GENERAL SUBJECT(S): DISCUSSION ON G.O. 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: 1:40 P.M. Tape(s): HFC 00 - 19, Side 1 PRESENT: X Representative G. Davis X Co-Chair Therriault X Representative Foster Absent Co-Chair Mulder X Representative Grussendorf X Vice Chair Bunde Absent Representative Moses X Representative Austerman X Representative Phillips X Representative J. Davies X Representative Williams ALSO PRESENT: WILSON, CONDON, COMMISSIONER, DEPARTMENT OF REVENUE; TIM RATTIGAN, VICE PRESIDENT OF PUBLIC FINANCE, SOLOMON/SMITH/BARNEY, JUNEAU; DEVAN MITCHELL, DEBT MANAGER, TREASURY DIVISION, DEPARTMENT OF REVENUE; NEIL SLOTNICK, ASSISTANT ATTORNEY GENERAL, CIVIL DIVISION, DEPARTMENT OF LAW. LOG SPEAKER DISCUSSION TAPE HFC 00 - 19, SIDE 1 000 VICE CHAIR BUNDE Vice Chair Bunde convened the House Finance Committee meeting at 1:40 p.m. 187 DEVAN MITCHELL, DEBT MANAGER, TREASURY DIVISION, DEPARTMENT OF REVENUE Provide a handout for Committee members. [Copy on File]. He noted that page 2 of the handout identified the general obligation bonds authorized and issued and listed by decade. 298 MR. MITCHELL Referenced page 3, which illustrates the outstanding bonds at each year since 1957. He commented on the general obligation bonds issued against the relation to the Prudhoe Bay drop off. 350 REPRESENTATIVE FOSTER Asked what the bonds were expected to be used for. 392 MR. MITCHELL Replied that bonding has been used for multiple purposes but generally are used for one time expenses that the State might have incurred. 431 MR. MITCHELL Referenced page 4, which demonstrates the general sales life of each bond. He suggested that today, there exists no outstanding debt. 491 REPRESENTATIVE AUSTERMAN Requested information regarding the 1984 spike. He imagined that there could be over $1 billion dollars given the current increase. 538 REPRESENTATIVE FOSTER Asked about the bonds used for capitol projects. He asked if other states had considered using bonds for operating expenses. 595 MR. MITCHELL Explained that bonds used for that purpose was no longer allowed. He noted that there is a tax-exempt limitation for one-time costs. 625 MR. MITCHELL Moved to page 5, which lists the State debt capacity. He explained that: ? The ratio of debt service to revenues is used as a guideline; ? Included debt service on state and state supported debt; ? Applied to unrestricted general fund revenues; ? 5% to 8% guideline for a double "A" rating. 746 MR. MITCHELL Added that there is not a defined capacity. He pointed out that the number is a moving target. A large consideration is the responsibility that comes with continued operation under the double "A" rating. He noted that other statistical measures do not apply in Alaska. An issuance of the size suggested would shift the rating. The State should rely on their capacity to standardize policy throughout the country. He added that normal measures do not apply to some situations. 890 MR. MITCHELL Commented that it is important to consider how the debt service should be supported. Mr. Mitchell referenced page ? State G.O. Debt; ? Lease/Purchase Obligations; ? University of Alaska; and ? School Debt (1) Reimbursement 989 MR. MITCHELL Stated that Moody's rate determination would not include the school debt reimbursement. Standard and Poor model does include the State debt reimbursement but does not include it for the borrowing capacity. He reiterated that there are differences for state supported borrowing. 1125 MR. MITCHELL Referenced page 7, which lists the types of debt service as a percentage of, unrestricted revenues. ? State GO Debt; ? State Supported Debt Service; and ? School Debt Service. 1155 VICE CHAIR BUNDE Inquired if that could change the State's rating. 1168 MR. MITCHELL Responded that it would not. 1184 CO-CHAIR THERRIAULT Admitted that was what was shown for 1999, however, voiced curiosity about the spike in the graph. 1206 MR. MITCHELL Agreed. 1215 MR. MITCHELL Reiterated that information on page 6 would help to define that situation more. He spoke to the projected range percentages. In 2001 through 2010 and onward, the projection is for all school debt reimbursement as if authorized today. Inclusive of that information, Alaska is at 4%. 1290 VICE CHAIR BUNDE Asked if the market had built a margin for the fluctuation in the price of oil. 1312 MR. MITCHELL Stated that the market will price, given consideration for oil price fluctuations. He added that this is the long-term projection and the plan at this time. He reiterated that this is the long-range projection and not geared for a short term unexpected event. 1360 MR. MITCHELL Page #8. Mr. Mitchell provided observations on the State debt capacity. ? Projected fiscal gap is limiting factor; ? 68% of revenues from oil is a limiting factor; and ? Debt issuance's of $100 to $125 million dollars per year over the next five years probably feasible as G.O. debt. 1442 MR. MITCHELL Continued addressing the Permanent Fund earnings and the projection on how that would be used. 1469 VICE CHAIR BUNDE Pointed out that there are proposals currently "on the table" that are worth over $100 million dollars. 1493 MR. MITCHELL Replied that will require "pushing the envelope" a little further. He emphasized that there is an 8% guideline included in the packet recommendations. The most important aspect is the dialogue that is involved. 1534 REPRESENTATIVE PHILLIPS Pointed out the 68% revenues from oil. She inquired if that number had been projected from last year. 1550 MR. MITCHELL Explained that it had been taken from the revenue book. That is classified as unrestricted revenue. He acknowledged that there was a discrepancy in that number. 1579 REPRESENTATIVE J. DAVIES Asked the revenue percentage used to determine that number. 1597 MR. MITCHELL For FY2001, that amount would be $1566.2 billion dollars. It would decline from that number. 1641 MR. MITCHELL advised that there had been discrepancies between the various departments. 1655 CO-CHAIR THERRIAULT Asked if the $100 - $125 would be debt issued to that amount. 1682 MR. MITCHELL Replied it would. 1687 CO-CHAIR THERRIAULT Asked if that was only for the GO and GARVEE bonds. He asked if the market would be looking at the overall debt. 1711 MR. MITCHELL Advised that the people will be looking at what the State of Alaska is doing broad based. It is contemplated that if the settlement were removed, given that there were deterioration, there would be no recourse against the State of Alaska. He stated that the GARVEE bonds would be paid with federal dollars. There is ongoing dialogue at this time. He reiterated that the overall debt issuance needs to be considered. 1805 REPRESENTATIVE PHILLIPS Asked if the Departments recommendation would be for the Legislature to put together the capital projects, but not to recommend issuing for more than $125 million dollars this year and then the remaining for the following years. 1841 MR. MITCHELL Commented on the parameters that the Department would recommend. He acknowledged that there could be ramifications. 1869 REPRESENTATIVE J. DAVIES Asked how long could it be expected that the authorization would last. 1889 MR. MITCHELL Stated that could occur. 1896 CO-CHAIR THERRIAULT Believed that some of the authorization could be strung out over a number of years. 1910 MR. MITCHELL Referenced page 9 which is a simplified debt schedule of State debt capacity in the $million dollars of debt service/unrestricted revenues (Fall 1999 Revenue Sources Book). He noted that at the 5% target, the cumulative capacity would be $155.13 million dollars and at 8% would be $628.8 million dollars. 1995 MR. MITCHELL If an additional amount were authorized, the State would use the more conservative approach which is the Standard and Pore recommendation. 2039 REPRESENTATIVE FOSTER Spoke to addressing deferred maintenance. He inquired if some of the funds should be used for that. 2058 MR. MITCHELL Understood that some of the recommended package did include some deferred maintenance costs. 2099 MR. MITCHELL In response to Representative Foster, Mr. Mitchell stated that the bonding agencies are not assuming any responsibilities. The people that buy the bonds are ultimately responsible. He emphasized that it is imperative that the State raises revenues to pay for the bonds. 2123 VICE CHAIR BUNDE Asked if the State of Alaska was becoming like the miser who would die with debt and lots of financial assets. 2154 WILSON, CONDON, COMMISSIONER, DEPARTMENT OF REVENUE Replied that could happen to the State given the choices of the investments that are made. It is important to give consideration of where the investments are made. The investments have to be weighed against other places where investments can be made. 2196 CO-CHAIR THERRIAULT Asked about the negative brackets [] on page 9. 2207 MR. MITCHELL Replied that was where there was a decrease in the fund service in what could be issued over the next 20 years. He added that it is the "mapping" expected revenue stream. 2235 CO-CHAIR THERRIAULT Asked about the use of the tobacco settlement funds. He noted that in some states, private citizens had undertaken litigation for the proper use of those funds. 2270 COMMISSIONER CONDON Did not know the legal basis that people in other states were using. He advised that what applies in Alaska could be legally different from those states. 2298 REPRESENTATIVE FOSTER Voiced appreciation on the testimony received both 2/26 and 2/27. He asked if there was a bill prepared with the discussed information. 2309 REPRESENTATIVE PHILLIPS Replied that it is being working on in Co-Chair Mulder's office. 2316 CO-CHAIR THERRIAULT ADJOURNMENT The meeting adjourned at 2:30 P.M. HOUSE FINANCE COMMITTEE LOG NOTES January 27, 2000 H.F.C. 6 1/27/00