HOUSE FINANCE COMMITTEE March 29, 2001 2:06 PM TAPE HFC 01 - 66, Side A TAPE HFC 01 - 66, Side B TAPE HFC 01 - 67, Side A CALL TO ORDER Co-Chair Williams called the House Finance Committee meeting to order at 2:06 PM. MEMBERS PRESENT Representative Bill Williams, Co-Chair Representative Con Bunde, Vice-Chair Representative Eric Croft Representative John Davies Representative Richard Foster Representative Bill Hudson Representative Ken Lancaster Representative Jim Whitaker MEMBERS ABSENT Representative Eldon Mulder, Co-Chair Representative Carl Moses Representative John Harris ALSO PRESENT Dan Fauske, Executive Director, Alaska Housing Finance Corporation (AHFC), Department of Revenue, Anchorage; John Bitney, Legislative Liaison, Alaska Housing Finance Corporation (AHFC), Department of Revenue, Anchorage; Joe Dubler, Chief Financial Officer, Alaska Housing Finance Corporation (AHFC), Anchorage, Department of Revenue; Steve Kantor, ARIMAX Financial Advisors, Alaska Housing Finance Corporation (AHFC), Anchorage, Department of Revenue; Les Campbell, Director, Budget, Alaska Housing Finance Corporation (AHFC), Department of Revenue, Anchorage; Robert Brean, Director, Research & Rural Development, Alaska Housing Finance Corporation (AHFC), Department of Revenue, Anchorage. PRESENT VIA TELECONFERENCE None GENERAL SUBJECT(S):  GOVERNOR'S CAPITAL BUDGET Alaska Housing Finance Corporation (AHFC) Tobacco Securitization The following overview was taken in log note format. Tapes and handouts will be on file with the House Finance Committee through the 22nd Legislative Session, contact 465- 2156. After the 22nd Legislative Session they will be available through the Legislative Library at 465-3808.   LOG SPEAKER DISCUSSION    TAPE HFC 00 - 66  SIDE A  000 Co-Chair Williams Called the House Finance Committee meeting to order and noted that the Committee would hear an overview provided by the Alaska Housing Finance Corporation (AHFC) and the Tobacco Securitization.  ALASKA HOUSING FINANCE CORPORATION  064 DAN FAUSKE, Noted that AHFC's Capital EXECUTIVE Improvement Projects (CIP) reflects DIRECTOR, ALASKA the needs of the Corporation and HOUSING FINANCE the pursuit of its mission through CORPORATION, the goals and objectives of the DEPARTMENT OF corporation's strategic plan. The REVENUE corporate departments have reviewed prior year's budgets to determine if there are any unfinished projects/programs that are on the on going need additional funds to be completed or should be extended.  190 Mr. Fauske Stated that the CBR was developed by AHFC staff and recommended for inclusion in the Governor's budget submission to the Legislature. Each project/program has been reviewed and prioritized by the Budget and Housing Policy committee and presented to the Board of Directors for approval. .  266 Mr. Fauske Noted that there are no line item increases requested in this year's budget.  291 Mr. Fauske Proceeded with an overview of the "Draft FY2002 Capital Budget". [Copy on File].  405 LES CAMPBELL, Noted that he would provide an DIRECTOR, BUDGET, overview of each fourteen-budget ALASKA HOUSING request. He referenced the FINANCE handout (*).  CORPORATION (AHFC), DEPARTMENT OF REVENUE, ANCHORAGE  495 Mr. Campbell Spoke to the items in the draft request: * The Supplemental Housing Development Program Stated that the purpose of the program was to supplement federal housing funds provided to Regional Housing Authorities to ensure safe, decent, affordable housing throughout Alaska.  575 Mr. Campbell * Low-income weatherization program. The purpose of the program is to provide cost effective energy improvements to homes of low-income families.  626 Representative Asked what type of heating systems Hudson would be used.  644 Mr. Campbell Explained the entire range of systems.  658 ROBERT BREAN, Added that in the Bush areas, AHFC DIRECTOR, is encouraging the use of monitor RESEARCH & RURAL stoves. He referenced the basic DEVELOPMENT, operations manual used so that ALASKA HOUSING there are no safety hazards.  FINANCE CORPORATION (AHFC), DEPARTMENT OF REVENUE 752 Representative Acknowledged the importance of the Foster program.  768 Representative Commented that the monitor stoves Hudson have cut his oil bill in half. He supported this program in particular for Rural Alaska.  804 Co-Chair Williams Asked who paid for the maintenance.  816 Mr. Bream Noted that was part of a grant program. He reminded members that AHFC was dealing with low-income families. He commented on the importance of education.  862 Mr. Brean Interjected that there is no one under contract that does furnace maintenance.  896 Mr. Campbell * Paxton Manor Replacement The purpose of the program is to provide funds for the replacement of 24 units of family housing in  Sitka.  973 Mr. Campbell * Chugach View Renovation - Phase 2 The purpose of the project is to complete the major renovation, including building improvements, and to ensure code compliance, for 120 senior housing units.  1040 Representative Asked about the funding history.  Davies 1049 Mr. Campbell Noted that this was federal receipt from FY01.  1065 Mr. Campbell *Senior Citizen's Housing Development fund (SCHDF). The purpose of the program was to provide funds for the development of senior citizen housing.  1115 Mr. Campbell * Senior and Statewide Deferred Maintenance and Renovation. The purpose of the project is to reduce deferred maintenance and address small renovation projects, in accordance with AHFC's 10-year plan, at several facilities utilized by senior citizens.  1176 Representative Asked about the bond receipts Croft associated with the request.  1189 Mr. Campbell Replied those would be General Obligation (GO) Bond receipts.  1210 Representative Asked who would manage the senior Lancaster housing.  1226 Mr. Campbell Advised it would be private operators building and managing these places.  1243 Mr. Campbell * Housing and Urban Development (HUD) Capital Fund Program (formerly CGP). He noted that the project would renovate and modernize public housing units.  1294 Mr. Campbell * HUD Federal HOME Grant Program The purpose of the program is to expand the supply of affordable, low and moderate income housing and to strengthen the ability of the State to design and implement strategies to achieve an adequate supply of safe, energy-efficient and affordable housing.  1372 Mr. Campbell * Federal and Other Competitive Grants The purpose of the program is to allow AHFC to apply for HUD, other  federal agency, and private foundation grants that target the housing needs, and supportive services, of low-income and special needs groups. AHFC will also apply for energy related grants as they relate to housing. When required, AHFC will provide the needed matching funds. Some of the funds received will be passed through to local non-profit sub-grantee organizations that deliver housing and/or services.  1433 Representative Inquired how much HUD money does Hudson the State currently receive.  1446 Mr. Campbell Believed it was around $480 million dollars. He noted that not all of that money comes to AHFC.  1463 Mr. Campbell Added that some of the funds go to the regional housing authorities and others to private developers and the project-based programs. He added that AHFC is one of the main sources of those funds.  1501 Mr. Campbell * Competitive Grants for Public Housing He noted that the purpose of the program was to allow AHFC to apply for HUD, other federal agency, and private foundation grants that target the housing needs of low- income and special needs groups. AHFC will also apply for grants to prevent crime and substance abuse in public housing and assist public housing families attain economic self-sufficiency. When required, AHFC will provide the needed match.  1556 Mr. Campbell * Energy Efficiency Monitoring Research The purpose of the project is to conduct research, analysis, information dissemination and interchange among members of the industry, as well as between the industry and the public.  1605 Mr. Campbell * State Energy Program (SEP) Special Projects. He noted that the purpose of the project is to allow the State to participate in special project grants offered by the Federal Department of Energy to promote  energy related technologies and research.  1637 Mr. Campbell * Homeless Assistance Program- Mental Health Bill The purpose of the program is to support programs that prevent homelessness by providing assistance to families in imminent danger of becoming homeless, or those who are currently homeless.  1669 Mr. Campbell * Beneficiary and Special Needs Housing - Mental Health Bill The purpose of the program is to provide funds for Alaskans non- profit service providers and housing developers to increase housing opportunities to Alaska Mental Health Trust beneficiaries and other special needs population throughout Alaska.  1728 Representative Noted the sum total of the projects Davies was $22.9 million dollars. He voiced his concerns with the 1st time homeowners program.  1760 Mr. Fauske Explained that the mortgage program and the arbitrage program are separate programs. The arbitrage program totals about $170 million dollars. Those dollars are separate and must be spend by mirroring the intent of the original bonds issued. Those bonds are mortgage bonds. The bond yield must stay within a certain amount for the rate of the life of the bond. AHFC has been buying down interest rates so that the earnings stay within those parameters.  1858 Mr. Fauske Emphasized that dollars do affect programs. He referenced the subsidized portion of the bonds - the arbitrage portion of the loans. The economy has changed and AHFC is attempting make homeowners out of those that cannot otherwise purchase homes. He pointed out that most of the money is used by the urban areas because that is where most of the State's people live. As the monies dwindle, he stated that there is only one source of revenue.  1935 Mr. Fauske Pointed out that AFHC is attempting  to be competitive. The bonds are being structured to maximize arbitrage, thus maximizing yield. Taxable, first time homebuyers have used the arbitrage program the most. The goal of AHFC is to provide a dividend to the State. It is difficult to do that at this time.  2011 Mr. Fauske Spoke to the low-income borrower, which often times needs, a subsidy to get the other programs to work.  2038 Mr. Fauske Responded to questions if the State had created programs that are not necessary. He stated AHFC had not. He emphasized the incredible need in the State programs. He noted that if business can be generated through State agencies, then the State could receive a dividend.  2110 Mr. Fauske Believed that AHFC could not continue at the current level. He addressed the affordability issues across America and how the discussions are occurring about arbitrage. Alaska has utilized funding for affordability. He spoke to changes to the FY98 format. He recommended that restriction be lessened.  TAPE HFC 01 - 66, Side B  010 Representative Asked if when the agreement was Davies made between the Legislature and AHFC, was arbitrage taken into consideration. He questioned if the $103 million dollars should be revisited.  096 Mr. Fauske Spoke to maintenance and how to spend corporate receipts. He agreed that it should be revisited.  254 Mr. Fauske Addressed fiscal planning and how important AHFC's investments have been for the State's economy. He pointed out that was a compliment not only to the Board, but also the Legislature by recognizing the needs and then factoring that into the program.  276 Mr. Fauske Pointed out the low default rate that AHFC has had.  309 Representative Asked about the arbitrate surplus Croft as being corporate receipts. He asked what had shifted.  350 Mr. Fauske Replied that there are several different types of applications.  383 STEVE KANTOR, Addressed the bonds and the ARIMAX FINANCIAL Internal Revenue Service (IRS) ADVISORS, ALASKA involvement. He commented that in HOUSING FINANCE the nature of housing, it is CORPORATION difficult to predict interest (AHFC), rates. It is pre decided over the DEPARTMENT OF life of the bond issue. He spoke REVENUE more on the arbitrage earnings.  501 Representative Clarified that the range should be Croft an appropriate charge so that it is not given away.  530 Mr. Kantor Replied that the corporation wants to guarantee that the money would be used for what it was intended.  558 Representative Spoke to the low interest loans.  Davies 570 Mr. Fauske Noted that nowhere in the United States is there an arbitrage program like the one that exists in Alaska. He noted that market conditions have been capitalized. Alaska has utilized $40-$60 million dollars a year. The State has been very fortunate.  638 Representative Asked what has changed.  Croft 664 Mr. Kantor Explained that the corporation has been able to land mortgages at a fixed rate and borrow at a variable rate. He added that earnings have increased on bond mortgage rates. AHFC was concerned with the rate of earnings. He pointed out that the interest rates have now been fixed, which resulted in a limited amount earned.  793 Representative Inquired if that amount related to Davies the total amount available.  TOBACCO SETTLEMENT SECURITIZATION  844 JOE DUBLER, CHIEF Provided an overview of the Tobacco FINANCIAL Settlement. He referenced the OFFICER, ALASKA Alaska Housing Finance Corporation HOUSING FINANCE -Tobacco Settlement Payment CORPORATION Securitization, March, 2001" (AHFC), handout. [Copy on File].  DEPARTMENT OF REVENUE 898 Mr. Dubler Overview of the Tobacco Settlement: * The Master Settlement Agreement (MSA)  * Options for spending the Settlement Money * How Securitization works * General Obligation vs. Tobacco Revenue Bonds.  943 Mr. Dubler Stated that the MSA was signed on November 23, 1998 and included 46 state and the four largest cigarette manufactures. The agreement requires the Participating Members (PM) to make unadjusted payments exceeding $6.2 billion dollars over the next 40 years, with additional payments in perpetuity. Payment is for the recovery of all claims and costs of the states.  956 Mr. Dubler Stated that most cigarette manufacturers are now parties to the MSA. In total the Pm's comprise approximately 99.7% of the domestic cigarette market, indicating that the MSA is acceptable to the tobacco industry. Mr. Dubler advised that there are benefits of the MSA from the State's perspective: · Alaska should receive large cash payments annually in perpetuity; · The MSA is an industry-wide settlement with payments based on total domestic cigarette shipments nationwide; · The MSA has been financed by higher cigarette prices, making it similar to an excise tax on cigarettes.  994 Mr. Dubler MSA Payments: * MSA Payments are based on domestic cigarette shipments. * Payment is adjusted annually for several factors, including inflation and volume of domestic cigarette shipments. * Payments are allocated to states based upon percentages specified in the MSA. Alaska's initial and annual payment percentage is .3414187%.  1056 Mr. Dubler MSA Payments: * Initial Payments - made up front  by the OPM through 2003; * Annual Payments - made by the OPM and SPM based on market share, in perpetuity; and * Strategic Contribution Payments - are payments in 2008-2017 to reimburse states for their contributions to the legal costs associated with the MSA.  1079 Mr. Dubler Commented on the MSA Payment adjustments, which are adjusted each year for a number of factors. The adjustments apply to certain payments. Some adjustments are expected to have little or no impact on Alaska's payments. He noted that other adjustments could be significant.  1100 Mr. Dubler Referenced Page 8, the Total MSA Payments to the State of Alaska. The aggregate amount of payments expected through 4/15/2025 is $788.471 million dollars.  1146 Mr. Dubler Spoke to the options for spending the settlement money: * Spend as you go * Trust built over time which would work like the Permanent Fund, with the MSA payments deposited to the Trust and a portion of income from the Trust used in future years for targeted expenditures; or * Securitization, which involves borrowing money with the MSA payments as collateral and source for repayment of bonds. The proceeds from the issuance of the bonds could be spent or put into a trust fund/endowment.  1184 Co-Chair Williams Inquired if the money could be spent any way the State decides.  1200 Mr. Fauske Acknowledged that was correct.  1216 Mr. Dubler Referenced page 10 - The Tobacco Transactions completed and anticipated.  1233 Mr. Dubler Noted Page 11, the Tobacco Settlement Asset-backed bonds, Series 2000. The first payment would be in FY03. The final projected payment would be in FY23, which would make better value of the bonds.  1307 Representative Inquired the percentage of Alaska's  Hudson total receipts that would authorize this.  1327 Mr. Dubler Explained that 40% of the bonds were purchased; the payments will dwindle off.  1350 Vice-Chair Bunde Asked when the next bonds would mature.  1364 Mr. Dubler Replied that the State has sold 40% of the bonds off, making the structure good until fiscal year 2023. He added that this year would not include the extra.  1408 Representative Understood that the State was Croft selling some of its risk.  1426 Mr. Dubler Explained that the State sells all or a portion of their expected tobacco payment-funding stream to a special-purpose entity, whose sole purpose is to issue bonds backed by those payments. Northern Tobacco Securitization Corporation (NTSC), not the State or AHFC, would be the sole entity legally responsible for paying the debt service on the bonds. be effectively transferred.  1458 Mr. Fauske Questioned additional costs.  1466 Mr. Kantor Commented that the State and AHFC are legally separate from NTSC and would not put their own credit ratings at risk through the tobacco bond issuance. The mechanism affords the State and AHFC protection from problems resulting from reduced, stalled or halted payment streams from the MSA.  1511 Mr. Fauske Noted that even when backed by a GO, it is still based on a revenue stream, which would under utilize a better-perceived revenue stream. He indicated that a small premium would be paid for that security. He emphasized that there is no benefit to the State to use up its GO credit.  1570 Representative Commented that last year, the Hudson Legislature had authorized $176 million.  1601 Mr. Kantor Explained that had been projected out from what the 40% would look like over time, and thus, placing $93 million dollars in proceeds back to the State.  1629 Representative Asked if there were other Hudson opportunities.  1636 Mr. Kantor Advised that there is no certainty on how the expected amount, which would be coming back from the bonds.  1658 Representative Asked the balance.  Hudson 1664 Mr. Kantor Reiterated that 40% had been allocated.  1673 Representative Questioned if the $116 had been Hudson determined this year, would the State then be able to appropriate into that fund.  1695 Co-Chair Williams Asked what was happening with smokers at this date.  1704 Mr. Kantor Replied that the AHFC consultants have updated their projection to be good for over the next forty years.  1737 Vice-Chair Bunde Interjected that this year, the tobacco industry had put $8 billion dollars into tobacco advertising.  1773 Representative Added that these concerns are the Hudson same as the GARVEE.  1785 Mr. Fauske Added that the tobacco industry is doing very "well" these days. He acknowledged that was a strange irony. However, the State wants the continued payment.  1813 Mr. Dubler Explained how securitization works - Page 12. * Securitization, in the case of the tobacco settlement is the process of issuing bonds that are backed by the MSA payments. * Securitization provides a sizeable up-front payment, rather than smaller payments spread over a number of years. For immediate pressing needs or special projects, securitization provides access to cash now. The approach is no different than borrowing money based on your future earnings to purchase a house, and paying it back over the next 30 years.  1854 Mr. Dubler Addressed the Benefits of Securitization - Page 14 * Securitization transfers the risks associated with the MSA payments to the buyers of the bonds, including the reductions in  cigarette sales; bankruptcy of any or all of the Pm's; invalidation of the MSA; a possible increase in the federal cigarette tax; individual lawsuits against the industry and states; and the impact of the additional volume reductions attributable to national smoking prevention and public education campaigns and significant additional restrictions related to the tobacco industry's marketing, advertising, and lobbying.  1870 Representative Asked the maximum timetable  Croft 1881 Mr. Dubler Believed it would be 2030.  1888 Representative Asked the reduction in the payments Croft expected to stretch?  1915 Mr. Kantor Suggested the number was close to 75%.  1938 Representative Commented that if the only risk Croft sold was that it would be over 75%, and then there was not much of a risk.  1964 Mr. Kantor Advised that investors still felt that the risk was too great.  1982 Mr. Fauske Interjected that at this point, the market place is better. There are dropping interest rates and more investors with a better perception on the bonds. He commented that the day bonds were priced; there had been a dip, due to the sale of a major coal company.  TAPE HFC 01 - 67, Side A  19 Mr. Dubler Observed that judgments against the tobacco companies could bankrupt companies, affecting the bonds.  104 Representative Summarized that there is $5 million Hudson dollars of equity. He asked if the 60 percent could be available on the time schedule if it were not used.  226 Mr. Kantor Stated that it would be available on the time schedule and as indicated.  248 Mr. Dubler Discussed page 15 - The Uses of Proceeds · On what and how the money s spent determines the tax status of the bonds. Tax- exempt bonds generally have  lower interest costs than taxable bonds, reducing the cost of the financing to the State. · If Bond Proceeds are spent on qualifying capital projects or other qualifying expenditures, interest paid on them will be exempt from federal income taxes. · If Bond Proceeds are spent on operating items, or the earnings of a trust/endowment fund created with Bond Proceeds are invested in taxable securities yielding above the cost of the bonds, the interest paid to holders of the bonds will be taxable.  300 Mr. Dubler Discussed page 16- General Obligation versus Tobacco Revenue Bonds. He noted that even though GO Bonds have lower interest costs than Revenue Bonds, there are compelling reasons to use Revenue Bonds. The State has a limited GO bond capacity. By note selling the bonds, he maintained that the State is holding an investment in the tobacco industry. Revenue bonds are an attractive source when revenue is restricted.  385 Representative Referred to page 7.  Davies 405 Mr. Dubler Explained that MSA are payments that reimburse the State for their tobacco litigation fees.  474 Mr. Dubler In response to a question by Representative Davies, he stated he could not give an example of a capital project not using their tax-exempt status.  520 Mr. Kantor Suggested that private capital projects would be questionable.  595 Representative Observed that the endowment Davies consideration had been discussed and he asked if that would be a qualifying expense.  637 Mr. Kantor Explained that would depend on the structure. It is possible if it is related to health related cessation.  670 Mr. Dubler Noted that the IRS has checked the issue of proceeds, scrutinizing those programs closely.  690 Co-Chair Williams ADJOURNMENT The meeting was adjourned at 3:45 P.M.