CS FOR SENATE BILL NO. 191(FIN) "An Act relating to the authority of the Legislative Budget and Audit Committee to approve the temporary transfer of money from the general fund to construction funds or accounts; and providing for an effective date." SUZANNE ARMSTRONG, STAFF, SENATOR KEVIN MEYER, discussed the legislation. She announced that SB 191 provided an administrative fix, established parameters for transferring general funds to General Obligation Bonds (GO) construction funds, and enabled better flexible management of GO bond construction funds and accounts by the State Bond Committee. She delineated that when the GO bond construction fund was temporarily exhausted the commissioner of the Department of Administration (DOA) on recommendation by the bond committee and Legislative Budget and Audit Committee (LBA) approval may temporarily transfer funds from the general fund into the bond fund. Under SB 191, if the transfer did not exceed 25 percent of the amount of the GO bond, the Commissioner did not need LBA approval. In addition, SB 191 authorized a 15-month loan period when advanced funds were transferred from the General Fund to a GO Bond construction fund. The change aligned with Internal Revenue Service (IRS) requirements that "advance fund bond issuance loans were repaid by bond proceeds within 18 months." She noted the proposed shorter timeframe than required by the IRS. She added that the legislation enabled more certainty in project schedules and cash flow and greater capability for the State Bond Committee to "respond to unforeseen increases in project expenditures." In addition, SB 191 facilitated greater flexibility in implementing bond sales. The statute change "eliminated the negative carry costs of borrowed funds sitting in construction funds for extended periods of time." Representative Holmes asked for clarification about how a transfer from the general fund could occur without any legislative oversight. LAURA PIERRE, STAFF, SENATOR ANNA FAIRCLOUGH AND THE LEGISLATIVE BUDGET AND AUDIT COMMITTEE, replied that SB 191 eliminated the LBA authorization requirement if the amount of the transfer did not exceed 25 percent of the authorized bond amount however, notification was still required. Representative Holmes wondered what amount of money 25 percent of the authorized bond amount typically was. DEVEN MITCHELL, DEBT MANAGER, DEPARTMENT OF REVENUE, replied that the authorization required was technical in nature. The legislature currently granted the administration the authorization to borrow up to the full amount of the bond for the same purpose without terms of repayment. The flexibility currently existed but must be reauthorized each year in the operating budget. He offered that a situation could occur where the debt was not sold over a certain time period and was not included in the operating budget. He continued that the only outstanding bond debt authorization happened with the Transportation Act of 2012 which amounted to approximately $450 million. Twenty five percent of approximately $110 million could have been authorized for cash flow purposes for up to 15 months. Mr. Mitchell discussed instances when the flexibility to transfer funds without approval would have been advantageous. He detailed that the state did not issue GO bonds for a long period of time but had the authorization in 1984 and 2003. The federal and IRS requirements and restrictions currently were much more stringent on tax exempt debt than they had been in 1984. The bill allowed the state to meet the restrictions; one such restriction required the state to spend the proceeds from the sale of tax exempt bonds within three years which, had proven problematic. In 2003 the state sold approximately $450 million in transportation bonds and did not expend all of the funds until 2012. The three year limit was unattainable. In 2008 the Transportation Act was approved, but a portion of the funds had been replaced with general funds. The state was only able to sell approximately half of the bond authorization of $165 million in April 2009 to fund 18 months of cash flow. The American Recovery and Reinvestment Act (ARRA) had been approved and the funds were not expended until 2013. The $165 million was borrowed at a 4 percent interest rate amortized for 20 years. The state could not reinvest the proceeds over the long term therefore; the department was very conservative about the reinvestment of proceeds. The negative carry associated amounted to millions of dollars. The department learned that it needed to approach the bond issues differently and to the extent possible sell "just in time" rather than upfront in anticipation of a project. 7:38:02 PM Representative Holmes ascertained that due to the three year limit, which the state was not able to consistently meet, from the time that the state sells the bonds to the time the state must expend the funds, the state would rather borrow it from the general fund and pay it back with bond funds. She asked for verification. Mr. Mitchell concurred. He elaborated that there was a potential for certain cash flow issues to arise when funding projects "just in time." A project can speed up and the state cannot execute a bond issue in one month; more time was needed to structure the loan. The legislation provided the flexibility to meet the need on time. Representative Holmes wondered if it had been a problem obtaining Legislative Budget and Audit approval in the past. She wondered why LBA should be "taken out of the picture." Mr. Mitchell replied that the timing element was a factor. Co-Chair Stoltze asked about the discussion regarding the issue in LBA committee. Ms. Pierre answered that prior to the drafting of the bill Senator Fairclough had met with the Department of Revenue and Mr. Mitchell to discuss the legislation in particular. She relayed that Senator Fairclough "had no problem" with the legislation. She cited page 2, line 8, of the legislation and related that Senator Fairclough requested that LBA be notified when such transfers occurred. The allowance was in line with other funds such as the Disaster Relief Fund and the DEC Spill Response Fund. Co-Chair Stoltze asked if the Legislative Budget and Audit Committee had taken formal action to support the bill. Ms. Pierre replied in the negative. Vice-Chair Neuman asked whether the flexibility would allow the department to save the state money by watching interest rates and borrowing money later or earlier depending on the interest rate. Mr. Mitchell replied that there could be an opportunity to save money by not borrowing money as quickly and obligate the negative carry in the construction fund. He exemplified that if the state lost 3 percent of $100 million the state would pay $3 million in interest expense just to have the money sit in the bank. He pointed to another example. He reported that market disturbances like the crash in 2008 potentially caused losses. At the time of the market crash he was working on a transaction with the Matanuska Susitna Borough on a correctional facility. He attempted to "price the deal" on December 7, 2008. At the time, the statutory limit on the debt service was $17.8 million annually. The interest rates were too high at the time to meet the limit. The design and build contractor was ready to begin and could terminate the contract on December 31st. The state ultimately sold the bonds on December 31, 2008 for fewer than 6 percent and three months later it would have been 5 percent. He believed that the situation led to the state paying a higher interest rate, and exemplified the need for granting the department the increased flexibility. Vice-Chair Neuman surmised that the flexibility to maneuver had the potential for considerable savings. Mr. Mitchell answered that that would be a goal of the legislation. He voiced that the "easily defined" goal was meeting the IRS code limit for the tax exempt bond issues. Co-Chair Stoltze wondered why LBA had not taken committee action on the matter. He believed it would have been "cleaner." Representative Gara asked what provision in the state constitution permitted money withdrawals from the general fund without legislative authorization. Mr. Mitchell answered that GO bond debt did not require an appropriation for repayment. He was not certain whether an appropriation was required for using general funds as liquidity for an anticipated general bond issue. Representative Gara wanted the state to have the flexibility to borrow as inexpensively as possible but he thought a constitutional prohibition against general fund withdrawal without legislative approval existed. Mr. Mitchell responded that other instances were cited earlier where authority to use general funds existed. He reiterated that the AMBB had the authority to borrow from the general fund. The bond transfer would borrow funds from the general fund for the purposes of liquidity and the general fund would be replenished. Representative Gara restated that general constitutional rule stated that money could not be withdrawn from the general fund without legislative approval. He wondered how the provision was legal. He wondered if the bill would help reduce the student loan interest rate. Ms. Pierre answered that the bill he was referring to was SJR 23. 7:49:39 PM Representative Munoz asked if there were examples when the LBA committee had slowed down the process. Mr. Mitchell replied in the negative. He offered that there was an instance when timing with the LBA meetings was an issue in resolving a cash flow matter. Co-Chair Stoltze OPENED public testimony. Co-Chair Stoltze CLOSED public testimony. Co-Chair Stoltze pointed to the zero fiscal note, FN1 (REV) from the Department of Revenue. Representative Gara wanted someone to point to the location in the constitution that authorized the provision. Co-Chair Austerman cited Article 9 [Finance and Taxation] Section 13 of the Alaska Constitution and referred to the words "appropriated by law." He surmised that SB 191 was a law allowing the appropriation. Representative Edgmon referred to the previous bill [SB 218 Muni Bond Bank; UAF Heat & Pwr Plant] and asked whether passage of SB 191 affected SB 218. Mr. Mitchell replied in the negative. Co-Chair Stoltze wondered whether the 25 percent was an absolute maximum or was the 25 percent limit allowed for each transfer of funds. Mr. Mitchell replied that it was the intent of the administration that the limit was up to 25 percent of the total bond authorization. He exemplified that a $100 million bond allowed borrowing of up to $25 million at any point in time for to 15 months for the purposes of liquidity. Co-Chair Stoltze cited page 1 line 11: If the amount of the transfer exceeds 25 percent of the amount … Co-Chair Stoltze inserted the word "cumulative" in front of transfer and wondered if that would more clearly indicate the intent of the 25 percent limit and not "harm" the legislation. AT EASE 7:55:40 PM RECONVENED 7:56:25 PM Mr. Mitchell pointed out that once employed for a particular authorization the language would eliminate the ability to use the provision for future potential bond issue use. He suggested using language that indicated that the 25 percent was "rolling." Representative Holmes wondered whether it was possible to hold the bill until the proper language could be identified. Representative Costello asked if adding the word, "initially authorized" after amount to read, " If the amount of the transfer exceeds 25 percent of the amount initially authorized." Co-Chair Stoltze wanted to ensure clarity in the language and thought the issue was a "very important policy" matter. Representative Holmes believed that the committee needed more time to find the proper language. Ms. Armstrong stated her willing to work with the committee to ensure that the language was correct and that the impact would affect the intent of the provision. Co-Chair Stoltze wanted to prevent future abuses of the provision via clarification and to ensure that the intent of the sponsor was met. Co-Chair Austerman asked about the full paragraph on page 1 beginning on line 6. He read: "When a construction fund or account established to receive the proceeds of state general obligation bonds…" Co-Chair Austerman wondered whether the words "a construction fund or account" met the intent of the legislation. He thought that the language was not specific enough. Mr. Mitchell answered that when general obligation bonds were authorized a fund was simultaneously created to deposit the proceeds. The language referred to that particular fund. He suggested the amendment language "at any time" after the word transfer to read: "If the amount of the transfer at any time exceeds 25 percent of the amount authorized" Mr. Mitchell explained that the 25 percent limit could not be exceeded without approval from LBA. Co-Chair Stoltze asked whether the suggestion matched the intent of the sponsor. Ms. Pierre replied in the affirmative.