Legislature(1993 - 1994)
03/24/1994 09:10 AM Senate FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
March 24, 1994
9:10 a.m.
TAPES
SFC-94, #36, Side 2 (000-end)
SFC-94, #38, Side 1 (000-372)
CALL TO ORDER
Co-chairman Steve Frank convened the meeting at
approximately 9:10 a.m.
PRESENT
In addition to Co-chairs Frank and Pearce, Senators Kerttula
and Sharp were present. Senators Jacko, Kelly, and Rieger
arrived soon after the meeting began.
ALSO ATTENDING: Nancy Usera, Commissioner, Dept. of
Administration; Jim Baldwin, Assistant Attorney General,
Dept. of Law; Elizabeth Shaw, Deputy Attorney General, Dept.
of Law; Nancy Slagle, Director of Budget Review, Office of
Management and Budget; Tom Williams, Director, Permanent
Fund Dividend Division, Dept. of Revenue; Pete Bushre, Chief
Financial Officer, Alaska Permanent Fund Corporation; Mike
Greany, Director, Legislative Finance Division; and aides to
committee members and other members of the legislature.
ALSO PARTICIPATING VIA TELECONFERENCE FROM ANCHORAGE: Norm
Levesque, Alaska Municipal Bond Bank; Eric Wohlforth, Bond
Counsel.
SUMMARY INFORMATION
SB 288 - APPROP: GOVERNOR'S SUPPLEMENTAL
An overview of Secs. 1 through 15 was provided by
Nancy Slagle. Commissioner Usera, Elizabeth Shaw,
Tom Williams, and Pete Bushre also testified. The
bill was HELD in committee for further sectional
review.
SB 312 - SCHOOL CONSTRUCTION GRANT REVIEW
Teleconference testimony from Anchorage was
provided by Eric Wohlforth and Norm Levesque. The
bill was HELD in committee for drafting of
additional language by Senators Rieger and Sharp.
SB 288 - APPROP: GOVERNOR'S SUPPLEMENTAL
An Act making and amending operating and capital
appropriations and ratifying certain state
expenditures; and providing for an effective date.
HOUSE BILL NO. 455
An Act making and amending operating and capital
appropriations and ratifying certain state
expenditures; and providing for an effective date.
[Cross-reference between SB 288 and HB 455. Most Senate
Finance Committee discussion of FY 94 supplemental funding
relates to SB 288. The bill which ultimately passed the
1994 legislature was HB 455]
Upon convening the meeting, Co-chairman Frank directed that
a sectional overview of the FY 94 supplemental commence.
NANCY SLAGLE, Director of Budget Review, Office of
Management and Budget, came before committee. She explained
that the administration's policy on supplemental funding
reflects an attempt to accommodate shortages in agency
budgets through means (cost cutting or realignment of
funding) other than the supplemental. However, in areas
where a supplemental is unavoidable, particularly in areas
of judgments, claims, court-ordered payments, and formula
funded programs, etc., funding therefor has been
incorporated within the proposed bill.
Sec. 1. Appropriates $955.8 to the Office of Management and
Budget for compliance with the Fair Labors Standards Act.
Funding would pay retroactive overtime claims under the act.
In response to a question from Co-chair Frank, Mrs. Slagle
explained that the request relates only to retroactive
overtime. Agencies are required to absorb overtime for the
current year. Claims covered by the appropriation date back
to FY 91. Co-chair Frank requested a breakout by
department. Mrs. Slagle advised that the Dept. of Natural
Resource, Dept. of Health and Social Services, Dept. of
Corrections, and Dept. of Transportation and Public
Facilities are the four agencies impacted by the request.
Sec. 2. Contains a $1,694.9 appropriation for the longevity
bonus program. That amount will cover the increased number
of recipients for the fiscal year. NANCY USERA,
Commissioner, Dept. of Administration, explained that the
department budgets prospectively based on demographic
information on the number of people entering the program.
That information is adjusted on an annual basis. The
program contains no provisions for proration of funding.
Co-chair Frank suggested that the number of recipients has
been chronically under-estimated. Senator Rieger asked if
the increased number of participants is due to individuals
coming into Alaska and signing up for the program. Ms.
Usera said that the department has not conclusively
established a growth pattern. There has been a net
immigration of seniors. Senator Kerttula noted that was a
general immigration of people into the state during the past
year.
Sec. 3. Contains a $466.0 appropriation for the public
defender agency to cover underfunding in personal services
for FY 94. Co-chair Frank asked how the request correlates
with cuts in agency funding in the FY 94 budget. NANCY
USERA said that the requested appropriation reflects the
cut. She referenced a four-year supplemental history. Last
year's supplemental was $342.0. This year it is $466.0.
The increase reflects the deeper cut in last year's
operating budget. Co-chair Frank noted that the request
exceeds the amount cut. Ms. Usera concurred. Senator Kelly
asked what would happen if supplemental funding is not
provided. Ms. Usera pointed out that public defender
services are constitutionally mandated. The court orders
that a defense be provided, and the agency has an obligation
to respond. The agency is chronically underfunded and
understaffed.
Discussion followed between Ms. Usera and members regarding
court referrals and the increasing caseload. She noted that
the Dept. of Law seeks reimbursement of defense costs
through individual permanent fund dividends. To date,
approximately $400.0 has been recovered and returned to the
general fund.
Further discussion of determinations of indigence ensued.
Sec. 4. Appropriates $554.7 for the office of public
advocacy. Of that amount, $460.0 is for contractual
services.
Sec. 5. Appropriates $100.0 to the division of personnel
for arbitration case costs. NANCY USERA attested to a two-
year backlog in arbitrations. A number of unfair labor
practices have been filed for lack of arbitration. The
Public Employee Relations Act is very clear as to what state
obligation are. The request relates to the cost to bring an
arbiter to Alaska to issue rulings. The backlog consists of
400 grievances. The risk associated with not dealing with
these matters is substantial.
Sec. 6. In response to a question from Co-chair Frank, Ms.
Usera explained that the $18.0 request represents a single
grievance award resulting from a grievance brought by an
employee against the Dept. of Administration.
Sec. 7. The $60.0 for a salary survey and geographical
shift differential study was ordered by the court system.
Ms. Usera explained that the study is statutorily required.
In past years, the department has not had the needed funding
to conduct the study. The state was subsequently sued, and
the court ordered that the statutes be complied with.
Responding to questions by Co-chair Frank, Ms. Usera said
that the law predates collective bargaining. The department
has, on a number of occasions, suggested that the law be
changed. In 1991 legislation was introduced to correct the
situation, but it did not progress. Needed changes are
again incorporated within the administration's omnibus bill.
Sec. 8. Contains a $1,752.4 appropriation for additional
leasing costs for FY 94. In response to a question from Co-
chair Frank, Ms. Usera pointed to substantial savings from
renegotiated leases. However, that savings is inadequate to
stem growth or make up for last year's underfunding.
Data Processing Chargebacks
Discussion of data processing chargebacks followed between
Senator Rieger and Ms. Usera. Ms. Usera attested to the
fact that DOA chargeback rates have gone down as provision
of computer services has become more efficient. Agencies
have also effected savings.
Ethics Complaints
Mrs. Slagle directed attention to new requests within the
supplemental bill and noted the $35.0 appropriation for
ethics complaints grievance awards. NANCY USERA explained
that the personnel board is responsible for investigation
and findings concerning ethics complaints brought against
the governor, lt. governor, and attorney general.
Grievances have been filed. There is no funding for
investigations or contracts with independent counsel. Ms.
Usera noted that a number of the grievances were filed by
the Democratic Party.
Sec. 9. Appropriates $325.4 to the Dept. of Law for
judgments and claims. ELIZABETH SHAW, Deputy Attorney
General, Civil Division, Dept. of Law, came before
committee. She explained that funding relates to costs and
attorney fees on cases where the state has been deemed
responsible for payment. Funds represent either court
ordered payments or settlement of claims. Approximately
nineteen have been grouped together within the $325.4
request. Senator Sharp directed attention to backup detail
and suggested that eight claims totaling $209.0 are highly
questionable.
Ms. Slagle noted that subsection (b) of Sec. 9 contains a
$50.0 appropriation to the Dept. of Education for legal fees
for litigation relating to pupil transportation in
Fairbanks.
Sec. 10. Appropriates $462.4 to the Dept. of Law for
settlements stemming from the reapportionment case. Mr.
Slagle directed attention to information set forth on a
handout (page 4 of Attachment A) which, she explained, shows
the judgment amount and interest owed each of the four
plaintiffs.
Sec. 11. Contains a $142.6 appropriation from the permanent
fund to the Dept. of Revenue for printing of 1994 dividend
application booklets. Funding relates to default by the
original contractor. TOM WILLIAMS, Director, Permanent Fund
Dividend Division, Dept. of Revenue, came before committee.
He provided background information on award of the printing
contract to an Anchorage contractor. On December 2, the
contractor notified the department it would be unable to
meet the end of the month delivery deadline. At that point,
the department sought another source. Supplemental funding
covers additional costs relating thereto. Approximately
half of the cost relates to air freighting of the booklets
for timely distribution. The state has subsequently billed
the original contractor for the additional costs and has
asked that the Dept. of Law pursue collection should it not
be forthcoming. The original contractor is also seeking
damages from out-of-state subcontractors. Due to the
complexity of the booklet, Alaska printing companies are
unable to do the work.
Sec. 12. Provides a $3,195.0 appropriation to the Alaska
Permanent Fund for additional equity management and
international custody fees. Senator Kelly sought assurance
that funding flow to managers rather than additional
personnel at the permanent fund. PETER BUSHRE, Chief
Financial Officer, Alaska Permanent Fund, Dept. of Revenue,
came before committee. He said that the fund has never used
moneys that were not needed for management or international
custody fees to cover any other portion of the budget,
including personal services. The corporation has lapsed as
much as $2.5 million from this item in past years. Manager
fees and custody fees are based upon the market value of
assets. Those values have increased substantially. There
is a cost associated with that.
Mr. Bushre described the restructured investment strategy at
the permanent fund. Passive management was previously
utilized in buying index funds. During the current fiscal
year, that has been changed. Index funds have been de-
emphasized and management has become active. The results of
this change have been extremely good.
Senator Kelly suggested that, per the request, management
costs appear to have increased by a third. He then asked if
corporate assets increased by a like amount. Mr. Bushre
responded negatively, but he further advised that the assets
of the fund appreciated by $400 million from the end of
November to the end of January.
End: SFC-94, #36, Side 2
Begin: SFC-94, #38, Side 1
Senator Rieger voiced support for active over passive
management.
In response to a question from Senator Kelly, Mr. Bushre
acknowledged that the requested $3,195 million would be
added to the $10 million provided for management for FY 94.
The FY 95 budget seeks $19 million for equity management
fees and $3 million for custody fees.
Sec. 13. Provides $1.5 million for the Dept. of Education,
K-12 foundation, for increased enrollment based on an
October student count. In response to a question from
Senator Jacko, MS. SLAGLE explained that the administration
did not expect school districts to absorb increased costs
this year without advising them ahead of time that they
would be restricted next year.
Sec. 14. Relates to ratification of prior year expenditures
for the Dept. of Education.
Sec. 15. Contains a $244.4 appropriation to the Dept. of
Health and Social Services for the permanent fund dividend
hold harmless program. The increase relates to higher
caseloads in AFDC and other programs.
Co-chair Frank directed that the meeting be briefly recessed
at this time.
RECESS - 10:00 a.m.
RECONVENE - 10:10 a.m.
SENATE BILL NO. 312
An Act relating to school construction grants; and
providing for an effective date.
Upon reconvening the meeting, Co-chair Frank noted the
teleconference availability of bond bank staff and bond
counsel to speak to SB 312 and directed that it be brought
before committee.
The Co-chair stressed need to understand the impact of
amendments offered by Senator Rieger, in terms of municipal
issuance of debt.
NORM LEVESQUE, Municipal Bond Band, testified via
teleconference from Anchorage. He pointed out that language
added by committee is difficult to comprehend. It has been
interpreted by those working on the bill in many different
ways. The language addresses premiums but not discounts.
He referenced a recent MatSu Borough sale and explained
that, as a net effect of the sale, the borough will end up
with a discount of $17.0.
Mr. Levesque said that he failed to comprehend the rationale
behind the amendment. Premium and discount application is a
marketing concept. What the state should be most concerned
by is the net interest cost for the issue. Mr. Levesque
advised that, this morning, the bond bank had a sale of $3.6
million in bonds. The net interest cost was 5.3212. That
is an excellent rate for the ten-year term.
ERIC WOHLFORTH, Bond Counsel, Alaska Municipal Bond Bank,
next spoke via teleconference. He attested to the fact that
the proposed amendment addresses a problem "which doesn't,
in fact, exist." When municipal bonds are sold, they are
sold with both an original issue premium and an original
issue discount. That means that the maturities are offered
for more or less than par. There are categories of bond
purchasers who desire the high interest rate bonds that a
bid for more than par produces, and there are categories of
investors who prefer discount bonds. The bottom line is:
Has the transaction, in its totality, produced the lowest
net interest cost to the municipality? When bonds are sold
at public or private sale, the drive is to produce the
lowest net interest cost. Configuring a bond issue with
premium and discount bonds is designed to attract a broad
category of investors that prefer those kinds of bond
issues. The fact that they are attracted broadens the
market and tends to reduce the true interest cost to the
lowest amount. With this legislation pending, the MatSu
issue, $16,145,000 for school purposes, may have to bear an
official statement for investors indicating that the
legislation has been approved by committee. That particular
issue is an example of why this is not the correct approach
to limiting interest costs and reducing the amount taxpayers
or the state must pay. The issue contains both premium and
discount bonds. The net cost of the issue is basically a
discount when the premiums are added and subtracted from the
discount. The net interest cost was favorable. If the
proposed legislation penalizes an issue for having premium
bonds, it would, in like fashion, have to a have a formula
that benefits the issue for having discount bonds. The
bottom line is that the legislation is not necessary. It
does not address a real issue in public finance in Alaska.
Senator Sharp referenced a sale with the majority of the
bonds due in four years at over 9.5% tax-exempt interest
with a $15 premium. He then asked who would receive moneys
over and above the face value. Mr. Wohlforth advised that
the municipality receives the funds. With respect to that
particular issue, subsequent bonds are being offered at a
discount so that the premium produced by the earlier issue
is reduced by the discount at which later maturities are
sold.
Senator Sharp noted legislation limiting bonding authority
and suggested that issues such as that described above
generate excess cash and obligate the state to extra
interest payments. Mr. Wohlforth reiterated that later
portions of the issue are sold at a discount so that the
premium for early maturities is reduced by the discount for
later maturities. Senator Sharp inquired concerning what
would prevent a large premium on all the bonds and
subsequent higher reimbursement by the state. Mr. Wohlforth
acknowledged that he could not say that the foregoing would
be a mathematical impossibility.
Senator Sharp than asked how often the blend of premiums and
discounts had been utilized. Mr. Wohlforth attested to
numerous instances in which issues have had both original
issue premium and discount bonds. He said he knew of no
cases of the above-suggested abuse whereby an entire issue
was sold at a premium. Senator Sharp reiterated that the
exposure exists and sought assistance in development of
corrective language.
Discussion followed between Mr. Wohlforth and Senator Rieger
concerning the particulars of the recent bond issue.
Senator Rieger concurred in comments by Senator Sharp that
language should be developed to avoid possible abuse. He
expressed additional concern over ability to shift offsets
for premiums and discounts over a shorter period than the
legislation generally requires. Senator Rieger acknowledged
that present amending language does not "get accurately at
the potential abuse the committee would like to get at or at
least preclude." Mr. Levesque concurred. Senator Kerttula
voiced support for plugging what appears to be a potential
loophole.
Co-chair Pearce called for additional questions. None were
forthcoming. She then advised that she would meet with
Senator Rieger prior to bringing the bill back before
committee. SB 312 was thus HELD in committee for subsequent
discussion.
ADJOURNMENT
The meeting was adjourned at approximately 10:25 a.m.
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