CS FOR HOUSE BILL NO. 13(FIN) "An Act relating to prepayments of accrued actuarial liabilities of government retirement systems; relating to the Alaska Municipal Bond Bank Authority, the Alaska Housing Finance Corporation, and the state bond committee; establishing the Alaska Pension Obligation Bond Corporation; permitting the Alaska Municipal Bond Bank Authority or a subsidiary of the authority, a subsidiary of the Alaska Housing Finance Corporation, the state bond committee, and the Alaska Pension Obligation Bond Corporation to assist state and municipal governmental employers by issuing bonds, notes, commercial paper, or other obligations to enable the governmental employers to prepay all or a portion of the governmental employers' shares of the unfunded accrued actuarial liabilities of retirement systems; authorizing a governmental employer to issue obligations to prepay all or a portion of the governmental employer's shares of the unfunded accrued actuarial liabilities of retirement systems and to enter into a lease or other contractual agreement with a trustee, the Alaska Municipal Bond Bank Authority or a subsidiary of the authority, a subsidiary of the Alaska Housing Finance Corporation, the state bond committee, or the Alaska Pension Obligation Bond Corporation in connection with the issuance of obligations for that purpose, and relating to those obligations; relating to revision of the employer contribution rate in connection with financed prepayment of unfunded accrued actuarial liabilities of government retirement systems; and providing for an effective date." REPRESENTATIVE MIKE HAWKER, sponsor, related that HB 13 would empower the state to issue pension obligation bonds (POB's) in order to finance part of the unfunded liability of the state's pension systems. Alaska faces billions of dollars in unfunded liability and has contractual and constitutional obligations to make up that liability. This bill allows the state to pursue a proven financial technique and approach the international capital markets to borrow money at a lower cost to pay off the pension liability and save the state significant amounts of money. Co-Chair Stedman asked for clarification of soft and hard liabilities. Representative Hawker explained that the obligation to the pension system is a soft liability, because it does not have a document behind it other than a moral and contractual obligation to the pension fund. A hard liability is when you go to the capital markets and sign a loan document with specific repayment terms. He explained that this bill would involve a hard debt obligation substituting for a soft debt obligation. The payment of the hard obligation is subject to a recurring legislative appropriation. 10:17:40 AM Co-Chair Stedman MOVED to ADOPT Amendment 1: Page 3, line 20, following ".": Insert "However, a subsidiary created for the purpose  of financing or facilitating the financing of  prepayment of a governmental employer's share of  unfunded accrued actuarial liability of retirement  systems may only borrow money and issue bonds if the  state bond rating is AA- or better." Page 5, line 26, following "37.15.955": Insert ", but only if the state bond rating is AA- or better" Page 8, line 26, following "if": Insert "the state bond rating is AA- or better and if" Page 11, line 2, following "37.16.900": Insert ", but only if the state bond rating is AA- or better" Page 15, line 14, following "if": Insert "the state bond rating is AA- or better and if" Page 19, line 12, following "AS 44.85.085": Insert ", but only if the state bond rating is AA- or  better" Page 23, line 7, following "may": Insert ", if the state bond rating is AA- or better," Page 23, line 27, following "appropriate": Insert ", but only if the state bond rating is AA- or better" Page 25, line 1, following "reasonable": Insert "; however, to carry out this paragraph, bonds  and other obligations may only be issued if the state  bond rating is AA- or better" Co-Chair Stedman OBJECTED for discussion purposes. DARWIN PETERSON, STAFF, CO-CHAIR STEDMAN, offered a Conceptual Amendment to Amendment 1, on behalf of Representative Hawker, to add "the equivalent of" before "AA-" throughout the bill. Co-Chair Stedman explained that the AA- rating is Standard and Poor's and the intent is to include equivalent ratings from other rating agencies such Moody's. Mr. Peterson explained the intent of Amendment 1 is to prohibit the state from issuing POB's if the state's credit rating is not the equivalent of AA- or better. Co-Chair Stedman pointed out that the state is currently AA, although the bonds would be issued at AA-. Mr. Peterson continued to explain that the intent of the amendment would ensure that if the state's credit rating falls below an acceptable level, the state would cease issuing any new POB's until the debt is paid off or the credit rating improves. Representative Hawker testified in support of the amendment. BRIAN ANDREWS, DEPUTY COMMISSIONER, TREASURY DIVISION, DEPARTMENT OF REVENUE, reported that the Department has no problem with the amendment. He reported that the state is now rated at AA+ by Standard and Poor. Senator Elton asked for clarification about the issuance of bonds. Mr. Peterson replied that the state can not issue bonds unless its rating is AA- or better, regardless of the individual ratings of the bonds. Senator Elton asked why that approach was taken, rather than stipulating the rating of the POB's. Mr. Andrews explained that POB's carry a credit rating one notch below the state's credit rating. The amendment tightens up the bill. 10:23:05 AM Senator Elton shared an approach which would prohibit the issuance of a low-rated bond. Representative Hawker thought that was a viable approach, but the amendment would work as well. Senator Elton said he was just asking for clarification. Representative Hawker thought the amendment would be preferable because it refers to the state's overall rating when a transaction is entered. Senator Thomas asked if a significant event such as a downward price of oil would have an effect on the state's credit rating. Mr. Andrews explained that credit rating agencies look at several factors. Co-Chair Stedman WITHDREW his OBJECTION to Amendment 1. Amendment 1, as amended, was ADOPTED. 10:27:17 AM Co-Chair Stedman MOVED to ADOPT Amendment 2: Page 3, line 19, following "may": Insert ", subject to AS 37.15.903," Page 6, line 2: Delete "may not exceed $5,000,000,000" Insert "is limited as provided in AS 37.15.903" Page 6, following line 10: Insert a new section to read: "Sec. 37.15.903. Pension obligation bond limit. The total unpaid principal amount of bonds, including refunding bonds, but excluding refunded bonds, issued by all state entities added together, for the purposes of financing prepayment of all or a portion of a governmental employer's share of unfunded accrued liability of retirement systems, may not exceed $5,000,000,000." Page 11, line 9: Delete "may not exceed $5,000,000,000" Insert "is limited as provided in AS 37.15.903" Page 19, line 12, following "AS 44.85.085": Insert "; this assistance is limited as provided in  AS 37.15.903" Page 23, line 7, following "may": Insert ", subject to AS 37.15.903," Page 23, line 25, following "debt": Insert ", subject to AS 37.15.903," Page 25, line 1, following "reasonable" Insert "; bonds issued under this paragraph are subject  to AS 37.15.903" Co-Chair Stedman OBJECTED for discussion purposes. Mr. Peterson explained that the amendment restricts the state's ability to issue bonds in excess of $5 billion. Representative Hawker approved of the amendment. Mr. Andrews agreed. Co-Chair Hoffman asked if other states have limitations. Mr. Andrews did not know. 10:28:27 AM DEBBIE SCHNEBEL, SENIOR VICE PRESIDENT, SCOTT BALICE STRATEGIES, explained that it varies state by state. States where the legislature is in session for longer periods have the ability to approve the exact amount being issued. Co-Chair Stedman related that the idea to limit the amount was so that the legislature could come back and request an increase if necessary. The $5 billion would be issued over a few years, which would give the Administration an opportunity to review the process and consider an extension. Senator Thomas referenced lines 10-14 and asked if they were specifically addressing the retirement unfunded liability. Mr. Peterson said yes. Co-Chair Stedman WITHDREW his objection. There being NO OBJECTION, Amendment 2 was adopted. 10:30:53 AM Co-Chair Stedman MOVED to ADOPT Amendment 3: Page 6, lines 15 - 17: Delete "The committee, on behalf of the state, may obligate and bind the state to set aside and pay into the bond redemption fund, on a monthly or other periodic basis." Co-Chair Stedman OBJECTED. Mr. Peterson explained that the amendment is in response to a legal memorandum dated March 26 from Tamara Cook. She expressed some hesitation and concern with regards to the state's constitutional limits on what debt the state can issue. In the second paragraph of the memorandum, she specifically suggested looking at a sentence in Section 3 of the bill as a potential problem. She suggested deleting the sentence, which would allow the bond committee to obligate and bind the state to pay bond debt. TAMARA COOK, DIRECTOR, LEGISLATIVE LEGAL SERVICES, LEGISLATIVE AFFAIRS AGENCY, agreed with Mr. Peterson's description of the concern regarding the problematic sentence. She understood that the pension obligation bonds will not be secured by the full faith and credit of the state. She voiced concern about the notion that the state bond committee would be able to obligate the state. Representative Hawker concurred with the amendment. Mr. Andrews also concurred with Ms. Cook's interpretation. The intent of the bill was "to use this as appropriation- type debt." Co-Chair Stedman WITHDREW his objection. There being NO OBJECTION, it was so ordered. 10:34:07 AM Co-Chair Stedman MOVED to ADOPT Amendment 4: Page 1, lines 10 - 12: Delete "to issue obligations to prepay all or a portion  of the governmental employer's shares of the unfunded  accrued actuarial liabilities of retirement systems  and"  Page 2, line 4: Delete "for that purpose" Insert "by a state entity for the purpose of prepaying  all or a portion of the governmental employee's share  of the unfunded accrued actuarial liabilities of  retirement systems" Page 4, lines 15 - 18: Delete "A municipality, or two or more municipalities jointly, may issue obligations to prepay all or a portion of each participating municipality's share of the accrued actuarial liabilities of retirement systems." Page 4, line 22, following "obligations": Insert "by a state entity" Page 4, line 29, following "issued": Insert "by a state entity" Co-Chair Stedman OBJECTED. Mr. Peterson related that Senator Elton's staff noted a drafting error on page 1, line 9, of Amendment 4. The word "employee's" should be "employer's". Ms. Cook agreed that it should be changed to "employer's" on line 9 of the amendment. Mr. Peterson explained that Amendment 4 restricts the bonding ability to the state and prohibits municipalities from issuing debt. It does not prohibit the state from issuing debt on behalf of the municipality. 10:36:00 AM Representative Hawker agreed with Amendment 4, in light of passage of SB 125. The bill does not expand any authorities of municipalities beyond what they may or may not already have. Mr. Andrews concurred with Representative Hawker's comments. Co-Chair Stedman WITHDREW his objection. There being NO OBJECTION, it was so ordered. 10:37:57 AM Mr. Andrews addressed the fiscal notes. He said that the Department of Revenue has an indeterminate note because potential cost savings to the state are not known at this time. He provided information about potential savings to the state. He referred to a handout on PERS and TERS cash contribution and pension obligation bond analysis (copy on file.) Co-Chair Stedman requested that information. Mr. Andrews noted that the matrixes were developed in conjunction with the actuary for the state, Buck Consultants. He turned to the first page, which shows an interest rate of 5.25 percent. He reported that last week the state of Wisconsin did a $900 million POB restructure at 5 percent. He highlighted the percentage of growth of 4 percent and explained the methodology. The actuarial required rate of return was 8.25 percent. Mr. Andrews turned to the second page to show the average annual contribution rate that the employer needs to make into the PERS system. He further explained reductions in annual contributions rates based on the amount of POB. Mr. Andrews explained the various savings matrixes. 10:42:51 AM Mr. Andrews explained what would happen with a combination of POB's and cash. He turned back to the first matrix and used $1 billion cash and $1 billion POB as an example. The annual contribution rate goes from 35.22 percent down to 30.28 percent, which leads to a reduction in the annual dollar requirement and a net present value savings of $2.1 billion. If the investments from the proceeds of the POB are greater than 8.25 percent, there would be further savings. On average, the pension plan for the last 15-16 years has earned 9.6 percent each year. Senator Olson asked if the rate of 9.6 would continue. Mr. Andrews said past history is a good indicator. Currently, asset allocations are set up so that the state is looking at a return of 8.5 percent for the next five years. 10:45:49 AM Co-Chair Hoffman MOVED to REPORT SCS CSHB 13(FIN) out of Committee with individual recommendations and the accompanying fiscal notes. There being NO OBJECTION, it was so ordered. SCS CSHB 13(FIN) was REPORTED out of Committee with a "do pass" recommendation and a new indeterminate fiscal note by the Department of Revenue and a new zero fiscal note by the Department of Administration. Representative Hawker pointed out an error on page 2, line 11. It should say "may" instead of "any". He thanked the Committee for their hard work. Co-Chair Stedman commented that it is the first step in addressing unfunded liability. 10:48:31 AM