Legislature(2023 - 2024)SENATE FINANCE 532
02/01/2023 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Administration Response to Prior Meetings - Office of Management & Budget | |
| Presentation: State Debt Summary and Credit Review | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
February 1, 2023
9:00 a.m.
9:00:57 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:00 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Donny Olson, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Jesse Kiehl
Senator Kelly Merrick
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Neil Steininger, Director, Office of Management and Budget,
Office of the Governor; Kate Sheehan, Director, Division of
Personnel and Labor Relations, Department of
Administration; Fadil Limani, Deputy Commissioner,
Department of Revenue; Ryan Williams, Debt Manager,
Department of Revenue.
SUMMARY
PRESENTATION: ADMINISTRATION RESPONSE TO PRIOR MEETINGS -
OFFICE OF MANAGEMENT & BUDGET
PRESENTATION: STATE DEBT SUMMARY and CREDIT REVIEW
9:01:27 AM
Co-Chair Stedman explained that the committee would hear a
continuation of the previous days' presentation by Office
of Management and Budget (OMB) Director Neil Steininger. He
explained that Mr. Steininger would review questions that
the committee had asked in a previous meeting. After the
OMB presentation, the committee would consider information
on state debt.
^PRESENTATION: ADMINISTRATION RESPONSE TO PRIOR MEETINGS -
OFFICE OF MANAGEMENT & BUDGET
9:02:25 AM
NEIL STEININGER, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET,
OFFICE OF THE GOVERNOR, resumed a presentation from the
previous day. He addressed a presentation entitled "State
of Alaska Office of Management and Budget - Follow Up to
January 24 Hearing," (copy on file). He addressed slide 1,
"Question 1":
Senators Stedman and Bishop asked about pension and
healthcare funding.
The Defined Benefit Pension funding ratio is 78.2% for
the Teacher Retirement System (TRS) and 68.1% for the
Public Employee Retirement System (PERS), and the
Defined Benefit Health Care ratio is 140.7% for TRS
and 134.9% for PERS. The Alaska Retirement Management
Board decision to forego the health care normal cost
contribution results in FY24 savings of $79.3 million.
Attached FY2019 to 2022 PERS TRS funded ratios
document provides additional information (attachment
1). Please also see the FY 2024 PERS TRS Savings
document for additional information (attachment 2 and
2b).
Mr. Steininger relayed that the slides corresponded to a
letter to the committee addressing members questions from
January 31, 2023 (copy on file). He relayed that the first
question asked about pension and healthcare funding, funded
ratios, as well as the change in contribution as a result
of the Alaska Retirement Management (ARM) Board decision
relating to the healthcare side of the contribution. He
explained that the pension systems were broken into two
systems, the Public Employees' Retirement System (PERS) and
the Teachers' Retirement System (TRS). He explained that
PERS covered the vast majority of state employees as well
as municipal and city employees, while TRS covered teachers
and school districts. Both of the systems were managed
separately with separate funding ratios. The funding ratios
represented the amount of money that was currently in the
pension account as compared to the actuarily-determined
amount that should be present to consider the account fully
funded.
Mr. Steininger cited that TRS was currently funded at 78.2
percent for the pension portion of the fund. The PERS
system was funded at 68.1 percent for the pension portion,
which covered benefits paid to retirees as an income
replacement. He addressed the healthcare portion of the two
pension systems, which covered retiree healthcare. He cited
that the TRS healthcare portion was funded at 140.7
percent, which meant there was significantly more money in
the account than was required to make payments for retiree
healthcare.
Mr. Steininger continued that in the PERS system,
healthcare was funded at 134.9 percent. As a result of the
funded ratios indicating there was no additional
contributions and more money than necessary, the Alaska
Retirement Management (ARM) Board had decided to forego the
healthcare normal cost, which was the base level cost
before additional contributions might be needed. As a
result of the decision, there was a savings of $79.3
million in the FY 24 budget. He noted that the following
three slides had attachments with more detail from the
actuaries' reports.
9:05:49 AM
Senator Kiehl appreciated Mr. Steininger's response, and he
had questions about the recommendation to forego the normal
cost. He considered that the normal cost was the amount the
state needed to put in in a given year to pre-fund the
benefits earned in the year. He noted there were statutes
that required payment of the normal cost, with no
exceptions for overfunding. He thought there were other
options available to the ARM Board, such as getting into
safer investments or reducing the return expectation. He
asked Mr. Steininger to explain the financial thinking
behind not making a statutorily required contribution.
Mr. Steininger qualified that he did not want to speak for
the ARM Board, as he was not a member. He mentioned that
the decision to forego the health care normal cost
contribution was made by the board after consideration of
information from the actuaries and projection of the funded
ratio on the health side. He furthered that continuing to
make the normal contribution would result in the funded
ratio continuing to go up. He noted that once money was
placed into the health portion of the retirement trust, it
was very challenging to move it out of that side. He
asserted that the additional funds did not benefit retirees
and were not needed. He explained that the $79.3 million
could be put to "higher and better use elsewhere in the
budget. He thought everyone was aware that there were
sometimes conflicts between appropriation and state
statute, and it must sometimes be contended with.
Co-Chair Stedman contemplated that the committee would
delve into the issue of healthcare being overfunded when
the ARM Board was before the committee. He commented that
the same issue had come up the previous year. He noted that
the pension side was underfunded. He commented on the
difficulty of changing the funding ratio. He asserted that
the topic would be an ongoing discussion, perhaps with a
final decision well into the budget process. He commented
that the committee might agree with OMB or conversely take
the same amount as the previous year.
9:10:54 AM
Co-Chair Stedman asked Mr. Steininger to address the total
unfunded liability in the pension systems.
Mr. Steininger spoke to slide 3, which addressed Question 1
and showed an excerpt from Attachment 1 (copy on file),
which had several additional columns and rows. He directed
attention to the unfunded actuarial accrued liability based
on the actuarial value of assets. He pointed out row C, and
cited $5 billion in unfunded liability in PERS, and $1.7
billion in unfunded liability in TRS for FY 22 on the
pension side.
Co-Chair Stedman asked if the PERS pension went from 77
percent funding level down to a 67 percent funded ratio
because of market conditions the previous year.
Mr. Steininger answered "yes."
Co-Chair Stedman pondered the table on slide 3 and the
increase in unfunded liability. He commented on line F.
Mr. Steininger answered in the affirmative.
Co-Chair Stedman remarked that there was a significant
alteration and expansion on the states unfunded liability.
He thought the previous year the unfunded liability had
been discussed as lasting until the end of the century.
9:13:49 AM
Mr. Steininger spoke to slide 4, which addressed Question 1
and showed an excerpt from Attachment 2 (copy on file) that
showed additional detail to the question regarding reports
from the ARM Board related to the healthcare portion. He
pointed out under the yellow header, it showed the original
amount that included the payment of the healthcare portion.
The green area labelled final was what the ARM Board had
recommended. He pointed out the difference, showing
$60,940,000 for the PERS portion, and the next line would
show the recommendation not to make the healthcare
contribution for TRS, which roughly added up to $70
million.
Mr. Steininger spoke to slide 6, "Question 2":
Senator Wilson asked about efforts made toward
addressing recruitment and retention.
There are five key initiatives the Department of
Administration is actively working to address this
matter:
1. Increase the use of internships to build pathways
towards permanent employment.
2. Updating and expanding job class minimum
qualifications. The department believes doing so may
increase applicant pools.
3. Increasing recruitment and retention initiatives.
This process will involve creating Letter of Agreement
(LOA) templates that can be more readily administered.
4. Returning recruitment services back to departments
for a better focused approach.
5. Contracting out certain work for vital state
programs.
Mr. Steininger discussed item 2 on the slide, and
consideration of whether there were overly restrictive
qualifications in jobs that were beyond what was required
to do work. He discussed the Letters of Agreement with
unions as a means of offering incentives. He discussed
recruiting staff moving back to departments after being
consolidated.
Senator Wilson suggested that Division of Personnel and
Labor Relations Director Kate Sheehan could provide a
report on some of the efforts listed on the slide. He
discussed the use of key words on job applications, and
asked if staff were doing a more in-depth review of
applicants.
Mr. Steininger deferred the question to Director Sheehan.
9:17:44 AM
KATE SHEEHAN, DIRECTOR, DIVISION OF PERSONNEL AND LABOR
RELATIONS, DEPARTMENT OF ADMINISTRATION, addressed Senator
Wilson's question. She explained that the division was
working towards competency-based minimum qualifications.
She noted that some of the state's minimum qualifications
requirements were very outdated. The department was looking
at whether a college degree was needed, and looking at
removing requirements for specific program experience. The
department had hired a non-permanent employee with the goal
of moving towards the competency-based qualifications and
moving away from key word requirements or things that did
not necessarily have meaning if an applicant was coming
from out of state.
Mr. Steininger discussed slide 7, "Question 3":
Senators Kiehl and Wilson asked about the changes in
cost resulting from the loss of enhanced FMAP.
The change in cost resulting from the FMAP decreasing
to 2.5% on July 1st will result in an estimated loss
of $10.3 million for the first quarter of FY24. On
October 1st, the rate will further decrease to 1.5%
resulting in a $13 million loss for the second
quarter. In the 3rd and 4th quarters, the enhanced
FMAP will entirely go away resulting in a loss of
$34.4 million for the remainder of FY24.
Mr. Steininger explained that FMAP signified federal
medical assistance percentage, and there had been an
enhancement of 6.4 percent to the rate the federal
government matched into Medicaid, which had happened under
the health emergency for Covid-19. The enhancement had
begun to taper down after being announced on December 29,
2021. The enhancement had provided about $17.2 million in
additional federal revenues to the state per quarter. The
taper-down would happen on a quarterly basis. He explained
that the administration was working with the Department of
Health to determine the General Fund need would be in FY 24
after changes in federal funds and changes due to the
health emergency expiration. He affirmed that the
administration would be coming to the committee with more
information regarding the impact on the Medicaid Program.
Co-Chair Stedman asked for a rough estimate in expected
additional funding needs for Medicaid.
Mr. Steininger estimated that there was about $57 to $58
million in lost federal revenue in FY 24 from what would
have come in had the public health emergency been extended
for the entire year. He noted that the administration had
not expected the public health emergency to be extended for
the full year so it anticipated a need in the range of $20
million to $40 million.
Co-Chair Stedman affirmed that the committee would put a
finer point on the numbers when finishing up the budget
with the help of the administration.
9:22:31 AM
Senator Wilson suggested that since the state was aware
that FMAP would end, the funds did not really constitute
lost revenue. He considered that the state should have
had a plan for the costs in the budget. He pondered that
there had been a lack of foresight on the part of the
administration.
Mr. Steininger reviewed slide 8, "Question 4":
Senator Kiehl asked about potential federal penalties
for not meeting eligibility redetermination deadlines.
Federal partners have indicated states could be
subject to sanctions for not meeting eligibility
redetermination deadlines but there has been no
communication around what that will mean. The
Department of Health will start its bi-annual review
by the Feds this May and more information is
anticipated at that time.
Mr. Steininger explained that in the federal programs in
the Department of Health Division of Public Assistance,
there were deadlines for redetermining beneficiaries'
eligibility in the program. If the state failed to meet the
deadlines there could be repercussions with federal
partners. He mentioned challenges in the Division of Public
Assistance and an indication of a biannual review in May.
He indicated proving more information later in the session
or during the following summer.
9:24:52 AM
Mr. Steininger referenced slide 9, "Question 5":
Senator Wilson inquired about a summary of cost
savings resulting from SB55, and what the current
actuarial rates are.
Current PERS actuarial rates are 25.10% of payroll, or
$611.8 million for all employers. Prior to passage of
SB55 during the 2021 session the state would have
directly paid all cost greater than 22% of payroll for
all employers. Under the policy implemented in SB55
the state now is able to charge the 3.10% difference
between the 25.10% actuarial rate and the 22% cap to
state programs, sharing that cost with federal funding
partners. In FY24 this represents a savings of
approximately $19 million UGF. Below is a table
illustrating the projected FY24 savings from this
policy change.
Mr. Steininger discussed current actuarial rates listed on
the slide. He mentioned the funded ratios of the pension
plans, and explained that the actuaries that worked with
the ARM Board took the funded ratios to determine a
percentage of payroll required to pay into the pension
systems to keep a healthy blance and work down the unfunded
liability. For FY 24, for PERS, the rate was determined to
be 25.1 percent of overall payroll for state employees and
municipal or other public employees.
Mr. Steininger continued that prior to the passage of of SB
55, the state had a cap of 22 percent of payroll for what
an employer would have to pay into the system. Under SB 55,
the cap was removed only for the State of Alaska as an
employer. Municipalities and other public employees paid up
to the 22 percent cap. The change allowed for the removal
of a part of the state obligation and shift the funds over
to state programs. The change helped bill some of the rate
out to federal partners in the state programs, as well as
some other fund sources.
9:27:50 AM
Mr. Steininger discussed slide 10, "Question 6":
Senator Olson asked what the success rate is for
litigation relating to statehood defense, and what the
running total is for such costs.
Currently, Department of Law has many cases still
pending in district courts or on appeal, please see
attached list of current litigations funded with the
multi-year appropriations for Statehood Defense. Out
of all these cases four were lost in the district
court and are currently on appeal (attachments 3 & 4).
Mr. Steininger informed that the deputy attorney general
had spoken to Co-Chair Olson's question in the meeting the
previous day.
Co-Chair Olson relayed that he did not have additional
questions but noted that when a decision from a lower court
was appealed, the appellate court would affirm that the law
had been followed and the chance of a reversal was small.
He doubted the state would prevail in such an appeal. He
considered the United States Supreme Court, which he
thought was more conservative. He did not see the advantage
of spending hundreds of thousands of dollars for out-of-
state lawyers to appeal some of the court decisions. He
thought the matter was appropriate for the budget
subcommittee.
9:29:36 AM
Mr. Steininger looked at slide 11, "Question 7":
There was a question regarding what the $2.5 million
for the Alaska State Defense Force would be used for.
Expanded operations of the Alaska State Defense Force
necessitates additional funding to enable recruitment
efforts, training, travel, supplies, and other
operating costs associated with a division. Also added
is a Director position as well as three administrative
support staff.
Mr. Steininger noted that the Alaska State Defense Force
was within the Department of Military and Veterans Affairs
(DMVA). He explained that there were some operating costs
associated with expanding the state defense force into a
full division within DMVA, including adding a director as
well as three administrative support staff.
Co-Chair Stedman relayed that the matter would be addressed
in the budget subcommittee process.
Mr. Steininger showed slide 12, "Question 8":
On January 23, 2023 the committee asked the Department
of Revenue to provide the minimum balance or minimum
range for the Constitutional Budget Reserve Fund
(CBRF). The department deferred that question to the
Office of Management and Budget.
There is no statutory or constitutional direction, or
objective criteria, for a minimum balance of the CBRF.
However, there are two key balance points agreed upon
by OMB and DOR. Drawing below $500 million would
likely result in adverse operational impacts from
difficulties in managing daily cash flow, however $2
billion is the generally agreed upon prudent minimum
balance.
Mr. Steininger contemplated that the amount of funds the
state had in reserves would correlate to the amount of time
needed to resolve a problem should the state have a crash
in revenue. He thought a minimum balance of $2 billion
would allow for time to come to the legislature in session
and discuss how to deal with a precipitous unanticipated
drop in revenue. He thought when looking at the overall
budget proposal, the administration was looking at keeping
the CBR balance at around $2 billion and not going far
below the amount.
9:33:20 AM
Senator Wilson thought there was an memorandum of agreement
(MOU) for $400 million that was signed in 2017 by OMB, the
Department of Revenue (DOR), and the Department of Law. He
wondered if it was time to update the MOU to better reflect
the current times numbers.
Mr. Steininger informed that the administration sat down
and reviewed the MOU on an annual basis with OMB, the
Treasury, and the Division of Finance to determine if
anything significant had changed that would require an
update to the memo. The $400 million amount in the memo
looked at a cash blance in the General Fund to meet day to
day cash needs in the state, which he thought still held
relatively true. He explained that the memo itself
dictated where the cash should come from based on
availability, and noted that no significant changes had
been made to the structure of the states accounts or funds
that would necessitate a change in where to go for cash
needs.
Co-Chair Stedman relayed that the committee had asked LFD
to look at what other states used as a minimum targeted
cash balance. He recognized that Alaska was different in
not having a steady property tax or sales tax flowing into
the treasury. The committee would spend time on the matter
when considering the fiscal modelling from LFD. He thought
the $2 billion minimum balance seemed reasonable, and
thought the committee would have the related policy
discussion forthcoming.
Mr. Steininger showed to slide 13, "Item 9":
The vacancy rates by department presented on slide 7
of the January 24th presentation contained errors. A
corrected table is attached and a corrected version of
the slide is included on the next slide
Mr. Steininger showed slide 14, "Budget Challenges -
Vacancy," which showed the information being clarified from
the previous slide was correctly shown in the table on the
left. He noted that the overall vacancy had been correct,
but the numbers had been mistakenly shifted for some
departments.
Co-Chair Stedman thanked Mr. Steininger for his
presentation.
^PRESENTATION: STATE DEBT SUMMARY and CREDIT REVIEW
9:37:50 AM
Co-Chair Stedman relayed that the committee would hear a
presentation from the state debt manager and the deputy
commissioner of DOR.
9:38:28 AM
AT EASE
9:38:53 AM
RECONVENED
FADIL LIMANI, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
relayed that he had recently been appointed as the deputy
commissioner of DOR. He discussed his background. He had
started his career 15 years previously in public accounting
with one of the largest accounting firms in the state. He
had worked for the North Slope Borough and oversaw all
elements of finance including the treasury, the borough's
permanent fund, debt management, and property tax. After
leaving the borough he had owned his own company, providing
financial and business consulting services. He had served
as the chief Financial Officer for the North Slope School
District before being hired by DOR.
9:40:46 AM
RYAN WILLIAMS, DEBT MANAGER, DEPARTMENT OF REVENUE,
introduced himself. He shared that he was also the
executive director of the Municipal Bond Bank Authority. He
had been with the Treasury Division for 13 years and had
been in the debt management section for the majority of the
time.
Mr. Limani discussed a presentation entitled "Credit Review
& State Debt Summary," (copy on file). He addressed slide
one and the roles of the Department of Revenue Deputy
Commissioner and the DOR Debt Manager.
Mr. Limani dicusssed slide two, "Agenda":
1. State Bond Rating Overview Page 3
2. Current Market Update Page 8
3. State's Current Debt Refunding Page 10
4. State Debt and General Fund Obligations Page 12
5. State Debt Capacity Page 17
Mr. Limani discussed slide 4 and general information on
bond rating. He explained that a bond rating was simply a
credit score that was provided through an issuer that
provided the credit worthiness of a bond and the credit
quality of the issuer. The assessments were provided by
reputable rating agencies such as Standard and Poor (S and
P) Global Ratings and Moodys. He mentioned a new rating
agency, which he would address later in the presentation.
Mr. Limani explained that generally when rating agencies
conducted an analysis of an issuer, it would provide
official statements of the underlying disclosure which
provided financial information about the issuer. He
explained that bond rating agencies had established rating
criteria by which they measured metrics to issue a rating.
Each agency had different published criteria, however the
agencies mostly focused on government framework, financial
management, the economy, budgetary performance, and the
debt and liability profile. He discussed the credit rating
scale as divided into "investment grade" and "non-
investment grade" rating categories. He explained that
anything from a BBB to an AAA rating was considered a
very high grade and was a low risk to bond buyers. He noted
that the non-investment grade bonds had a moderate to high
risk and were sometimes referred to as junk bonds.
Mr. Limani continued to address bond ratings. He discussed
benefits of ratings including an overview to the market,
potential interest in borrowing costs, and credibility to
the market. He cited that lower ratings could result in
increased borrowing costs and a more aggressive market.
Mr. Limani discussed slide 5 and the state's credit ratings
with Moody's, S and P, and Fitch. The state currently had a
AA3 with a stable outlook with Moodys, a AA- with a
positive outlook from S and P, and an A-plus rating with a
stable outlook from Fitch. Currently the state utilized
Moodys and S and P ratings, however Fitch only evaluated
the credit for the state based on historical bonds
outstanding. He explained that the states historical
ratings showed a great deal of fluctuation. He made note of
improvements in recent years, and noted that much of the
changes in 2021 and 2022 was driven by the adoption of SB
26 and the percent of market value (POMV) draw from the
Permanent Fund, coupled with the surplus the state had in
FY 22 as well as the increase in the oil price environment.
9:46:38 AM
Co-Chair Stedman suggested considering only one rating
agency to discuss the state's highest and lowest ratings
from S and P.
Mr. Limani relayed that the highest rating the state had
received from S and P Global was in 2012, where the state
received an AAA rating. at the same time, Moodys also gave
the state an AAA rating, which was the highest rating the
state could receive. He noted that in 1961, Moody's had
given the state its lowest rating of BBB.
Co-Chair Stedman asked about the economy as a focus area
for ratings. He asked what matrix the agencies used, and
whether the gross domestic product (GDP) was considered.
Mr. Limani replied that many criteria were considered, and
noted that later slides would address the topic. He
commented that from the rating agency's perspective, Alaska
was unique and did not fit into matrices that rating
agencies had established. He used the example of
consideration of states pension obligations. He described
that while Alaskas pension systems were well funded, the
agencies considered the funding in comparison to GDP as
opposed to how well the plans themselves were funded. He
mentioned the states population and thought the evaluation
was unfair considering the well-funded status of the
pension systems. He thought the state compensated for the
fact by having a sovereign welfare fund and having the
necessary reserves.
Co-Chair Stedman clarified that the Permanent Fund was not
a sovereign welfare fund but rather a sovereign wealth
fund.
Mr. Limani continued to address Alaskas uniqueness with
regard to rating criteria, and considered the general
governance of the state, which rating agencies might see
differently. He noted that agencies had a point-based
evaluation system for ratings. He cited that the
fluctuation of oil price and having a structurally balanced
budget was always a component of concern.
9:50:30 AM
Mr. Limani discussed slide 6 and Alaskas ratings compared
to other states. He pointed out that the state still had a
high-quality rating compared to other states, and noted
that some other states had relatively lower credit. He
mentioned the fluctuation in oil prices in Alaska, and that
other states might have more flexibility in the tax base.
Mr. Limani showed slide 7, "LONG TERM CHALLENGES REMAIN,
BUT IMPROVEMENT IN FY2022," and noted that rating agencies
viewed the state differently when it came to rating
criteria. He mentioned consideration of the state budget,
the Permanent Fund, and utilization of reserves. The state
had been able to make some ratings improvements since 2015.
He mentioned amortization of new debt and increased funding
levels for PERS and TRS. He mentioned the improved price of
oil and additional resources deposited into the CBR, which
had been viewed favorably by rating agencies. He discussed
long-term impacts, and noted the rating agencies still
believed that the state was heavily focused on the oil and
gas economy, which was volatile. He mentioned the Permanent
Fund and the diversified investments, which yielded one-
third of state revenues.
Mr. Limani noted that one of the goals related to rating
agencies was prorating agencies, which could provide a more
comprehensive review of unique issuers. He thought the
prorating agencies could be more favorable to the state as
compared to others.
9:54:11 AM
Co-Chair Olson mentioned the percent of market value (POMV)
draw and split between the Permanent Fund Dividend (PFD)
and state government spending. He asked if DOR had an
opinion on the matter, whether the PFD should be favored
over government services or vice versa.
Co-Chair Stedman thought Mr. Limani might want to think
twice before answering the question.
Mr. Limani deferred the question to the administration. He
reminded that he was relatively new to his position.
Mr. Limani addressed slide 9, "Current Municipal Market
Update," and explained that the slide showed a snapshot of
market activity for the past month. He noted that the
information was included because the state had recently
refunded some bonds. He observed that the market had been
relatively volatile over the previous month. He directed
attention to a chart that showed interest rates from the
United States Treasury for ten years and thirty years. He
directed attention to municipal market data. He pointed out
rates in basis points. He directed attention to the chart
on the right-hand side, which provided the yield curves for
different ratings over a thirty-year term.
Mr. Limani discussed the state going out to market for
refunding of bonds and explained that there had not been
that much supply in the market earlier in the week, nor
were there any other issuers within the state, which had
made it favorable for the states bonds to be sold. The
following slide would provide an overview of the bond
refunding.
9:57:20 AM
Mr. Limani spoke to slide 11, "State Debt - Recent
Refunding Transaction":
G.O. refunding transaction: 2012A and 2013B Bonds
Summary of refunding activity from pricing:
o The 2012A Bonds are subject to optional redemption
(~$7.4 million, 8/1/2023 maturity)
o The 2013B Bonds are subject to optional redemption
(~$50.2 million, 8/1/2023 8/1/2025 maturities)
o GO Refunding pricing analysis: $1.7 million in NPV
savings or approximately 3.04%
o The refunding transaction reduces debt service
associated with these bond series in every year
through 8/1/2025 and the final maturity date remains
intact
Mr. Limani highlighted that the state manager had done a
superlative job refunding the bonds. He highlighted that
the tax cut and jobs act that had been passed in 2017 had
changed rules around advanced refunding. Historically
issuers could take the benefit of future maturities and
have call option provisions on bonds. To the extent to
which the market provided, it was possible to call on
bonds. Under the new law, in the event of an advanced
refunding, 90 days of maturity or less was required, which
provided a challenge for issuers. He mentioned refunding
the bonds earlier in the week, when there had been
significant interest and all the bonds were sold within an
hour. He recounted that large institutions had been
reluctant to do any investing because of ESG policies, but
the past week had been shown to be contrary and showed
institutions purchasing bonds.
Co-Chair Stedman asked what ESG signified.
Mr. Limani deferred to the debt manager.
Co-Chair Stedman asked for a definition of ESG.
Mr. Williams explained that ESG signified environmental,
social, and governance, which were focus areas for rating
agencies and other entities for the previous three years.
There had been environmental factors, social factors, and
governmental factors that contributed to activity on both a
state and community level.
Co-Chair Stedman asked if in a nutshell, EGS made it more
difficult for energy producing states such as Alaska, which
relied on hydrocarbons, and favored other areas.
Mr. Williams answered in the affirmative.
Senator Bishop had noticed hypocrisy form lending agencies,
especially since the run-up in energy prices. He thought
some of the big lending institutions were starting to
backpedal from ESG compliance and were getting back into
energy stocks. He asked if Mr. Limani and Mr. Williams had
observed the same.
Mr. Limani affirmed that a lot of institutions were
softening in tone pertaining to the renewable energy
market.
10:02:24 AM
Co-Chair Stedman stated that the issue of hindering the
state's resource extraction was a sore spot with the
committee. He considered that the state relied on oil and
fisheries to function. He referenced Senator Bishop's
comment and thought it was important to know if
institutions were modifying their position regarding ESG.
He mentioned the reinsurance market, which could restrict
development and was a concern of the state. He noted that
the state had the ability to restrict where it invested
state funds, including which banks were utilized. He asked
for further discussion on the calling and reissuance of
debt and the 90-day window.
Mr. Limani relayed that the window was usually 90 days of
maturity in question for a particular issuance.
Co-Chair Stedman asked if Mr. Limani was referring to the
call date.
Mr. Limani answered affirmatively.
Co-Chair Stedman asked about extending a maturity date on
bonds.
Mr. Limani relayed that there was no extension of the
maturity, rather the bonds still provided for the previous
structure, and DOR had just looked at things from an
interest-saving perspective.
Co-Chair Stedman mentioned reviewing municipalities and
requests for refinancing and emphasized caution when
considering extension of maturity dates. He mentioned
significant assets in the state that had been refinanced
but never paid off, which he found unacceptable. He
mentioned a hydro-power project that was built 40 years
previously and should have been paid off. He described
trying to expand energy generation while still being
affected by old infrastructure being built. He stressed
looking beyond net present value when working with local
assemblies and councils.
10:06:00 AM
Co-Chair Olson asked about the decision to refund some of
the general obligation (GO) bonds and asked if it had been
a departmental decision or if legislative approval was
required.
Mr. Limani relayed that when considering the transactions,
DOR was not looking to change the terms. He recounted that
in the early part of December, there was volatile movement
in the interest rate environment and it had not been
feasible to look at the refunding options. In January
greater savings materialized, even though the terms were
not changed. He noted that the authority lay within DOR.
Mr. Williams added that the State Bond Committee approved a
series resolution to issue the GO refunding bonds. There
was a minimum threshold savings percentage of two percent.
He relayed that usually one would see a higher savings
threshold of three percent or higher, but the state was
past the redemption call date on the 2012 A bonds and was
coming up on the call date for the 2013 B bonds. He
continued that the savings threshold was a little lower as
the state reached or passed the optional redemption date,
there was potential that additional savings would not be
gained.
10:08:08 AM
Mr. Limani showed slide 12, State Debt and General Fund
Obligations.
Mr. Williams showed slide 13, "State Debt Obligation
Process," and explained that all forms of state debt were
first authorized by law. Any GO debt was authorized by
voters through a ballot initiative. All state debt was
structured and authorized by the state bond committee once
authorized once first authorized by law and voters. He
mentioned state guaranteed debt and state supported debt.
He discussed state supported debt subject to appropriation
and explained that the state had outstanding certificates
of participation that funded the Alaska Tribal Health
Consortiums housing facility project, which had been
issued in 2014.
Mr. Williams explained that there were also lease revenue
bonds issued by the state and supported by lease revenue
for the Goose Creek Correctional Facility. There were other
outstanding state debt programs that were included as
reimbursement programs such as the school debt
reimbursement program and the transportation infrastructure
development program. He recalled that the SDRP was
partially funded in 2017, 2020, and 2022, with no funding
in 2021. With appropriations in the 2023 budget, there was
100 percent coverage and offsets for prior fiscal year
reductions.
Senator Wilson asked Mr. Williams to discuss the Alaska
Supreme Court ruling regarding the states issuance of
bonds.
Mr. Williams explained that in September 2020 there was a
decision surrounding the Alaska Tax Credit Certificate Bond
Corporation (ATCCBC) whereby the structure was deemed
invalid. He continued that in general the decision would
support state debt if backed by a physical lease obligation
for instance, which was not only an appropriation to pay
such as in the ATCCBC. He relayed that certain structures
had been invalidated, including the Pension Obligation Bond
Corporation, where the construct was such that the debt
payment would have been (if issued) a general appropriation
that was not backed by something such as physical lease
revenue.
Mr. Williams spoke to slide 14 and addressed state GO debt
and subject-to-appropriation debt. He cited that there was
about $621.9 million outstanding in GO debt, and about
$177.7 million in subject-to-appropriation debt. He looked
at the bar graph on the bottom left of the slide and noted
that the GO program was in accelerated paydown. He
qualified that with no authorization currently outstanding
and the current payment schedule, there was a fairly modest
debt program.
10:12:50 AM
Mr. Williams spoke to slide 15 and 16, which showed a table
of total state and state agency debt in Alaska as of June
30, 2022. He noted that the values on the table
corresponded to those in the Alaska Public Debt book (copy
on file). He highlighted the top three items listed by
credit pledge including GO Bonds, state guaranteed debt,
and state supported debt. He highlighted that under state
guaranteed debt, the Alaska Housing Finance Corporation
(AHFC) had issued collateralized debt for Veterans
Mortgage Program Bonds with about $46 million outstanding.
He cited total state supported debt at $177.7 million. He
discussed state supported municipal debt, which totaled
about $457 million. He mentioned $440.2 million for the
SDRP, which was the portion subject to appropriation. The
total amount outstanding through the municipalities was
$657 million.
Mr. Williams addressed the unfunded actuarially assumed
liability. He noted that he had not used updated data from
the most recent ARM Board report, which had not yet been
approved by the board. The international airport system had
about $243 million outstanding, which was a significant
reduction over FY 21, which was also a refunding
transaction and a restructuring through cash payment to pay
down a portion of the debt. The University of Alaska debt
was about $253 million. He pointed out that there was also
state agency collateralized or insured debt, and that the
majority of the types of credit issuances were through
AFHC. There was also Alaska Railroad debt outstanding, as
well as debt through the Northern Tobacco Securitization
Corporation in tobacco asset-backed bonds.
Senator Kiehl referenced a footnote on slide 15, regarding
Interest to Maturity and Total Debt Service to
Maturity, as well as interest due at maturity. He asked
if interest due at maturity was indicative of a balloon
payment, and wondered which categories the payment would be
in.
Mr. Williams asked to get back to the committee with
further information and a more thorough response.
Co-Chair Stedman agreed.
10:17:07 AM
Mr. Williams spoke to slide 18, "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% for directly
paid state debt, and 7% 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 2023 analysis determined that the State
conservatively had a debt capacity of 1,650 million
Adjustments made to base analysis to account for
recognition of a POMV split for PFDs vs state
budget, special funding for PERS/TRS and future
budget uncertainty and volatility in the State's
revenue sources
Mr. Williams mentioned that he had provided the committee
members with a copy of the Alaska Public Debt Book the
previous evening as a preamble to the slide. He noted that
he should have also shared the Debt Affordability Analysis
and avowed to send the material at a later time. He
explained that the analysis was required each year and
would provide more discussion on the states credit rating,
debt levels, as well as history and projections. He
reminded that the publication relied on debt ratios from
prior years compared to UGF revenues. With transfer of the
POMV draw, state revenues available for debt service had to
be slightly discounted since a portion went to PFD
payments.
Mr. Williams conveyed that the 2023 analysis indicated that
there was conservatively a debt capacity of about $1.65
billion, which was a modest increase from the prior years
amount of approximately $1.35 billion. He recalled that the
previous report was issued in January of 2022, and since
that time oil price was slightly higher. Overall, the
forecast in the RSB showed better revenue over the ten-year
forecast period.
Co-Chair Stedman commented that the state would not issue
over $1.65 billion in bonds just because it had the
capacity. He relayed that there had been legislative
discussions pertaining to paying off bonds.
Senator Bishop mentioned the $1.6 billion in debt capacity,
and thought the state owed about $900 million.
Co-Chair Stedman thought the state owed $600 million, and
the communities owed $900 million. He asked for
clarification.
Mr. Williams explained that the current analysis considered
outstanding GO debt and state-supported debt. The debt
capacity was in addition to the current state debt
outstanding.
Co-Chair Stedman asked how much debt the state owed versus
how much debt was held by the Municipal Bond Bank for the
municipalities and inquired about GO bonds for the state.
Mr. Williams relayed that the GO bonds, certificates of
participation (COPs), and lease revenue totaled
approximately $800 million.
Co-Chair Stedman asked about the GO portion.
Mr. Williams answered that the GO portion was approximately
$622 million.
Co-Chair Stedman estimated that roughly $600 million would
retire the GO debt, and approximately $900 million would
retire all municipality debt issued to the bond bank.
Mr. Williams answered affirmatively, and specified that the
bond bank had approximately $993 million outstanding. He
continued that underlying the bond bank amount of $993
million, there were regional health organizations and joint
action agencies.
10:21:47 AM
Mr. Williams addressed slide 19, "Authorized Bonding
Authority & Outstanding Obligations," and highlighted that
the debt service for GO bonds was approximately $40 million
to $50 million over the following five years. The revenue
bonds ranged from $17 million to $24 million.
Mr. Williams showed slide 20, "Current General Fund Annual
Payment Obligation," and noted that the top graph depicted
the somewhat accelerated principal paid down for the debt
programs mentioned earlier. The slide also included state-
supported municipal debt projections that were obtained
through the Department of Education and Early Development.
Co-Chair Stedman discussed the importance of staying
abreast of the state's debt and debt capacity.
Senator Wilson asked if Mr. Williams saw any trends in high
inflation and interest rates in terms of communities
seeking issuance of bonds.
Mr. Williams stated that the trend varied. He mentioned
other revenue projects such as long-awaited capital
projects for school refurbishment, as well as projects for
docks and harbors, electric utilities, and water and sewer.
He relayed that he saw demand for issuance regardless of
interest rates, but thought the interest rate needed to be
carefully considered because of annual debt service paid by
communities. He discussed variables related to analysis of
particular bonds.
Co-Chair Stedman thanked the presenters. He discussed the
agenda for the following day.
ADJOURNMENT
10:25:37 AM
The meeting was adjourned at 10:25 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 020123 State Debt Summary Credit Review SFIN 2.1.23.pdf |
SFIN 2/1/2023 9:00:00 AM |
|
| 020123 OMB 1.24.23 SFIN Response - Revised.pdf |
SFIN 2/1/2023 9:00:00 AM |
|
| 020123 OMB Senate Finance Followup.pdf |
SFIN 2/1/2023 9:00:00 AM |
|
| 020123 Attachment 1 – Debt Affordability Report, January 2023.pdf |
SFIN 2/1/2023 9:00:00 AM |
|
| 020123 Attachment 2 – Alaska Public Debt, January 2023.pdf |
SFIN 2/1/2023 9:00:00 AM |
|
| 020123 Attachment 3 – NTSC Financial Statements as of 6.30.2022.pdf |
SFIN 2/1/2023 9:00:00 AM |
|
| 020123 DOR Response to SFIN 2.1.23 State Debt and Credit Review Presentation.pdf |
SFIN 2/1/2023 9:00:00 AM |