,
the Bond Bank has issued approximately $4 million in bonds for
loans to 52 different projects. He offered examples.
MR. MITCHELL said he thinks the reason that the Bond Bank was
selected for inclusion in HB 278 is because of the role the Bond
Bank currently plays with municipal entities in helping them
finance their capital needs in an efficient manner. He said
there is a "state support to the Bond Bank," which is called a
moral obligation of the State of Alaska. In the statutes that
create the Bond Bank there are provisions for the creation of a
reserve fund. That reserve fund, he noted, is essentially the
equivalent of one year's debt service of all of the Bond Bank's
bonds. He explained that when the Bond Bank borrows money, it
issues bonds in the capital markets; it takes that money and
lends it to the communities at the same rates at which it
borrowed the money. All the Bond Bank's bonds in its general
obligation program, he said, are issued on a parity basis,
meaning that "they have the same plane on assets and revenues as
other bonds in the reserve fund." He said the Bond Bank has an
approximately $30 million reserve fund that secures the bonds.
Mr. Mitchell stated that if there was a draw on that reserve
fund because one of the communities defaulted, in all but one
case the reserve would fully pay for that community's debt
service, "and so that creates part of the credit of the bond
bank." He added, "But if there were a draw on that reserve
because of a community default, we would be ... required by the
statute to request the legislature and the governor to
appropriate money to replenish that reserve. That is the moral
obligation; the requirement that we request the replenishment
implies that we would receive the replenishment in the moral
obligations."
9:47:39 AM
CHAIR SEATON asked if there is any distinction between the
security backing a general obligation bond and the POBs if they
were issued through [the Bond Bank].
9:47:54 AM
MR. MITCHELL noted that there is a revenue bond program in the
Bond Bank that relies on specific enterprise credit strength.
He said, "So, this would maybe be more similar to that in the
structure as proposed." He noted that there are some questions
about the structure and "the implementation of that; how that
would be managed." He said Representative Hawker, in his
testimony, alluded to a proposal that contemplates the possible
use of a revenue bond structure, and there is some disagreement
in the legal community regarding whether or not that would be
allowed. He advised the committee of the need for discussion on
additional issues to ensure that the proper structure would be
in place to meet certain expectations.
9:49:26 AM
CHAIR SEATON asked if Mr. Mitchell was suggesting that the
committee should resolve that question before it authorizes
issuance of the bonds.
9:49:50 AM
MR. MITCHELL said that issue should be resolved sooner rather
than later. He spoke of finding middle ground. He continued:
... In Oregon they actually ... [dealt] with a similar
issue. I don't know all the nuances of it, but in the
end they wound up having a constitutional amendment to
allow general obligation pledges of local districts
for this type of obligation, which our constitution
prohibits at this point because there's no capital
project.
And the [difficulty] with revenue bonds is there's not
an enterprise; it's a contractual promise to pay that
exists to the pension system. If you want your
participants to receive the pensions that were
promised to them, you have to pay. Whether or not
that can be transferred then to a bond issue is a
difficult question to answer, I think, even amongst
attorneys.
9:51:18 AM
CHAIR SEATON encouraged Mr. Mitchell to continue to share his
knowledge with the committee as the hearings on HB 278 progress.
MR. MITCHELL, in response to a request from Representative
Gruenberg, agreed to supply the committee with a thorough
description of who he is and what he does.
9:52:03 AM
REPRESENTATIVE GRUENBERG told Mr. Mitchell that if he believes
there is a constitutional issue, he would like to see a legal
opinion and a draft constitutional amendment.
9:53:23 AM
MR. MITCHELL said he has not seen a legal opinion. He revealed
that he is involved in a transaction that will close in February
[2006], involving five communities and five bond councils, in
addition to the bond council with which he works. He said
during casual conversations there have been a variety of
opinions expressed. He said he thinks Representative Gruenberg
is asking for something much more formal, and he recommended an
opinion be obtained from the Office of the Attorney General. In
response to Chair Seaton, he offered to request that opinion.
9:54:33 AM
REPRESENTATIVE GRUENBERG stated that he wants the legislature to
be on good legal ground.
9:56:04 AM
GREG SUNDBERG, Managing Director, Merrill Lynch, noted that he
had brought with him a handout [included in the committee
packet] entitled, "Presentation to: State of Alaska: PERS/TRS
Update Pension Obligation Bonds January 2006." He said it would
take 2.5 hours to make the presentation in depth; therefore he
suggested that he could simply answer questions from the
committee. He also provided a list entitled, "Municipal Taxable
Pension Financings 2001-Present" [included in the committee
packet], which he said contains similar information to what
Representative Hawker included in his previously reviewed
handout. In response to a question from Representative
Gruenberg, he confirmed that there is also a handout entitled,
"Alaska School Districts and Municipal Governments Re: TRS and
PERS Liability Refinancing," which was already in the committee
packet from a prior hearing in 2005.
9:59:00 AM
MR. SUNDBERG stated that POBs are but one piece of the puzzle.
He said the much harder work is that which the legislature has
already undertaken to solve the systemic problem. He said
Merrill Lynch has addressed the liability that has increased
over the years and "stands at an actuarial-assessed number as of
the current day." He said Representative Gardner indicated
accurately previously that that's a number that can shift over
time. He indicated that the number will probably never get to
zero, but it could diminish or increase. He said the tool that
is being proposed for consideration is one step in the process.
10:00:24 AM
CHAIR SEATON directed attention to page 2 of the update, and
defined some terms used: "UAL" means unamortized actuarial
liability and "PV" means present value. He turned to page 1,
which shows the PERS/TRS unfunded liability as of June 30, 2004.
He noted that the liability has been steadily increasing. By
July 2005, the total liability was $6.0 billion, and by July
2006, he said it will be $6.5 billion. He said, "Those numbers
are not changing; those are the same numbers, but it's just that
we're a year later and we haven't had 8.25 percent interest on
that present value deposit, and so the number's still the same."
If nothing happens as far as contributions into the system by
July 2007, he warned, that obligation will be $7.1 billion. He
added that that would be without any changes; "that's just
because of not having another year of money in the bank
accumulating interest."
10:03:27 AM
MR. SUNDBERG confirmed that Chair Seaton's statements are
absolutely accurate.
10:03:33 AM
CHAIR SEATON, in response to a question from Representative
Gruenberg, said the source of the numbers came from the
actuarial firm Mercer Human Resource Consulting.
10:04:18 AM
MR. SUNDBERG said those who work in the debt markets tend not to
distinguish in terms of the legal framework surrounding debt or
contractual obligations. He continued:
We look at an obligation that you're being charged
8.25 percent on, based on an actuarial determination
of the appropriate rate that you'll need to both
invest at. And there's some component of that that's
going to be interest; there's some component that's
going to be principal - exactly like your mortgage.
And that's a rate that's necessary in order for you to
compound to satisfy your future obligation of this
unfunded liability So, contrast that with a world
where ..., instead of compounding that 8.25 percent,
you could ... pay a rate equal to what your cost of
borrowing those funds is.
Again, looking at one obligation versus another:
whether you have a contractual obligation to make
those payments on a year-to-year basis or whether you
have a contractual obligation to make debt service
payments, the obligation itself is in essence the
same. The result is markedly different, because in
the bond world - at least as afforded in current
markets and as indicated by Representative Hawker
earlier - the rate right now falls somewhere between
probably 5.5 and 6.5 percent. So, markedly lower than
the actuarial yield you'd be charged.
The number that Representative Hawker referred to
earlier, which is the present value or ... current
dollars, ... that difference is roughly somewhere
around $1 billion .... That in a nutshell is really
the simple mechanics of what we're talking about here.
10:07:00 AM
MR. SUNDBERG said he would now distinguish between the debt or
bond side of the equation and the investment side. He
continued:
Not wrapped up in the bond side is the prospect of
what you do with the money once you have borrowed it.
... Instead of just paying a payment based on an
interest rate of 8.25 percent per year, in a bond
world it is a requirement that you actually invest the
money. So, one thing that you need to do from your
standpoint - a due diligence standpoint - is make sure
you have a vehicle in place that you're comfortable
with from an investment perspective. And, by all
accounts and by all observation, you, in fact, do have
that. You certainly have something that would satisfy
the requirements of the rating agencies that
Representative Hawker referred to earlier - Standard &
Poor's, Moody's, and Fitch - as affording a high level
of confidence that you were going to have an entity
that was investing in a prudent fashion. That is
completely separate from the bond side, and the tool
that we're proposing as a potential piece of the
puzzle does not incorporate a strategy for the
investment of funds or a necessary component for the
investment of funds. It's completely separate.
The committee took an at-ease from 10:08:29 AM to 10:16:59 AM.
10:17:29 AM
MR. SUNDBERG suggested the easiest way to look at [changing to a
POB structure] is changing "one mortgage obligation for another
mortgage obligation." He said virtually every municipal entity
is well accustomed to refinancing its debt from a higher
interest rate to a lower one. He continued:
And what you do when that process is undertaken is
that you structure a new bond issue at a lower cost
that has cash flows that are on a pro rata basis
proportionate to your previous payments, but in fact
lower, because it's a lower interest rate. And that's
another useful tool, I think, in terms of using bonds
versus your existing contractual obligation for an
unfunded liability at 8.25 percent.
10:18:47 AM
REPRESENTATIVE GRUENBERG asked if there are other kinds of
financing that the committee should consider allowing under HB
278. He asked if there are variables or other kinds of
securities that would prevent the necessity of underwriting new
bonds every time the interest rate changes.
10:19:26 AM
MR. SUNDBERG said he is referring to bonds in a generic sense.
He explained that within the framework of bonds there are a
number of different structural features that can be
incorporated.
10:19:50 AM
REPRESENTATIVE GRUENBERG clarified that he wants to ensure that
the words being used would allow even the most conservative bond
lawyer to "do what you're saying." He said he would like Mr.
Sundberg to return with an answer.
10:20:15 AM
REPRESENTATIVE HAWKER noted that the language of the bill does
not refer to bonds, per se; therefore, it is constructed to
provide access to the widest variety of financial instruments
available on the street.
10:20:37 AM
CHAIR SEATON directed attention to page 23 of the update, the
"Oregon Example," which shows results for the City of Portland.
He noted that the City of Portland used a combination of fixed
and variable rate debt. Historically, he said, the cost of
variable rate debt has been significantly below the cost of
fixed rate debt. The risk of variable rate debt is that rates
spike up. He said it could be conservatively argued that a
straight fixed rate program offers more assurance and certainty.
10:22:59 AM
MR. SUNDBERG, in response to a comment by Chair Seaton,
proffered that the variable rate does afford the additional
benefit of being redeemable at any time. In response to a
question from Chair Seaton, he said long-term obligations
typically have a redemption provision for calling the debt back
in and restructuring it. Inside of 10 years - based on the call
date on the bonds - the obligations could be advance refunded.
Outside of 10 years, he said, there is the same flexibility as
with variable rate obligations.
10:24:15 AM
MR. SUNDBERG, in response to a follow-up question from Chair
Seaton, said the market has evolved to the point where there are
a lot of obligations - particularly in the tax-exempt realm,
where there's not a premium charged for "redemption of bonds
early." He concluded, "In the taxable world - which these
obligations would be taxable - there is more often a redemption
premium inside that 10 years."
10:24:32 AM
MR. SUNDBERG, in response to a question from Representative
Gruenberg, said there are entities in various jurisdictions in
the U.S. who have "looked for ways to do these on [a] tax exempt
basis." He said the federal government tends to frown on ways
for the state to benefit at the expense of the federal
government. He said, "In our way of thinking and in the
foreseeable future, we see these as always taxable obligations."
REPRESENTATIVE GRUENBERG asked, "What is the criterion for
determining whether an obligation issued by a state or local
government or an entity like the Bond Bank Authority would be
tax exempt versus non-tax exempt? What's the bright line
criterion that the [Internal Revenue Service (IRS)] uses?"
MR. SUNDBERG answered that it varies by entity and by type of
purpose to which the monies will be applied. He said, "But as a
general rule, in this instance what we're dealing with is a
situation where the federal government frowns on the ability of
a local ... or ... state jurisdiction to be able to borrow money
at a tax-exempt rate and reinvest it at a taxable rate. There
are very limited circumstances where you can do that, and that
would tend to be the bright line."
10:26:51 AM
CHAIR SEATON said he would like to pose that question to the
Alaska Municipal Bond Bank Authority at a future date, in order
to get an answer from a state perspective.
10:27:20 AM
MR. SUNDBERG recalled another issue that had been addressed was
in regard to the type of vehicle that would be used to fund a
bond obligation within the state of Alaska. Mr. Sundberg said
that although he is not an attorney, he works in a world that
intersects with bond attorneys every day. He continued:
... We try to have a nexus where we come up with an
idea and we match that to existing laws, best as
possible, and if there are requirements to tweak or
change the law, we tweak or change the law to the
extent that it is desirable on the part of the
benefiting entity. We try to, at all costs, avoid
things that would require constitutional change,
because that's something that's probably the most
difficult to achieve.
So, ... when we first started looking at this issue,
we were looking at it on the basis of individual
municipal jurisdictions - not looking at it on a
statewide basis necessarily or the state specifically.
We ... immediately came to the conclusion that it
would be very difficult to do this under Alaska
constitutional law; that ... a general obligation -
which is the least expensive way of borrowing - ...
would run afoul of the constitution.
MR. SUNDBERG said Merrill Lynch considered whom an experienced
entity would be that could serve as a conduit or as an issuing
entity for the contractual obligations that the municipal
entities have built up. He stated that the Bond Bank has a long
history of providing funding for municipal jurisdictions. He
said thus far the issue of whether the state itself could solve
or address its unfunded liability through the use of the Bond
Bank has not been discussed. That, he said, is a question that
attorneys need to wrestle with further. What has been
questioned is whether there is a precedent for municipal
entities coming individually to the Bond Bank for the issuance
of debt, and the answer is yes.
MR. SUNDBERG said, "We jumped then from general obligation
issues to two ... different types of bond issues based on the
revenue stream that's used to repay the debt. One of those
would be appropriation debt." He said [Merrill Lynch] looked at
the possibility of structuring an obligation that was subject to
annual appropriation and questioned whether that would be
covered under the umbrella of a general obligation. He said the
response received from a number of attorneys is that it would
not be covered; it would be considered to be a separate
obligation and one, in fact, that could be issued.
MR. SUNDBERG said another question, primary to the use of the
Bond Bank, is whether there are obligations that could be
structured as contractual obligations. He offered the example
of a funding that he personally has been involved in is that of
the Federal Bureau of Investigation (FBI) headquarters in
Anchorage. He explained that the FBI building is secured by
contractual payments from the U.S. General Services
Administration (GSA) that flow through an intermediate entity.
He added, "And that's ... what would be more referred to as a
contract obligation, as opposed to a general obligation. So, we
looked at that as another vehicle, and again one that we felt
would make the attorneys more comfortable looking at the
constitution restrictions and looking at the available
mechanisms that might be used to secure an obligation as a means
of selling debt.
MR. SUNDBERG explained that once the attorneys give the okay,
the flip side of the coin is having to question: "Is this
something we could sell into the market? Would investors buy
it?" He clarified that the question of whether or not bond
council will provide an opinion is separate from the question of
whether there will be a market for these obligations at a
desirable rate. He concluded, "And we feel in the case of both
the contract obligation model, as well as the appropriation
model, that structurally we can get to something that has a lot
of investor appeal."
10:31:58 AM
MR. SUNDBERG, in response to a question from Chair Seaton, said
a contract obligation is very similar to a revenue bond
obligation. He offered the example that an individual municipal
entity that comes to the Bond Bank has a "cumulated contractual
obligation" to make payments into the pension obligation, and
instead of making those payments on an annual basis into the
pension fund, that funding would be provided up front by the
issuance of bonds and the municipal entity would instead be
making contractual payments to bond holders.
CHAIR SEATON stated his understanding that Mr. Sundberg was
separating out the past service cost from the normal service
cost. The latter, he noted, would still be paid by the
municipality into PERS.
MR. SUNDBERG said that's correct.
REPRESENTATIVE GRUENBERG recalled that there was a bill passed
last year that provided for a type of alternative funding that
was contractual.
10:33:28 AM
CHAIR SEATON confirmed [with information shared by Mr. Mitchell
off microphone] that the bill had to do with a virology lab that
dealt with structured payments from the Department of
Administration.
10:34:23 AM
MR. SUNDBERG said he would conclude that the vehicle that was
used was "referred in our lexicon as a certificate of
participation."
10:34:38 AM
REPRESENTATIVE GRUENBERG said yes.
10:34:43 AM
MR. SUNDBERG said, "That particular obligation does ... bear a
great resemblance to what you are doing with what I refer to as,
sort of, middle-ground type obligation that you could construct
under [HB] 278."
10:34:55 AM
REPRESENTATIVE GRUENBERG referred to part of Article 9, Section
8, of the Alaska State Constitution, which read:
No state debt shall be contracted unless authorized by
law for capital improvements or unless authorized by
law for housing loans for veterans, and ratified by a
majority of the qualified voters of the State who vote
on the question.
He suggested that the legislature should look at whether that
provision is out of date and the state should be provided with
more flexibility.
10:36:16 AM
MR. SUNDBERG said there is a two-stage check on the entire
process: First, the bill does not replace or circumvent the
existing jurisdiction's process for issuing bonds. No one will
be getting blanket authorization. The bill just adds the
potential to use a tool if it is viewed as a prudent part of an
overall package, with regard to the balance of state and
municipal obligations as well as market conditions. Second,
each individual entity would have to go through a serious review
by the rating agencies. He continued:
Rating agencies have generally become quite
comfortable with this as a tool. In fact, they've
become more comfortable with the tool than entities
that are trying to get along without it. They view
the obligations in the same way we do - that it's a
contractual obligation you have to fund on an annual
basis. And their question is very similar to mine:
"Do you do it at [an] 8.25 percent interest rate, or
do you do it at a lower market rate?" They do not
necessarily penalize you for not using this tool, but
they certainly don't penalize you for using it when
it's combined with a prudent investment practice. And
the key is "prudent investment of proceeds."
10:39:28 AM
CHAIR SEATON directed attention to page 5 of the update, which
explains pension financing. He noted [that the chart showing
"taxable pension bond financings"] shows that the number of
financings in 2003 was approximately 70, but it dropped to less
than 60 in 2004 and to less than 40 in 2005. He asked what the
reason is for that fairly rapid decline.
10:40:29 AM
MR. SUNDBERG responded that much like a lot of sectors of the
market, the issuance of pension obligations tends to be a
somewhat "lumpy" proposition. He reminded the committee that
the chart shows the number of financings rather than the dollar
amount of financings; therefore, the dollar volume may have
increased while the number of financings decreased. In response
to a follow-up question from Chair Seaton, he noted that there
was a dip in interest rates in 2003, which corresponded with an
increase in financing. He concluded, "If we remain at or near
the level of interest rates that we are experiencing right now,
we would anticipate that based on the growing problem, and this
being more and more accepted as a good tool to address the
problem, ... you'll see more financings done - in terms of
dollar amount."
10:43:18 AM
MARK PRUSSING, Vice President, Seattle-Northwest Securities
Corporation, said that the corporation is the leading
underwriter of municipal bonds and financial advisory work in
the Northwest and is the financial advisor to the State of
Washington and the City & Borough of Juneau. In response to a
request from Chair Seaton, he explained that underwriting bonds
means buying the bonds and turning around and selling them to
investors, thereby taking the risk of finding the buyers for
those bonds. He stated that he and Mr. Sundberg are competitors
in their everyday business; however, "in this effort we are
joining forces in that we both have an interest ... in providing
a framework for the State of Alaska to issue pension obligation
bonds." The nature of each one of those individual obligations
will vary, he said.
MR. PRUSSING revealed that he has had 25 years of public finance
experience - a substantial amount of that in Alaska. He offered
further credentials. He said he was involved in the initiation
of the Alaska State Pension Investment Board and "served the
staff" to that board for a number of years. He said he
currently works in municipal finance and underwrites bond
issues.
10:46:14 AM
MR. PRUSSING, in response to a request for clarification from
Representative Gruenberg, said he is speaking today as both a
potential financial advisor and a potential underwriter. He
said his information today is meant to be shared as
"informational in nature" rather than as any obligation his
corporation has with the State of Alaska or municipal entity.
10:47:24 AM
MR. PRUSSING said the Seattle-Northwest Securities Corporation
thinks the Bond Bank could provide a broader ability for smaller
municipal entities to enter the capital markets "that others
would not be able to." He said the corporation sees many
parallels between Oregon and Alaska. He noted that in one case
the Oregon School Board Association formed its own entity to
issue bonds with a trustee. He said that would be similar to if
the Alaska Municipal League decided to pool municipalities
together. He said the Bond Bank is not the only vehicle, but
the corporation thinks it would be a good one, especially if it
were the intent of the legislature to provide some additional
security for the bonds that were issued through the Bond Bank.
He said he doesn't think that's what's anticipated currently,
but it could be added on if it were the goal of the legislature
to reduce the borrowing cost of the entities that issue bonds
through the Bond Bank.
MR. PRUSSING continued as follows:
For example, you could put into place a stronger
ability to intercept revenues to a school district or
municipality that the money goes to the Bond Bank to
make that debt payment first. Doing that would allow
an entity to put that pledge in place, and it allows
investors then greater security that they're going to
receive their money before the operations -- they're
the first handout, if you will, when money comes in.
And this would particularly play a role in the TRS
system where the majority of funding from school
districts comes from the state. Putting an intercept
in place to intercept that money first before it goes
to the school districts to pay the debt service on
these bonds, would increase investor acceptance. And
what that means is it would provide a lower interest
rate on that pension obligation bond. And ... rather
than having that liability accruing at 8.25 percent,
having it accrue at a lower rate would actually result
in more of the money that you send to the school
districts being put to use in education and in the
classrooms. So, we think that if you choose to use
the Bond Bank, ... it would be a good vehicle to add
on some abilities, if that's what you choose to do.
We think that, of course, the stronger credit quality
that you can provide, the lower the borrowing cost
would be; but it is a legislative decision on how much
the state wants to stand in to help the
municipalities.
10:50:18 AM
MR. PRUSSING, in response to a question from Chair Seaton, said
the information he had just discussed can be found on page 13 of
his handout [entitled, "Pension Obligation Bonds," included in
the committee packet]. He continued:
And this is something that you could do without really
putting the state behind the debt - say for ... any of
the school districts that pool together. You wouldn't
be saying that if they default ... you would step in
and make that payment. But what you would be saying
is that you would provide the Bond Bank the authority
to intercept the money going through the district to
make the debt payments.
CHAIR SEATON, regarding the term "intercept," asked if Mr.
Prussing is talking about the PERS payment that is coming from
the school district based on the contribution rate.
MR. PRUSSING answered no. He clarified, "We're talking about
... the money that the state pays to the school district to
support its operations. ... A portion of that could be
intercepted in between the state and the school district to make
the payment on the bonds through the Bond Bank." In response to
a question from Representative Gruenberg, he confirmed that he
is talking about foundation formula money.
10:53:22 AM
CHAIR SEATON asked if that would be the portion of the
foundation formula money that is related to the salary base of
teachers that make the contribution to PERS.
10:53:49 AM
MR. PRUSSING answered that the goal would be to provide
bondholders more assurance that the district is going to make
its payment on the bond. He said, "To the extent that you can
intercept any funds before [they] get to the hands of the ...
school district ... and send [those funds] to bond holders
provides greater assurance to the bond holders that they're
going to receive their money." He emphasized that he offered
the previous remarks as an example, not a proposal.
10:55:46 AM
REPRESENTATIVE HAWKER, in response to a concern stated by Chair
Seaton, said he thinks the committee is focused on the specifics
when it should have been a more general commentary. He said,
"The interest on the debt will be lower if there is less risk to
the lender. All that we're really discussing in this point is
... a possibility of a way the state itself may, as a policy
decision, decide to lower the risk to the lender of the money."
He spoke of a municipal revenue sharing program as possibly
being another source. There are any number of technical devices
that could be considered; however, the bill is only the
framework to "make this happen." He said it might be best to
consider vehicles that might specifically aid in an execution
when they are specifically identified, "rather than trying to
create a generic catchall that might open up or might cause some
unanticipated consequences."
10:57:36 AM
MR. PRUSSING agreed with the comments of Representative Hawker.
He said the state later could consider a constitutional
amendment that would allow a municipality to issue general
obligation bonds to fund pension obligation bonds.
10:58:13 AM
REPRESENTATIVE GARDNER asked Mr. Prussing if he knows of any
advisors who would be likely to advise against POBs.
10:58:47 AM
MR. PRUSSING recalled that within the Department of Revenue
there is an opinion that POBs should be entered into cautiously.
He said his corporation would agree with that assessment. He
said it is important to analyze the risk of any financing that
is undertaken. He said:
And in this case the risk is: "Will you earn more
than you're paying on the bonds?" If you ... borrow
money and put it into an investment vehicle, and if
you do not earn at least what you're paying on those
bonds, you would have been better off not doing that.
MR. PRUSSING said the State of Oregon conducted a statistical
analysis in 2003 and came up with the conclusion that there was
a 90 percent probability of exceeding the bond interest rate
with their investment earnings. He stated that any investment
vehicle has tradeoffs. The leaders in Oregon that moved for
incorporating POBs were the school districts and municipalities;
initially the state was opposed to issuing POBs. He offered
further details. He stated that Alaska would not be cutting new
ground; however, the legal framework of the state is different.
He said his corporation plans on working with the Alaska
Retirement and Management Board to look at the nuts and bolts of
the system to ensure that the money that is put in can be
appropriately accounted for and the entity receives the
appropriate benefit. He said each governmental entity has its
own process for approving debt, whether it's a municipal entity,
or the state. If the state were to do something on its
liability, that is something that could be addressed through HB
278, or through a constitutional amendment. He said it's
important to distinguish between the state's liability and what
it wants to do with it versus the municipalities' liabilities
and what each wants to do with them. He concluded, "This
legislation, essentially, while it may eventually be used for
the state, [is] mainly geared, as I believe, to allow the
municipalities to work with their legislative bodies to
determine whether this is an appropriate vehicle for their
finances."
11:03:30 AM
REPRESENTATIVE GRUENBERG asked Mr. Prussing what kind of
constitutional amendment was necessary in Oregon.
11:03:46 AM
MR. PRUSSING said Oregon could not legally issue bonds. In
response to a follow-up question from Representative Gruenberg,
he said his corporation would provide the committee with further
information in that regard. He also noted that he has asked
legal counsel to draft what a constitutional amendment would
look like for Alaska. He offered to work with Mr. Mitchell to
provide that.
[HB 278 was heard and held.]
ADJOURNMENT
There being no further business before the committee, the House
State Affairs Standing Committee meeting was adjourned at
11:04:06 AM.
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