Legislature(2017 - 2018)SENATE FINANCE 532
02/07/2018 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: State Debt Analysis | |
| 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
February 7, 2018
9:02 a.m.
9:02:42 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:02 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Anna MacKinnon, Co-Chair
Senator Click Bishop, Vice-Chair
Senator Peter Micciche
Senator Donny Olson
Senator Gary Stevens
Senator Natasha von Imhof
MEMBERS ABSENT
None
ALSO PRESENT
Deven Mitchell, Debt Manager, Department of Revenue
SUMMARY
^PRESENTATION: STATE DEBT ANALYSIS
9:03:29 AM
DEVEN MITCHELL, DEBT MANAGER, DEPARTMENT OF REVENUE,
discussed the presentation, "2018 Credit Review and State
Debt Summary" (copy on file). He shared that the
presentation had become an annual one that was provided to
the state to facilitate the discussion on outstanding debt
and the state's potential to issue debt.
9:04:18 AM
Mr. Mitchell addressed Slide 2, "Debt Affordability
Analysis":
• Annual analysis required by AS 37.07.045 to be
delivered by January 31
• Discusses credit ratings current levels and history
• Relies upon debt ratios for issued debt and debt that
the state supports at the local level
• Identifies currently authorized, but unissued debt
• Establishes refinancing parameters
• Determines a long-term debt capacity at current rating
level
• Discusses, but doesn't define a capacity for short
term debt
Revenue Anticipation Notes are limited by
statutory definition and would not be included in
capacity
9:06:07 AM
Mr. Mitchell highlighted Slides 3 and 4, "January 2017 Debt
Affordability Analysis" and January 2018 Debt Affordability
Analysis." The slides offered a chart that listed the Fall
2106 Unrestricted General Fund Revenue(UGF), Percentage of
UGF Committed to State Debt (5 percent cap), Percentage of
UGF Committed to Total State Supported Debt (8 percent
cap), Percentage of UGF Committed to Expected Payment on
Behalf of PERS/TRS, and Percentage of UGF Committed to
State Debt or PERS/TRS, through fiscal years 2017 to 2026.
Slide 4 contained the same analysis beginning 2018. He
noted that the primary metric that was used for determining
capacity was the percentage of UGF that the equated to the
debt. He said that there was a 5 percent target for general
obligation bonds and direct state obligations, the target
was 8 percent for the more "lenient" obligations that were
subject to appropriation. He shared that the percentage of
payment for the PERS/TRS had been added in 2017, due to the
significance of the percentage size. He highlighted that in
2017 the state was above target at 7.5 percent, which
diminished to 3.75 percent by 2026, primarily to declining
outstanding bond balance and associated debt service. He
pointed out that the 8 percent target for 2017 was 15.6,
declining to 5.9 in 2026. He PERS/TRS percentage increased
from 14.9 in 2017, to 19.3 in 2026. He relayed that the
numbers for 2018 were better, due primarily to an increased
projection in revenue in the Revenue Sources Book of
approximately $600 million. He said that the outstanding
debt had remained static from 2017 to 2018. He related that
the payment for PERs/TRS remained a substantial payment
through 2026.
9:09:37 AM
Co-Chair MacKinnon requested comment on the governor's
proposal to issue debt on the tax credit liability.
Mr. Mitchell replied that he had slide further in the deck
that would speak to the question. He agreed that there
would be some impact on capacity because of the issuance of
debt to refinance the credits. He did not believe that the
payment would be dollar for dollar because it was an
existing liability that held an expectation of payment over
an already defined period.
9:10:53 AM
Co-Chair MacKinnon stated that the governor had short the
calculation for the payment on PERS/TRS in the proposed
Operating Budget. She wondered how the sort funding would
affect the analysis percentages.
Mr. Mitchell responded that he could not speak to why a
lower number had been incorporated in to the proposed
budget. He said that the numbers that had been included in
the analysis were based on the actuarial analysis, payments
otherwise due based on the percentages of payroll that had
been predicted by the actuary based on the amortization of
the unfunded liability.
9:12:00 AM
Co-Chair MacKinnon wondered what would happen if the
legislature failed to appropriate the actuarial
calculation.
Mr. Mitchell explained that not funding the actuarially
determined contribution rate would reflect negatively on
the state's scorecard from rating agencies. He felt that
the issue came down to a policy decision on the part of the
legislature.
9:12:59 AM
Co-Chair MacKinnon advocated for the required payment
recommended by the actuaries.
9:13:16 AM
Senator Micciche understood that the report focused on
actuals and used the forecasted revenue set out in the
Revenue Source Book.
Mr. Mitchell replied that the percentages in the report
were based on the Revenue Source Book.
9:14:02 AM
Senator Micciche wondered whether the division embraced the
energy prices projected by the administration that
estimated that oil prices would drop $20 per barrel across
the board into the future.
Mr. Mitchell replied that the Revenue Sources Book was a
product of the tax division, which was not under his per
view. He said that ranges of projected price were in the
sources book and a point within the range was generally
chosen for the price predictions. He observed that oil as a
commodity was inherently volatile and price prediction was
very difficult.
9:15:29 AM
Vice-Chair Bishop echoed Co-Chair MacKinnon's support for
the actuaries recommended pension plan funding. He warned
that negative things happened to debt obligation when
pensions went unfunded and cited the State of Illinois as
an example.
9:16:26 AM
Co-Chair MacKinnon understood that the administration could
put forward new numbers for PERS/TRS, but without the new
numbers she felt that it was necessary to advocate for
funding what the actuaries suggested was necessary for the
pension debt.
9:16:55 AM
Mr. Mitchell addressed Slide 5, "Debt Capacity":
• Projected annual revenue increase of approximately
$600 million in FY 2018 vs FY 2017
• Ratios are still at or above capacity in both
categories each of the next two years
• Increased capacity of approximately $150 to $200
million to total capacity of $3-400 million
• Creating or using existing "restricted" revenues to
fund state government will increase capacity.
• Historically, PF earnings have been classified as
restricted by custom rather than unrestricted
• A shift of this revenue stream to unrestricted would
have a significant impact
• For every $100 million of recurring revenue that is
added at this point we expect a current market
increase in long term debt capacity of $60-$70 million
9:19:19 AM
Mr. Mitchell looked at Slide 7, "State Debt Obligation
Process":
• All Forms of State Debt are Authorized First by law
May be a one-time issuance amount or a not-to-
exceed issuance limit in statute
General obligation bonds must then also be
approved by a majority of voters
• All State Debt must be structured and authorized by
the State Bond Committee
Includes general obligation bonds, subject to
appropriation issues, and state revenue bonds
• The State Bond Committee determines method and timing
of debt issues to best utilize the state's credit and
debt capacity while meeting the authorized projects
cash flow needs
• The State has established other debt obligations
Reimbursement Programs
square4 The School Debt Reimbursement Program or HB
528 reimbursement
• Communities issue bonds and the State
agrees to reimburse at a certain level
• Not currently authorized for new debt
and periodically partially funded
Retirement Systems
square4 Unfunded actuarially assumed liability
(UAAL) for defined benefit employees is
guaranteed by the Constitution
square4 Annual payments on the UAAL of other
employers is reflected as State debt in the
CAFR
square4 Some flexibility in how payments are made
9:21:33 AM
Mr. Mitchell highlighted Slides 8 and 9, "Total Debt in
Alaska at June 30, 2017." The page was lifted directly from
the 2018 Alaska Public Debt book and ran through all
categories of obligations that existed in through the state
and its political subdivisions. He noted that there were 10
categories of debt, some of which were direct obligations
of the state, and were layered on the table form highest to
lowest priority of commitment to the state. General
Obligation Bonds were the highest priority at $776.8
million outstanding as of June 30, 2017. He discussed the
details of the various types of debt.
9:25:08 AM
Co-Chair MacKinnon announced that Mike Barnhill, Deputy
Commissioner, Department of Revenue and Ken Alper,
Director, Tax Division, Department of Revenue were
available in the gallery for backup.
9:25:30 AM
Co-Chair MacKinnon referred to Slide 8, she asked whether
the state debt included unissued bonds.
Mr. Mitchell replied that it reflected outstanding debt. He
said that the Alaska Public Debt Book contained projections
of the debt outstanding on the School Debt Reimbursement
Program from June 30 of the year of publication. He
explained that the number could fluctuate based on
experience after June 30th.
9:26:26 AM
Co-Chair MacKinnon returned to the issue of actuary
payments on the unfunded pension liability. She understood
that the numbers the division had used were from June 30,
2017 and that the administration could now have new
assumptions for evaluation.
Mr. Mitchell replied in the affirmative.
9:27:01 AM
Senator Micciche queried Mr. Mitchell's thoughts on revenue
versus debt and where Alaska measured in comparison to
other states.
Mr. Mitchell replied that on a per capita basis, the state
had sizable obligations relative to the population. He
relayed that on a monetary basis, Alaska had obligations
that were well within the realm of acceptable levels. He
thought that the unfunded liability associated with the
retirement system was a challenge and represented the
state's largest liability. He said that when compared to
other states, Alaska fell in the middle of the scale; not
the best and not the worst. He noted that the state had
been accounting for other post-employment benefits and had
a fairly defined picture of the debt. He added that the
state had also had opportunity to transfer funds into the
trust, which had benefitted the funding of the trust.
9:29:28 AM
Mr. Mitchell highlighted Slide 11, "Current General Fund
Annual Payment Obligation":
• GF Payment peaked in 2018 at $225.2 million
• Declining payment in every year (50 percent of peak in
2029)
• PERS/TRS special funding payments grow every year
• PERS/TRS special funding is many times all other state
commitments
• Existing Authorizations for $300 million for Knik Arm
Crossing, $110 GO bonds, $5 billion POB Corporation
He pointed out to the committee that the lower graph on the
slide illustrated the retirement debt and made all the
other state debt look relatively insignificant. He shared
that the debt would grow into the future under the current
methodology. He stressed that the debt was affordable, and
the state had capacity otherwise within the payment
structure, but was a liability that leadership needed to be
aware of and plan for.
9:30:24 AM
Co-Chair MacKinnon interjected that the refinancing option
had extended the debt further, the 22 percent that was
capped from municipalities, had lengthened the shared
burden. She shared that the payment was currently over $500
million and could rise to approximately $700 million. She
$3 billion cash infusion had brought the payments down from
$1 billion down to $500 million.
9:31:18 AM
Vice-Chair Bishop commented that there should be a future
discussion of a termination study on dropping the payment
percentage for municipalities.
9:31:36 AM
Co-Chair MacKinnon retorted that municipalities would
surely be interested in termination studies to reduce their
liability to the trust; however, the state would still be
responsible for the remaining payments.
9:32:01 AM
Mr. Mitchell observed that striking a balance was
challenging; any choice that the state made in relation to
how much it paid did not negate the requirement that a
payment be made - someone else would have to pay and it
would likely be municipalities.
9:32:30 AM
Vice-Chair Bishop pointed out that the debt was not so bad
when compared to that of General Electric in Illinois.
9:32:55 AM
Co-Chair MacKinnon added that pension liability in America
was significant. She believed that the cash infusion had
been helpful and that municipalities had been protected by
the 22 percent cap. She said that 60 percent of the PERS
liability was the states responsibility, while 40 percent
was the municipalities and other organizations using the
system.
Mr. Mitchell replied that the percentages were generally
accurate.
9:33:54 AM
Mr. Mitchell looked at Slide 10, "State Debt Obligations
Outstanding." The slide illustrated the state's General
Fund paid debt and total principal outstanding in millions
from 2000 to 2036:
Annual Position as of June 30
Balance outstanding peaked in 2016 at $1,919.9
million
Declining principal balances in every year (50
percent repaid by 2026)
$110 million of unissued general obligation bond
authority
Mr. Mitchell relayed that the decade of the 90s had seen
revenue suppression, flat $2.3 billion budgets, which had
put a moratorium on School Debt Reimbursement program. He
noted that the outstanding debt hit its peak in 2016, at
approximately $2 billion in total principal outstanding. He
highlighted that the growth had occurred primarily in state
general obligation bonds for transportation projects and
education projects. He pointed out to the committee that
the outstanding balance was predicted to decline every year
forward from 2018. He felt that the issuance of additional
debt in the future was a possibility.
9:35:53 AM
Co-Chair MacKinnon said that the legislature had placed the
moratorium on School Debt Reimbursement, which she
understood was a struggle for municipalities, but thought
had been a good way to control the state's mounting debt.
9:36:50 AM
Senator von Imhof wondered how the graph on Slide 10 would
be affected once the School Debt Reimbursement moratorium
expired.
Mr. Mitchell replied that it would be expected that, after
a period of not allowing participation, if there were an
open authorization there would be some level of debt issued
related to the pent-up demand. He shared that at certain
periods in time in the past the legislature would have
limited authorization for participation in the program and
would craftily draft legislation that ranked eligibility by
student body population - resulting in able participation
by only one school district.
9:38:39 AM
Senator von Imhof surmised that those estimates could
change depending on how the state behaved financially in
the future.
9:38:46 AM
Senator von Imhof spoke to spending limits. She though that
if a spending cap had been in place in 2006 to 2014,
approximately $18 million would currently be available to
pay down the debt. She mused on what could have been done
differently in the past.
9:39:46 AM
Senator Micciche thought that it was important the people
realize that school debt reimbursement was approximately
half of the outstanding debt reflected on Slide 10. He
queried Mr. Mitchell's thoughts on whether the state was
doing the best it could managing the PERS/TRS debt. He
wondered whether there could be a better management system
for the outstanding liability.
Mr. Mitchell replied that the issue was complex and
difficult. He said that he did not have solutions to the
problem. He thought that there were alternatives that
existed to the current payment methodology. He thought that
paying immediately, rather than an "as-you-go" method would
be most beneficial.
9:42:16 AM
Senator von Imhof added that it made more sense to spend
now, rather than later, because of volatility in the stock
market.
9:43:00 AM
Co-Chair MacKinnon referred to Slide 10 and clarified that
the slide was not a reflection of not how the state
behaved, but how municipalities behaved, concerning the
largest component of debt. She said that municipalities
indebted the state without checking to see if the state had
the ability to pay the debt. She hoped that the moratorium
would be helpful in the matter and that municipalities
would be indebting themselves more, and the state less once
the moratorium was lifted.
Mr. Mitchell said that if the program were to be renewed it
would be beneficial to consider revamping it so that the
state provided grants to local districts, that districts
could match however they chose. He shared that occasionally
districts would have a surplus and would pay cash for their
portion of the debt. He stated that that could not happen
under the current program but had to borrow money for at
least 10 years to participate in the program. He thought
that this would give more flexibility to municipalities
because they would not longer have to worry whether the
state would appropriate for the program.
9:46:04 AM
Co-Chair Hoffman thought that the state should be
addressing the municipalities ability to refinance the debt
initiated at a 70/30 split, resulting in the state paying a
higher percentage after refinancing.
Mr. Mitchell responded that the payment should be pro-rata
applied whenever there was refinancing.
9:46:44 AM
Co-Chair Hoffman requested that the division research his
question and get back to the committee.
9:47:20 AM
Co-Chair MacKinnon understood that if a municipality had a
higher interest rate on their debt, it would be up to that
municipality whether to refinance. She noted that there was
nothing in state statute that required municipalities that
are carrying debt to take advantage of lower interest
rates.
Co-Chair MacKinnon referred to Senator Micciche's comments
about what could be done, in a structured way, to help
reduce the state's debt. She shared that the administration
had proposed using pension obligation bonds, which was a
tool that existed in state statute. She relayed that the
legislature had been uncomfortable with the idea due to the
volatility in the stock market.
9:49:03 AM
Co-Chair MacKinnon lamented that the committee would not
likely finish the presentation due to time constraints. She
asked Mr. Mitchell if he would be able to return the
following Monday.
Mr. Mitchell replied in the affirmative.
9:49:22 AM
Mr. Mitchell addressed Slide 12, "Existing State Short Term
Debt Obligation Alternatives":
• Bond Anticipation Notes (AS 37.15.300-390)
May be used when long term debt is authorized by
law
While short term, it is expected to be a
precursor of long term debt
May be used to avoid negative carry in
construction funds, better match long-lived
projects and their financing, or as an additional
budget management tool
Directly impacts long term debt affordability
• Revenue Anticipation Notes (AS 43.08.010)
May borrow money when it becomes necessary in
order to meet appropriations for any fiscal year
in anticipation of the collection of the revenues
for that year
All notes and interest thereon shall be paid
from revenue by the end of the fiscal year next
succeeding the year in which the notes were
issued
May be tax-exempt if a bona fide revenue deficit
occurs during the fiscal year
square4 Earnings of the Permanent Fund and other
available fund earnings, will need to be
included in determining if a revenue deficit
occurs
The State has not used since the late 1960's
9:52:45 AM
Senator von Imhof wondered whether the second to last
bullet relating to earning of the permanent fund was
dictated by federal law.
Mr. Mitchell replied in the affirmative. He furthered that
it was purpose was for tax exemptions. Taxable securities
could be issued that would not need to meet the same
requirements.
9:53:05 AM
Senator von Imhof queried the difference in rate.
Mr. Mitchell replied that the difference in rate was
currently fairly modest. He explained that if it were 20
basis points on a short-term play, credit risk would be
necessary to yield at the same maturity levels.
9:53:52 AM
Co-Chair MacKinnon stated that the presentation would
continue the following week. She discussed housekeeping for
the following day.
ADJOURNMENT
9:54:24 AM
The meeting was adjourned at 9:54 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 020718 2018 Credit Review and State Debt Summary .pdf |
SFIN 2/7/2018 9:00:00 AM |
SB 144 |