Legislature(2015 - 2016)SENATE FINANCE 532
04/24/2015 01:30 PM Senate FINANCE
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| Audio | Topic |
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| Start | |
| Presentation: Debt Management Policies and State Debt Capacity | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
April 24, 2015
1:35 p.m.
1:35:21 PM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 1:35 p.m.
MEMBERS PRESENT
Senator Anna MacKinnon, Co-Chair
Senator Pete Kelly, Co-Chair
Senator Peter Micciche, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Deven Mitchell, Executive Director, Alaska Municipal Bond
Bank Authority, Department of Revenue; Senator Cathy
Giessel; Senator Mia Costello.
SUMMARY
^PRESENTATION: ALASKA PUBLIC DEBT
^PRESENTATION: DEBT MANAGEMENT POLICIES and STATE DEBT
CAPACITY
1:36:55 PM
DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL BOND
BANK AUTHORITY, DEPARTMENT OF REVENUE, pointed out that the
two documents that would be referenced during the meeting
were, "Alaska Public Debt" (copy on file) and "January 2015
State of Alaska State Bond Committee Debt Management
Policies And State Debt Capacity" (copy on file)were
published annually.
Mr. Mitchell directed the committee's attention to the
summary Table 1.1 on page 5 (5 of 55) of the "Alaska Public
Debt" publication that listed the types of obligations the
state held ranked by "level of commitment." The types of
obligations are listed as follows:
• State Debt
• State Supported Debt
• State Guaranteed Debt
• State Moral Obligation Debt
• State and University Revenue Debt
• State Agency Debt
• State Agency Collateralized or Insured Debt
• Municipal Debt
• Industrial Development Bonds
Mr. Mitchell reported that state debt represented the
highest guaranteed commitment the state made in the form of
general obligation bonds (GO). The "full faith and credit"
of the State are pledged to the payment of principal and
interest on GO debt. As of June 30, 2014, the State had
$803.8 million in outstanding GO bonds. The figure included
$170 million in bond anticipation notes. In addition, $452
million was authorized from 2012 for transportation
projects that were not fully issued and approximately $20
million in principle was retired. Therefore, approximately
$430 million of additional long-term fixed rate debt was
potentially issuable in the coming years for transportation
projects.
Co-Chair MacKinnon asked for clarification regarding the
total indebtedness. Mr. Mitchell clarified that the total
principal outstanding totaled approximately $1.070 billion.
He pointed out that the state was paying off debt at a
rapid rate; in FY 2015 the state paid off approximately $50
million in principle and was expected to pay $47 million in
FY 2016 and $40 million in FY 2017.
Vice-Chair Micciche reiterated that the current principal
balance was $803.8 million; $453 million in transportation
GO bonds of which $190 million was encumbered and left $263
million remained for a total indebtedness of $1.065.8
billion. He asked for concurrence.
Mr. Mitchell answered in the affirmative except for an
additional deduction of $50 million in principle payment
for FY 2015.
Co-Chair MacKinnon asked if Mr. Mitchell could provide a
graphic chart to depict debt over the subsequent five
years. Mr. Mitchell stated that the information could be
provided, and directed the committee's attention to page 49
a historical summary of "Alaska Debt Service on outstanding
State Supported Debt as of June 30, 2014." He delineated
that the table included GO bonds, university debt, lease
purchases and certificates of participation, Capital
leases, school debt reimbursement, and capital project
reimbursements information. Starting on page 50 the table
became prospective through FY 2039. He furthered that the
figures for school debt reimbursement were based on actuals
that were outstanding as of June 30, 2014 and did not
include any type of transaction information for FY 2015.
1:43:37 PM
Senator Dunleavy asked what the current total school debt
reimbursement was. Mr. Mitchell referred to page 5, and
noted that the state's portion of the school debt
reimbursement as of June 30, 2014 was $859.6 billion listed
on the table as "State Reimbursement of Municipal School
Debt Service."
Senator Dunleavy inquired whether any other school related
debt existed. Mr. Mitchell pointed to page 6, that listed
the total school GO bond debt of $1.273.3 million, which
included the $859.6 million figure. The remaining amount
was the portion to be levied on local communities.
Co-Chair MacKinnon explained that she had a concern related
to the financial health of municipalities and how they
could meet their bond obligations if the state was unable
to pay its part of the debt. She reminded the committee
that state statute did not bind future legislatures to pay
it portion of municipal school debt. She asked whether the
only option for the state to repeal the "$263 million of
outstanding" debt was by vote of the citizens of Alaska to
repeal the bonding authority.
Mr. Mitchell replied that to the extent that municipal
grants were included in the proposition, a majority of
voters was needed to rescind the bonding authority.
Co-Chair MacKinnon asked that out of the $263 million in
outstanding debt, how much was under the state's control to
release the debt and how much was under municipal control.
In addition, she wondered "what was the probability of how
much of that money would be sold in a market."
Mr. Mitchell was unable to recall the exact figures from
the 2012 Transportation Act. He remembered that
approximately one quarter to one third of the amount were
municipal grant projects with the balance comprised of
bonds for Department of Transportation and Public
Facilities (DOT) projects.
Co-Chair MacKinnon asked Mr. Mitchell to provide the
information to the committee.
1:47:57 PM
AT EASE
1:50:00 PM
RECONVENED
Co-Chair MacKinnon reiterated her questions prior to the at
ease. Mr. Mitchell explained that when a GO bond
authorization was approved by the voters, the bond bank
authority compiled a memorandum of understanding (MOA)
between all of the state agencies involved. The
transportation bonds involved the Department of Commerce,
Community and Economic Development (DCCED) and DOT; the two
agencies were dispersing the funds. The DCCED allocation
was in the form of municipal grants. The bond bank
requested quarterly cash flow estimates as part of the MOA.
The bank issued debt based on the cash flow estimates to
ensure the projects were funded "in time but not in
advance." He related that when tax exempt municipal debt
was sold the expectation was that the money would be
expended within three years. The first time the state had
issued "new" money bonds since 1987 was in 2003. At the
time, it was anticipated that interest rates would rise,
which created pressure to sell all of the transportation
bond authorizations to a certain market. The bond bank sold
the entire authorization based on an executive directive
but did not begin to expend the funds until 2006. He noted
that the state did not comply with its' stated intent in
regard to expenditure of the funds within three years. The
lack of compliance subjected the state to a "negative
penalty." Subsequently, the bond bank strove to pay for its
actual expenditures within a two year cycle. Most of the
projects had cash flows but he was uncertain whether the
projects could be completed with the funding available.
Further investigation was warranted to determine the amount
necessary to bring the projects to completion.
Co-Chair MacKinnon asked what the total annual payment
amount was under the State Debt category (GO bonds). Mr.
Mitchell specified that the general obligation portion of
debt payment was $88 million for FY 2015. In addition, the
state paid annually for "State Supported Debt." He restated
the items included as "State Supported Debt" according to
the table on page 49. State supported debt were obligations
of another public issuer, such as municipalities or other
political subdivisions that the state agreed to reimburse
on a subject to appropriation basis. However, default on
lease purchase financings and capital leases would be
considered a default of state credit obligations. He
elaborated that not included in lease purchase financing on
page 49 was the Alaska Native Tribal Health Consortium
(ANTHC)bond issue for residential housing issued in
September, 2014 with a debt service of $2.9 million
annually out of a $30 million obligation. Capital leases
included the Atwood Office Building and Parking Garage with
AHFC and the Goose Creek Correctional Center [financed with
the Matanuska Susitna Borough]. The Anchorage jail will be
paid off in FY 2016. The total debt service for capital
leases was $26.4 million in FY 16; Goose Creek debt service
amounted to approximately $17.8 million, the Anchorage Jail
was $1.9 million, with the remainder for the Atwood
Building parking facility.
1:56:28 PM
Co-Chair MacKinnon asked whether the state had done any
calculations regarding paying off the Goose Creek facility.
Mr. Mitchell confirmed that the state had discussed the
issue. He specified that $164 million in par [principle]
had a call date of 2019; the bonds were issued in December,
2008. He conveyed that a call date of 10 years was typical
with municipal bonds. The bond bank refinanced the 2026
through 2039 maturing bonds, which currently have a call
date of 2025. The 2019 through 2025 maturities had a call
date of 2019.
Co-Chair MacKinnon asked whether the decisions regarding
paying off a loan in order to save interest were brought to
the legislature or administration.
Mr. Mitchell replied that the decisions were an executive
decision made by the State Bond Committee, described in the
"Debt Management Policies" document. He added that the
minimum threshold was 3 percent and present value savings
was a percentage of the refunded bonds. Refinancing the
Goose Creek facility saved 8.7 percent in present value
savings or $8.7 million in savings, or over $10 million on
a nominal basis.
Co-Chair MacKinnon clarified that the discussion pertained
to state supported debt and asked whether any more
information was outstanding regarding municipal school
debt.
Mr. Mitchell noted there had been questions about trends in
debt, and referred to historical information on school debt
reimbursement on page 49. He noted that through the mid-
1980's through the early 1990's the school debt
reimbursement program was at or above the levels seen today
on a dollar basis. Mr. Mitchell referred to the recent
presentation by David Teal, [Director, Legislative Finance
Division], which discussed the state's history of revenue
generation and expenditure since the 1980's. He mentioned
that the same sort of trends on the columns [state
supported debt] on page 49 existed on outstanding debt,
which decreased, with the exception of lease purchasing.
The state was focused on paying off its obligations and new
borrowing was rare. In the early 2000's, the state trended
to "funneling the states credit through another entity like
the Alaska Housing Finance Corporation (AHFC) or
municipalities." He opined that the state should have
recognizes its obligations more directly through the lease
purchasing category rather than acting like the debt was
not a direct commitment of the state. The state
appropriated undesignated general funds to directly repay
the AHFC or municipal funneled debt service. He shared that
investors disliked financing the Goose Creek Correctional
Facility as municipal debt with the Matanuska Susitna
Borough. The investors thought that the facility was
privately operated and were less interested in investing.
The state had to convince the investors that the prison was
a lease commitment of the State of Alaska. The state ran
the risk of bonding at higher interest rates and losing
investors when a bond issue like Goose Creek was not
described as a direct State of Alaska, Certificate of
Participation lease commitment of the state.
2:03:59 PM
Co-Chair MacKinnon referred to Alaska's credit-worthiness,
and wondered whether creditors considered the total value
of state assets versus the amount the state was able to
borrow or did creditors consider revenue versus credit. She
maintained that if the answer was both she wondered how
things differed currently than in the 1980's and 1990's
when the state was better able to carry the debt load. She
referenced suggestions that the state should borrow its way
through the current fiscal crisis, which she did not
support.
Mr. Mitchell answered that creditors looked at both revenue
generation and assets to formulate a full picture to decide
credit decisions. He referred to page 51, and discussed
the "Total Debt Service to Revenues" column, remarking that
debt service to revenue was what was considered to
determine the state's debt capacity for decades. He noted
that in the 1987 when revenues decreased the debt service
as a percentage of unrestricted revenue increased to 15.8
percent, which resulted in "an impairment of the state
issuing additional debt." He pointed to the projected FY
2015 (based on the fall forecast) total debt service to
revenues at 8.5 percent. The stated targeted debt service
at 8 percent and targeted 5 percent for total state debt
service which was projected at 4.3 percent. The FY 2016
projected debt service to revenue ratio was 9.1 percent.
Co-Chair MacKinnon asked whether the reason the projected
debt to revenue percentage was increasing was due to
decreased revenue coming into the state.
Mr. Mitchell affirmed. He remarked that last year's
projections were satisfactory and that the increased ratio
was a function of revenue volatility. The volatility
created a challenging situation for the state from a credit
perspective. He commented that the state reserves acted as
"shock absorbers" during periods of volatility and reminded
the credit rating analysts of Alaska's reserve positions.
He cited the ratings history table (Table 5.3) on page 54,
and pointed out that in 1980 that state's credit rating was
a low double A.
Co-Chair MacKinnon asked about 1987 when the state's debt
service to revenue ratio was 15.8 percent. She wondered
whether the state's credit rating dropped. Mr. Mitchell
responded in the negative and noted that the credit rating
at the time was double A negative or flat.
2:09:16 PM
Senator Dunleavy announced that there was a philosophy
regarding issuing new bonds to pay off debt, and wondered
when Mr. Mitchell considered it to be a good practice.
Mr. Mitchell extrapolated that under the scenario where the
state was paying high interest rates for debt, the state
could refinance with a different form of debt. He furthered
that years ago the state considered pension obligation
bonds. He defined the concept as theoretical debt that was
amortized at 8.25 percent repaid with lower interest debt
and theoretically keep the difference and consider it
savings.
Senator Dunleavy asked whether the advantage to the state
in maintaining a high bond rating was to take on debt at a
lower interest rate. Mr. Mitchell answered in the
affirmative.
Vice-Chair Micciche asked where the state's total debt
service to revenue ratio limit of 8 percent was derived
from. Mr. Mitchell confirmed that 8 percent was "an Alaskan
metric based on past analytics." The limit was similar to
what might be considered in other states. He referred to
Table 2, page 7 of the "Debt Management Policies and State
Debt Capacity" document and pointed out that several other
states maintained an 8 percent limit.
Vice-Chair Micciche asked about the bond bank's evaluative
process regarding bond refinancing. Mr. Mitchell reiterated
that typically a bond was issued with a "10 year par call",
which meant the bond cannot be refinanced before the 10
year call date. However, a one-time opportunity called an
"advance refunding" was available. He defined that an
advance refunding refinanced the bonds prior to the ten
year call date, by borrowing money and placing it into an
escrow account with a third party. The money was sized to
pay the interest expense on the bonds the state wanted to
call in the future. Therefore, the money in escrow provided
the cash flow that payed off the old high interest debt and
the state also paid current advance refunding debt service.
2:14:28 PM
Vice-Chair Micciche asked whether the bonding agency set
the margin between the "old rate and the refinanced rate."
Mr. Mitchell specified that the market rate of the day set
rates. Opportunities to refinance were available when
interest rates dropped or through the passage of time. He
detailed that the interest rate on the bonds were priced
for each year. In a standard rising interest rate
environment the shorter the term the lower the interest
rate.
Vice-Chair Micciche asked whether presently, Alaska had any
outstanding 4 percent to 6 percent interest rate bonds. Mr.
Mitchell stated that the Department of Revenue (DOR)
recently refinanced a 2009 GO bond issue worth $100 million
which generated a $7.5 million savings in present savings.
Currently, no opportunities for refinancing existed.
Senator Bishop referred to refinancing through an escrow
account [advance refunding debt], and wondered what the
advantage was. Mr. Mitchell clarified that the scenario was
an opportunity to "lock in" savings that were afforded by a
certain interest rate environment when uncertainty existed
about the interest rate at the call date of the bond.
Senator Hoffman asked what the initial interest rate for
the Goose Creek facility financing was and what the
interest rate was currently. Mr. Mitchell stated that
initially in 2008, the interest rate was approximately 6
percent. The current interest rate on the refunded bonds
was approximately 3.5 percent.
2:19:38 PM
Co-Chair MacKinnon asked about GARVEE bonds. Mr. Mitchell
related that the state had GARVEE eligible bonds in 2003
that were issued for 10 years and were paid off in 2013.
Co-Chair MacKinnon asked whether GARVEE bonds were
available for the state transportation bond projects for
deferred maintenance.
Mr. Mitchell responded in the affirmative, and reported
that the GARVEE bonds were still "viable." The amortization
period was shortened. GARVEE bonds required that the
federal receipts were dedicated to the bond issue. The
state was not able to dedicate revenue which limited the
state's use of GARVEE bonds. The state lacked alternative
bonding options, therefore the transportation bonds were
sold as a GO bonds.
Senator Bishop inquired whether the state was "pre-
spending" federal dollars with GARVEE bonds. Mr. Mitchell
answered in the affirmative.
Co-Chair MacKinnon asked whether Senator Bishop's
definition of GARVEE bonds was complete. Mr. Mitchell
explained that the intent of GARVEE bonds were to meet the
needs of priority projects regarding life and safety or
other crucial needs that could not wait for the time it
took for a state to accumulate enough funds to build the
project. The GARVEE bonds were an exception to the tax code
rule regarding pledging federal revenue to a tax exempt
bond issue.
Senator Hoffman referred to the credit rating history on
page 54, and wondered what the administration thought would
happen to Alaska's high AAA bond rating in the next five
years and whether additional costs would be incurred as a
result of a rating downgrade.
Mr. Mitchell offered that the state had been "notified" by
all three rating agencies in December, 2014 subsequent to
publishing the fall revenue forecast regarding bond
ratings. The rating agencies general concern was how the
state would manage its resources in the midst of declining
revenues. The state achieved the AAA bond ratings partly
due to its "extraordinary reserve position." The agencies
concern was prompted by the state's anticipated need to
draw on its reserves to cover revenue shortfalls. He
notified the committee that Moody's Investor's Service, in
December, 2014 placed the state on "negative outlook;" a 30
percent expectation of downgrade in the next 18 months.
2:25:03 PM
Co-Chair MacKinnon announced that she obtained a report
from Fitch Rating Agency. She shared that at least 15
states had an AAA bond rating. She asked for concurrence.
Mr. Mitchell did not have the information available to
answer the question.
Co-Chair MacKinnon discussed refinancing, and asked whether
the state considered the amortization period in regards to
debt. She suggested the option of refinancing shorter loans
for longer periods thereby creating lower payments.
Mr. Mitchell stated that the state previously amortized its
debt over a ten year debt service structure. Over time the
state moved away from that approach and currently amortized
bonds over a longer periods of time on a case by case
analysis. Most of the states GO bonds were amortized over
20 years some even longer predicated on tax credit
advantages. He detailed that some of the 2010 bond
authorizations were sold under the "Build America" bond
structure and "Qualified School Construction" bonds. He
noted that the Qualified School Construction bond offered a
tax credit eligible for state allocation of approximately
$35 million reimbursed by the federal government for 99.9
percent of the state's interest expense. Currently, the
reimbursement rate was approximately 93 percent for the
state's interest expense. He remarked that the state took
full advantage of the "advantageous structure" of the Build
America bonds for as long as possible. He mentioned that
the Alaska Native Tribal Health Consortium bond issue was
amortized for 15 years based on the legislation. He
expounded that in general, extending outstanding debt
service was viewed as a "credit negative." He exemplified
the state of Illinois, which borrowed significant amounts
of money of long-term debt to pay current year pension
system obligations that placed negative pressure on its
bond rating. He qualified that any decisions around
financing debt should be understood in terms of the
action's consequences.
Vice-Chair Micciche conveyed that he disapproved of the
idea of the state extending debt.
2:31:58 PM
Co-Chair MacKinnon agreed and related that the public's
suggestions in emails and correspondence in response to the
state's revenue crisis was being considered in an effort to
examine all of the options in seeking a solution.
Co-Chair MacKinnon referred to state-guaranteed debt and
other types of public debt, and asked Mr. Mitchell to
elaborate on the cost of the debt, interest rates, and
amortization periods in his discussion.
Mr. Mitchell reported that interest rates varied from
market to market but a correlation existed between the
level of pledge and relative interest rate; the state's
full faith and credit [State Debt] representing the highest
level corresponding to the lowest interest rate. He noted
that currently interest rates were very low; GO bond debt
interest rates were approximately 3 percent amortized over
20 years. He discussed State Guaranteed Debt. He summarized
that in 1982, voters approved an amendment [Article IX,
Section 8] to the Alaska Constitution] that permitted the
state to guarantee unconditionally as a full faith general
obligation of the State, the payment of principal and
interest on revenue bonds issued by AHFC for the purpose of
purchasing mortgage loans made for residences of qualifying
veterans (Veterans Mortgage Program.) The bonds were rated
AAA based on their own collateralized mortgages and the
states full faith pledge. The loans were diminishing; in
2003 the loans totaled $320.4 million and currently totaled
$73.5 million. He continued with the next type of debt,
State Moral Obligation Debt. He defined that the debt
consisted of bonds issued by state agencies which were
secured, in part, by a reserve fund. In the event of a
default on a draw on the reserve fund, a report must be
submitted to the legislature; required by statute, which
created a "moral obligation" by the state to act on the
notification and replenish the reserve fund.
Mr. Mitchell cited the growth in moral obligation debt; in
2003 the debt total $256 million in contrast to the FY 2014
balance of $923 million.
2:36:06 PM
Co-Chair MacKinnon asked whether it was worth maintaining
the state's AAA bond rating for the sake of municipalities
and other entities that employed state moral obligation
debt if the state got out of the business of borrowing
directly.
Mr. Mitchell stated that even if the state was not
currently interested in borrowing, the state's position
might change in the future, therefore the interest
difference between AAA and AA bond rating might not be as
significant in a low interest environment but would be at
higher interest rates. He spoke to the difficulty of
raising a credit rating as opposed to the ease of lowering
it, and maintained that if the state were to fall to an AA
credit rating, it would be very difficult to regain the AAA
rating. He referred to municipal debt issued by the Bond
Bank as an example of the state providing credit support.
He detailed that as the Bond Bank issued education and
capitol project funding to communities, an estimated 50
percent of the debt was eligible for the school debt
reimbursement program and the state by extension, was
paying for the debt service. He thought that the example
was a powerful use of the state's credit rating.
In response to a question by Co-Chair MacKinnon, Mr.
Mitchell clarified that half of the state's municipal bonds
were issued to municipalities that were building school
facilities and out of that amount some portion was
reimbursable by the state of Alaska through the School Debt
Reimbursement program depending on the specifications of
the project.
Co-Chair MacKinnon asked whether communities were accessing
more than one program for school debt. Mr. Mitchell pointed
to page 6 and cited the total School GO debt service of
$1.273.3 billion under the municipal debt umbrella, $859.6
million of state reimbursable debt was a portion of the GO
bond debt and the $460 million from the Alaska Municipal
Bond Bank would be included in the GO bond total. He
offered that "it was a web of participation and reporting.
Co-Chair MacKinnon asked why the Alaska Municipal Bond Bank
carried an obligation dating back to 1976. Mr. Mitchell
explained that "there was a master indenture crafted in
1976 under which bonds were sold until 2005. In 2005, a new
master indenture was created called the "2005 program."
Under the program created in 1976 the final bonds issued
will mature in February of 2016 and the entire 1976 program
will mature.
2:42:40 PM
Co-Chair MacKinnon articulated that "some of the problems
she had with debt" was paying for repair while still not
having paid off the cost of construction. She wondered how
the legislature "could take care of bonding for things that
had life cycles inside of the debt structure."
Mr. Mitchell believed that required revisiting how the
school debt reimbursement program actually worked. He
delineated that the program was administered by the
Department of Education and Early Development (DEED) and
the issuance of the bonds were done by municipalities or
the municipalities through the Alaska Municipal Bond Bank.
He guessed that even if a facility had existing debt
outstanding it did not limit the municipality from issuing
additional debt and qualifying for the program.
Senator Dunleavy commented that the life expectancy of
recently constructed buildings was approximately 30 years,
which he considered a "consumable" or operating expense
that required continuous minor and major maintenance as
opposed to being a capital investment.
Senator Bishop asked what the model design and build
requirements should be going forward. He wondered whether
the state was going to design and finance 30 year buildings
or construct buildings that would last 50 or 100 years.
Mr. Mitchell discussed the Alaska Energy Authority (AEA)
bonds under Moral Obligation Debt. He reported that the
bonds were outstanding and financed under the Alaska Energy
Program. The balances were diminishing each year with no
new activity since 2003. He mentioned the Alaska Student
Loan Corporation with $243 million of moral obligation debt
that was diminishing since 2003. He noted that the total
moral obligation debt service was $1.245 billion compared
to $940 million in 2003, which reflected the growth in the
Alaska Municipal Bond Bank.
Co-Chair MacKinnon noted that she introduced legislation
that asked the citizens to consider a constitutional
amendment regarding the huge debt that college students
were carrying across the country. The interest rate on
college debt was much higher than other types of loans. She
inquired whether the Alaska Student Loan Corporation debt
was increasing or decreasing.
Mr. Mitchell asserted that he was not an expert on the
Student Loan Corporation but thought that its debt was
decreasing because other lower interest loan alternatives
were available.
2:49:02 PM
Co-Chair MacKinnon asked if Mr. Mitchell could furnish her
office with information about whether fewer students were
accessing the program because it was so costly and wondered
whether the administrative costs were rolled into the
program and driving the debt higher. She stated that a
constitutional amendment would enable a one percent
savings. Mr. Mitchell agreed to supply the information.
Mr. Mitchell moved to State Revenue Debt. He explained that
Sportfish Revenue Bonds were sold in 2005 for a portion of
the cost of sportfish hatcheries in Anchorage and Fairbanks
partially supported by a surcharge on license sales, which
had $35.3 million of outstanding debt. The surcharge
revenue was used for the debt service. The loans were
amortized through 2025 but were expected to be retired in
2020 depending on sport fishing license sales.
Senator Bishop deduced that there was not a penalty to pay
off the bond before the call date. Mr. Mitchell answered in
the affirmative and noted that the bonds were structured
with optional redemption allowances that allowed a 3 or 7
year call on the original issue.
Co-Chair MacKinnon commented that the sportfish license
revenue stream was dedicated.
Mr. Mitchell noted that a revenue stream can be dedicated
if it existed prior to statehood. The sportfish bonds were
dedicated under federal law.
Co-Chair MacKinnon asked whether the federal government
"allowed or mandated dedicated funding streams." Mr.
Mitchell responded that the federal government mandated
dedicated funding streams.
Co-Chair MacKinnon asked whether the bond payment excess
from the sportfish license revenue could be used in other
areas of the state that wanted sportfish hatcheries to
"create increased harvest opportunities."
Mr. Mitchell responded that the scenario was possible but
required an extension of the surcharge which necessitated
legislation.
2:55:11 PM
Co-Chair MacKinnon asked whether the surcharge was based on
a specific year, or expired when the bond was paid off. Mr.
Mitchell clarified that the surcharge expired when the
obligation was paid off.
Co-Chair MacKinnon surmised that the surcharge was specific
to the hatchery bonds and the surcharge would decrease when
the obligation was paid off. Mr. Mitchell responded in the
affirmative.
Mr. Mitchell referred to International Airport revenue
bonds and reported that the bond issues were for the
airport in Fairbanks and the majority were for the terminal
redevelopment in Anchorage. The bond peaked in 2006 and
payments subsequently declined. He added that the bonds
were fully self-supported. He spoke to the University of
Alaska debt, noting it incurred revenue bonds and lease
obligations as part of an installment contract. The
university's debt remained relatively "constant" since
2003.
Co-Chair MacKinnon referred to a prior request by
University of Alaska President Patrick Gamble who requested
bonding for deferred maintenance as a way to reduce overall
expenses. She wondered whether the university had embarked
on that scenario or were building new facilities.
Mr. Mitchell stated he was unsure of the purpose of the
university's bond issues. He recalled that the university's
bond issues had been relatively modest for capital
projects.
Co-Chair MacKinnon wondered whether, out of the $140
million shown on the table in university revenue bonds, the
university was meeting its payment obligations. Mr.
Mitchell answered that the university met its bond
obligations from its revenues.
Mr. Mitchell discussed "State Agency Debt." He voiced that
state agency debt was not a general obligation of the State
and did not provide any security for the debt. He
identified the AHFC Commercial Paper program debt currently
at $65 million that decreased from $150 million in 2003. He
moved to the Alaska Municipal Bond Bank Costal Loan
Program, which was a direct National Oceanic and
Atmospheric Administration (NOAA) obligation to the
communities of St. Paul and Nome. The balance was $11
million in 2003 and was currently $10.6 million. He pointed
to the outstanding bonds in the amount of $142.4 million,
which increased from $20 million in 2003. He noted that the
Northern Tobacco Securitization Corporation, Tobacco
Settlement Asset-Backed Bonds were part of a legal
settlement the state participated in and subsequently sold
40 percent of the settlement twice; in 2000 and 2001 in
exchange for a one-time payment. The state securitized the
cash flow through the sale of the portion of the
settlement.
3:01:26 PM
Co-Chair MacKinnon expressed confusion regarding the
settlement. Mr. Mitchell clarified that the remaining 20
percent of the settlement was dedicated for tobacco
cessation efforts. He detailed that at the time, the
settlement was being securitized by other states and
municipal entities and Alaska followed their lead. The
settlement cash flow was "projectable and predictable into
the future" therefore, the state leveraged the
securitization. He summarized that, "the settlement sales
were a means of bringing future value forward to provide
for capital projects through the use of an asset sale and
subsequent securitization through the corporation."
3:03:42 PM
AT EASE
3:09:01 PM
RECONVENED
Co-Chair MacKinnon explained that the committee would
receive additional information on the Northern Tobacco
Securitization Corporation. She shared concern about
municipal debt and the challenge the state's revenue crisis
might pose for municipalities and the state in meeting its
bonding obligations.
Mr. Mitchell spoke to "State Agency Collateralized or
Insured Debt," noting that it was primarily the Alaska
Housing Finance Corporation's obligations comprised of
either collateralized mortgages or bond issues for state
capital projects. He cited the amount of the combined debt
of $2.2 billion as of June 30, 2014 and in 2003 the amount
was $2.7 billion. He furthered that Alaska Industrial
Development and Export Authority (AIDEA) bonds; Revolving
Fund and Refunding Revolving Fund Bonds in the amount of
$73.2 million and the Power Revenue Bonds, First Series
(Snettisham Hydro-electric Project) in the amount of $72.1
million were also included in the category.
Co-Chair MacKinnon noted that there had been conversation
about using AIDEA to finance the Interior Energy Project
(IEP). She wondered whether the project would result in
increased bond indebtedness for the state. Mr. Mitchell
stated he was not aware of how AIDEA would finance the
project.
Senator Bishop asked what the "First Series" designation
under the Power Revenue Bonds for the Snettisham Hydro
Project meant. Mr. Mitchell explained that the obligation
had been refinanced and historical documentation about the
bond was not easily available.
3:14:02 PM
Mr. Mitchell looked at Municipal Debt on page 6, and
reiterated the GO bond debt totals. He referenced "other GO
Debt" for municipalities of $1.144.4 billion and additional
"Revenue Debt" of $887.6 million. He elaborated that the
other GO debt was "static" since 2003. School GO debt had
increased from approximately $831.9 million in 2003 to the
current balance of $1.273.3 billion. Revenue bonds had also
increased from approximately $550 million in 2003.
Senator Bishop cited the total Alaska public debt listed on
page 6, at $8.138.4 billion and asked for verification. Mr.
Mitchell answered in the affirmative. Senator Bishop asked
what the annual payments were on the total debt. Mr.
Mitchell cited page 50, and highlighted that in FY 2015 the
total debt service was $218 million either on a GO or
subject to appropriation basis.
Vice-Chair Micciche observed that the potential existed for
the state to incur a higher level of debt service in the
future.
Mr. Mitchell stated that was correct, and pointed to the
potential increases in the school debt reimbursement
program and the State GO category.
Co-Chair MacKinnon directed the member's attention to page
11, Table 2.5, to view "General Obligation Debt - Issued by
Purpose." She read the following breakdown of percentages
of the total debt: Transportation, 42.8 percent; Education,
39.2 percent; Water and Sewer, 5.2 percent; Fish and Game
and Recreation, 3.6 percent; Public Safety, $3.3 percent;
Flood Control and Harbor Development, 2.9 percent; Health
and Housing 2.9 percent.
3:19:04 PM
Co-Chair MacKinnon directed the committee to page 33, Table
3.7, "Alaska Municipal Bond Bank Outstanding Loans to
Municipalities." She wondered if there were particular
cities or municipalities that had overextended themselves.
Mr. Mitchell voiced that the priorities and guidance of the
Bond Bank was established by statute that required the bank
only make loans that it expects to be repaid. He commented
that however, approximately half of the entities on the
list received bonds from the school debt reimbursement
program. Smaller municipalities that were receiving 70
percent reimbursement from the state, would be hard pressed
to pay the debt service on the bond issues. He thought that
all of the communities could adapt to a loss of state
reimbursement but would require significant increases in
the local tax base.
Vice-Chair Micciche asked if Mr. Mitchell saw any value in
limiting outstanding loans to municipalities on its
percentage of state population.
Mr. Mitchell offered that if the legislature decided to
change the parameters of the program, the change should be
enacted "prospectively rather than retroactively."
Co-Chair MacKinnon reiterated her concern that local
communities continued to misunderstand the fiscal situation
of the state and believed that "local property tax payers
would be impacted." She asked if there was a way to break
down the municipal loan figures on page 33 further, to
illustrate where the cities have revenue generation versus
local property payments that covered the debt. Mr. Mitchell
agreed to provide the information.
3:24:30 PM
Co-Chair MacKinnon specified that some cities had a revenue
generation mechanism in place to repay the bonds. However,
the school debt reimbursement bonds were a cause of
continued concern and the information would be helpful for
investing in the future.
Senator Bishop referred to page 11, and the amount
authorized for transportation. He referenced the $453
million outstanding in transportation bonds that had not
been issued. He asked for clarification. Mr. Mitchell
responded that the amount was actually $263 million.
Co-Chair MacKinnon stated that the committee wanted to
ensure good management of the state's resources, and debt
was part of that management structure.
Mr. Mitchell closed to say it had been his and his
predecessors rule to maintain a conservative and viable
approach to debt practices. He believed that the state's
judicious use of debt was reflected in the outstanding debt
portfolio.
Co-Chair MacKinnon appreciated Mr. Mitchell's service to
the state and his outstanding informative presentation
provided to the committee on short notice. She related that
the state was doing it's very best to make the wisest
decisions for Alaska as a state and the communities that
benefited from the state's investment decisions.
ADJOURNMENT
3:31:05 PM
The meeting was adjourned at 3:31 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 042415 Debt book 2014 FINAL.pdf |
SFIN 4/24/2015 1:30:00 PM |
SB 72 |
| 042415 AK Debt Management Policies & Debt Capacity January 2015(Final).pdf |
SFIN 4/24/2015 1:30:00 PM |
SB 72 |