Legislature(2019 - 2020)SENATE FINANCE 532
02/04/2019 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| State Debt Overview and Credit Ratings | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
February 4, 2019
9:01 a.m.
9:01:48 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:01 a.m.
MEMBERS PRESENT
Senator Natasha von Imhof, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Peter Micciche
Senator Donny Olson
Senator Mike Shower
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
Senator Lyman Hoffman
ALSO PRESENT
Deven Mitchell, State Investment Officer, Department of
Revenue; Senator Cathy Giessel.
SUMMARY
^STATE DEBT OVERVIEW and CREDIT RATINGS
9:03:52 AM
DEVEN MITCHELL, STATE INVESTMENT OFFICER, DEPARTMENT OF
REVENUE, gave a brief history of his qualifications and
experience. He discussed the presentation, "2019 Credit
Review and State Debt Summary" (copy on file). He
highlighted 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 limit of 5 percent for state
debt and 8 percent when combined with municipal debt
that the state supports
With SB 26 change to revenue generation, and
uncertainty about available revenue in future,
reductions of 1 percent to debt ratio limits have
been made
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
Co-Chair Stedman wondered why SB 26 was of any
significance.
Mr. Mitchell replied that SB 26 created the percent of
market value (POMV) transfer from the Permanent Fund
Earnings Reserve Account (ERA). He stated that for FY 19,
it resulted in a significant increase in UGF revenue.
Mr. Mitchell discussed slide 3, "January 2018 Debt
Affordability Analysis."
9:09:57 AM
Co-Chair Stedman asked about the two far right columns.
Mr. Mitchell replied that the percentage of UGF that was
committed to the projected special payment on behalf of
Public Employees' Retirement System (PERS) and Techers
Retirement System (TRS). The state determined in SB 26,
that it was in the best interest of the system to limit
employers contributions for TRS to 22 percent of payroll.
The actuary went through an analysis of the funding levels
and the expectations of payouts for participants that
resulted in an actuarily calculated rate that should be
paid to make up that balance over a finite timeframe.
Mr. Mitchell looked at slide 4, "January 2018 Debt
Affordability Analysis."
Co-Chair Stedman wondered how the dividend calculation was
handled in the 5.25 percent draw.
Mr. Mitchell only examined the UGF revenue. He did not look
at expenses.
Senator Micciche noted the discussion of the reduction of
one percent to debt ratio limits due to the increase in
available revenue, and wondered who made that
determination.
Mr. Mitchell replied that it was Department of Revenue
(DOR).
Senator Micciche supported the conservative approach.
9:15:00 AM
Co-Chair von Imhof appreciated the examination of the POMV
structured draw. She said that PERS and TRS was not
considered "debt" but was a real debt to the state.
Senator Wielechowski queried the projected PFD, and the
split between PFDs and fund transfers.
Co-Chair Stedman also requested the distortion that may be
explicit, if the PFD was not accounted in any regard.
Mr. Mitchell replied that he did not make assumptions or
projections about expenditures. He focused on the resources
available to the state in the Revenue Sources Book.
Co-Chair Stedman wanted to follow the statutes, which
dictated that the state pay the dividend.
Mr. Mitchell agreed to provide that information. He
wondered whether that should be presented as percentage.
Co-Chair Stedman felt that the left-hand column could be
used, and would change the percentages on the screen.
Mr. Mitchell agreed that it would look different.
Co-Chair Stedman stressed that the conversation should
include the statutory obligation to pay a dividend.
9:20:03 AM
Mr. Mitchell completed discussion of slide 4.
Co-Chair Stedman wondered whether it included paying to
dividend to meet the debt capacity.
Mr. Mitchell replied in the negative, and was a matter of
what the money would be spent toward.
Co-Chair Stedman understood that Alberta was currently
facing trillions of dollars in debt. He did not want Alaska
to look like Alberta.
Co-Chair von Imhof stated that when looking at debt
capacity, there was an examination of how much cash was
available to cover the debt. She remarked that there should
be a discussion about whether the state actually that cash
flow had, because of the PFD required under statute.
Senator Shower remarked that budget would have a specific
number.
Senator Micciche felt that the column needed to be changed
for Alaska to be in line UGF forecast.
9:25:19 AM
Mr. Mitchell stated he felt it was a good discussion,
because it was not his job to determine the size of the
PFD.
Co-Chair Stedman announced that the PFD amount would not be
zero, but probably less than $3000.
Mr. Mitchell highlighted slide 5, "Debt Capacity":
Projected annual unrestricted revenue increase of
approximately $3.1 billion in FY 2019 vs FY 2018
Shift is primarily due to SB 26 and categorization of
Permanent Fund earnings transfer as Unrestricted
General Fund Revenue
Historically, PF earnings have been classified as
restricted by custom rather than unrestricted, and
these earnings may, in whole or part, revert to
restricted
Due to uncertainty of UGF in future years,
reductions of 1 percent to debt ratio limits have
been made
Projected ratios are below reduced ratio limits in
both categories for the forecast period
Increased capacity of approximately $1.5 to $1.6
billion to total capacity of $1.9-2.0 billion
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
Co-Chair von Imhof assumed the converse was true.
Mr. Mitchell replied in the affirmative. He furthered that
the debt load did not change, rather it was related to the
volatile revenue.
Senator Micciche surmised that including the statutory
requirement for the PFD, the $3.2 billion may change the
decision on the self-imposed cap.
Mr. Mitchell replied that it would, because so much
uncertainty related to the PFD number.
9:29:15 AM
Mr. Mitchell addressed slide 7, "State of Alaska Credit
Ratings and Recent History Agency Views":
FY 2010-2014 high levels of unrestricted general
fund revenue greatly exceed budgetary needs, growing
reserve positions, pre-funding of budget items, large
capital budgets, highest credit ratings with stable
outlook. Upgraded to highest credit ratings.
FY 2015-2017 significantly diminished unrestricted
general fund, use of pre-fundings, Statutory Budget
Reserve and Constitutional Budget Reserve to balance
budget, reductions to capital and operating budgets,
discontinuation of following statutory formula for
determining Permanent Fund Dividends, consideration of
various tax proposals, consideration of use of
earnings of the Permanent Fund to pay for government,
State downgraded four times followed by three
additional downgrades in FY 2018.
FY 2018-2019 rating stabilization, shifting the
state's credit analysis towards an endowment model
rather than the state models that rely almost
exclusively on annual tax and fee collection.
Mr. Mitchell highlighted slide 8, "Recent Financial
Market/Credit Rating Challenges":
Investors False Perceptions on the State of Alaska:
Alaska's Economy Totally Reliant on Oil and is in Free
Fall
? In 2016 the oil and gas sector represents about
13 percent of Alaska's GDP ($6.75 billion of
$50.7 billion GDP) and represented approximately
4 percent of employment
? Oil and gas is the only industry in Alaska
whose GDP is less in 2016 than in 2012 while
other sectors have experienced moderate declines,
stability or growth
? The State of Alaska does not currently rely on
the broader economy for revenue as there is no
broad based tax in Alaska
? The State benefits from the national and
international economy through the investments of
the Permanent Fund in securities of national and
international firms
Reserves are Dwindling
? The reserve position of Alaska at 6/30/2017 is
above the 6/30/2015 position
? Permanent Fund Earnings Reserve increased $4.2
billion from FY 2016 to FY 2017
? Often discussed draws on reserves (SBR and
CBRF) have been offset by deposits into the
Earnings Reserve
? The Net Position of Alaska increased as a
result of FY 2017 activity
? The Net Position of Alaska is projected to
increase in each of the next nine years
The State Won't be Able to Balance its Budget.
? SB26 was passed
? Expenditures have been significantly reduced
and may be reduced further
? In 2017 and 2018 the Governor and Legislature
have ignored the statutory formula for
determining the
Permanent Fund Dividend and inflation proofing
appropriations
? Just like the CBRF the Earnings Reserve of the
Permanent Fund may be appropriated without
statutory change
? Alaska's oil and gas tax credit structure has
been changed
? Considering available revenues to the State,
the budget has been in balance
9:35:46 AM
Co-Chair Stedman wondered how many other states owned their
own subsurface and created the wealth to the state like
Alaska.
Mr. Mitchell did not know.
Co-Chair Stedman stated that Alaska was the only state that
was owned by the people. He stated that Alberta was similar
to Alaska.
9:37:12 AM
Senator Bishop commented that
9:37:58 AM
Mr. Mitchell replied //
9:38:09 AM
Senator Micciche //
9:38:51 AM
Co-Chair Stedman //
9:39:03 AM
Mr. Mitchell //
9:39:12 AM
Mr. Mitchell addressed slide 9, "Alaska's Economy Has Been
More Stable than U.S."
9:40:53 AM
Senator Shower //
9:41:01 AM
Mr. Mitchell //
9:41:38 AM
Mr. Mitchell highlighted slide 10, "Alaska's Economy is
Diversified by Our Endowment":
.notdef The Alaska Permanent Fund Provides Alaska
Unparalleled Revenue Source Diversification
.notdef As of March 31, 2018 Alaska's Permanent Fund
endowment had an unaudited total fund balance of $64.6
billion.
o The State's Permanent Fund Revenue is generated
from the national and world economies
o The Permanent Fund does not rely on Alaska's
economy for revenue generation prohibited
investment
o The APFC Board independently directs
investments and has established a 10-year total
return projection of 6.50 percent
o The Permanent Fund owns shares in more than
3,000 corporations around the world
o Fixed Income holdings include both US and
International securities
o The Real Estate allocation provides inflation
protection and enhanced diversification worldwide
.notdef Investment income has tended to be countercyclical
to oil, the source of the State's other largest
revenue stream
9:43:08 AM
Mr. Mitchell looked at slide 11, "CBRF/SBR Balance and
Credit Rating Timeline."
9:44:01 AM
Co-Chair von Imhof //
9:45:32 AM
Mr. Mitchell replied that the described scenario would most
likely result in some form of report that would be negative
in nature.
9:47:10 AM
Co-Chair von Imhof //
9:47:49 AM
Mr. Mitchell
9:49:08 AM
Co-Chair Stedman //
9:49:12 AM
Mr. Mitchell //
9:49:52 AM
Mr. Mitchell highlighted slide 12, "CBR/SBR and PR Earnings
Reserve Balances Timeline."
9:50:30 AM
Co-Chair Stedman //
9:50:44 AM
Mr. Mitchell //
9:51:48 AM
Co-Chair Stedman //
9:52:26 AM
Mr. Mitchell agreed.
9:52:31 AM
Mr. Mitchell addressed slide 13, "State of Alaska Available
Reserves Balance Timeline."
9:52:50 AM
Co-Chair von Imhof //
9:54:03 AM
Co-Chair Stedman //
9:54:33 AM
Mr. Mitchell //
9:55:41 AM
Co-Chair Stedman //
9:55:52 AM
Senator Micciche //
9:56:29 AM
Mr. Mitchell //
9:57:10 AM
Senator Micciche //
9:57:30 AM
Co-Chair Stedman //
9:57:32 AM
Co-Chair von Imhof //
9:58:17 AM
Mr. Mitchell agreed.
9:58:22 AM
Mr. Mitchell discussed slide 14, "State of Alaska Credit
Ratings and Recent History Agency Views."
9:59:25 AM
Mr. Mitchell displayed slide 16, "State Debt Obligation
Process":
.notdef 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
? General obligation bonds are the only debt
secured by full faith credit and taxing authority
.notdef 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
.notdef 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
.notdef The State has established other debt obligations
Reimbursement Programs
? The School Debt Reimbursement Program or HB 528
reimbursement
.notdef Not currently authorized for new debt and
periodically partially funded
Retirement Systems
? Unfunded actuarially assumed liability (UAAL) for
defined benefit employees is guaranteed by the
Constitution
? Annual payments on the UAAL of other employers is
reflected as State debt in the CAFR
? Some flexibility in how payments are made
10:03:22 AM
Mr. Mitchell addressed slide 17, "Total Debt in Alaska at
June 30, 2018."
10:04:00 AM
Co-Chair Stedman //
10:04:06 AM
Mr. Mitchell continued with slide 17.
10:08:05 AM
Co-Chair von Imhof //
10:08:21 AM
Senator Bishop //
10:08:33 AM
Mr. Mitchell /
10:08:58 AM
Co-Chair Stedman //
10:09:17 AM
Mr. Mitchell /
10:09:24 AM
Co-Chair Stedman //
10:09:40 AM
Mr. Mitchell discussed slide 18, "Total Debt in Alaska at
June 30, 2018."
10:11:34 AM
Senator Bishop //
10:12:00 AM
Mr. Mitchell //
10:12:03 AM
Senator Bishop //
10:12:16 AM
Co-Chair Stedman //
10:12:35 AM
Mr. Mitchell //
10:14:10 AM
Co-Chair Stedman //
10:14:22 AM
Co-Chair von Imhof //
10:15:03 AM
Co-Chair Stedman //
Mr. Mitchel //
10:18:07 AM
Senator Wielechowski //
10:18:25 AM
Co-Chair Stedman //
10:18:38 AM
Mr. Mitchell looked at slide 19, "State Debt Obligations
Outstanding":
Annual Position as of June 30
.notdef Balance outstanding peaked in 2016 at $1,919.9
million
.notdef Declining principal balances in every year (50
percent repaid by 2026)
.notdef $110 million of unissued general obligation bond
authority
Senator Wielechowski wanted to correlate the numbers. He
looked at page 17, which had total State Moral Obligation
of $1.897 billion. He wondered whether that correlated with
the total on page 19.
Mr. Mitchell replied in the negative. He shared that the
moral obligations were not paid by the general fund. He
remarked that they were backstopped at the general fund.
10:20:45 AM
Senator Wielechowski asked for a correlation between pages
17 and 18.
Mr. Mitchell replied that the state debt would be included
on the $724 million, and the state supported debt of $24.2
million would be included. He stated the remaining debts
that would be included.
Co-Chair Stedman agreed for a table format of those
numbers.
Senator Wielechowski wondered how much more debt the state
could issue.
Mr. Mitchell replied that it was uncertain.
Mr. Mitchell addressed slide 20, "Current General Fund
Annual Payment Obligation":
.notdef GF Payment peaked in 2018 at $225.2 million
.notdef Declining payment in every year (50 percent of peak
in 2029)
.notdef PERS/TRS special funding payments grow every year
.notdef PERS/TRS special funding is many times all other
state commitments
.notdef Existing Authorizations for $300 million for Knik
Arm Crossing, $110 GO bonds, $1.5 billion POB
Corporation
10:25:32 AM
Co-Chair Stedman noted that there was a request for runs
from the actuary to deal with the PERS/TRS obligation.
Mr. Mitchell looked at slide 21, "Existing State Short Term
Debt Obligation Alternatives":
.notdef 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
.notdef 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
? 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
Mr. Mitchell discussed slide 23, "Authorized Bonding
Authority."
10:30:04 AM
Co-Chair Stedman recalled that the initial issue to not
have a timeframe, and felt that it should be timed out.
Therefore, there was some concern about the amount of funds
to issue without any legislative input. The legislature
then took action He remarked that there was the issue of
tax credits that were due by the state, and issuing bonds
and then paying those bonds off. He remarked that there
would be discussions about that issue.
Senator Wielechowski queried the impact of the state of the
failure to pay those tax credit bonds once they are issued.
Co-Chair Stedman further requested the appropriator risk.
Mr. Mitchell noted that it would be categorized as a
subject to appropriation obligation, similar to the
certificate of participation program. He stated that there
was a commitment to seek an appropriation every year, but
not required by law to make the appropriation. He stated
that, in the instance of a failure to pay, there would be
an expectation that the state's credit rating would
diminish.
10:35:28 AM
Co-Chair Stedman understood the appropriation risk, related
to the payments of the tax credit.
Mr. Mitchell stated that it was a fundamental risk of the
investor.
Senator Wielechowski stressed that there was a statute in
place, and the state had never not paid, and felt that it
would not affect its credit rating.
10:36:35 AM
AT EASE
10:38:58 AM
RECONVENED
10:39:14 AM
Mr. Mitchell stated that there would be a debt commitment
made that should mirror the additional work that was
currently authorized. He stated that over time the reality
of oil price fluctuating would change what would be paid in
future years.
Co-Chair Stedman stressed that there were various requests
of information that he still hoped to examine the statutory
requirement and what was actually paid.
ADJOURNMENT
10:49:29 AM
The meeting was adjourned at 10:49 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 020419 State Investment Funds Update Version 2.1.2019.pdf |
SFIN 2/4/2019 9:00:00 AM |
State Investment Funds |
| 020419 DOR. SFC.Debt Presentation 1-30-2019.pdf |
SFIN 2/4/2019 9:00:00 AM |
State Debt Summary |
| 020519 FY18 AMBBA Financials FINAL AU.pdf |
SFIN 2/4/2019 9:00:00 AM |
Debt Summary |
| 020519 Copy of UGF Updated - Less Dividends 2.4.2019.pdf |
SFIN 2/4/2019 9:00:00 AM |
Debt Summary |
| 020519 updates after presentation - DOR SFC Debt Presentation 1-30-2019.pptx |
SFIN 2/4/2019 9:00:00 AM |
Debt Summary |