Legislature(2019 - 2020)SENATE FINANCE 532
01/24/2020 09:00 AM Senate FINANCE
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| Audio | Topic |
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| Start | |
| Presentation: Status Update - State Debt Summary and Credit | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
January 24, 2020
9:04 a.m.
9:04:54 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:04 a.m.
MEMBERS PRESENT
Senator Natasha von Imhof, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Lyman Hoffman
Senator Donny Olson
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Deven Mitchell, Dept Manager, Treasury Division, Department
of Revenue; Senator Gary Stevens; Senate President Cathy
Giessel.
SUMMARY
PRESENTATION: STATUS UPDATE - STATE DEBT SUMMARY AND CREDIT
Co-Chair Stedman indicated there were mechanical issues
with the presentation screen. They would attempt to do the
presentation without the technology. He indicated Senator
Stevens and Senate President Giessel were also present. He
reviewed the agenda for the meeting. He turned the meeting
over to Mr. Mitchell. He asked him to provide some
background about himself to the committee.
^PRESENTATION: STATUS UPDATE - STATE DEBT SUMMARY AND
CREDIT
9:07:14 AM
DEVEN MITCHELL, DEBT MANAGER, TREASURY DIVISION, DEPARTMENT
OF REVENUE, introduced himself. He had been in his position
since 1998 - initially in an acting capacity and ultimately
designated as debt manager among other things. Since early
2000 he had been the debt manager for the State of Alaska.
He was raised in Alaska, went to school in Arizona, and
returned to Alaska to work for the state. He indicated the
intent of the presentation was to review the state's debt.
He would also talk about debt capacity and the rating
agency process. The state had a rating from the three major
rating agencies. He would discuss their view of the state.
He began the PowerPoint presentation: "State Debt and
General Obligations." He referred to slide 2 to review the
state debt obligation process.
Mr. Mitchell reported that all state debt had to be
authorized by the legislature. The authorization, in
certain instances and for general obligation bonds, had to
be ratified by the electorate. The State Bond Committee -
comprised of a commissioner from the Department of
Commerce, Community and Economic Development (DCCED), the
Department of Administration (DOA), and the Department of
Revenue (DOR) - issued all state debt. The state also had a
couple of other obligations that were based on a statutory
framework consisting of a school debt reimbursement program
and the capital reimbursement program (otherwise known as
the DOT Program). Both programs were supported by municipal
general obligation debt. They were ultimately payable by
local revenues if the state did not have money or transfer
money to communities on an annual appropriation basis. The
state had been unable to transfer funding multiple times,
most recently in the current fiscal year. It was not fully
funded for the first time in 1983. In the early 1990s it
was also not fully funded for a series of years. More
recently, it had been fully funded allowing for capital
investment for school projects around the state.
Mr. Mitchell indicated the other major category of
obligation was related to the retirement systems of the
state; The Public Employees' Retirement System (PERS) and
the Teachers' Retirement System (TRS). In the early 2000s
unfunded liabilities were recognized. Since that time,
there had been a series of actions taken to limit future
liabilities, as well as address the outstanding liability.
The objective was to work towards a fully funded pension
system which currently had an amortization that would end
in 2028.
9:11:12 AM
Mr. Mitchell pointed to slide 3 of the numbered
presentation which contained a table that came from the
State Debt Book, an annual publication of the Treasury
Division of DOR that was required by statute. The table was
categorized from the highest to the lowest commitment of
credit. State general obligations were listed first, and
the state currently had about $670 million outstanding, a
reduction of about $54 million from the prior year. The
state had a declining outstanding balance on an annual
basis.
Mr. Mitchell explained that the second category on the list
was state guaranteed debt comprised of the Veterans'
Mortgage Program which had to be voted on by the electorate
for bonds to be issued. The program was managed by Alaska
Housing Finance Corporation (AHFC) and was supported by
payments made by the mortgage holders. The Veterans' that
obtained mortgages through the program had paid all of the
debt service related to the bonds. It allowed for tax
exemption to be utilized for purposes of funding the
mortgages. They had lower rates than what would otherwise
be available. He reported approximately $106 million
outstanding presently which equated to a $60 million
increase from the previous year.
Mr. Mitchell continued that state supported debt, debt
where the state committed its credit to pay on a subject-
to-appropriation basis (not constitutional debt), was a
debt recognized by the market. He noted a certificate of
participation for a facility in Anchorage which had an
outstanding balance of $22 million - a reduction of $2
million from the prior year. He also pointed out lease
revenue bonds comprised of Goose Creek Correctional
Facility and the parking garage in Anchorage through AHFC
that had an outstanding balance of $193 million - a $10
million reduction from the previous year.
Mr. Mitchell moved to the state supported municipal debt
which included the school debt reimbursement program and
the capital reimbursement program. He indicated that for
purposes of the publication and because there was a lack of
clarity on how the program might evolve into the future, he
assumed it would be fully funded. He relayed that
$704.8 million remained outstanding for the school debt
reimbursement program which was a reduction of $65 million
from the prior year and $22.5 outstanding for the other
program reflecting a reduction of $3.5 million from the
previous year.
Mr. Mitchell continued to review slide 3. He addressed the
Pension System Unfunded Actuarial Accrued Liability. The
numbers on the chart reflected the June 30, 2018 valuation
for PERS and TRS. The numbers did not necessarily reflect
all of the state's liabilities because there were several
PERS employers and the state's percentage of the TRS
employer category was relatively small. The numbers totaled
about $6.6 billion or $6.7 billion as of June 30, 2018
which was a reduction of about $260 million from the prior
year mostly related to some actuarial adjustments made due
to assumptions about health care or other post-employee
benefits. He understood that there was a preliminary June
30, 2019 valuation which was slightly smaller, about $6.5
billion. Fortunately, the number was not growing like it
had in the past.
Mr. Mitchell continued to state moral obligation debt,
another statutory framework required to support the items
listed and recognized by the market. The existence of a
reserve fund was required in statute as well as certain
reporting requirements. The market recognized the structure
in statute as a moral obligation, even though it was not
explicitly backed by the state's credit. However, it was
implied that in the event of a failure of the underlying
credit to be able to pay, the state would step in to
replenish the reserve fund. If the state failed to do so,
it would have a reduction made to its credit rating. The
largest borrower in the category was the Alaska Municipal
Bond Bank, which primarily provided loans to municipalities
for local capital projects paid back with local revenues.
He reported about $1.1 billion outstanding in the program
which was a reduction of about $30 million from the prior
year.
Mr. Mitchell reported that the Alaska Energy Authority
borrowing was for Bradley Lake on the Kenai Peninsula and
the Alaska Student Loan Program. Both have reductions of
$10 million and $12 million.
Mr. Mitchell moved to state revenue debt. He explained that
revenue debt was difficult because of the prohibition on
dedicating revenues. In order to dedicate revenue a
pre-existing revenue dedication prior to statehood or a
federally mandated dedication requirement had to be in
place. He reported the state had been able to borrow under
the the Sportfish revenue bonds because sportfish licensure
fees were dedicated to sport fish management by federal
law. He also noted the international airport revenue bonds
which were in place and had debt outstanding prior to
statehood. He added that the sportfish revenue bonds had
about $13.9 million outstanding as of June 30, 2019, a $3
million reduction from the prior year. The remainder of the
bonds were payable on April 1, 2020. The last time he
checked there was about $11.7 million available for the
payment the final payment or optional redemption. He
anticipated both of the debts being fully paid in calendar
year 2020. The surcharge that was implemented to provide
for the repayment of the bonds would be sunsetting. The
cost of a sport fishing license would either go down or be
repurposed.
Mr. Mitchell continued that the state bond committee issued
the international airport system debt. The Department of
Transportation and Public Facilities (DOT) managed the
system with airport directors and a controller at the
system level. He was currently working with the airport
system on refinancing some bonds that would become callable
on October 1, 2020. He reported there would be about $100
million in bonds. The department projected saving in the
current market to be about $10 million to $14 million. The
department would be moving towards making air travel and
the system more efficient into the future. The airport
system and some of the interaction that had gone on behind
the scenes during the great depression or the recession of
the United States where transfers through the system for
cargo from Asia to the Continental U.S. Under duress, the
department was able to work with airport management to
diminish the landing fee requirement for the system
relatively significantly for a period of years through the
use of resources and debt restructuring. It allowed the
airport to remain more competitive than it otherwise would
and retained traffic that it could have lost. He noted
there had been a good relationship with the airport system.
Co-Chair Stedman noted that the two slides were combined
[slide 3 and slide 4].
9:20:28 AM
Senator Bishop asked if all of the Alaska Energy Authority
bonds terminated at the same time. Mr. Mitchell responded
that there were multiple series of bonds. He mentioned the
most recent issue related to a modest increase in megawatts
of power in the dam's capability to generate power. He
believed the termination dates were staggered but would
have to get back with the committee with specific dates.
Co-Chair Stedman asked Mr. Mitchell to get back to the
committee with a response to all of the questions resulting
from the current hearing.
Senator Olson highlighted the state supported municipal
debt in the middle of the slide. He queried how the figures
were impacted by the school debt service vetoed by the
governor past the June 30, 2019 date.
Mr. Mitchell replied that the balances listed on the slide
were outstanding balances. He clarified that the annual
debt service was impacted by the veto. The annual debt
service associated with the school debt reimbursement
program was about $100 million, $50 million of which would
be paid by local jurisdictions. The other capital project
program reflected a 100 percent reduction. The annual debt
service in FY 20 was about $4 million to $4.5 million. The
amount would be paid by rate payers because of certain
enterprise activity that was included in the program such
as electrical generation projects and port and harbor
projects. There were also some general obligations that
would be paid by local revenues.
Senator Olson asked what would happen if the vetoes were
over-ridden. Mr. Mitchell indicated it would not change the
current numbers. However, the municipalities that had
already paid a portion of their debt service, in essence,
would receive a windfall because they were anticipating not
receiving the 50 percent reimbursement.
Senator Olson clarified, "That's if the override is
sustained." Mr. Mitchell responded, "That's correct."
Senator Wielechowski asked if the Treasury Division
considered the oil tax credits to be a debt. Mr. Mitchell
indicated the department considered them an obligation.
However, it was not something the division included in the
current spreadsheet. He explained that the reason debt, but
they were not reflected in the spreadsheet. The reason the
division considered them an obligation was because they
were included in the state's net position analysis. The
document was a working document. Previously, the division
did not include information on PERS or TRS liability. It
would be something that was worth considering including in
the summary.
Co-Chair Stedman asked a clarifying question about Senator
Wielechowski's query. He commented that when things were
settled, it would be a bond issue or, the state would
payout cash. He wanted to make sure the committee
understood the full position of the state.
Senator Wielechowski suggested that if the state were to
win the lawsuit, it would be considered a debt. He inquired
about the effects of the state's failure to pay. He
wondered if the state's credit rating would be affected.
Mr. Mitchell did not believe it would.
9:25:56 AM
Mr. Mitchell moved to slide 4 which was a continuation of
the summary of the total debt in Alaska as of June 30,
2019. He spoke about the University of Alaska (UA) debt. He
relayed that the UA debt was supported by revenues derived
by the University. There was about $287 million in a couple
of categories and, there was a reduction of about $13.5
million in the prior fiscal year.
Mr. Mitchell moved to the topic of state agency debt. He
reported that they were obligations that were not back-
stopped by the State of Alaska but were issued by entities
that the State of Alaska created. The Northern Tobacco
Securitization Corporation, a subsidiary of AHFC, was
specifically created to place any liability further from
the state because the bond issuance was supported by a sale
- a portion of a settlement agreement that the state was a
party to in exchange for a one-time payment. The Treasury
Division did not want to expose the state to potential
diminishment in the future by paying the debt service out
of other resources in the event that the settlement
agreement revenues were deficient. He would not expect the
state to attempt to pay the debt in the event of a default
unless there were other policy matters that warranted such
considerations. He reported a reduction of about $40
million for state agency debt leaving $440 million
outstanding to-date.
Co-Chair Stedman noted there had been concern about the
potential issuance of bonds that had already been approved
by the legislature. He thought the dollar amount was in the
billions. He would like an update on the issue. He
recognized that some of the authorities such as the Alaska
Railroad would never issue them for various reasons. He
suggested it would be a good idea for the committee to be
briefed. He thought the amount was staggering.
Mr. Mitchell clarified that the Alaska Railroad
authorization was for a natural gas pipeline. There was the
potential for them to access a tax exempt bond even though
there was private activity. He asked if the Co-Chair was
talking about any authorization that was currently
outstanding, which would be a wider net. For example,
pension obligation bonds were authorized up to $1.5 billion
and would be paid by the State of Alaska.
Co-Chair Stedman interjected that he would include the
pension obligations and the railroad issue, as they were
colossal and had no expiration. He thought there was an
oversight on the part of the committee. He suggested
expiration dates should be in place. Mr. Mitchell agreed
with the Senator.
9:30:41 AM
Mr. Mitchell discussed slide 5 which showed the mature
nature of the state's general obligation debt program. He
highlighted the declining outstanding debt service each
year. It declined an average of about $40 million per year.
The structure was viewed as very conservative and had the
potential for significant additional borrowing power with
the stability of revenue. He provided an example of having
an outstanding balance of $500 million in bonds. If the
numbers were filled out to 2028 at the same level, the
state would use about half of its potential capacity. He
reported that when he talked to rating agencies and
investors, he highlighted the strength of the state
illuminating that the state had a net debt service of about
$78 million that would decline to about $12 million per
year during the same period.
Mr. Mitchell continued to slide 6 regarding the current
general fund annual payment obligation. It reflected the
full amount of debt. The two charts that were included were
designed to show how relatively insignificant all of the
state obligations were in comparison to the PERS/TRS
liability. He pointed to the chart at the top of the page
which showed the general fund paid debt service by
category. The categories included state general obligation
debt, state supported debt, and state supported municipal
debt. The chart reflected the full amount of municipal debt
and a timeframe from 2000 to final maturity. It was a
historical and perspective chart. He highlighted that the
largest category of debt service was school debt - on the
reimbursement side rather than on the state side. The state
was currently about $100 million on each side; $100 million
of state supported debt and $100 million of reimbursement.
It would diminish gradually through 2038.
Mr. Mitchell continued to the chart on the bottom of
slide 6. It was difficult to see where the $200 million in
2020 existed. He indicated it was beneath the blue that
extended out through 2040. The blue represented the
PERS/TRS commitment to the state. If there was a way to
consider addressing the PERS/TRS liability it would be
beneficial to the state and the state's credit. It was
universally noted that Alaska had a relatively large
unfunded pension liability in relation to the state's
population and the size of its economy.
9:34:05 AM
Senator von Imhof asked for clarification of Mr. Mitchell's
use of the term, "relatively large" in reference to
Alaska's population size. She noted periodicals that
compared all 50 states regarding whether they were under
water. Generally, Alaska was in the middle of the road. She
asked if Mr. Mitchell viewed Alaska as being under water
relative to all of the 50 states.
Mr. Mitchell replied that he had not studied all 50 state
pension systems. However, he was aware that when rating
agencies looked at Alaska's pension liability, they tended
to use a lower discount rate. Instead of assuming Alaska
was going to earn 7.38 percent, they assumed the state
would earn something less as a conservative measure of
their analysis. They also compared the liability,
amortizing it in a way they viewed was appropriate. In some
instances, it was thought Alaska's amortization schedule
was too long and that the state was not keeping up with the
interest that was accrued in certain scenarios. He provided
an example. He reiterated that relative to Alaska's
population size and its economy, analysts tried to
homogenize between states. Although Alaska had a sidebar of
extraordinary wealth from oil generation and investment
income, analysts tended not to incorporate it into their
score cards. As a result, the state ended up with a mention
in its credit reports that it was relatively less off
because of pension liabilities.
Co-Chair Stedman commented that some members had concerns
over the reduction of the annual contribution to the
pension plan over the past few years. He suggested that
some of the restating of schedules lead to the state's
current situation. However, he thought virtually
discounting the state's Permanent Fund was a huge
oversight. Alaska was the only state with such a magnitude
of wealth per capita. He argued that the state was not
going broke any time soon and suggested that the public
should not stay up too late worrying. The state was not
going to skip out on its obligations because of its wealth
accumulation.
Mr. Mitchell highlighted the note on slide 6 of other
existing authorizations. He pointed to the final bullet
showing $300 million for the Knick Arm Crossing. The
authorizations were limited to those obligations that the
state would likely pay for from the general fund. The Knik
Arm Crossing authorization was still on the books and was
envisioned as a subordinate lien on toll collections of a
project to build a bridge across the Knik Arm. It was
anticipated that tolls would be insufficient to cover the
debt of the project. Even though there would be a pledge,
the state's commitment of an appropriation subject to
approval would backstop the bonds. He indicated the
legislature could fully anticipate paying the debt service
from the general fund. He reported a remaining $110 million
authorization for general obligation bonds relating to the
2012 transportation act, a $1.5 billion pension obligation
bond authorization, and $1 billion tax credit bonds
authorization.
9:39:38 AM
Senator Wielechowski queried whether the authorizations
affected the state's credit rating. Mr. Mitchell answered
that it was noted from time-to-time. The rating analysts
sometimes forgot if a specific authorization was not
brought up. It was something that could influence the
ratings discussion. However, it was not brought up day-to-
day.
Co-Chair Stedman would wait to see what the list looked
like when Mr. Mitchell got back to the committee. The
committee might want to have a separate hearing on the
matter. If it was of interest to the committee, he would
put forth a recommendation to try to reign some of it in or
at least put a window of termination in place.
Mr. Mitchell believed it would be a good thing to pursue
because otherwise he would find himself crosswise with the
legislature. He elaborated that when something was
authorized it was assumed that it could take place.
However, in many ways, if something was not done within 1-2
years of authorization, it would obligate the state to
carry a financial commitment of funds to be paid out of the
general fund. He suggested that perhaps it was something
the legislature should have to reauthorize.
Co-Chair Stedman indicated the committee would look at the
issue and talk to the commissioner of DOR to get his
thoughts. He confirmed it was something to pay attention
to.
Mr. Mitchell moved to slide 7 which discussed the existing
state short-term debt obligation alternatives. He
highlighted bond anticipation notes - debt authorized by
the legislature and eligible for issuance. If the state did
not want to issue long-term debt for management reasons,
bond anticipation notes could be issued for a short-term.
The state issued them in 2014, 2015, and 2016 for the 2012
transportation act, a management tool for financial
reasons.
Mr. Michell reviewed revenue anticipation notes, a tool
where statutes allowed the state to borrow money in years
where there was a cash deficiency. He thought the subject
dove-tailed into other discussions regarding the
Constitutional Budget Reserve (CBR) and how it had been
utilized historically. There was the potential of a
financial benefit from using revenue anticipation notes. He
elaborated that the largest municipality in the state,
Anchorage, issued a tax anticipation note annually even
though it had enough money to pay for its fiscal year
needs, it borrowed intra fiscal year because it could
borrow tax exempt and could keep its money invested
taxably, requiring a taxable rate. The difference between
the two rates was extra revenue for municipalities to
utilize. The difficultly in the state using revenue debt
application notes was that all revenue had to be included -
not revenue that the state categorized as revenue. If
revenue was included from the Revenue Sources Book (money
being saved or not categorized as being available) the
state would not be viewed as having a deficit in the
governor's proposed FY 21 budget. Therefore, the state
would not be able to borrow on a tax exempt basis in the
scenario. The state had not used revenue anticipation notes
since the late 1960s.
9:44:42 AM
Senator Hoffman pointed out that Mr. Mitchell had mentioned
the CBR account, which the state was obligated to repay
each year. He asked if an amount was noted anywhere that
the state was obligated to pay the CBR.
Mr. Mitchell indicated it was not noted because it was an
obligation that the state was lending to itself. Although
there was a constitutional framework for the CBR, there was
an allowance within the framework that permitted the state
to ignore it. The state had opted to disregard it which was
the reason the state had not already repaid it.
Senator Hoffman asked for the amount. Mr. Mitchell
responded that it was about $10 billion.
Co-Chair Stedman remarked that there was no interest
charge, as it was held within the state's accounts. The
state borrowed from itself at no interest and with no
timeline for repayment. He reported that at one time
several years ago the state had paid the money back and
accumulated a significant increased amount. At $10 billion,
he did not think any debt payments would be made anytime
soon.
9:46:34 AM
Mr. Mitchell concluded the overview of the state's
outstanding debt. He moved to the topic of state debt
capacity beginning on slide 10. He noted another
publication that his office generated annually, "The Debt
Affordability Analysis." The publication was required in
statute. He spoke of the difficulty in recent years of
producing the publication because of the evolution that had
been underway within the state as far as how revenues were
categorized and what they were. He noted SB 26 [Legislation
passed in 2018 establishing a percent of market value
(POMV) draw] had a most impactful change. He suggested that
even with SB 26 in place, the lack of structure around
revenue made it difficult to determine how much money was
available and how much was off the table.
Mr. Mitchell continued that in 2019, the division reduced
some of the ratios used from 5 to 4 percent and 8 to 7
percent, to determine the state's potential debt capacity.
In his view, even with the reductions it might overstate
capacity without a downgrade in the state's current
situation. The ratios churned out a capacity of about $2.8
billion over the next 10 years, a huge number. However,
straightaway the state had $1 billion of authorization for
a tax credit corporation structure as well as having $100
million in authorized general obligations yet to be issued.
The reduction brought the state down to about $1.7 billion
of theoretical capacity. However, it would be much easier
if there were additional sideboards regarding how the state
was moving into the future than were currently in place. He
opined that it was a difficult task. He noted structure was
good, and structure with flexibility was better. He
continued that being able to betray that into the future
was critical to forecasting what the state might be able to
do in the future. He reported that the publication
discussed a number of aspects related to capacity and was
available on the Division of Treasury's website under debt
management.
Co-Chair Stedman commented that when Alberta, Canada dealt
with imploding oil prices and ran significant deficits,
they borrowed money to fill the hole rather than reducing
their operating budget. They were currently in a
predicament that they might not get out of. He thought the
state might have extra capacity, but there was a concern
with piling on more debt.
Mr. Mitchell agreed that the debt made sense particularly
in Alaska's construct with a large invested tax exempt
fund. It allowed the state to borrow tax exempt against
itself as long as the state had structure and it was
borrowing for things it would have otherwise paid for. It
was very difficult given the state's current make-up. He
indicated it was part of a rational ongoing program that
made financial sense to take advantage of debt to allow the
state to retain resources. However, it should not be in
addition to what the state would otherwise do.
9:51:24 AM
Mr. Mitchell continued to slide 10 which was a lookback at
the past and described how the change from SB 26 changed
ratios from the Fall 2017 forecast to the Fall 2019
forecast. He highlighted that the revenue expectation went
from $2 billion to $2.8 billion to an expectation of
$5 billion to $6 billion. The change was due to the
inclusion of the POMV transfers from the Permanent Fund. If
the POMV transfer was backed out, it would reduce capacity.
He noted the blue charts on the slide. He pointed to 3.17
percent in 2020 with a cap of 5 percent to determine the
incremental capacity to borrow. He also pointed to 6.4
percent in 2020 with a cap of 8 percent. Comparing the 2
amounts, the debt capacity was a much lower; $622 million
to $1.2 billion in total. When the POMV transfer was backed
out, it had a significant reduction in capacity. Arguably,
authorized debt would fully utilize the capacity. He
thought it highlighted the importance of having debt
structure around how the POMV revenue would be available.
Mr. Mitchell pointed to the revenue forecast and budget
outlook on slide 11. Historically, the state had used the
slide because of the way the state categorized revenue. He
commented that conservatism had been baked into the state's
structure. In the 1990s the division would have approached
a deficit by looking at how much to draw out of the CBR.
For instance, if the deficit was $200 million the state
would have looked at how much was earned and the amount of
deposits in the CBR. If the amount earned in the CBR was
$400 million and the deficit was $200 million, there would
have been a net draw of $200 million, which did not include
the Permanent Fund at the time. Today, the state had a
rejiggering as a result of SB 26. Currently, certain
revenues such as the POMV revenue from the Permanent Fund
was included. However, it was not total revenue but
anticipated revenue by the Alaska Permanent Fund
Corporation (APFC). The revenue sources book reported about
$1.3 billion that was expected to be earned in FY 21 and
categorized as restricted.
Mr. Mitchell continued that under the structured draw
scenario, it was available for appropriation. It was money
coming in rather than going out. Although the division
shared the revenue information, it was hidden in the
Revenue Sources Book. In addition, there were deposits and
earnings into the CBR and deposits into the Permanent Fund
(some of which were constitutionally mandated and some of
which were statutorily mandated). The combination would
result in the state potentially saving more money than the
state declared as a deficit in FY 21. He reiterated that
the state credit to third parties was hidden in the
publications and difficult to draw out at times.
Co-Chair Stedman asked Mr. Mitchell to use the term "less
apparent" rather than hidden.
9:56:38 AM
Mr. Mitchell moved to slide 12 showing the January 2020
Debt Affordability Analysis inputs. Included was the
general obligation debt service from FY 20 through FY 29.
Lease purchase payments were also included as well as the
capital leases, school debt reimbursements, capital project
reimbursements, and the projected PERS/TRS payments. They
flowed down into the lower chart that turned the
percentages of UGF as characterized in the Revenue Sources
Book. The state was below its targets for both the 4
percent and 7 percent caps. As far as including the pension
fund obligations, it dwarfed the other debt commitments of
the state. However, the percentage of revenues that might
be paid for outstanding debt service and past pension fund
liability was within the parameters of other states. The
state was in a neutral or net category for payment
percentages.
Co-Chair von Imhof suggested including a total on the far
right. Mr. Mitchell agreed. Co-Chair von Imhof appreciated
Mr. Mitchell's comment about the state being neutral or
net. She thought it was nice to see how Alaska compared to
other states.
Co-Chair Stedman indicated that the committee had consumed
two-thirds of the time allotted for the meeting and had
only reviewed 50 percent of the presentation. He wanted to
finish up the meeting within 25 minutes. He invited the
presenter to speed up his pace.
9:59:08 AM
Mr. Mitchell touched on slide 13 which he had already
discussed. He would expand the list to include other
obligations that were not necessarily created by the State
of Alaska. Slide 14 showed the Alaska tax credit bond
corporation history. It was created due to the 2016
scenario where the historical practice of paying most of
the tax credits annually was no longer feasible. At the
time, the state started paying based on the statutory
formula. It was not anticipated by industry and resulted in
duress. The corporate structure was derived with the
state's and credit holder's interests in mind. In other
words, there was a financial benefit to the state and to
the credit holders. He elaborated that the payments that
would be made would be discounted from the stated accrued
value. He referenced the third bullet on the slide which
noted that in the Fall 2019 Revenue Sources Book the $739
million currently accrued would diminish to somewhere
between $583 million and $660 million depending on the
discount rate, given the numbers in the book at the time.
The state benefited significantly, and capital relief was
provided to industry. He hoped it would allow industry to
do more in the state. The constitutionality was questioned
for the corporation and was currently in the Supreme Court
ripe for a decision.
Co-Chair Stedman commented that the committee had the
information mentioned two days prior and would be watching
the case. It might be that the budget would have to be
modified before the end of session.
Mr. Mitchell reported that the department had done work to
prepare for the potential of a positive ruling. If the
ruling was passed the division would anticipate trying to
issue bonds in the current year. The market would expect
the legislature to revalidate the structure by having a
debt service appropriation in FY 21, as it was a subject to
appropriation commitment. Given some of the past
disagreements between an administration and a legislature,
he asserted it was important to have solidarity.
Mr. Mitchell turned to slide 15 showing the state security
structure. He highlighted the agreement between DOR and the
corporation. The agreement would result in the proceeds of
the money that bond holders gave the corporation in
exchange for their bonds. The bonds would be transferred to
DOR to pay the determined amount for the outstanding
credits in exchange for a contractual commitment to make
annual payments to the corporations.
Co-Chair Stedman indicated the subject could be discussed
at a later time when the appropriation was before the
committee.
Mr. Mitchell continued to slide 17 showing the state's
credit rating compared to other states. The state's credit
rating had slid since 2014 and the decline of the price of
oil. Some of the credit diminishment that the state
incurred was a result of the difficulty in defining how the
state would move forward. Presently, the state's ratings
were strong: Aa3, AA, and AA-. Alaska was in the lower 20
percent rather than the top 20 percent of state credit
ratings.
10:03:53 AM
Senator Wielechowski asked about the stability of ratings
for states such as Illinois with a rating of Baa3, BBB-,
and BBB. He noted Illinois was stable compared to Alaska
and wondered why.
Mr. Mitchell explained that it was a designation the rating
agencies used. The ratings had an implied probability of a
ratings action in the future. Moody's assigned a negative
outlook on Alaska not long before Fitch downgraded Alaska
without putting it on any watch. It was a result of the
difficulty the state had in getting a capital budget and an
operating budget passed with a CBR agreement in place. He
talked with analysists from Moody's and Standard and Poor's
after the Fitch rating action was taken. He reported that
both rating agencies were watching carefully. They were
aware of the legislative session start date and of the
governor's budget proposals for the coming fiscal year.
Mr. Mitchell continued to slide 18 regarding credit rating
challenges. The slide was in response to an investor
presentation he had attended in May 2018. He had not been
to another investor presentation since that time. He spoke
to a group of investors about the state. He received
feedback that people had misperceptions about the State of
Alaska. They thought Alaska was running out of money, oil
was the only source of revenue for the state, and it would
never balance its budget. He provided a series of facts to
offset the misperceptions. He had some success in
dispelling the misperceptions, however, it was still
difficult because of the use of mass media.
Mr. Mitchell moved to the rating agency challenges on slide
19. He spoke of the political paralysis of the legislature.
He mentioned the 2 extended sessions in 2019 and the
contentious issues taken up in the sessions. The sessions
resulted in a diminished budget with some adjustments to
the diminishments that were initially suggested. There was
a near balanced budget even though there was some reliance
on the CBR and the Statutory Budget Reserve (SBR). In his
view, they were offset by projected deposits into the CBR.
In essence, there was a net neutral budget that was agreed
upon even though it was difficult. He furthered that the
governor had some proposals that were viewed credit
negative that were not all approved. The legislature also
had some proposals that were viewed credit negative that
were not all approved. The melding, in his view, was
positive.
Mr. Mitchell continued that he was surprised when Fitch
downgraded the state. He thought the basis for Fitch's
downgrade had more to do with potential outcomes, rather
than fact. He was discouraged by the downgrade. He noted
the influence of the pension obligation bonds and the
structural undesignated general fund imbalance. The state
tried to offset the obligations by reporting it had other
money. However, it was difficult to persuade the rating
agencies. There was also concern with Alaska's revenue
related to petroleum and potentially being outsized. He
explained further that in order to reach 80 percent to 90
percent of UGF coming from oil revenue, Fitch went back to
2014 in its report. He opined that it was shoddy work on
the part of Fitch to imply that Alaska was totally reliant
on oil revenue from a 2014 revenue situation.
10:10:54 AM
Mr. Mitchell pointed to the credit rating challenges on
slide 20 and noted the unrestricted surplus deficit. He
highlighted that the state was in deficit from 2013 forward
continuing into 2020 and projected into 2021. He pointed to
the far righthand column that showed the change in net
position. He emphasized that the net position was only
negative for a period of 2 years due to the strong
structural make-up mandating that the state saved money.
The state was saving more than its deficit.
Co-Chair Stedman asked Mr. Mitchell to restate his comment.
Mr. Mitchell obliged. He explained that the category the
state referred to as unrestricted general fund did not
include all revenue, just some. Some revenue that was
available for the legislature to expend was not included as
unrestricted revenue. He continued that there were valid
reasons why the funds were categorized as they were. He was
not suggesting that the construction should be changed. He
suggested that, although the state had an unrestricted
general fund imbalance, in total the state had a surplus.
Co-Chair Stedman asked how the Earnings Reserve Account
(ERA) and the POMV payout factored into the picture. Mr.
Mitchell responded that the Permanent Fund impacted it
hugely since it was such a significant category of revenue.
He was not suggesting that the POMV structure should be
amended, changed, or not followed. He suggested that the
legislature should recognize that the Permanent Fund for
the coming fiscal year was anticipating revenue that
exceeded the draw by $1.3 billion.
Co-Chair Stedman asked if Mr. Mitchell was talking about
the current fiscal year, not the 5 year averaging of the
POMV. Mr. Mitchell responded, "That's correct."
Co-Chair Stedman expounded that in looking at all revenue
in the siloed year relative to the expenditures in the same
year, the state would have a surplus under the methodology.
Mr. Mitchell replied, "That's correct."
Senator Hoffman asked if the Permanent Fund ERA was taken
into consideration when looking at the last column
[Slide 20]. Mr. Mitchell responded that the chart did not
show the fund balance. It showed the projected earnings or
revenue.
10:14:18 AM
Mr. Mitchell moved to slide 21 and noted the difficulty of
comparing Alaska to other states because of the Permanent
Fund. No other state had a permanent fund like Alaska did
or the size of its budget relative to population. The
Permanent Fund was not reliant on Alaska's economy to
generate revenue. Alaska was no longer like states such as
California or New York that generated revenue from their
economy. Alaska received revenue based on a world economy
through the Permanent Fund - a unique situation among the
states. He had broached the discussion with rating
analysts.
Mr. Mitchell provided detail on the Alaska job economy
turning to slide 22. While Alaska was in recession and had
job losses over the last several years, the rest of the
states had a strong resurgence in their economies and very
low unemployment. Alaska's unemployment was much less
volatile than other states. Looking historically at the
number of years that the State of Alaska had added jobs, it
ranked number 3 in stability. He argued that while Alaska's
unemployment had not been a rosy picture in the past couple
of years, it appeared to be better in 2019 without any
large spike up or down. He did not think it was appropriate
for the state to receive black marks for having the highest
unemployment in the country. Alaska went from 7.2 percent
to 8 percent when the rest of the country went from 10
percent to 4 percent.
10:16:34 AM
Mr. Mitchell continued to slide 23 which showed the CBR,
SBR, and ERA balances on a timeline. He emphasized that
while the CBR (the state's historical reserve fund) had
been used for intra-fiscal year capital and funding for
fiscal year expenditures, the ERA had significant growth
during the same timeframe. He suggested that while the
state did not want to spend it, it was still a reserve. The
large drop in 2019 was the POMV draw in conjunction with
the $4 billion that was used for inflation-proofing. The
money was still in the fund but no longer available for
appropriation.
Co-Chair Stedman thought the Senate Finance Committee was
interested in putting more money into the corpus of the
Permanent Fund. He suggested the amount would be in excess
of $1 billion. He indicated the committee would have some
future discussions on the subject. He thought the amount
would be a significant contribution to the protected
portion of the fund. The committee would work with the
administration to acquire support to ensure a transfer was
signed into law.
Mr. Mitchell commented that from a policy perspective it
would be an acceptable decision. He was aware that Fitch
had conducted significant analytics on the ERA and the
Permanent Fund. He thought Fitch was unrealistic on some of
its analytics from his standpoint. He thought it was
unrealistic to assume that the state would not make any
changes if it experienced a series of bad years. He
understood the concern about the ability of the ERA to
sustain the state in the event of need in the period of
multiple years over a negative cycle. He was not suggesting
that legislators' policy decisions should not be to
restrict money by transferring it to the principle. He was
just relaying information.
Co-Chair Stedman did not think the legislature's policy
direction would be to transfer so many funds from the ERA
to the corpus that it would hinder the state's ability to
pay dividends and operate. He thought the purpose of the
transfer would be to inhibit the ability to liquidate the
ERA - which would be an easy course of action.
10:20:02 AM
Senator Hoffman asked Mr. Mitchell, as the state's debt
manager, how he would decide to put funds into the corpus
versus paying off a portion of the state's unfunded PERS
and TRS liability.
Mr. Mitchell responded that there would be an immediate
positive effect from paying down the pension obligation
fund. Shifting money to the principle of the Permanent Fund
was a wise thing to do. He advised not overspending as a
result of not restricting certain categories of money.
However, in the short-term, it would have more of a
negative impact because it would be viewed from the
perspective of flexibility in the event of a negative
experience in the future.
Co-Chair Stedman suggested that in the event of a
catastrophic event, such as financial failure or an act of
mother nature, the people of Alaska could allow access to
the funding. He continued that there would have to be a
significant reason to access the funds, rather than a
political whim.
Mr. Mitchell indicated he was finished with his
presentation.
Co-Chair Stedman thanked Mr. Mitchell for his presentation.
The committee would be inviting him back for additional
information as the debt manager of the state. The committee
would also be hearing from APFC, DOR, and other entities.
He reviewed the agenda for the following Monday, January
27, 2020. He also reviewed other topics that would be heard
throughout the following week.
ADJOURNMENT
10:24:37 AM
The meeting was adjourned at 10:24 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 012420 Debt presentation SFC 2020.pdf |
SFIN 1/24/2020 9:00:00 AM |
State Credit Review and Debt Summary |