HB 119-AIDEA:DIVIDEND TO STATE;INCOME;VALUATION    3:54:07 PM CHAIR KITO announced that the next order of business would be HOUSE BILL NO. 119, "An Act relating to the dividends from the Alaska Industrial Development and Export Authority; relating to the meaning of 'mark-to-market fair value,' 'net income,' 'project or development,' and 'unrestricted net income' for purposes of the Alaska Industrial Development and Export Authority; and providing for an effective date." 3:54:26 PM The committee took an at-ease from 3:54 p.m. to 3:55 p.m. 3:55:51 PM GENE THERRIAULT, Alaska Industrial Development and Export Authority (AIDEA), advised that the PowerPoint presentation titled, "Alaska's Development Finance Authority" discusses problems corrected by this legislation in the calculation of the Alaska Industrial Development and Export Authority (AIDEA) dividend. He turned to slide 2, and explained that AIDEA is a completely owned entity of the State of Alaska that helps with economic investment in the state. It was capitalized in the 1980s with approximately $350 million worth of money, and AIDEA has since paid back approximately $392 million to the state treasury, he said. 3:57:21 PM MR. THERRIAULT turned to slide 3, and explained that HB 119 would update statutes dictating how the dividend is calculated, or the number taken into the dividend calculation to determine the size of the check written to the state's general fund each year. MR. THERRIAULT turned to slide 4, and noted that this slide references the calculation of the dividend, and AIDEA wants the dividend to be based upon real transactions that either provides or deducts a dollar from the AIDEA treasury. Also, he explained, depreciation on assets is taken into account and AIDEA would like to continue having those come into account (coughing) taking into the dividend. Except, he noted, new issues are being triggered by federal accounting rules which cause these "mark-to-market adjustments" which, he described, are paper adjustments that must be done in order to get the audited financial statement. Alaska Industrial Development and Export Authority (AIDEA), he said, will still do all of those things in order to receive its audited financial statement, but the legislators "get to then tell AIDEA" which of those papers adjustments it backs out to get back to pure cash and then put that number into the dividend calculation. 3:58:48 PM MR. THERRIAULT turned to slide 5, and advised that the slide is a summation of the existing dividend language. AIDEA is listed on the second block of text, "you are supposed to take" a number into the dividend calculation and share 25 percent to 50 percent of the net income with the state general fund on a yearly basis. The difficulty is, he explained, in that last block of text the definition of net income refers to the net income as shown in the audited financial statement under general accepted accounting principles. He pointed out that, that is now the area where the uncertainty comes into the calculation due to a number of paper adjustments that must be made in order to get that audited financial statement. MR. THERRIAULT turned to slide 6-7, and offered that the first problem AIDEA is trying to correct is called the "market value adjustments." Under the "Gap Rules," a snapshot must be taken and "book what your market value is on certain items that are in your portfolio." When those paper adjustments are made it has an impact on the calculation of the AIDEA dividend. Sometimes it over-inflates the dividend and suggests that AIDEA should pay a larger dividend on cash it did not actually make, and sometimes it under reports net income and suggests AIDEA should pay a lower dividend than the cash it actually has to make that calculation ensure that money. He reiterated that AIDEA is trying to clean up the statutes so there is clear direction to back out those paper adjustments and get back to cash on hand before it calculates the dividend. He explained that slide 7 depicts a snapshot of the front sheet from a personal income tax, and for instance, the person has $100,000 of real wages, an investment account, rental property, and a 401K, which calculates to $109,000. The person would write a check to the federal government for a percentage of that real cash income that person achieved within the year. 4:01:45 PM MR. THERRIAULT turned to slides 9-10, and said, however, if that person had to follow all of the new Governmental Accounting Standards Board (GASB) rules as AIDEA must in order to get its audited financial statement, the person would have to "book these following adjustments." He turned to slide 10, line 11, "GASB 31" and explained the rule has been in place for some time which causes AIDEA to basically book at the end of the fiscal year, take a snapshot of securities it has within its overall investment portfolio, and if the securities have appreciated even though the enterprise has not sold them and captured that cash, it has to book that increase in estimated value as if in fact it achieved the cash and had sold those securities at the end of the fiscal year. He said that line 11 suggests that if a person had a portfolio of $250,000 and the market is up by 10 percent, that would cause a person to book an extra $25,000 of income even though they did not sell those securities and did not really achieve that income. 4:02:50 PM MR. THERRIAULT referred to slide 10, line 16, "GASB rule 68" and advised that is an adjustment for retirement or 401K. In the event a person has investments in a 401K and the market is up, even though the person had not sold those investments and actually captured that, the person would book that as if it were true income. The analogy for the state is "every year AIDEA, as a state enterprise, has an estimation of their share of the unfunded obligation for retirement." The enterprise then pays a portion of money for their share, but it generally is less than that snapshot of their share of the unfunded obligation for the state. He advised that AIDEA would like to book those things that actually are an increase or decrement to true income, but back out the paper adjustments so it does not artificially over- inflate or under-inflate the number taken into the dividend calculation. MR. THERRIAULT referred to slide 10, line 20a, "GASB rule 75," and advised that it is an adjustment for post-employment benefits, and for the state it would be an estimation of future health care benefits owed for state employees. For the individual, it would cause them to actually estimate the value of their medical coverage in the future and actually capture that as if it were cash the person could count on right on, and actually put it on their tax form. 4:04:41 PM MR. THERRIAULT turned to slide 11, and said that basically, AIDEA is asking with the passage of this legislation the paper adjustments ... 4:04:54 PM REPRESENTATIVE BIRCH referred to slide 10, and opined that the "mark to market" in the banking industry was when the market was going down, not up. Basically, he said, in the event a person has major losses that are not yet realized and have an obligation, the person may be in a position to make a payment, but might not want to make a payment because they need to offset those losses at some point. MR. THERRIAULT answered that these adjustments are both on the upside and downside, and the soon to be discussed slides will show that the swings have been on both the upside of true net income and to the downside. Alaska Industrial Development and Export Authority (AIDEA) is trying to back them out on both sides, get back to true net income, and then take that number into the dividend calculation. MR. THERRIAULT turned to slide 11, and explained that with regard to the "fixed to the mark-to-market adjustments," AIDEA would like to back out those paper adjustments, get back to the true $109,000 of real income this individual made, and that is what they would write their check to the United States government, or AIDEA would write its check to the state general fund treasury to share a portion of the true net income it made in a calendar year. 4:06:39 PM MR. THERRIAULT turned to slides 12-13, and explained that the graph on slide 12 is AIDEA's net income over the years and it moves up and down depending upon the economy and AIDEA's investments. There is some volatility in the actual cash AIDEA takes into the dividend calculation. Except, he said, slide 13 has graphed "GASB rule 31," which has been in place for a number of years, against the true net income. He referred to the gold/yellow line and said it has periodically spiked the net income up in some years and has depressed it artificially down in other years. Early on, he pointed out, the ups and downs were not as pronounced, but in the most recent years the "zigs and zags" up above and below the (coughing) line are getting a bit more pronounced. He reiterated that AIDEA would like to back those paper adjustments out, get to the green line, and pay the dividend on that amount. 4:07:45 PM MR. THERRIAULT turned to slide 14-15, and advised that the second problem is the "dividend penalty" which results in times when AIDEA receives money to investigate a project from an outside source and invests that money when looking at a project. Although, periodically, AIDEA may determines that a project would not go forward, and on those occasions, the money from an outside source, not from within AIDEA's investment portfolio, must be written off. On those occasions, it would be taken as a deduction against net income in that particular year. In the event AIDEA had to show that in the dividend calculation, it would artificially suppress the dividend in that year, and Alaska Industrial Development and Export Authority (AIDEA) believes it is not fair to the state treasury and; therefore, would like to also back out those periodic, infrequent, adjustments. He reiterated that problem 2 is a source of outside money being written off, and if in that year AIDEA was going to pay a dividend of 50 percent of its net income, that means it is taking away fifty cents of a dollar that would have been shared with the state treasury, thereby, making it a dividend penalty. Previously, he noted, when AIDEA started getting money from outside sources to investigate projects, the legislature advised "as that money comes into AIDEA and gets shown as an increase in net income to bring the money on the books, that AIDEA was to ignore that money coming onto the books because if it didn't, it would artificially spike net income in that year, and then when we got to the end of year we would be trying to then share back a 50 percent of the money that was brought to us from an outside entity." He related that the legislature previously said, "No, that's not what we intend." If the state legislature gives AIDEA $1 million for a project, it does not expect AIDEA to share one-half of that money back with the state at the end of the year. The legislature gave the money to AIDEA for a specific project, so AIDEA should bring it onto the books, and shouldn't artificially inflate income in the year that you bring it onto the books. MR. THERRIAULT stated that the legislature did not anticipate periodically having investigated a project. Then AIDEA might have turned a portion of that $1 million into an asset, and now it is carrying that work product on the books. In the event the project did not go forward, ultimately, AIDEA must write that asset off the books. In the event AIDEA did not also have the right to exclude it when it comes off the books, the state would pay a penalty for having investigated that project. 4:10:55 PM MR. THERRIAULT turned to slide 16, and explained that the slide takes the previous "mark-to-market adjustment" graph and added on the dividend penalty. The numbers AIDEA used on slide 16, as an example, are the funds given to AIDEA to investigate the Amber Road. That project is currently going forward, and AIDEA was given approximately $9.3 million to investigate the Amber Road project. In the event AIDEA invested all of that money doing work, such as an environment impact statement (EIS), applications for permits, and turned that money all into assets, except that ultimately the project did not go forward, AIDEA would be carrying $9.3 million worth of investment on its books in assets and at some point, would have to write that value off of its books. In the event this all happened in one year and AIDEA was anticipating (coughing) 50 percent of its net income to the state treasury, that deduction of the $9.3 million would artificially suppress AIDEA's dividend in that particular year by $407 million. He advised that AIDEA was previously told that when it receives money from an outside source to investigate a project, AIDEA should disregard it and not over-inflate the dividend in that year. The Alaska Industrial Development and Export Authority (AIDEA) is basically asking that periodically, if a dollar from such a source is ever written off the books that AIDEA does not artificially suppress the AIDEA dividend in that year. 4:13:10 PM MR. THERRIAULT turned to slides 17-18, and reiterated that those are the two issues AIDEA is trying to correct with this legislation as it wants to remove those mark-to-market valuation paper adjustments. Alaska Industrial Development and Export Authority (AIDEA) will continue to "do all of those things" to get its audited financial statement, but the legislature "gets to tell AIDEA" what number to take into the dividend calculation. Due to the dividend penalty, AIDEA is trying to "levelize" the two sides of a dollar coming from an outside source, wherein the money is eventually written off, and to not artificially suppress the dividend in those years. 4:14:04 PM REPRESENTATIVE KNOPP offered that he understands the intent of this legislation, but Mr. Therriault was asking the legislature to exempt it from the GASB rules, which makes it a policy call. He related that his discomfort is not complying, because every municipality in the state is complying and following the standards. MR. THERRIAULT responded that AIDEA would continue to follow all of the GASB rules to receive its audited financial statement, except there are these rules that push the net income number around. He asked whether the committee directs AIDEA to take the number incorporating all of those artificial ups and downs into the dividend calculation, or whether it directs AIDEA to back out the paper adjustments and take the true net income number into the dividend calculation before it calculates the check to the state treasury. CHAIR KITO opened public testimony on HB 119, and hearing no one that wanted to testify, left public testimony open. 4:16:46 PM MR. THERRIAULT referred to page 2 of the color-coded copy of HB 119, and explained it is where the adjustment to the definition on net income takes place. In response to Representative Knopp's question, he referred to page 2, line 3, the red box around the word "excluding," and explained that word is already in the statutory definition. He said he believes that highlights that previous policymakers realized there were some things that should be backed out of the income number before calculating the dividend. However, he noted, the last time the adjustment was made, some of these new federal rules were not anticipated as to how they would push around the adjusted number. Both in the definition of net income - top portion of page 2, and unrestricted net income - bottom of page 2, the word "excluding" already exists in the statute. MR. THERRIAULT explained that at the beginning page 2, line 6, the added blue language makes adjustments for sources of non- AIDEA revolving loan funds, and in the event those monies are ever written off there will not be a dividend penalty. He explained, that is where that problem is inserted into the exclusions. MR. THERRIAULT noted that the pink language is the mark-to- market fair market valuation based accounting entries issues. In the event there are unsold marketable securities and the market is up, suggesting a paper gain, AIDEA asks to exclude those paper gains or losses prior to beginning the dividend calculation. He referred to the green highlighted language, and explained they are the items adjusted for future retirement obligations paper adjustments. [HB 119 was held over.]