HOUSE BILL NO. 92 "An Act relating to borrowing in anticipation of revenues; relating to revenue anticipation notes; relating to line of credit agreements; and providing for an effective date." 9:32:54 AM LUCINDA MAHONEY, COMMISSIONER, DEPARTMENT OF REVENUE, provided a PowerPoint presentation titled "State of Alaska Department of Revenue: HB 92 Revenue Volatility Tools," dated April 16, 2021 (copy on file). She explained that the bill modernized the states cash management tools in order to increase the investment income from treasury funds and the Alaska Permanent Fund Corporation (APFC). The last time the statute was updated was in the 1960s. She believed the update was necessary to leverage investment income and bring maximum returns on investments. She emphasized that the reason for HB 92 was to better manage intra-year funds. Currently, when the state borrowed from the Constitutional Budget Reserve (CBR) it resulted in cash flow mismatches. The bill provided access to more modern short-term financing tools that allowed the state to borrow externally on a short-term basis and leveraged funds internally by keeping them invested. 9:35:29 AM Commissioner Mahoney turned to slide 2 titled Agenda and reviewed the presentation agenda: Goal Limitations of current statutes (AS 43.08) Cash Flow Mismatches Access/Harm to Other Funds if needed for cash management Benefits of modernizing financing tools Mechanics of the Bill Questions Commissioner Mahoney delineated that AS 43.08 allowed the Commissioner of the Department of Revenue (DOR) to issue Revenue Anticipation Notes. However, there were many more modern tools the state lacked access to. The proposed tools allowed for lower interest rates on debt and to manage and leverage the cash in the cash pool. She offered that mismatches occurred when expenditures were due before the revenues needed were received within the same fiscal year. She elaborated that access to a line of credit or other financing tools enabled short-term borrowing earning a higher rate of return than the cost of the debt, which was called arbitrage. It also delivered more investment income to the bottom line. Co-Chair Merrick requested that the commissioner keep the topic at a high level overview. 9:37:41 AM Commissioner Mahoney turned to slide 3 titled Goal of HB 92: Improve Cash Flow Management: Addresses cash flow MISMATCHES, not deficits. Current statute AS 43.08 allows for "Revenue Anticipation Notices" (gold circles) which is only one of short term borrowing structures, and not always the best fit Bill enables access to short term debt management tools available in the market i.e. Commissioner Mahoney stressed that the bill addressed cash flow mismatches, not deficits. She indicated that the slide also provided a visual of the cash management tools available and pointed to the gold circles that named the types of Revenue Anticipation Notes and the other colored circles represented only some of the tools currently available. She maintained that the world of public finance was constantly changing. She pointed to the left side of the slide that represented Capital Market Products and the right showed products directly from banks or Bank Market Funded Products. The bank products offered more flexibility. It was impossible to anticipate every circumstance where it was beneficial to employ the short- term financing tools, which was why the state needed access to every tool available. 9:39:30 AM Commissioner Mahoney advanced to slide 4 titled Cash Flow Mismatches: $400M is minimum balance needed to manage cash flow Expenditures can occur prior to receipt of revenue, resulting in cash flow timing mismatches: ? Federal programs require expenditures before reimbursement - Medicaid, Transportation, etc. ? Beginning of the year appropriation transfers and cash flow needs State pension payments, transfers to subfunds, construction peak season in summer. Cash flows may be impacted by external events: ? Spike in Medicaid expenditures. ? Federal Shutdown. Commissioner Mahoney communicated that $400 million represented two days' worth of high cash needs for the state. At the point where it was anticipated to need 5 days' worth of revenue, the department turned to the CBR for borrowing. She commented that mismatches were experienced throughout the year. She exemplified that Medicaid caused DOR to spend money in advance of receiving federal reimbursement and in those situations, she borrowed from the CBR. Because the CBR was depleted, the department had to adjust the asset allocation in the CBR, so its funds were placed in cash equivalent investments which was earning 1.7 percent instead of a higher interest rate. She reiterated that the legislation was about borrowing at lower rates and reinvesting at a higher rate to generate more net income. 9:41:28 AM Commissioner Mahoney reviewed a line graph on slide 5 titled Cash Flow Mismatches. The graph depicted Cumulative Revenues and Expenditures by Week, Excluding CBR Borrowing in 2019. The gold line represented revenues and the silver line showed expenditures. She explained that during the first six weeks of the year the expenditures were significantly more than revenues due to many upfront payments during that time. As a result, DOR may have to borrow from the CBR in such situations, however the graph was merely intended to provide a visual. 9:42:26 AM Representative Rasmussen asked if slide 5 was based on fiscal year or calendar year. Commissioner Mahoney replied the graph reflected a fiscal year. Commissioner Mahoney advanced to slide 6 titled Current Access to Other Funds. The slide contained a chart of some state funds, their balances and interest earnings. She pointed to the CBR and reiterated the change to a cash equivalent investment strategy earning .17 percent. If the CBR was depleted, she had to look to other high interest earning funds to help manage cash. She stated that the scenario was not wise finance management. Representative Josephson looked at slide 6 showing the Permanent Fund Earnings Reserve Account, Power Cost Equalization (PCE), and the Higher Education Fund. He asked if the funds could statutorily be accessed in a pinch. Commissioner Mahoney deferred to her colleague. 9:44:17 AM PAM LEARY, DIRECTOR, TREASURY DIVISION, DEPARTMENT OF REVENUE (via teleconference), replied that two funds were not statutorily prohibited to be borrowed from. They were included in the sweepable funds that were swept into the CBR and could be accessed if there was a need for borrowing. Representative Josephson wondered if the CBR was reverse swept before July 1 and the Treasury could not make its payments whether the Treasury was allowed to borrow from PCE or the ERA above the 5 percent draw for some length of time. Ms. Leary answered that currently the way the General Fund (GF) was managed was money was taken from the ERA and CBR as needed. She explicated that the bill allowed the department to take funds from the CBR, the 5 percent ERA draw was used to manage state funds. Representative Josephson expressed confusion because the slide was titled "current access to other funds." He had thought they were talking about something different. Representative Wool stated his understanding that the minimum advisable balance for the CBR was $400 million to $500 million. He wondered why the entire amount of the CBR was in a cash access fund. He deduced that $1 billion was a lot to have invested in cash. 9:47:38 AM Commissioner Mahoney answered that until six months prior the CBR was invested farther out on the yield curve, but until the recent increase in oil prices the department had been unsure of the amount of deficit and needed revenue and had adjusted the asset allocation. She wanted to ensure necessary cash flow was available throughout the year. Currently, the price of oil increased and she was considering adjusting the CBR back out on the yield curve. She stated that the situation reflected that the department was doing its job managing cash flow. The bill was about having other tools versus only adjusting for asset allocation. She would rather have the CBR allocation farther out on the yield curve for a longer period of time then managing it so closely for the short-term knowing they could make arbitrage. 9:48:54 AM Commissioner Mahoney advanced to slide 7 titled "Benefits: Enables the Treasury and APFC to maximize returns and income ? Takes advantage of low short term interest rates. Today's cost for $100 million 12 months: ? Commercial paper - .8% (.2% interest plus.2% cost of issuing and liquidity cost of .4%) ? Line of Credit .55% (75% fixed rate of .4% plus .2% interest when drawing down and .15% costs of issuing) ? Weekly VRDN - .74% (.04% interest plus .2% cost of issuing, .1% remarketing and .4% liquidity cost) ? RANS - .36% (.16% interest plus .2% cost of issuing) ? Enables current funds to remain in longer lived higher interest-bearing accounts (APFC, CBR, PCE, Higher Ed, etc.) earning more income ? Scheduling of POMV payments ? Improved liquidity management ? Enables quick access to funds in case of emergency Commissioner Mahoney reiterated that the short-term notes would enable DOR to better manage the states money. She elucidated that the legislation would also help the APFC by offering better tools to manage the POMV payments to the state. She furthered that currently, the POMV was managed over 10 months at $300 million per month based on the $3 billion payout. She relayed that there was currently a large commitment of $8 billion to $9 billion for capital calls to invest in a private equity fund. The APFC had to manage the liquidity of the Permanent Fund (PF) and managed for the monthly $300 million payment. If the department had access to more financing tools the department could allow APFC to push out the POMV payments farther towards the end of the year within the same fiscal year or at a better time when the APFC could liquidate investments. The department could take out a short-term note to cover payouts until it received the funds from the APFC. The scenario increased the investment income in the PF. 9:51:45 AM Commissioner Mahoney turned to slide 8 titled hypothetical example of potential benefit. She related that the slide depicted the cost of borrowing for various financing tools: Revenue Anticipation Note, Variable Rate Note, Commercial Paper, and a Line of Credit. The chart included cost of borrowing, low and high earning potentials, and the income generated from borrowing using short-term notes. 9:53:08 AM Commissioner Mahoney concluded with slide 9 titled HB 92 Mechanics: Funds borrowed would be repaid no later than the fiscal year following issuance Repayment of funds would be made from revenues anticipated within the fiscal year in which funds are borrowed The borrowing pledges the full faith, credit, resources, and taxing power of the State of Alaska (identical to general obligation bonds) Due to the size of Permanent Fund earnings tax- exemption may not be available for the borrowing Provides structural alternatives to the currently authorized revenue anticipation notes that are available in today's short-term market Representative Edgmon stated that it all seemed so obvious he wondered why it had not been done before. He asked about risk and rewards. He deduced that it basically ring- fenced the CBR at a certain level. He spoke to the risk versus reward tradeoffs. He thought that there was a bigger picture regarding risk and rewards. 9:55:19 AM Commissioner Mahoney answered that she did not really know why it had not been done before. She recognized that there had been a much larger balance in the CBR so there was likely not attention to the level of revenue generation. She voiced that regarding the risk versus reward there was always risk in an arbitrage play. She shared that she had engaged in arbitrage for 5 years for the Municipality of Anchorage and always had a positive outcome. She spoke to the need to be careful but believed that the employees in the Treasury and DOR could easily deliver. Representative Edgmon believed it would be helpful to hear from the director of the Alaska Permanent Fund Corporation (APFC). Commissioner Mahoney had spoken to Angela Rodell, Executive Director, Alaska Permanent Fund Corporation to provide testimony during the hearing but she was unavailable. Representative Rasmussen asked what the commissioner believed her roll was in terms of what she owed to Alaskans as overseer of the states assets. Commissioner Mahoney answered that it was her responsibility as fiduciary to oversee all funds in compliance with the laws and to manage the department. She believed it was also her duty to maximize investment income and modernize the ways of investing. 9:58:28 AM Representative Rasmussen thought the commissioner should have all the tools allowing the department to execute what was in the best financial interest to the state. She found it shocking the statute had not been updated since the 1960s. She supported the bill. Representative LeBon thanked Commissioner Mahoney for her presentation. He strongly supported the bill. He thanked the commissioner for meeting with him in person the previous day about the bill. He thought the tools should have always been available to DOR and he believed it was long overdue. In the world of short-term financing, the timing was critical for passage of the bill sooner rather than later to allow the commissioner rapid access to the tools. 10:00:55 AM Representative Edgmon supported the bill and believed he needed to learn more about it. He determined that the necessary minimum amount of what should be in the CBR was a gray area and unanswerable question. He considered the CBR a checking account of sorts. He believed that if the CBR maintained a $1 billion balance the investment tools were a no brainer. However, if the CBR was depleted to $400 or $500 million he was interested in knowing more about the tradeoffs. He strongly believed $400 million was the bare minimum that should be in the account and would like to learn more about the bill. Representative Wool stated that the legislature kept hearing that $400 million to $500 million was the bare minimum balance that should be in the CBR. He referenced Commissioner Mahoney's testimony stating because the price of oil decreased the CBR balance needed to increase and if the financial tools were available more of the CBR could be kept in a higher earning account. He had not previously heard that analysis. He deduced that if money could be borrowed on the short-term then it could be argued that an even smaller balance could be kept in the CBR. He reasoned that the CBR was a political and fiscal account, and it was beyond a simple cash account. He asked if linking the CBR balance to the price of oil or having additional financing tools changed the number the legislature was told was the minimum needed in the CBR. 10:05:09 AM Commissioner Mahoney viewed reserves differently. She reasoned that there was a cash flow mismatch reserve and there was also the potential for deficits. She determined that cash flow management reserves were different than a deficit reserve situation. She elaborated that when she had referred to a price of oil decline, she considered it a deficit situation therefore she would want the CBR balance to be higher, because the future was unknown. She stated the complexity of the issue and shared that the department had staff exclusively dedicated to work on cash flow management. HB 92 was HEARD and HELD in committee for further consideration. Co-Chair Merrick reviewed the schedule for the following Monday.