Legislature(2009 - 2010)SENATE FINANCE 532
02/05/2010 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Overview of State Bonding and Debt Instruments | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
February 5, 2010
9:10 a.m.
9:10:05 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee meeting
to order at 9:10 a.m.
MEMBERS PRESENT
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice-Chair
Senator Johnny Ellis
Senator Dennis Egan
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
Senator Lyman Hoffman, Co-Chair
ALSO PRESENT
Deven Mitchell, Executive Director, Alaska Municipal Bond
Bank Authority, Department of Revenue; Jerry Burnett, Deputy
Commissioner, Division of Treasury, Department of Revenue.
SUMMARY
^Overview of State bonding and debt instruments
9:10:11 AM
Co-Chair Stedman explained that the committee is considering
policy decisions regarding cash payment for infrastructure
investments versus issuing debts. This year the committee is
reviewing a proposal from the governor to use certificates
of participation for the State Crime Lab and the University
of Alaska Fairbanks (UAF) Life Sciences Building. He
expected to learn more today about the certificates of
participation along with other debt instruments. He pointed
out a version of "Alaska's Public Debt" (Copy on File), a
primary source of information about state obligations.
Co-Chair Stedman expected a review from the Department of
Revenue (DOR) and the Department of Legislative Finance on
the categories of public debt and bonding provisions
contained in the American Recovery and Reinvestment Act
(ARRA).
9:15:08 AM
DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL BOND
BANK AUTHORITY, DEPARTMENT OF REVENUE, highlighted the
PowerPoint presentation "Information for Senate Finance
Committee presented by: the Alaska Department of Revenue"
(Copy on file).
Mr. Mitchell reviewed Slide 2: "Discussion Agenda"
ƒState Debt Discussion
ƒBond Structuring Opportunities from Recovery Act
ƒCurrent Market Condition
ƒSummary
Mr. Mitchell continued with Slide 3: "$9.3 Billion in
Outstanding State Debt"
ƒGeneral Obligation 502.8
ƒState Supported 1349.8
ƒState Guaranteed 383.9
ƒState Moral Obligation 1250.0
ƒState Revenue 639.5
ƒUniversity 128.0
ƒState Agency 744.4
ƒState Agency Collateralized 2698.0
ƒMunicipal 3297.9
Mr. Mitchell referenced the "Alaska Public Debt" book Page
5, Table 1.1 (Copy on File). He began with state debt, in
particular the General Obligation (GO) Bonds, which include
a state credit pledge. He informed that outstanding
obligations total $502.8 million. An additional $150 million
was authorized in 2008 for transportation projects not yet
been issued. State supported debt is a category subject to
appropriation. Lease purchase financings are certificates of
participation, which yield based on the market conditions of
the day. The state reimbursement of Municipal School Debt
Service is classified as GO debt of state municipalities and
equals $920 million. State reimbursement of capital projects
relates to HB 528 and has a current outstanding balance.
9:19:17 AM
Co-Chair Stedman pointed to the table on Page 5 of the debt
book. He noted that the table contained subcategories.
Mr. Mitchell continued with Lease Revenue Bonds, which are
subject to appropriation, when a fractionalized leased
facility is involved. State Guaranteed Debt is a state
obligation akin to GO. He mentioned a bill intended to
provide additional authorization for the state guaranteed
debt. The debt is also collateralized by the mortgages
entered into with veterans. The program has some of the
lowest default rates of any mortgage program in Alaska.
Mr. Mitchell continued with State Moral Obligation Debt,
which is a category of debt with statutorial requirement
that a reserve be funded. The reserve is a security feature
on the bonds. A failure to pay debt service results in the
provision of a one year grace period. The reserve must be
established and the legislature must be requested for
replenishment in the event of a draw on the reserve. The
construct implies that the legislature would appropriate in
the event of default. The category also contains the Alaska
Municipal Bond Bank, the Alaska General Authority, and the
Alaska Student Loan Revenue Bonds.
Mr. Mitchell continued with the State Revenue Debt. The
state has a prohibition on dedicating revenue excluding a
dedication prior to statehood or federal mandate. The Sport
Fish Revenue Bonds were a means of relying on the federal
mandate to dedicate all revenue related to sport fishing.
The International Airport Revenue Bonds existed prior to
statehood under the same category.
9:23:33 AM
Co-Chair Stedman asked for clarification on International
Airport Revenue Bonds. Mr. Mitchell responded that the
Alaska international Airport System existed prior to
statehood, leading to exemption from prohibition on
dedicated revenue. The sale of revenue bonds requires a
contract to pledge revenues. A limited number of
opportunities exist to sell bonds at the state level. The
university system includes revenue bonds with $128 million
outstanding. State Agency Debt is secured by the public
corporations pledge. He mentioned the northern tobacco
securitization corporation, which has $387.4 in bonds
outstanding. The reason that the revenue was securitized was
to avoid risk of settlement failure. The investors who
purchased the bonds took on the risk and were compensated
through interest rates that were greater than those subject
to appropriation debt. The total State Agency Debt equals
$744.4 million including some housing corporation debt, bond
bank obligations, and the Alaska Railroad.
Mr. Mitchell continued with state agency collateralized or
insured debt including Alaska Housing Finance Corporation
(AHFC) programs, the Shettisham Hydro Project, the revolving
fund and the refunding revolving fund bonds totaling $2.7
billion. He addressed municipal debt including the school GO
debt, which equals $1.3 billion. He identified $1.1 billion
for other GO debt and $1.7 billion for revenue debt. The
total Alaska public debt equals $9.3 billion.
9:27:29 AM
Co-Chair Stedman requested commentary on the $9.3 billion
debt. Mr. Mitchell responded that as the state's debt
manager, the focus is on general fund obligations. He
informed that the School Debt Reimbursement Program should
not necessarily count against the state's debt capacity. The
documents from OMB and the Legislative Finance Division will
not contain agency debt or collateralized debt because those
are obligations that are paid from sources issuing the debt
without state appropriations.
Senator Thomas requested a reason the "total debt service to
maturity" was not calculated for School GO Debt, Other GO
Debt, and Revenue Debt. Mr. Mitchell responded that he could
certainly provide the aggregate totals, but informed that he
does not receive municipal level amortizations.
Senator Thomas wondered about the case of principal
outstanding interest to maturity. He asked if the bonded
debt would be paid off over a period of time. Mr. Mitchell
answered that much state debt carries longer maturities. He
remembered a period of time when the focus was on ten year
amortizations. With the sale of bonds, investors expect a
certainty that they will receive an interest rate close to
the market of the day. The standard call provision is ten
years, which is a zero cost call for debt. He provided an
example with the GO bond category where the 2003 maturity
had 10, 15, and 20 year amortizations for different uses
within the $450 million authorization so the 15 and 20 year
bonds are callable in 2013. Advance refunding on tax refund
debt is a possibility, but it requires interest expense
until the call date.
Senator Thomas asked whether a portion of the total
University debt at $128 million was repaid with general fund
dollars or with the help of the University.
Mr. Mitchell responded that some state supported obligations
once existed, but currently the obligations are paid out of
the operating revenues of the university.
9:33:47 AM
Co-Chair Stedman stated that details about the university
and their debt could be answered during the committee
meeting addressing the University's operating budget.
Mr. Mitchell addressed Slide 4: "Historical Use of General
Obligation Bonds." He outlined the categories and amounts
issued.
Mr. Mitchell discussed Slide 5: "Subject to Appropriation
Leases Since 1990" identifying the types of buildings funded
under the certificate of participation program and lease
revenue conduit.
Co-Chair Stedman requested a definition for certificate of
participation. Mr. Mitchell responded that a certificate of
participation is a lease in which the state provides a title
position to a trustee to act on behalf of the certificate
purchasers. The state pays the trustee who represents the
certificate purchasers. The certificates are $5 thousand
blocks, which encompass a municipal bond ranging in maturity
from one, twenty, or thirty years. The yield, determined by
the amount of time invested is paid semi-annually through
the lease. The date that the certificate matures, the final
interest payment and principal are received. The lease is
subject to annual appropriation. In the event of failure to
pay, the trustee is obligated to take control of the
facility and attempt to make bond purchasers whole for the
term of the lease. The certificates of participation are
more limited than a GO commitment.
Co-Chair Stedman noticed that the table shaded in grey does
not show interest rates. Mr. Mitchell responded that the
interest rates vary.
9:39:57 AM
Co-Chair Stedman requested a report on the interest rates.
Mr. Mitchell noted that the municipal market varied. Co-
Chair Stedman asked if it was possible to call the bond in
less than eight years. Mr. Mitchell answered that it would
depend on the short term treasury market and the potential
rebound.
Co-Chair Stedman asked for the Goose Creek Correctional
Facility schedule. Outstanding obligations are continuously
reviewed to determine whether opportunities exist to reduce
cost. Senator Huggins requested the schedule for Goose Creek
Correctional Facility.
9:42:44 AM
Mr. Mitchell discussed Slide 6 and the "Prudhoe Bay curve"
that was expected in the early eighties.
JERRY BURNETT, DEPUTY COMMISSIONER, DIVISION OF TREASURY,
DEPARTMENT OF REVENUE, stated that the GO bonds went to zero
in 2001.
9:44:06 AM
Mr. Mitchell explained the various authorizations and
projects. Co-Chair Stedman asked what categories encompass
GO bonds. Mr. Mitchell answered capital projects and funds
sold on tax exempt bases. He explained that GO bonds are
easier to administer and can be used for larger state
projects.
9:46:59 AM
Co-Chair Stedman pointed out the outstanding GO bonds
coinciding with high cash positions and savings. He believed
that the policy discussion was whether or not the state must
continue to engage in the administration of GO bonds versus
paying cash. He requested a summary table of projects and
their call date. He suggested a policy to liquidate or call
all the GO bond debt. He wondered how soon the call could be
implemented. Mr. Mitchell answered immediately, but the
negative carry would be incurred in an escrow. All bonds in
final maturity have a ten year call.
Mr. Mitchell explained that the calculus to determine the
policy includes viewing the expectations for savings
accounts on a comparable basis to these long term
obligations. The state is a tax exempt borrower and
investor. He explained that the state could purchase credits
comparable to tax exempt credits at taxable rates. Bonds can
that are issued by municipalities under the Build America
Bond Program are taxable for purposes of the investor. Co-
Chair Stedman stated that he understood arbitrage. The
policy call includes GO bonds and debt outstanding. He
expressed concern that the policy calls concerning debt are
considered with heavier weight than some newspaper articles
dealing with our budget.
9:51:52 AM
Mr. Mitchell addressed Slide 7: "Alaska Municipal Bond Bank"
The handout provides an overview of outstanding loans to
municipalities funded with bonds.
Co-Chair Stedman asked about communities whose financial
condition is deteriorating. Mr. Mitchell replied that the
bond bank has obligations to provide for certain community
buildings. The purpose of the program is to help communities
like Kaktovik, who receive the majority of their income from
gaming, which carries a certain amount of risk. The city of
Adak causes concern due to financial difficulties related to
fish processors, remoteness, and size of community.
9:54:31 AM
Co-Chair Stedman spoke of the community known as Inter-
island Ferry Authority that has undergone financial
challenges with the shutdown of the northern route. He
stated that the job of the committee is to help those
committees facing difficulties. Mr. Mitchell explained that
the Inter-island Ferry is another community that is in
regular communication with the Alaska Municipal Bond Bank.
If the bond bank were not involved in the loan for Inter-
island Ferry, the community would pay considerably higher
interest rates for financing.
Co-Chair Stedman listed challenged communities as Kaktovik,
Adak, and Inter-island Ferry. Mr. Mitchell clarified that
Kaktovik has various challenges yet has never missed a
payment.
Mr. Mitchell recalled that the community of Northwest Arctic
Borough is thoroughly reliant on a mine and the mine is
facing certain challenges.
Senator Thomas asked the definition of "community savings"
as noted on Slide 7. Mr. Mitchell answered that the
community savings represents the benefit to the community by
having participated in the Alaska Municipal Bond Bank. The
savings represent an estimate of the potential interest
expense paid without participation in the bond bank. He
provided examples.
10:00:32 AM
Senator Olson asked about the backup plan for the Northwest
Arctic Borough. Mr. Mitchell responded that the borough has
revenue reserves due to conservative investments made when
the price of zinc was high. He explained that the mine will
retain value taxable by the borough in the event that the
mine cannot access a new ore body.
Mr. Mitchell addressed Slide 8: "Investment Grade Rating
Categories" He explained the rating system.
the investment grade categories
Aa2/AA/AA+
appropriation debt is rated Aa3/AA-/AA
Co-Chair Stedman asked why Alaska did not receive a greater
rating with the state's great cash resources. He thought
Alaska was certainly more solvent than the Federal
Government.
10:05:03 AM
Mr. Mitchell answered that the rating analysts have certain
criteria including broad based taxes and diversity of
economy. Since Alaska relies so heavily on oil, much
volatility exists. He opined that Alaska offsets the
volatility with the reserve position.
Mr. Mitchell explained about expenditure trends and
administrative factors on Slide 9: "Rating Factors for
Alaska's General Obligation Bonds."
o non-renewable oil extraction industries
o renewable resources fishing and timber
o Tourism
o Military bases
o Trend in expenditures
o Oil generated revenue dependency and volatility
o Projected decline in oil production and the
Prudhoe Curve
o Gas Line
o Reserves (CBR, SBR, PF, etc.)
o Very low net debt after deductions for self-
supporting and guaranteed debts
o Debt conservatively managed
o Forecasting ability
o Reserve policies
o Investment strategies and performance
o Services provided
10:08:25 AM
Senator Huggins requested information regarding the gas
line's credit or debit. Mr. Mitchell responded that the
state receives a credit in the gas line category.
Mr. Mitchell turned to Slide 10: "Alaska's State Supported
Debt." He explained the impact education had which resulted
in differing numbers.
Mr. Mitchell reviewed the "State Supported General Fund Debt
Service" as depicted on Slide 11. The school debt
reimbursement program is rebounding and will peak in FY11.
10:11:32 AM
Mr. Mitchell explained "Alaska's Debt Service to
Unrestricted Revenue" (debt capacity) on Slide 12.
Historically, five to eight percent of unrestricted revenue
constitutes the upper limit of capacity.
10:13:31 AM
Mr. Mitchell discussed "Recovery Act Opportunities" on Slide
13.
Mr. Mitchell explained "Advantages of Build America Bonds"
as depicted on Slide 14.
qualify as tax exempt.
Federal Government on interest expense
depending upon market
basis points depending on market.
Mr. Mitchell elaborated upon "Recovery Zone Bonds" as
depicted on Slide 15.
o Identical to BABs but a boosted 45 percent subsidy
o $90 million allocation to Alaska
o Provide opportunity for municipalities to offer
tax exemption to businesses investing in their
communities
o $135 million allocated to Alaska
10:17:10 AM
Mr. Mitchell listed the "Recovery Zone Allocations" as
depicted on Slide 16. The allocations present a problem
because they currently exist in census areas where a
governmental body does not use them. These allocations
require reallocation for use. He discussed the revenue bond
for private businesses and the concern about allocations.
Co-Chair Stedman referred to Bethel's allocation. Mr.
Burnett commented that the majority of the allocation in the
Bethel census area cannot be used because it is allocated to
an area without a local government possessing bonding
authority. He expected the introduction of methodology for
reallocating the funds.
Co-Chair Stedman thought that the subject of reallocating
these funds was important session work.
10:19:50 AM
Mr. Mitchell discussed Slide 17: "Qualified School
Construction Bonds."
the purchase
recent issues required supplemental coupon of 1.5
percent
2010
Mr. Mitchell addressed Slide 18: "Municipal Market Update."
rate bonds accounting for $360.7 billion (89%)
America Bonds (BAB) account for $64.2 billion of
taxable issuance
but have widened slightly recently
near historic lows
10:24:38 AM
Mr. Mitchell addressed Slide 19: and the "Market Update
Fixed Rate Bonds." He stated that the current "AAA"
Municipal Market Data (MMD) has been lower than today only
1.73 percent of the time since January 1 1990. Interest
rates have never been lower.
10:26:07 AM
Mr. Mitchell detailed Slide 20 and the "Alaska Municipal
Bond Bank". He described the analysis.
Co-Chair Stedman addressed the upcoming bond related
legislation. He assumed that the committee would spend time
addressing the issue.
10:28:44 AM
Mr. Mitchell Slide 21: "Current Cost of Capital" He
explained that the table provides a simple interest rate and
amortization comparisons.
Mr. Mitchell explained the summary on Slide 22.
Rating
Recovery and Reinvestment Act (ARRA)
last 20 years.
Mr. Burnett commented on congressional legislation to extend
the BAB concept. The cost to the treasury is tax exempt.
Senator Thomas asked about funding for the Life Sciences
Building and the Crime Lab using certificates of
participation under ARRA. He asked if the certificates of
participation were the best scenario offered for the lowest
possible interest rate. Mr. Mitchell replied that efficiency
is achieved through combination of certificates of
participation. He stated that the combination would provide
a transaction with low interest rates.
Senator Thomas asked if the state was taking full advantage
the current low interest rates. Mr. Mitchell answered yes.
Senator Thomas asked whose responsibility it was to redirect
funding for the Life Sciences Building. Mr. Mitchell
answered that the Fairbanks North Star Borough can take
advantage of the economic development bonds or other GO bond
issues within the borough. The borough can allocate to the
city of Fairbanks which can sell revenue bonds without a
vote, but they cannot allocate outside the area.
10:35:28 AM
Mr. Burnett clarified that legislation would allow another
entity to reallocate funds between projects.
Senator Huggins commented that the recovery act makes him
nervous. He observed an excess of $1 trillion deficit on the
federal level and Alaska contributing to the deficit.
Mr. Mitchell explained that the ability to sell tax exempt
debt is a structuring alternative available to
municipalities. The recovery act includes a standing
appropriation for reimbursements to the issuers. He believed
that enough acceptance is present, making it unlikely that a
congressional act would change the standing appropriation.
10:37:59 AM
Senator Huggins stated that he is still nervous.
Co-Chair Stedman introduced the "FY11 Governor Debt
Obligations and Revenue Sources" (Copy on File) from the
Office of Management and Budget (OMB). He pointed out the
obligations listed including the Crime Lab, the Virology
Lab, and the University of Fairbanks Life Sciences Building.
He noted that the discussion regarding these debt
obligations would be addressed during the upcoming capital
budget process.
10:40:11 AM
ADJOURNMENT
The meeting was adjourned at 10:40 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| AK Public Debt 2010.pdf |
SFIN 2/5/2010 9:00:00 AM |
|
| 2010 01 28 OMB re FY11 Debt Service.pdf |
SFIN 2/5/2010 9:00:00 AM |
DOR State savings accounts and budget reserves |
| Debt Presentation Senate Finance-2010.ppt |
SFIN 2/5/2010 9:00:00 AM |
|
| Debt Summary Table FY02- FY11.pdf |
SFIN 2/5/2010 9:00:00 AM |
|
| Legal Memo 020410.pdf |
SFIN 2/5/2010 9:00:00 AM |
|
| 2010 02 08 GO Bond Calls.pdf |
SFIN 2/5/2010 9:00:00 AM |
|
| 2008 12 22 MatSu Goose Creek RevBond Final Pricing.PDF |
SFIN 2/5/2010 9:00:00 AM |
DOR State savings accounts and budget reserves |
| DOR Slide 5 w Interest Rates.pdf |
SFIN 2/5/2010 9:00:00 AM |
DOR State savings accounts and budget reserves |