Legislature(2021 - 2022)SENATE FINANCE 532
01/31/2022 09:00 AM Senate FINANCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| State Debt and Credit Rating | |
| 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
January 31, 2022
9:02 a.m.
9:02:42 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:02 a.m.
MEMBERS PRESENT
Senator Click Bishop, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Donny Olson
Senator Natasha von Imhof (via teleconference)
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
Senator Lyman Hoffman
ALSO PRESENT
Deven Mitchell, Executive Director, Alaska Municipal Bond
Bank Authority, Department of Revenue; Ryan Williams,
Operations Research Analyst, Department of Revenue, Juneau.
SUMMARY
^STATE DEBT and CREDIT RATING
9:04:39 AM
DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL BOND
BANK AUTHORITY, DEPARTMENT OF REVENUE, introduced himself.
He discussed, "January 2022 Credit Review and State Debt
Summary" (copy on file). He addressed slide 3, "State of
Alaska and Other 49 States' Ratings."
Co-Chair Stedman requested some historical data around
credit ratings.
Senator Olson queried the main reason for the downturn in
the credit rating.
Mr. Mitchell replied that the state was already in a
difficult position because it did not conform to many
metrics used by credit agencies. He stated that the state
had a small population and a high revenue. The revenue was
historically oil and gas driven, which had high volatility.
He also noted that the state did not have a broad-based
tax. He stressed that the combination resulted in a
difficult analysis.
9:11:50 AM
Senator Olson gathered that a broad based tax would ensure
a pathway to balance the budget.
Mr. Mitchell replied that he did not believe that he said
that, but stated that the state had not yet instituted a
broad based tax.
Senator Wielechowski wondered whether there should be an
expectation of an increase in the states credit rating
because there had been an increase in the price of oil.
Mr. Mitchell replied that it was easier to go down in
credit rating rather than go up, but the increase in the
price of oil was a part of the positive story that the
state could tell the credit agencies.
Co-Chair Stedman pointed out that the numbers showed that
the budget was balanced using federal funds, and not state
revenue.
9:14:48 AM
Mr. Mitchell pointed to slide 3, "Municipal Market Update:
Market Commentary":
From January 13th to January 20th, AAA MMD increased 8
to 10 basis points across the curve.
MMD/UST ratios for the 5Y, 10Y and 20Y increased to
approximately 56 percent, 70 percent, and 84 percent
respectively.
For the week ending January 20th, municipal bond funds
experienced outflows of $238 million after
experiencing inflows of $231 million the previous
week. This marks the first reported outflows since
March 2021.
The new issue calendar for next week shows
approximately $6.3 billion in total par, composed of
$5.1 billion in negotiated deals and $1.2 billion in
competitive sales.
Co-Chair Stedman queried the basis point.
Mr. Mitchell replied that the basis point was a hundredth
of a percent.
Co-Chair Stedman remarked that the inverted yield curve had
been a predictor of a recession, and asked for more
explanation on that issue.
Mr. Mitchell replied that inverted yield curves typically
occurred when investors felt that the future would have
issues with the ability to obtain quality investments.
9:21:43 AM
Co-Chair Stedman surmised that there would be a flat curve
if there was no prediction of a recession.
Mr. Mitchell agreed.
Senator Olson wondered whether the change in federal rates
would have an effect on the states credit rating.
Mr. Mitchell replied that the state would be making more on
the invested fixed assets, but a loan would result in a
higher interest expense.
Senator Olson wondered whether the bond bills would be good
for the state in the long run.
Mr. Mitchell replied that the current interest rate
environment was extremely low, and felt that a slight
interest rate increase would still be very low.
Mr. Mitchell wondered whether the committee would like a
verbal history.
Co-Chair Stedman replied in the affirmative.
Mr. Mitchell offered a brief history of the states credit
rating.
9:27:15 AM
Senator Olson remarked on the Senate Finance Committee
chairmen at the time of the decline in the states credit
rating.
Co-Chair Bishop noted that Alaska did not fit the metrics
of the rating agencies.
Mr. Mitchell discussed slide 4, "Long Term Challenges
Remain, but Improvement in 2022":
Same Challenges:
?How to spend the structured percent of market value
draw from the Alaska Permanent Fund Permanent Fund
Dividend versus State services
?How to manage the state's budget into the future,
there is a general consensus that there is a need to
either spend less or generate more revenue at the
State level but finding common ground on options has
proven difficult
?The 10 year fiscal outlook still reflects deficits
from fiscal year 2024 through 2029
?Assumptions on investment income assumptions and
budget inflation questioned
?Reserve flexibility diminished; Constitutional Budget
Reserve balance was approximately $1.2 billion on 6-
30-21
Improvements since 2015:
?Significant reduction in state general fund spending
?The transfer from the Permanent Fund has been defined
through a Percent of Market Value structure
?Even though they include one-time revenues, projected
balanced budgets for fiscal years 2022 and 2023
?Improved oil price environment and production
expectations in Fall 2021 Revenue Sources Book
?Significant improvement in the funding ratios of PERS
and TRS which actuarially is 85.5 and 92.5 percent
respectively
?The large balance of the Constitutional Budget
Reserve Fund allowed decisions on how to change how
(and how much) the State spends, or how it generates
revenue to be deferred for the last six years
Long-term Rating Agency Concerns:
?Comparatively large net pension liability
?Narrow economy that is relatively small
?Perception that the majority of operating revenues
and the State's economy are primarily reliant on
petroleum development
?Difficulty in building consensus for financial
structure change
9:33:32 AM
Senator Wielechowski wondered whether the long legislative
session in the previous year had a negative impact on the
credit rating.
Mr. Mitchell stated that there was a managerial component
in the credit analysis, so difficulty in making managerial
decisions would have an impact on the rating.
Co-Chair Bishop stated that North Carolina had a very good
credit rating, but it took over two years to pass their
operating budget. He wondered whether federal dollars were
factored into the rating.
Mr. Mitchell replied that federal dollars were not
considered in the rating, but had a GDP target.
9:36:16 AM
Co-Chair Stedman wondered whether the rating agencies
examined the audited financial statements.
Mr. Mitchell replied in the affirmative.
9:39:11 AM
Mr. Mitchell looked at slide 5, "Alaska's Most Pressing
Credit Rating Challenge":
?The CBRF receives additional dispute resolution
deposits and restricted earnings
Post FY2019, it was determined that adjustments to
the CBRF account balance was necessary for dispute
resolution deposits originally deposited to the
General Fund
?In FY2021, GF expenditures include a transfer to the
SBRF of $325 million
9:41:11 AM
Co-Chair Stedman surmised that the net position of the
state included the Earnings Reserve Account (ERA) of the
Permanent Fund.
Mr. Mitchell replied in the affirmative.
Co-Chair Stedman wondered whether the SBR was included in
the chart on the graph. He stated that Mr. Mitchell could
provide that information at a later date.
9:46:42 AM
Senator Wielechowski queried the second bullet on the
chart.
Mr. Mitchell replied that it was the legal dispute about
certain deposits inappropriately placed in the CBR.
Co-Chair Stedman remarked that the discussion could be had
with the auditor.
Mr. Mitchell remarked that the legislature had historically
forward-funded education, so that was used in the timeframe
since 2015.
9:48:07 AM
RYAN WILLIAMS, OPERATIONS RESEARCH ANALYST, DEPARTMENT OF
REVENUE, JUNEAU, displayed 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
General obligation bonds are the only debt
secured by full faith credit and taxing
authority
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 project's
cash flow needs
The State has established other debt obligations
Reimbursement Programs
The School Debt Reimbursement Program or HB
528 reimbursement
Not currently authorized for new debt
and periodically funded (was most
recently partially funded in 2017, 2020
and 2022, and no appropriation in 2021)
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
9:50:51 AM
Co-Chair Stedman queried the numbers used for the slide.
Mr. Williams replied that there was reference to the annual
Comprehensive Financial Report for 2021.
Co-Chair Stedman wondered whether the market return or
actuarial smoothing was used in the presentation.
Mr. Williams agreed to provide that information.
Co-Chair Stedman noted that the committee would examine the
status in the reports.
Senator Wielechowski wondered whether a failure to pay in
the School Debt Reimbursement program would impact the
credit rating.
Mr. Williams replied that those obligations were subject to
appropriation, so he would not expect an impact on the
credit rating.
Senator Wielechowski wondered whether a law to enable
borrowing would impact the credit rating.
Mr. Mitchell replied that that unissued authorized debt
would require a hedging process. He noted that there were a
couple of items on the books that were no longer legal, so
they were no longer considered impactful to the state.
9:55:17 AM
Co-Chair Stedman wondered whether the state could issue
debt on the operating budget.
Mr. Mitchell replied that the constitution stated that
there could only be general obligation debt to capital
projects.
Co-Chair Stedman spoke of previous concerns about borrowing
and spending. He expressed concern for the burn rate and
depletion of state savings. He spoke of a negative figure
of $1 billion since the administration began and hoped that
things would see improvement.
Senator Wilson asked whether there were debt borrowing laws
on the books that were no longer legally effective.
Co-Chair Stedman mentioned the railroad and market risk
levels issuing bonds.
Mr. Mitchell replied that the next slide would speak to
three statutory frameworks created over the years for
various funding through bonds that the construct of the
financing.
10:00:47 AM
Senator Wilson asked whether the administration had
language to fix the statute.
Mr. Mitchell replied in the negative.
Senator von Imhof was online and appreciated the
conversation. She stressed the importance of examining of
cash flow.
10:02:01 AM
Mr. Williams looked at slide 8, "Total Debt in Alaska at
June 30, 2021." The slide listed various state debt and the
state agency debt by type. The figures, in million,
referred to principal outstanding, interest to maturity,
and service to maturity.
10:04:26 AM
Co-Chair Bishop asked about the outstanding in the general
bonds in state debt, and whether it was from the sale in
2012.
Mr. Mitchell replied that it was a combination of bond
propositions over a range of time.
Co-Chair Bishop asked about AEA and the $102 million to
maturity Ms. Fowler those bonds to be paid off in 2022.
Mr. Mitchell replied that he could not speak to that issue.
Mr. Mitchell continued his comments about not using banks
that did not support oil exploration.
Co-Chair Stedman requested in writing the list of banks.
Mr. Mitchell agreed to provide that information.
Mr. Williams looked at slide 9, "Total Debt in Alaska at
June 30, 2021." The slide listed state and state agency
debt by type and in millions. The total debt was $11.9
billion.
10:09:42 AM
Senator Wilson asked whether the state had recently retired
any debt.
Mr. Mitchell replied in the affirmative, and noted that
upcoming slides would address those retired debts.
10:10:38 AM
Co-Chair Stedman asked about any bonds that would be
considered callable.
Mr. Mitchell replied that there was approximately $55
million in debt that would be callable in 2022.
Senator Wilson asked about the 2006 Tobacco Settlement
Asset back bonds.
Mr. Mitchell replied that Alaska, and 46 other states,
entered into a settlement agreement with the tobacco
companies in 2006. Those revenues were a way of funding
capital budgets at the time, and a way for the state to
divest from the majority of a partnership with the tobacco
industry.
Senator Wilson recalled that the funds would be in accounts
that were considered designated general funds (DGF).
Mr. Mitchell replied that the fund had been earmarked for
smoking cessation efforts.
Senator Wilson asked whether sweeping those funds would put
the state out of compliance.
10:15:06 AM
Co-Chair Stedman remarked that there was a concern about
cash flow related to those funds.
Mr. Mitchell recalled that there was some concern because
of the structure of the bonds, but stated that the
refinancing stated that the settlement revenues would be
sufficient to pay the debt service to maturity.
Co-Chair Stedman asked for more information at a later date
on the subject.
Senator Wielechowski wondered whether the administration
used revenue anticipation notes.
Mr. Mitchell replied that revenue anticipation notes had
not been used since the 1960s.
Mr. Mitchell discussed slide 11, "Debt Affordability
Analysis":
Annual analysis required by AS 37.07.045 to be
delivered by January 31
Discusses credit ratings, current debt levels,
history, and projections
Relies upon debt ratios, limit of 4 percent for
directly paid state debt, and 7 percent when combined
with municipal debt that the state supports
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
The 2022 analysis determined that the State
conservatively had a debt capacity of $1,350 million
Adjustments made to base analysis to account for
POMV split for PFDs vs state budget, special
funding for PERS/TRS and future budget
uncertainty
10:20:14 AM
Co-Chair Stedman asked about the risk adjustment.
Mr. Mitchell replied that the analysis currently did not
have a smoothing type of input for revenue projection,
which resulted in more volatility.
Mr. Mitchell addressed slide 12, "Authorized Bonding
Authority and Outstanding Obligations":
?The State currently has no legally authorized but
unissued general fund obligations
?As of June 30, 2021, the State had debt obligations
secured and paid by the general fund of approximately
$663.0 million of general obligation bonds
?$18.7 million of Certificates of Participation
?$172.1 million of lease-revenue bond conduit
issues of political subdivisions
?The State's liability under the SDRP was $560.9
million
?Annual principal repayments over the next five years
are:
?GO bonds $40 to $50 million
?Lease bonds $14 to $20 million
?SDRP approximately $60 million
10:25:23 AM
Senator Wielechowski asked about the $110 million
authorization in 2021.
Mr. Mitchell replied that it was transportation projects
authorized in the in General Obligation Transportation Act.
Senator Olson queried the meaning of the first bullet on
slide 12, "The State currently has no legally authorized
but unissued general fund obligations."
Mr. Mitchell replied that it was general obligation funds
paid, which included the lease on the list.
Mr. Mitchell pointed to slide 13, "Current General Fund
Annual Payment Obligation":
GF Payment peaked in 2018 at $225.2 million
FY2022 GF Debt service payments include approximately
$96.2 million in State GO and State Supported debt,
and approximately $35 million for State Supported
municipal debt
PERS/TRS special funding is many times all other state
commitments
10:31:02 AM
Senator Olson queried the frequency of the state assisting
municipalities in debt.
Mr. Mitchell replied that there were a couple of instances
where the state assisted communities in times of financial
difficulty, but it was fairly rare.
Senator Olson wondered whether the graph should cause alarm
from a liability standpoint.
Mr. Mitchell replied in the negative because there was
declining debt in a mature portfolio.
Co-Chair Stedman discussed housekeeping.
ADJOURNMENT
10:38:23 AM
The meeting was adjourned at 10:38 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 013122 Credit Review and State Debt Summary 2022.pdf |
SFIN 1/31/2022 9:00:00 AM |