HOUSE BILL NO. 286 "An Act providing for and relating to the issuance of general obligation bonds for the purpose of paying the cost of municipal port projects; and providing for an effective date." 2:07:47 PM Co-Chair Stoltze asked for information on the governor's proposal to use general obligation (G.O.) bonds as a funding approach. ANGELA RODELL, DEPUTY COMMISSIONER, TREASURY DIVISION, DEPARTMENT OF REVENUE, read from a statement: This bill would authorize the issuance of $350 million in general obligation debt. General obligation debt is backed by the full faith, credit and resources of the State. We currently have approximately $628 million in general obligation bonds outstanding. The State has the resources and capacity to take on the proposed additional debt. Currently, interest rates are at historic lows. This has allowed us to take advantage of the market and reduce our debt service obligations. In January of 2012, we sold $175.56 million of general obligation refunding bonds (with more than $26 million of the 2012 bonds sold to Alaskans) and used the proceeds to refund $191.410 million of bonds that had been issued in 2003. This transaction has an all-in true interest cost of 1.24% and saved the state $27 million, net present value. This transaction demonstrates the attractiveness of Alaska's general obligation paper and also the current low cost of borrowing in the tax exempt market. Any new debt issued will have the debt service structured to provide a low cost of funds and a level burden on future state budgets. As we move forward with this proposed legislation, we would like to work closely with you to ensure all of the projects meet the necessary tests for tax exemption and can take advantage of the low rates. In November of 2010, Moody's Investors Service raised the state's general obligation rating to AAA. This was followed by S&P raising our rating to AAA this past December. A triple A rating is the highest investment grade rating achievable and expresses an opinion of the rating agency as to the ability of the state to honor its long-term unsecured financial obligations and contracts. In reviewing our rating, Fitch, Moody's and S&P will be looking to the final dollar amount issued and the overall plan of finance in conjunction with other State issues such as revenues, expenses and other commitments such as the PERS/TRS unfunded liability. We have provided a fiscal note which assumes the voters would approve $350 million in general obligation bonds. We are required by federal tax law to track all funds to final expenditure and to ensure that all funds are spent within 3 years of the date of issuance. In order to comply with these requirements, we assumed the bonds would be issued in three tranches, giving an opportunity for funds to be spent before additional debt is incurred. We assumed the first issuance would come in February 2013, following the November 2012 election. Debt repayment would begin in Fiscal Year 2014. 2:11:39 PM Ms. Rodell continued reading from a statement: The costs associated with issuing bonds including underwriting, ratings, legal counsel, financial advisors, marketing and disclosure services, administration and printing, for a $350 million bond program would total approximately $2,965,000 or $8.50 per bond. Co-Chair Stoltze asked whether there were projections that showed how different interest rates would impact the FY 14 operating budget and beyond. Ms. Rodell replied that interest rates were not expected to rise in the near-term; the department had made a conservative estimate of 4 percent if an issuance did not occur until 2014. She elaborated that DOR had raised rates slightly with the assumption that they would rise somewhat because there would be two years before it had the full issuance. The projected interest rate would add approximately $19 million per year in debt service. Representative Wilson asked whether investments would make more than 4 percent. Ms. Rodell replied that DOR expected the long-term funds would exceed 4 percent. Representative Wilson asked what the same funds had made the prior year. Ms. Rodell replied that the DOR Revenue Sources Book assumed a 3.2 percent rate for general funds going forward and a 6.85 percent rate for long-term funds. Representative Gara asked what the Statutory Budget Reserve (SBR) was currently earning. Ms. Rodell replied that the SBR was currently earning approximately 3.5 percent. Representative Gara asked whether the amount was less than the bonds would cost. Ms. Rodell answered that DOR assumed a rate of 3.2 percent at present with the assumption that rates would rise on the bond issuance; it also assumed that rates would increase on the SBR if borrowing costs increased to 4 percent. 2:15:23 PM Representative Gara surmised that the SBR was invested in short-term issuances and that it could be used more quickly than Constitutional Budget Reserve (CBR) funds. Ms. Rodell responded in the affirmative. Representative Gara discussed that there was currently $16 billion in savings and the state would have no problem making long-term bond payments in the next several years. He was concerned about the possibility of increased annual payments of $19 million ten years out if state revenues decreased and costs continued to increase. He thought the state could be more responsible presently and know what it could afford to spend. Ms. Rodell replied that there would be no money to invest for the future if the $350 million was spent at present; therefore, there would be no funds to fall back on when revenues were on the decline. Whereas, the state would only need to come up with $19 million to pay the debt service if debt had been issued. She stressed that once cash was spent it was gone. Representative Gara believed that the state would be facing a tighter budget 10 years in the future and that the SBR could be much smaller if it only earned 3 or 4 percent per year. He opined that DOR's assumption that the SBR would be the same size in ten years was unlikely. He believed the state should work to protect future years from long-term obligation. Co-Chair Stoltze commented that bonds had an internal discipline and they had to be inherently fair for Alaskan voters to approve. He added that the governor could not "cherry pick" or veto certain sections. He opined that perhaps spending would even be restrained less than it would have been through other spending vehicles. 2:18:47 PM Representative Doogan asked whether the bond issuance cost would come out of the general fund. Ms. Rodell replied in the affirmative. Representative Doogan wondered whether the issuance cost was the only cost that tax payers were responsible for. Ms. Rodell answered that outside of the issuance cost, the only other cost was associated with principle and interest; the costs were amortized over the life of the debt. Representative Doogan queried the total cost of existing bonds. Ms. Rodell replied that there were $628 million in outstanding principal. She asked for clarification on the question. Co-Chair Stoltze clarified that the question related only to G.O. bonds. Representative Doogan verified that he was interested in the current cost of existing G.O. bonds. Ms. Rodell would follow up with the information. Representative Doogan noted that the current $350 million was likely to increase. He asked for verification that if the state's total indebtedness was $670 million that 50 percent would have been added to the debt total. Ms. Rodell responded in the affirmative. 2:21:06 PM Representative Joule wondered how high the state was willing to go related to a bond package with the understanding the legislature would have an interest. He observed that the governor recognized needs of the state through legislation and that negotiation would occur with the state's upper tolerance level in mind. KAREN REHFELD, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET, OFFICE OF THE GOVERNOR, replied that the governor had indicated there was room for between $50 and $75 million. She believed there was also sensitivity to what the voters felt comfortable approving. Representative Joule referred to talk about "one-third, one-third, one-third." Co-Chair Stoltze pointed to the fiscal note that included a sale schedule. 2:23:00 PM Representative Edgmon wondered whether the bond package had been directed at "shovel ready" projects. Ms. Rehfeld answered that the projects were in various stages; some were more shovel ready than others. She explained that the timing of the bond sales would depend on where the projects' stood. She pointed out that none of the projects would be fully funded for specific phases and it would be important for the projects to be able to reach completion with the help of other financing options. She restated that the bonds were not designed to fully fund the projects. 2:24:19 PM Co-Chair Thomas believed that community projects partially funded by bonds would need additional funding in the future. He wondered why the projects would not be fully funded with bond money, given his belief that it would be less expensive than using general funds. Ms. Rehfeld responded that there were different funding opportunities for each project and some were working with the Alaska Industrial Development and Export Authority (AIDEA). Co-Chair Stoltze remarked that it was not necessary to get into detail on specific projects during the meeting. He thought there were pros and cons to fully funding projects all at once. He noted the issue would be dealt with as a policy that was presented in the budget and without it the construction of the capital budget would be different given that holes would be created. Ms. Rehfeld agreed and believed the governor had put the bill forward to work with the legislature on developing infrastructure along Alaska's coastline. Vice-chair Fairclough asked how much bond debt the state typically had relative to the $627 million debt. She relayed that the legislature had been working to pay down debt during her time in office. She asked for a historical five to ten year perspective. Ms. Rodell replied that the state had a past history of not issuing bond debt. Co-Chair Stoltze pointed to bonds used in 2002, 2008, and 2011. Ms. Rodell continued to reply and explained that there was $197 million in voter approved authorized unissued debt for education; before the debt was issued the Department of Education and Early Development would have to show that it was prepared to spend the money during the three-year time frame. The $628 million was more than the state had historically had on its books, given that the state had a long period of no G.O. debt issuance. Co-Chair Stoltze explained that there had been securitized loans and revenue bonds on the books and that the G.O. bonds had been present during the past three elections; he noted his preference for the approach, given its inclusion of voters. Vice-chair Fairclough noted that Standard and Poor's (S&P) had recently upgraded the state's credit rating to AAA. She pointed to the fiscal note that showed an expected blended rate of 2.35 percent on the $350 million debt. The CBR was currently yielding 3.4 percent and the CBR subaccount had a 6.85 percent rate of return. She surmised that there would be a net gain to Alaskans. She discussed that small communities may not have the ability to come up with matching funds that the administration may want. She wondered how the bond market would look at the state's fiscal structure of $16 billion per year. She referenced the decline in production that had been offset by the high production value. 2:33:11 PM Ms. Rodell answered that rating agencies would primarily be concerned about the state's plan to repay debt, but they would not put a cap on the state's debt issuance. She communicated that the state had traditionally structured its debt very conservatively and it worked to limit debt to 20 years or less. The state worked to actively manage and take advantage of current markets and had been able to frontload a significant portion of the debt, to keep near- term debt service constant, and offer relief in FY 22 through FY 24 by over $10 million per year. She believed agencies would look at all of the state's financial obligations including the unfunded liability for the Public Employees' Retirement System (PERS) and Teachers' Retirement System (TRS). Agencies would also look at steps Alaska was taking to manage the obligations, to increase revenues, and to hold budgets back in declining revenue years. She expounded that Alaska had a good history of showing fiscal restraint when revenues were not meeting expectations. Vice-chair Fairclough discussed the PERS and TRS unfunded liability. She surmised that the state was able to move within the current range, maintain its AAA rating with Moody's and S&P, and go forward carrying debt without too much of a burden on the current operating budget. Ms. Rodell agreed. Co-Chair Stoltze believed the governor would communicate his views on the appropriate debt cap. HB 286 was HEARD and HELD in committee for further consideration.