GENERAL SUBJECT(S): OVERVIEWS: Alaska Housing Finance Corporation (AHFC) The following overview was taken in log note format. Tapes and handouts will be on file with the House Finance Committee through the 21st Legislative Session, contact 465-2156. After the 21st Legislative Session they will be available through the Legislative Library at 465- 3808. Time Meeting Convened at 1:35 p.m. Tape HFC 99-20, Side 1 and 2 PRESENT: X Representative G. Davis X Co-Chair Therriault Absent Representative Foster X Co-Chair Mulder X Representative Grussendorf X Representative Austerman X Representative Kohring X Representative Bunde Absent Representative Moses X Representative J. Davies Absent Representative Williams ALSO PRESENT: DANIEL R. FAUSKE, EXECUTIVE DIRECTOR, ALASKA HOUSING FINANCE CORPORATION; JOHN BITNEY, LEGISLATIVE LIAISON, ALASKA HOUSING FINANCE CORPORATION, DEPARTMENT OF REVENUE LOG SPEAKER DISCUSSION OOO HFC 99-20, SIDE 1 ALASKA HOUSING FINANCE CORPORATION (AHFC) Co-Chair Mulder Convened the meeting at 1:35 p.m. 101 DANIEL R. FAUSKE, EXECUTIVE DIRECTOR, ALASKA HOUSING FINANCE CORPORATION Provided members with a handout, Alaska Housing Finance Corporation (AHFC) rating news (copy on file). He gave a brief overview. He read written remarks (Attachment 1, see below). Their budget request reflects the overall direction of AHFC. 442 Mr. Fauske AHFC plays a major role in the state's housing industry and economy. The Corporation supports itself through annual net income of the corporation and federal dollars. 501 Mr. Fauske Pointed out that AHFC's credit strength is the key to its success. Homeownership in Alaska at the end of 1997 was 67.2 percent. This is an increase from 1992. Average interest rates have dropped. Almost all communities report a steady and strong recovery in their residential construction market. 543 Mr. Fauske Emphasized that housing is the most significant investment that a family will make in their personal budget. 583 Mr. Fauske Discussed activities of the corporation. Noted that AHFC was capitalized with $1 million dollars. The state of Alaska has received $965,964 thousand dollars. 613 Mr. Fauske Pointed out that AHFC was scored by the federal department of Housing and Urban Development (HUD) as one of the nation's leading agencies. 654 Mr. Fauske Noted AHFC's success in bond ratings. Stressed that AHFC has a good working relationship with the state and effective management. AHFC has received a bond rating upgrade. 710 Mr. Fauske Discussed issuance of the remaining balance the bonds for capital projects that were authorized in F99. 729 Mr. Fauske Noted that the increase in bond ratings was accompanied by an increase in bond ratings for the state of Alaska, the Mat- Su Borough and Kodiak Borough and the North Slope Borough. 835 Mr. Fauske Stressed that AHFC must balance competing goals of maintaining its own facilities, buildings, and programs and funding the needs of the state. 879 Mr. Fauske Discussed the $53 million dollars proposed for capital projects. He noted that $38.5 million dollars of this amount is proposed for projects and programs that would be administered by AHFC. The rest would be for remaining state agencies. $13.2 million of the remainder would be for water and sewer projects in Department of Environmental Conservation. 1012 Mr. Fauske Discussed budget requests (see attached written remarks). He emphasized the need to address deferred maintenance. They are asking for $15.8 million dollars in corporate funds and $17.9 million dollars in federal funds. 1053 Mr. Fauske Discussed the Gateway Learning Center in Anchorage. 1071 Mr. Fauske Concluded written remarks. 1084 Co-Chair Mulder Asked the mission of AHFC. Mr. Fauske Make safe, quality and affordable housing available for Alaskans. Co-Chair Mulder Asked AHFC's total book value? 1167 Mr. Fauske Responded that AHFC had $4.4 billion dollars is the total book value. Fund equity is approximately $1.8 billion dollars. 1183 Representative G. Davis Recalled legislation to allow AHFC into other markets, such as rural and assisted living housing. Asked if there are areas that AHFC wants to get out of or expand into. 1247 Mr. Fauske Noted that programs to help low income housing offer tax breaks. Added that AHFC could expand in area of taxable programs, like FANNY MAE. They have not been very active in their taxable program in recent years. Stated that AFHC is doing fine in the areas in which they are currently operating. Observed that they are holding discussions to find better ways to develop statewide. 1338 Co-Chair Therriault Has administration discussed options for reducing FY99 of FY00 expenses? 1370 Mr. Fauske Stressed that they are scrutinizing travel and purchases. They are also freezing new hires that are not essential. 1430 Co-Chair Therriault Does AHFC track the housing market in terms of when it might be overbuilt? 1472 Mr. Fauske 2 months ago AHFC formed a contingency task force to look at economic indicators. They looked at how layoffs affect the market and AHFC. Stressed that they would with industry. Pointed out that interest rates have dropped to allow capital into the housing market. They will watch the default rate. The default rate remains constant at between 3 and 4 percent. In 1986 it was most to 16 percent. 1543 Co-Chair Therriault Has AFHC had dialog with lending institutions to prevent over building? Mr. Fauske Yes, they have had good dialog. Stressed that memories of the last downturn are still fresh in everyone's mind. Pointed out that the goal is to show steady growth. Acknowledged that there is a downturn in the oil industry, but pointed out other sectors of the economy are vibrant. 1721 Co-Chair Therriault Referred to the Bank of America Building. Asked if AHFC purchased the asset. Mr. Fauske Clarified that AHFC purchased the asset and has factored it into one of their upcoming general government bond obligation. Co-Chair Therriault Referred to South Hall Manor. John Bitney, Legislative Liaison, Alaska Housing Finance Corporation, Department of Revenue; Observed that renovation of the South Hall Manor is in the Governor's capital budget. It is item 11. 1774 Representative J. Davies Noted that there is a 40 percent ratio of personal income to housing costs in Alaska. Observed that 67 percent of Alaskans are homeowners. 1821 Mr. Fauske Stated that the market indicators were derived from the Department of Labor. Pointed out that the National average of home ownership is over 60 percent. It used to take 1.7 members of a household working to make a mortgage. This is now down to 1.4 members of a household. 1877 Representative Bunde Reiterated that there is an increase in housing growth during a time of large state budget deficits. Asked if the deficit is viewed as an impact on the overall economy. 1962 Mr. Fauske Stressed that the strong economy reflects confidence that the problem will be resolved. Consumers want to take advantage of low interest rates. Try to prevent the domino affect of reductions. More diversified then before. The state is more diversified. Observed that permanent fund dividend earnings exceed oil revenues. 2065 Representative Bunde Pointed out that the state needs to walk a narrow path, between the sky is falling and not recognizing deficit. 2079 Representative Bunde Referred to the Family self-sufficiency program. 2098 Mr. Fauske Explained that there is a center in Park View for training and job skills. It is funded through federal grant money. 2124 Co-Chair Mulder Consumers have high level of confidence, but once consumers are frighten there is a domino effect. Challenge is that the public's perception is that spending has not been reduced. Conflicting needs of educating public and gaining their confidence. 2185 Mr. Fauske Recommended discussions with public to educate them that there is a real problem that must be solved. Show numbers and how it works. Can't cut $1 billion dollars from the budget without adverse effects. Stressed that it is important to retain consumer confidence. 2265 Co-Chair Mulder Haven't gotten the public's attentions. Pointed out the availability of venture capital. The state's financial status affects private industry's ability to capture capital nationally. 234 Mr. Fauske Observed that bond rating is a key indicator. Financiers look at the state's plan. 000 HFC 99-20, SIDE 2 TAPE CHANGE 050 Mr. Fauske Noted that there have been several upgrades to municipal issuance bonds. Discussed how state can assure public. 145 Co-Chair Mulder Noted that there would be a town meeting in Anchorage. 155 Representative Austerman Referred to the low interest rates. Asked Mr. Fauske's prediction for 1999. Mr. Fauske Observed that the rate was 6.125 for a first time homebuyer as of 2/11/99. 271 Representative Austerman Asked if he foresaw change in 1999. 288 Mr. Fauske Interest rates climbing slightly. Noted no change in federal rates. If there is inflation there may be some slight increase. Anticipates rates staying fairly stable. Pointed out national economy is good. 436 Representative Austerman Alaskans are comfortable at this point. Asked if missions and measures are available. 484 Mr. Fauske Yes. Mr. Fauske 1974 - 1976 $1 billion dollars was placed into AHFC. 567 Mr. Fauske Amount AHFC has paid back is almost $1 billion dollars. Emphasized that it has been a wise investment. The merger of the housing finance agency and the public housing was good. Other states are following the example of AHFC. 628 Representative Austerman Pointed out the need to protect revenue sources as the budget is balanced. 650 Mr. Fauske Observed that the debt that was initiated as a result of SB 360 was a general government obligation of the Corporation. The way AHFC is rated and viewed is based on their ability to secure debt. Pointed out thousand dollars at they don't have the ability to tax. Observed that half of debt remains to complete the sale for SB 360. Pointed out that $10 million dollars of $93 million dollars was purchased by Alaskans. Co-Chair Mulder Asked when they expect complete sale on $93 million capital SB360. 829 Mr. Fauske Anticipate that the cash flow requirements on the $93 million dollars would be used up in September. Want to calculate difference between maximizing the arbitrage and giving up basis points in interest. Will probably complete sale or portion in next 2-3 months to take advantage of interest rates. 921 Co-Chair Mulder What is dominated AHFC activity. 944 Mr. Fauske New loans are exceeding refinancing. They are close. 985 Co-Chair Mulder Asked if AHFC is able to react better than other agencies to reduce staff. 1028 Mr. Fauske Did not know. Activity is high trying to increase ability to service. Observed there is a three-day turn around. Pointed out that mortgage activity is high and they have a small staff. 1129 Representative Kohring Best thing Legislature can do is to get its fiscal house in order. Co-Chair Mulder Referred to multiplex lending. 1236 Mr. Fauske Observed that multiplex lending is a combination of low income and those seeking tax credits. Pointed out that multifamily lending has increased. There were 39 loans 1998. Taxable rates are 6 - 7 percent. 1311 Co-Chair Mulder Noted problems with multiplexes being refurbished or sold. 1331 Mr. Fauske Expanding program for equity transfers if money goes into a similar investment. Getting inquiries from military in reference to housing needs. 1385 Co-Chair Mulder Asked who owns senior housing properties. 1397 Mr. Bitney AHFC has title, but changes need HUD permission. Almost joint ownership with HUD backing. 1456 Co-Chair Therriault Local nonprofits contracted for operation? 1488 Mr. Bitney Public housing funded by federal government but AHFC holds title. AHFC needs HUD approval. Clarified that grants go to nonprofit for operation. 1549 Representative J. Davies Long term care report. Asked if AHFC is involved in financing for assisted living or nursing homes. 1574 Mr. Bitney Yes, through the senior housing assistance. Mr. Fauske Expected to see more assisted living housing. 1665 Co-Chair Mulder ADJOURNMENT The meeting adjourned at 2:50 p.m. Attachment 1 ALASKA HOUSING FINANCE CORPORATION OVERVIEW House Finance Committee February 11, 1999 Introduction Statement Mr. Chairman, members of the House Finance Committee - I am Dan Fauske. I have been the CEO of Alaska Housing Finance Corporation since March 1, 1995. Mr. Chairman, I was asked to give you an Overview of AHFC. I have prepared; 1) a brief opening statement; 2) some recent activities of the corporation; 3) information regarding the state housing industry; 4) a summary of our funds in the budget; and, of course, 5) I am available for your questions. Today - unless there are specific items in our operating or capital budget requests that you would like to discuss -- I will keep my comments in this area fairly general. Our budget officer, Mr. Les Campbell, and myself are available to come to Juneau when you are ready to get into specific line items for the capital budget. I am also prepared and ready to work with Representative Bunde as our subcommittee chairman for the Department of Revenue operating budget. I will say that the budget numbers we are requesting reflect the overall direction of AHFC and the policies, goals, and priorities that have been established by the Board of Directors and senior management. We have also taken it upon ourselves to establish and come forward with performance measures and goals that you will see when we get into more budget details. II. Opening Summary Alaska Housing Finance Corporation is a public corporation lead by a Board of Directors - 4 public members appointed by the governor & 3 commissioners Today, AHFC plays a major role in the state's housing industry and economy with our ability to attract low-cost capital through the issuance of bonds for taxable and tax-exempt single family and multi-family mortgages. Alaska Housing Finance Corporation operates itself AND supports the housing market through annual net income of the corporation and federal dollars. In addition, our net income (or profits) that are not used by AHFC for housing programs is returned directly to the State of Alaska. Our credit strength is key for our ability to generate net income. While we serve many social functions for lower income housing, senior & special needs housing, and other areas, we function as a profit-making corporation in order to self-support our operations and programs with no state funds coming our way. Our access to the capital markets is as strong today as ever. This is based on AHFC's credibility, strong management, financial strength, and the increased diversification of the Alaskan economy. By bringing low-cost capital into this state from outside investors who purchase our bonds, the positive results can be seen in Alaska's current housing market indicators. (Source: AK Dept. of Labor, Research & Analysis Section) ? Homeownership for Alaska at the end of 1997 hit 67.2%, a substantial increase from 55.5% in 1992. ? Average interest rates dropped from 7.79% in 1997 to 6.9% in 1998. ? Statewide in Alaska, total number of loans by all mortgage institutions nearly doubled in 1998 compared to 1997. ? Almost all communities around the state report a steady and strong recovery in their residential construction market. For example, Anchorage and Mat-Su recorded their busiest season since 1984. Anchorage Public Works estimates that permit valuation exceeded $200 million in 1998. ? Through the 3rd quarter of 1998, total loan volume was $1.4 billion in those regions of the state where we can determine permit numbers. ? Total sales volume for the same period was $1.77 billion. According to numbers from the Alaska State Homebuilders Association, the construction of 1,000 single family homes generates 2,448 full-time jobs in construction related industries; $79 million in wages; and $42 million in combined federal, state, and local revenues and fees. The Homebuilders estimate 2,369 single family homes are permitted in 1999. This does not include homes built outside of municipalities that require building permits. We've got a healthy industry going right now. Housing remains probably the most significant investment that a family will make in their personal budget. For 1998, Total Alaska Personal Income was $15.2 billion, of which $6 billion was spent for housing. In other words, roughly 40% of personal income was spent on housing. As a business entity, AHFC finds these numbers encouraging. Housing activity is robust and steady, and AHFC is a key player in that market which equates to good business for the corporation and low cost mortgage financing for Alaskans. What we do is work to keep rates as low as possible, and by passing these rates on to the Alaskan consumer, increase disposable income for things other than housing. There is nothing more basic in our own personal budgets than housing. A key part of our mission is to make sure that Alaskans have the opportunity to benefit from the low cost capital - or "interest friendly environment" we are experiencing. In addition, I also wanted to inform you on where the corporation stands as far as paying back the state's investment in AHFC. From 1976 to 1984, AHFC was capitalized with $1 billion. To date today, the State of Alaska has directly received $965,964,000. This number does not even include hundreds of millions in annual AHFC mortgage activity in the state, or AHFC's own capital budget programs. Personally, I am very proud of what has been accomplished at AHFC over the past four years. III. Activities of the Corporation Mortgage Activity Report Over the past two years, we have initiated measures to increase our mortgage activity. We believe we offer lending and mortgage institutions the lowest interest rates to pass on to the Alaskan homebuyer. In turn, our mortgage programs keep those dollars in state. ? We established focus groups with industry to help with changes to our programs ? We have streamlined our mortgage process, reduced paperwork requirements, loan application turnover time, and established a "user friendly" policy ? We have increased outreach and information effort with homebuyer education workshops, a marketing effort, and homebuilder and realtor workshops for continuing education credits. ? AHFC now posts its mortgage interest rates at 8 AM every day. For example, today's rates are _______. Our single family mortgage activity reflects these efforts. (These are calendar In addition to increasing our activity by over 1,000 loans in 1998, our staff also processed 1,499 Streamline Refinance loans worth over $128 million. We also have seen increased activity in multifamily lending (5-Plex and larger in size). Again, these numbers show that we have been busy. Along this line, we have requested some increments in our operating budget to handle this activity. We are also considering whether requesting an amendment to our front section may be necessary for loan authorizations. Financial Management We have taken steps to both monitor and manage our internal funds better. Much of this was started two years ago when we established new fiscal policy procedures. ? We have hired two fund-manager firms, which has resulted in an increase of $1 million to AHFC over what would have been made using in-house management ? We have brought our commercial paper program from Europe back to the domestic market ? Just last week, we began the process of initiating a securities lending program PHMAP For the third consecutive year, AHFC scored a perfect 100.0 on the Dept. of Housing & Urban Development's Public Housing Management Assessment Program. In eleven different evaluation criteria, HUD recognizes us as one of the leading agencies in America for effectively managing and delivering housing services for over 2,700 low-income Alaskan families. Bond Ratings Many of you are probably well aware of our recent bond rating success. All of the things I have mentioned here today are an integral part in achieving good bond ratings. ? A good working relationship with the state and its elected officials ? Strong financial statements and net income numbers ? Effective management of our programs and responsibilities ? A good state economy Mr. Chairman, I wanted to update you and the committee on the $200 million in bonding that was authorized last session for state capital projects. This was a very unique deal in the United States. For the first time, a state housing authority issued bonds on behalf of its state government. In this case, we offered the ability to leverage a portion of our future dividends to the state (what used to be the $50 million payment to the general fund) and pledging those funds as a debt service payment over 7 years. On January 20th we closed on the first portion of the bonds, totaling $92.3 million. ? Alaskan investors purchased $10 million. ? The bonds were priced to yield form 2.96% to 4.05%, with a True Interest Cost of 3.88%. ? AHFC also received a bond rating upgrade from A+ to AA- from Standard & Poor's. I have some handouts that might help describe the deal. (HANDOUTS) We are now starting some internal discussions about timing the remaining balance. Again, a very favorable deal, and I commend the legislature (especially the co-chairs and members of this committee) and the governor for their help in making this a success. The legislature and the governor have honored our agreement regarding transfer of funds to the state every year since 1995, and this is referenced in our ratings and the success I just mentioned. The success of doing business in this manner is something all of us should be proud of. By establishing an agreement regarding transfers of funds from the corporation to the state, and staying on course every year with that plan has upgraded our credit, upgraded our credibility, and proven the benefits of establishing a financial plan and sticking with it. As we've seen our bond ratings increase, the same criteria has also led to bond rating increases for the State of Alaska, the Mat-Su Borough, the Kodiak Borough, the North Slope Borough, I also want to commend the legislature and the governor the Economic Summit held on Tuesday here in Juneau. Having the debate is encouraging, and sends a positive message to the investment community about our state. It goes without saying that we have been quite topical toward ways that AHFC can contribute to state budget concerns. We are not the solution. However, our success has shown ways that we can part of the effort. So often I hear people say that AHFC should give more money because the corporation has a lot of money. Yet, I seldom ever hear anyone ask why the corporation has money. Again, our credit strength is the key. I encourage all of you here and to those listening to look at how AHFC does its business and take the time to understand the importance and factors that go into having good access to the nation's capital markets. I appreciate you allowing me to talk a little bit about these activities, Mr. Chairman. I realize that you are also interested in looking at our budget numbers, but it is important that you know that we are working very hard to maintain our core-business functions. These functions generate the profits that go into providing our funds for the capital budget, and for our bonding ability. FY2000 Budget AHFC finds that it must balance the competing goals of (1) net income; (2) maintaining its own facilities, buildings, and programs; and (3) funding certain needs of the state. For Fiscal Year 2000, AHFC is making available $103 million for transfer to the state. The first call on these funds is the debt service obligations for the bonds authorized last session. Beyond that, I believe that you will find all of these funds in the appropriate places throughout the various budget bills. Within the $53 million proposed for capital projects, $38.5 million is for projects and programs administered by AHFC. The balance is for projects in other state agencies - the main one being $13.2 million for water and sewer projects in the Department of Environmental Conservation. Increases in our capital budget reflect a growing deferral of maintenance and renovations to our public housing facilities. As we have seen these requests reduced in prior years in order to free up non-general fund dollars for off budget state expenditures, our facilities find their needs being deferred into future budget requests. I understand the budget situation faced by all of you, and AHFC has stepped up to the plate time and again in recent years. But I would ask, Mr. Chairman, that we not allow a maintenance problem to start to accrue with public housing facilities while AHFC is asked to fund the backlog of state maintenance problems. Specifically, you will find increased funding in our capital budget for Senior & Statewide Deferred Maintenance, the renovation of Southall Manor in Fairbanks, Mt. View Senior Citizens housing here in Juneau, and Parkview and Fairmount in Anchorage. As for our operating budget, we have requested $35,663,700 for FY2000. As I mentioned earlier, either our own corporate funds or federal housing dollars pays for our operations. Specifically, we are asking for $15.8 million in corporate funds, and $17.9 million in federal funds. Our proposed budget demonstrates a commitment results-oriented a measurable, results- oriented framework that is intended to gauge our ability to perform our mission. I will say that we have asked you to consider approving four new positions for us. Three positions are for our mortgage department, and are intended to keep up with the current level of loan activity, and also to increase it through the establishment of an automated mortgage underwriting system to maintain our share of the mortgage market in state. We have asked for two Range 10 assistants, and a Range 20 Loan Program Officer. We have also requested a position in our public housing department to assist at the Gateway Learning Center in Anchorage. This Center is part of our Family Self-Sufficiency program designed to complement the state's welfare to work initiative by providing training, job searches, and a computer lab. This position would be a Range 15, and would be funded by federal HUD dollars. Mr. Chairman, I would like to conclude by saying that things are going well at AHFC. Business has been good, and I am proud of the contributions the corporation is making to our state. We are seeing positive market indicators in the housing economy, and we have received a bond rating upgrade even in this low oil price environment. Much of this success stems from the good working relationship we have had with this committee, and I know that I speak for the board and the staff when I say "thank you" for your support of our efforts. Mr. Chairman, I will stop here and make myself available for your questions. HOUSE FINANCE COMMITTEE LOG NOTES February 11, 1999 HFC 12 2/11/99