HOUSE BILL NO. 256 "An Act relating to a dividend payment to the state made by the Alaska Housing Finance Corporation each fiscal year; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken stated that the House Finance Committee sponsors this legislation, which "amends and codifies the existing agreement between the Alaska Housing Finance Corporation (AHFC) and the Legislature regarding an annual AHFC dividend." He continued that this legislation would provide for a $103,000,000 dividend while maintaining AHFC's strong bond rating. Amendment #1: This amendment changes the fiscal year date from FY 2007 to FY 2008 in Sec. 2, subsection (5)(B) on page 4, line 13 in HB 256, Version 23-LS0838\I. This language would read as follows. (B) minus the amount of money from the Alaska Housing Finance Corporation used during fiscal year 2008 for bond repayments and other costs related to the bonds issued under Co-Chair Wilken moved to adopt Amendment #1. He stated that this amendment addresses a technical change in the bill and is offered at the request of AHFC. There being no objection, Amendment #1 was ADOPTED. DAN FAUSKE CEO and Executive Director, Alaska Housing Finance Corporation, Department of Revenue spoke in support of the bill. He reviewed that the AHFC dividend transfer plan was established in 1995 as a means of transferring some of the Corporation's net profits to the State to support, in particular, State capital projects. He stated that a major concern addressed in those initial discussions was that the specified transfer amount not affect the Corporation's credit ratings. For numerous years, he declared, the total annual transfer amount has been $103 million, based on a variety of factors including net income levels. Mr. Fauske expressed that, in recent years, the reduction in lending interest rates has resulted in a significant increase in the Corporation's lending activities as well as "investment earnings on short-term monies." However, he informed that, while "the business profile is excellent, the Corporation's net income has fallen." Mr. Fauske explained that in 2002, in anticipation of continuing lower net income levels, AHFC requested that the Legislature readdress the amount of the AHFC dividend paid to the State. He informed that the Corporation's FY 03 net income is projected to be approximately $75.6 million; and therefore, he asserted that a plan must be developed to enable the Corporation to continue to contribute the $103 million amount "that the State has grown accustomed to." Additionally, he stressed that the plan must allow the Corporation to be sustained at a level that would not adversely affect its ability to conduct its business. He stressed that the level must also be acceptable to the financial community and investors. Mr. Fauske noted that this legislation would address these concerns by proposing that "a percentage of net program" be implemented that would allow a gradual reduction in the amount of dividend being paid to the State. The proposed plan, he explained, would allow the total dividend that would be paid to the State for the next three fiscal years to remain at the current $103 million level and that, by FY 09, the amount of the dividend would be calculated at a 75- percent of net income level. He reminded that the final payment on a $50 million debt service that AHFC assumed on behalf of the State would be paid off in December of 2006. Mr. Fauske communicated that this proposal would allow the Corporation to increase its equity position; would allow dividends to be paid to the State, which is its parental entity; and would provide the Corporation with sufficient monies to reinvest in AHFC programs in order to continue its viability and continue to retain its healthy and predictable profile with financial entities. He opined that in consideration of the Corporation's current status, "this is a good bill." He assured that, as the financial market progresses, the issue could be revisited. Senator Taylor asked whether a separate proposal for a five-percent of market value annual dividend program would provide the stability and continuity that AHFC would require. Furthermore, he asked whether a program of this type would be more acceptable to the New York City Wall Street financial market than this legislation. JOE DUBLER, Chief Financial Officer and Finance Director, Alaska Housing Finance Corporation, Department of Revenue stated that the amount of the FY 04 transfer, based on this bill's language, would amount to 5.8 percent of the Corporation's total liquidity as of June 30, 2002. He stated that this bill would allow the Corporation to implement a payout policy based on net income as opposed to a payout based on net assets. He noted that this predictable payout would be acceptable to Wall Street investors and would, therefore, enable AHFC to continue to fulfill its mission of providing access to housing for Alaskans. He opined that paying a dividend "based on percentage of net income is the appropriate approach" for AHFC. Senator Taylor acknowledged that a dividend based on a percent of net income would be more appropriate program as, he calculated that a percent of asset formula "would eventually, significantly erode" the Corporation's asset base. SFC 03 # 79, Side B 09:49 AM Senator Taylor furthered that a dividend program that might erode the Corporation's asset base would negate the ability of the Corporation to lend money, which is the basis of the Corporation's mission. Mr. Fauske agreed. Senator Hoffman stated that the proposal specifies that the dividend to be paid in fiscal years 2007 through 2009 would be 95, 85, and 75 percent of net income, respectfully, based on the "prior year's income minus debt service." He asked for a recap of the formula specified for FY 04 through FY 06. Mr. Dubler clarified that the annual dividend for fiscal years 2004 through 2006 would be $103 million rather than a percentage of net income. Senator Hoffman asked how $103 million would equate to a percentage of net income basis. Mr. Dubler explained that the annual dividend determination would be calculated as a percent of the net income of the base fiscal year, which is the fiscal year ending two years before the end of the current fiscal year. In response to Senator Hoffman's question, he calculated that the $103 million dividend in FY 04 would equate to 147 percent of the FY 02 net income; the FY 05 dividend would be 150 percent of the projected FY 03 net income, and the FY 06 dividend would equate to 147 percent of the projected FY 04 net income. Senator Hoffman asked how these dividend levels, which are higher than 100 percent of net income, would affect the Corporation's bond ratings with consideration given that, as of FY 07; the dividend would be determined at a lower percentage of net income rate. Mr. Fauske qualified that the Corporation has been paying out more than it has been earning for several years. He asserted that the dividend program specified in this legislation recognizes that AHFC is a strong financial institution and that, while the FY 04, FY 05, and FY 06 dividends would exceed net income, "relief" would be forthcoming in later years. Mr. Fauske relayed that "there has always been apprehension" in the Stock Market that the State would request dividends in excess of $103 million. He communicated that "the strength" in this legislation is that it "would place in statute a predictable and sustainable payout to the State." He communicated that while the investment market is unpredictable, expectations are that, in contrast to the current refinancing trend, the next market "cycle" would allow the Corporation to experience an increase in net profits due to an increase in conventional loans to first-time home buyers and an increase in the interest levels earned on Corporation's investments. He stated that during discussions with the rating agencies, it is recognized that AHFC must begin making contributions into its "equity positions" over time. Mr. Dubler commented that this legislation is based on AHFC's historical financial projection methodology that takes into consideration such things as the Corporation's long-term bonds. He noted that while AHFC's longer-range financial projection mode is atypical to the normal State financial projection methodology, it "has worked very well" for the Corporation. Co-Chair Wilken asked the Corporation to distribute to Committee members a pro forma document titled "Summary of Projected Amounts Available for Appropriation" [copy on file] that was developed during initial discussions on this bill. He stated that this document would provide Members with projected dividend amounts based on a percent of net income formula. Co-Chair Wilken pointed out that other material in the Members' packet includes a Moody's Investors Service report [copy on file] dated March 2003 that specifies that, of the 15 states with a Housing Finance Corporation (HFC), Alaska's program is ranked number two "in its contribution back to the State." Furthermore, he noted that the report highlights the concern that states are demanding higher levels of contribution from their HFCs. He called to the Committee's attention the fact that AHFC contributes a "significantly" higher amount per capita than other HFC programs. Co-Chair Green voiced that the sponsor's statement "implies" that the AHFC dividend would fund debt service for certain bonds and capital projects. However, she noted that language in Section 1, page 1, beginning on line 7, specifies that, "the legislature may appropriate the dividend for capital projects." She questioned whether this language should be changed to include the phrase debt service. Mr. Dubler responded that debt service is addressed in Section 1, subsection (2) that reads as follows. (2) minus the amount of money from the corporation used during that current fiscal year for bond repayment and other costs related to the bonds issued under (A) ch.26, SLA 1996, up to a maximum of $1,000,000; (B) sec. 10(b), ch. 130, SLA 2000; (C) sec. 1, ch. 1, SSSLA 2002; and Co-Chair Green surmised, therefore, that this language provides for the inclusion of the debt service in the calculation. Mr. Dubler concurred. Co-Chair Green noted that separate legislation being entertained by the Committee contains a different definition of the term "net income." Therefore, she questioned "the appropriateness" of there being multiple definitions of this term in State regulations. Mr. Dubler explained that the difficulty in arriving at a single definition of the term net income arises from ongoing changes in the nationally recognized General Accounting Standards. He stated that programs have been formulated using whatever definition was in effect at the time. Therefore, he attested that to adjust to one terminology would be tedious; and therefore, each situation involving net income is defined accordingly. Co-Chair Green continued to voice concern that State statutes incorporate numerous definitions of net income. She asked whether crafting one definition would be possible. Mr. Dubler stated that a goal of financial accountants is to develop one definition. Unfortunately, he stated, the process might be lengthy due to the multitude of entities and terminologies that would be affected. Co-Chair Green voiced frustration at being required to determine which net income definition is specific to each piece of legislation being addressed. Senator Hoffman asked the present AHFC financial rating as well as what bond rating projections the Corporation expects after FY 04. Furthermore, he asked what type of housing loans would be expected based on State population growth forecasts. Mr. Fauske stated that currently the Corporation has an AA and AA+ rating by two major rating agencies; however, he voiced that were the ratings determined by statistical analysis, AHFC would be rated AAA as it is one of the strongest performing HFAs in the nation. He voiced that the official rating is affected by subjective criteria based on such things as the State's economy, the State's fiscal gap, the activity in Prudhoe Bay, and the fishing industry in Bristol Bay. He credited the Legislature for honoring the intent language specified in every AHFC appropriation bill, as he stated that that action has allowed AHFC to maintain its high credit rating. Mr. Fauske predicted that were this legislation adopted, AHFC's credit rating would further improve and that the Corporation would be able to contribute more to the State without jeopardizing its ability to carry out its mission or negatively affecting its credit rating. Mr. Fauske continued that AHFC tracks the economy closely in order to effectively anticipate future business opportunities. He attested that such things as unemployment and demographics changes, including an aging population, are monitored. He stressed that the job market is critical to a healthy economy, as jobs are necessary to attract younger people who might purchase homes and require loans. He avowed that because AHFC is a strong entity with a good market share, financial programs such as Fanny Mae and Freddie Mac and other major lenders are able to operate in the State. He voiced confidence that the Legislature would adequately address the State's fiscal situation, as he qualified that a healthy State fiscal plan is important to the State and to the success of AHFC. Mr. Fauske stressed that the housing market must be sustained, as it is a "big player" in the State's economy in that it "occupies 25 percent of the State's domestic product." Senator Hoffman concluded therefore, that AHFC does not anticipate a drop in their bond ratings through FY 09. Mr. Fauske affirmed. Senator Taylor voiced that this legislation would establish policy regarding AHFC dividends today and for the future. He allowed that while the proposed formula could be changed in the future, the proposal currently "gives an illusion to the market and to the people of Alaska" that the State "would not get so desperate as to liquidate an asset" that provides funds to the State. "As a fiscal conservative," he argued that the legislation should be altered to eliminate the requirement of a $103 million dividend in FY 04, and immediately set in motion the proposed percentage of net income payout as, he declared, that continuing the status quo dividend for three years would be an invasion of the Corporation's corpus. Co-Chair Green asked regarding the recurring phrase "unrestricted, unencumbered money of the corporation" in Sec. 2 subsection (2)(C) located on page 3, lines 1 3 and Sec. 2, subsection (3) (C) on page 3, lines 25-27 that reads as follows (2)(C) minus any appropriation of unrestricted, unencumbered money of the corporation during fiscal year 2005, other than an appropriation for the corporation's operating budget; (3)(C) minus any appropriation of unrestricted, unencumbered money of the corporation during fiscal year 2006, other than an appropriation for the corporation's operating budget; Mr. Dubler responded that this language is included "in an attempt to make an all encompassing reference" to all funds transferred to the State by the Corporation in order to prevent the Legislature from classifying some of those funds as non-dividends, and saying that "they don't count." Co-Chair Green asked whether this language is a change from the historical recognition of transferred funds, and she asked whether it would allow funds to be "manipulated." Mr. Dubler responded that the concept of this language is to define which funds being transferred from AHFC to the State should be recognized as "a dividend." Senator Taylor ascertained, therefore, that other funds the State might receive from AHFC would be classified as "operating expenses." Mr. Dubler reiterated that the intent of the language is to clarify which of the funds being transferred to the State would be considered dividends. He communicated that the bill could be amended to provide further clarification. Senator Taylor moved to report the bill from Committee with individual recommendations and accompanying fiscal note. There being no objection, SCS HB 256 (FIN) was REPORTED from Committee with zero fiscal note #1 from the Department of Revenue.