GENERAL SUBJECT(S): Overview: General Obligation Bonds 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: 1:42 p.m. Tape(s): HFC 00 - 17, Side 1 HFC 00 - 17, Side 2 HFC 00 - 18, Side 1 PRESENT: X Representative G. Davis X Co-Chair Therriault X Representative Foster X Co-Chair Mulder X Representative Grussendorf X Vice Chair Bunde X Representative Moses X Representative Austerman X Representative Phillips X Representative J. Davies X Representative Williams ALSO PRESENT: TIM RATTIGAN, VICE PRESIDENT OF PUBLIC FINANCE, SOLOMONSMITHBARNEY, SEATTLE; MIKE DALESSI, BRANCH MANAGER, SOLOMONSMITHBARNEY, JUNEAU. LOG SPEAKER DISCUSSION TAPE HFC 00 - 17 SIDE 1 71 Co-Chair Mulder Convened the meeting at 1:42 p.m. 125 CO-CHAIR MULDER Noted that SB 74, HB 240, HB 245, HB 319 and HB 281 all deal with general obligation bonds. The intention of the meeting is to provide an overview on general obligation bonds (GO) by private bond counsel. 255 TIM RATTIGAN, VICE PRESIDENT OF PUBLIC FINANCE, SOLOMONSMITHBARNEY SEATTLE Provided members with a booklet, House Finance Committee, General Obligation Bond Presentation (copy on file). He gave a brief overview on SolomonSmithBarney. 449 Mr. Rattigan Discussed page 1 of the handout. Noted that $68.4 billion dollars is the overall issuance of municipal general obligation bonds. 503 Mr. Rattigan Discussed page 2 of the handout. Noted that there have been historically low interest rates in the last 15 years. 571 Mr. Rattigan Discussed page 3 of the handout. Noted that debt service was calculated with a 30-year payoff. Alaska general obligation bonds have one of the highest rated credits with one of the lowest interest rates. They have a rating of AA. 673 Mr. Rattigan Reviewed the state of Alaska's overall ranking on pages 4-6 of the handout. Standard and Poor's is the major ranking agent. Alaska has low total net tax supported debt. 790 Co-Chair Mulder Questioned what the number includes. Noted that the total net tax supported debt includes Certificates of Participation and general obligation bonds to the extent that they are not being repaid. 844 Mr. Rattigan In response to a question by Representative G. Davis, Mr. Rattigan explained that debt calculations include debt of state agencies, but does not include debt of private entities. Lease obligations are included in the rating. 892 Representative J. Davies Clarified that low tax supported debt is good. 932 Mr. Rattigan Alaska is 47th in 1997 standards in net tax supported debt per capita. Suggested that the current amount may be less. 958 Mr. Rattigan Alaska is 48th in net tax supported debt as a percentage of 1997 personal income. 1001 Co-Chair Mulder New York is high in all of the categories. 1017 Mr. Rattigan New York used to be in the lowest category of BBB. This is the lowest acceptable standard. 1052 Mr. Rattigan In response to a question by Co-Chair Mulder, Mr. Rattigan explained that the difference in interest rates between BBB and AA rated entities depends on the market. Differences may be between 1 tenth of one percent and a third of a percent. 1121 Mr. Rattigan In response to a question by Representative Phillips, Mr. Rattigan explained that rating companies take the Permanent Fund into account, to a limited extent. The Permanent Fund is deemed to be the appropriate long term planning vehicle. The Constitutional Budget Reserve is considered the model for short term budget planning. 1175 Mr. Rattigan Reviewed page 7 of the handout. General obligation bonds are considered full faith credit. It is the lowest cost of borrowing. Other types have limitations. General obligation bonds almost always have a higher rating. States are given priority, as a stronger debt vehicle, over local government entities. 1269 Mr. Rattigan Discussed page 8 of the handout. A bond rating is a signed letter assessing the ability, willingness and legal obligation of an issuer to make full and timely payments of principal and interest. It is an objective assessment of relative creditworthiness. He noted that a bond rating is not a rating of government. It is a rating of relative credit quality. It is not an audit or a measure of the relative worth of an issuer. 1333 Mr. Rattigan Discussed page 9 of the handout. 1363 Representative Foster Asked why Alaska is not AAA rated. 1392 Mr. Rattigan Discussed reasons why Alaska is an AAA rated entity. 1518 Mr. Rattigan Observed that credit rating agents would look to make sure that whatever amount is in the Permanent Fund is sufficient for the long-term. 1568 Mr. Rattigan Discussed page 10 of the handout. He noted that there are four factors for rating of general obligation bonds: economic base, financial analysis, debt analysis, and administrative factors. 1601 Mr. Rattigan Discussed the four factors as contained on page 11 of the handout. The economic base is dependent on natural resource industries, non-renewable oil extraction, industries, renewable resources fishing and timber, tourism, and military bases. The financial analysis takes into consideration trends in expenditures, revenue dependency and volatility and the Prudhoe Bay Curve, and reserves (Constitutional Budget Reserve and Alaska Permanent Fund). Debt analysis takes into consideration low net debt after deductions for self- supporting and guaranteed debts, and debt conservatively managed and structured to the Prudhoe Bay Curve. 1757 Mr. Rattigan Discussed negotiated underwriting vs. competitive underwriting on page 13 of the handout. Negotiated sales are negotiated with an underwriter. Negotiated sales occur where size is an issue. Negotiated sales allow direct retail marketing. Competitive sales are submitted by sealed bid. 1927 Mr. Rattigan Discussed page 14 of the handout. Time of payoff has an impact on debt service. The schedule was based on a 6 percent interest rate. A 10-year pay off would almost double the amount of debt services. Rating agencies like aggressive repayments. 2001 Mr. Rattigan Provided the Committee with the estimated debt service for different general obligation bonds assumptions. Debt Service was broken out by programs and the amount issued in each of the next 5 fiscal years. Assumptions were made based on the type of project being built. There is no reason a 30-year program could not be done in 10 or 15 years. 2061 Mr. Rattigan Referred to page 16, aggregate debt service schedule. There is a gradual stepping down of the debt. 2088 Mr. Rattigan Noted that there are other charts relating to school construction, harbor construction, state facilities, and university debt service 2130 Mr. Rattigan Discussed page 23 of the handout. He noted that earlier debt issuance would result in debt service being laid on faster. The charts show an all at once approach and a gradual approach. 2191 Mr. Rattigan Noted that all general obligation bond debt would result in an unburdenable debt service. 2215 Mr. Rattigan Discussed page 24 of the handout. Noted that there is a potential for interest earnings, but emphasized that it must be offset by the additional debt service. This assumes that interest can be earned before the money is spent. 2252 Mr. Rattigan Stressed that a gradual debt issuance is better because it allows growth. 2280 Co-Chair Mulder Questioned how bond capacity would be established for Alaska, which is deficit spending. 2306 Mr. Rattigan Responded that debt capacity looks at thresholds relating to tax support debt with general fund revenues. A debt capacity formula would be applied. This allows for 5 - 10 percent of general fund spending. TAPE CHANGE, HFC 00 -17 , SIDE 2 33 Mr. Rattigan In response to a question by Representative J. Davies, Mr. Rattigan noted that the IRS has shut the door on arbitrage earning with the exception of capital spending. Discussed arbitrage spending. 181 Representative Foster Asked how aggregate debt of local entities would affect the state. 243 Mr. Rattigan Noted that a bigger pool of population helps state debt. 280 Representative Foster Anchorage and Fairbanks make up half of the debt in the state. How would they affect the state of Alaska's debt rating? 308 Mr. Rattigan Pointed out that during the 1984 collapse municipalities suffered in their debt rating, but state's rating remained at AA. Anchorage recently received upgrades due to a broader tax base. Municipalities are more at risk the two can be diverse. 413 Representative Williams How would the vote relating to the use of the Permanent Fund affect Alaska's rating? 495 Mr. Rattigan Rating agencies acknowledge that the Prudhoe Bay Curve has not been as drastic as anticipated. Emphasized that he would like to see a conservative debt policy but did not see the Prudhoe Bay Curve as a stumbling block to long debt, due to the Constitutional Budget Reserve and Permanent Fund. 577 Mr. Rattigan Discussions with rating agencies indicate that Alaska could absorb $600 million dollars in general obligation bonds. It would bring Alaska to the middle of the pack. Rating agencies will look at all factors. 725 Representative Williams Noted decrease in timber industry. 739 Mr. Rattigan Recognized that the oil is the industry that the bulk of the credit rating is depended on and accounted for. It is possible to have debt outstanding past 10 years. 782 Co-Chair Mulder Echoed concern that future legislatures would be tied if there $600 to $110 million dollars in general obligation bonds were issued. 842 Mr. Rattigan Pointed out that the question is, how much is tied in relation to flexibility and what is the annual obligation and how does it fit into long-term revenue sources. He emphasized that the numbers being discussed have not been demonstrated to be too much debt to maintain. 930 Co-Chair Mulder Observed that it is a policy question. People would be asked to pay for new schools over their lifetime. 955 Representative Austerman Stressed the need to look at other revenue sources as oil is depleted. 994 Mr. Rattigan Acknowledged that diversity is important, but emphasized that rating agencies are not policy setters. 1039 Representative Grussendorf Referred to taxing tools. Asked if rating agencies look at available tax tools. 1120 Mr. Rattigan Noted that rating agencies distinguish between tools that exist and are not being used and those that would require a vote. 1130 Representative Grussendorf Questioned if rating agencies would look at the lack of will to implement tax tools and the political atmosphere. 1159 Mr. Rattigan Responded that they would look at the political atmosphere. Rating agencies look at the availability of tools and the willingness to use the tools. 1195 Representative Grussendorf What if the legislature was serious about a distribution of the Permanent Fund? 1209 Mr. Rattigan Responded that he was certain that rating agencies would have a strong set of questions about the long-term impact. They would ask how it would affect the long-term stability of the state of Alaska. 1301 Mr. Rattigan In response to a question by Representative J. Davies, Mr. Rattigan noted that saturated tax ability would have a negative affect on rating because of the inability to increase the tax base. 1404 Mr. Rattigan In response to a question by Co-Chair Therriault, Mr. Rattigan noted that the state's backing of their general obligation bond pledges impacts municipalities. 1472 Mr. Rattigan Discussed Anchorage bonds ratings. 1556 Co-Chair Mulder Pointed out that the handout talks about the tobacco settlement. 1613 Mr. Rattigan Reviewed page 1-1 of the handout. The master settlement agreement allowed an identifiable revenue stream. There have been three tobacco-securitized issuances. 1712 Mr. Rattigan Discussed New York financing. Most states require legislation to use securitization financing. 1789 Mr. Rattigan Pointed out that securitization is a higher cost debt. Securitization of debt is sold at one-half to .7 percent higher than general obligation bonds. 1868 Mr. Rattigan Stressed that the many debates on tobacco securitization have indicated that there is a misconception that the money of tomorrow is being sold today and no money would be seen in the future. Clarified that there is still a difference of funding beyond the debt service, which comes back to the state. Money is forwarded and the risk is sold off that it would be less than expected. 1943 Representative J. Davies Referred to page 1-2 of the handout. Questioned if the assumption that Alaska will receive $781 million dollars over the next 25 years excludes consumption and inflation. 1969 Mr. Rattigan Clarified that rates will increase with inflation. Consumption will have the biggest impact. 2003 Mr. Rattigan Forecast of tobacco securitization is that with decline of consumption there would still be sufficient money to pay the debt. 2037 Co-Chair Mulder New York did issue tobacco bonds because they were out of debt compactly and this could get them around their limit. Plus the concept is it is a narrow market to sell the bonds. 2080 Vice Chair Bunde Stated that the GO market has been left untapped. 2097 Mr. Rattigan Replied that was a policy issue. 2108 Mr. Rattigan It is clear that general obligation bonds would have a lower cost. Stressed that it is not just a general obligation bond versus tobacco securitization issue. General obligation bonds will always be more favorable. 2138 Co-Chair Mulder Suggested that there are three other considerations. All votes do not pass. There is discussion with the Governor's Office on buying an inclusion. It is difficult to get any package through the legislature without inclusion. There is an immediacy issue with the GO bond concern. It takes longer to bring tobacco bonds to the market than it does GO bonds. 2188 Co-Chair Mulder Stated that the difference in timing might not be as dramatic as it would be assumed. Does it take 6 to 9 months to bring that to market? 2212 Mr. Rattigan Stated that was an estimate with marketing time being in line. 222 Co-Chair Mulder Stressed that decisions could be moving sooner. The third consideration is the on-budget versus the off-budget issue. The Governor's approach is off-budget. 2253 Vice Chair Bunde Spoke to the policy concern and public's involvement. 2267 Co-Chair Mulder Estimated that this will be a campaign issue. 2276 Mr. Rattigan Discussed Grant Anticipation Revenue Vehicle Bonds (GARVEE). Stated that GARVVEE bonds are the excelleration of money from the federal government for transportation projects. They allow leveraging of federal dollars. The concept is that GARVEE bonds are issued based on projects that will happen in three to four years. He listed the various states that have successfully used GARVEE bonds. There is evolution in what these bonds can do. They provide dollars sooner. TAPE CHANGE, HFC 00 18,- SIDE 1 012 Mr. Rattigan Explained Revenue Bonds. 172 Mr. Rattigan In response to a question by Representative J. Davies, Mr. Rattigan discussed airport revenue bonds. He noted that revenues generated at the airport secure them. 191 Representative J. Davies Noted that they provide a bridge structure based on anticipated federal receipts. 219 Mr. Rattigan Explained that airport revenue bonds are issued in anticipation of federal funding. 304 Vice Chair Bunde Expressed concern that the state of Alaska not allows itself to "be penny proud and pound-foolish". 404 Co-Chair Mulder ADJOURNMENT The meeting adjourned at 3:22 p.m. HOUSE FINANCE COMMITTEE LOG NOTES January 26, 2000 House Finance Committee 6 1/26/00