ALASKA STATE LEGISLATURE
HOUSE STATE AFFAIRS STANDING COMMITTEE
January 19, 2006
8:09 a.m.
MEMBERS PRESENT
Representative Paul Seaton, Chair
Representative Jim Elkins
Representative Bob Lynn
Representative Jay Ramras
Representative Berta Gardner
Representative Max Gruenberg
MEMBERS ABSENT
Representative Carl Gatto, Vice Chair
COMMITTEE CALENDAR
HOUSE BILL NO. 273
"An Act relating to the dividends of individuals claiming
allowable absences; and providing for an effective date."
- HEARD AND HELD
HOUSE BILL NO. 278
"An Act relating to the Alaska Municipal Bond Bank Authority;
permitting the Alaska Municipal Bond Bank Authority or a
subsidiary of the authority to assist state and municipal
governmental employers by issuing bonds and other commercial
paper 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 and
authorizing governmental employers to contract with and to issue
bonds, notes, or commercial paper to the authority or its
subsidiary corporation for that purpose; and providing for an
effective date."
- HEARD AND HELD
HOUSE BILL NO. 34
"An Act relating to the expungement of records relating to
conviction set asides granted after suspended imposition of
sentence."
- SCHEDULED BUT NOT HEARD
PREVIOUS COMMITTEE ACTION
BILL: HB 273
SHORT TITLE: PFD: DELAY PAYMENT FOR ALLOWABLE ABSENCES
SPONSOR(s): REPRESENTATIVE(s) WEYHRAUCH
04/18/05 (H) READ THE FIRST TIME - REFERRALS
04/18/05 (H) STA, FIN
05/05/05 (H) STA AT 8:00 AM CAPITOL 106
05/05/05 (H) Heard & Held
05/05/05 (H) MINUTE(STA)
01/12/06 (H) STA AT 8:00 AM CAPITOL 106
01/12/06 (H) Scheduled But Not Heard
01/17/06 (H) STA AT 8:00 AM CAPITOL 106
01/17/06 (H) Heard & Held
01/17/06 (H) MINUTE(STA)
01/19/06 (H) STA AT 8:00 AM CAPITOL 106
BILL: HB 278
SHORT TITLE: RETIREMENT SYSTEM BONDS
SPONSOR(s): REPRESENTATIVE(s) HAWKER
04/19/05 (H) READ THE FIRST TIME - REFERRALS
04/19/05 (H) STA, FIN
01/12/06 (H) STA AT 8:00 AM CAPITOL 106
01/12/06 (H) Heard & Held
01/12/06 (H) MINUTE(STA)
01/17/06 (H) STA AT 8:00 AM CAPITOL 106
01/17/06 (H) Heard & Held
01/17/06 (H) MINUTE(STA)
01/19/06 (H) STA AT 8:00 AM CAPITOL 106
WITNESS REGISTER
TERRY HARVEY, Staff
to Representative Bruce Weyhrauch
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Reviewed the intent of HB 273 on behalf of
Representative Weyhrauch, sponsor.
SHARON BARTON, Director
Central Office
Permanent Fund Dividend Division
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Answered questions during the hearing on HB
273.
KIM SMITH
Homer, Alaska
POSITION STATEMENT: Testified on behalf of herself in
opposition to HB 273.
KEITH APPLEMAN
Wrangell, Alaska
POSITION STATEMENT: Testified during the hearing on HB 273.
VIOLA "VI" JERREL, Ph.D.
Anchor Point, Alaska
POSITION STATEMENT: Testified on behalf of herself in
opposition to HB 273.
JULI LUCKY, Staff
to Representative Mike Hawker
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified during the hearing on HB 278 on
behalf of Representative Hawker, sponsor.
REPRESENTATIVE MIKE HAWKER
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified as sponsor of HB 278.
ACTION NARRATIVE
CHAIR PAUL SEATON called the House State Affairs Standing
Committee meeting to order at 8:09:20 AM. Representatives
Elkins (via teleconference), Lynn, Gardner, and Seaton were
present at the call to order. Representatives Ramras and
Gruenberg arrived as the meeting was in progress.
HB 273-PFD: DELAY PAYMENT FOR ALLOWABLE ABSENCES
8:10:06 AM
CHAIR SEATON announced that the first order of business was
HOUSE BILL NO. 273, "An Act relating to the dividends of
individuals claiming allowable absences; and providing for an
effective date."
8:10:19 AM
REPRESENTATIVE GARDNER moved to adopt the committee substitute
(CS) for HB 273, Version 24-LS0871\Cook, 1/18/06, as a work
draft. There being no objection, Version F was before the
committee.
8:11:10 AM
CHAIR SEATON reviewed the amendments that had been previously
adopted to HB 273.
8:12:13 AM
TERRY HARVEY, Staff to Representative Bruce Weyhrauch, Alaska
State Legislature, reviewed the intent of HB 273 on behalf of
Representative Weyhrauch, sponsor. Mr. Harvey said over the
years the Permanent Fund Dividend Division has compiled some
compelling statistics that indicate that most of the individuals
leaving Alaska with an allowable absence and receiving their
permanent fund dividend (PFD) are not returning to the state.
He indicated that the sponsor of the bill does not think the
intention of those who began the PFD program was to give the PFD
to those who never return to the state; therefore, HB 273
modifies the qualifications for receiving a PFD and stipulates
that the recipient with an allowable absence must return to
Alaska to receive all the PFDs that were held while he/she was
out of the state.
8:14:55 AM
MR. HARVEY said this is not a debate about the importance of the
PFD to any individual, nor is it a debate about fraud. The
intent of the bill is not to change the eligibility of those
already receiving allowable absences. He said there are 13
categories of allowable absences that are spelled out in the
bill exactly as they are in statute. He said millions of
dollars leave the state and it is important for the Alaska
economy that the PFD dollars are kept in the state.
8:19:20 AM
MR. HARVEY, in response to a request from Representative
Gruenberg, reviewed the changes made to a previous version of
the bill that resulted in Version F.
8:20:53 AM
REPRESENTATIVE GARDNER, in response to further requests for
clarification, said one of the two amendments that were
incorporated into Version F had been offered by her. The
language appears on page 4, line 19. She said the bill would
hold dividends for a qualified recipient of the PFD while he/she
is out of state. The language added by her would delay that
holding of the PFD for two years.
8:23:06 AM
REPRESENTATIVE GRUENBERG, in response to Chair Seaton, indicated
his satisfaction with the language that had made it into Version
F. He mentioned a concept for an amendment which would have
exempted one class of military people from the delay in
receiving a PFD; it would have given preference to people who
entered the military from Alaska. However, he said he will not
be offering that amendment because he came to the conclusion
that that might cause significant constitutional problems and
jeopardize the entire bill. Notwithstanding that, he stated
concern that a lot of people who may be affected by the bill
will have cause to challenge it. Therefore, he recommend having
a findings and a purpose section in the bill, in order to show
evidence supporting what impelled the legislature to pass the
bill and for what purpose. That way, he explained, any review
in court will have evidence to support the bill.
8:25:30 AM
CHAIR SEATON said there are some committees opposed to including
findings in a bill; therefore, he suggested the committee may
want to also include a findings letter to accompany the
legislation.
CHAIR SEATON noted that there is a handout in the committee
packet entitled, "Permanent Fund Dividend HB 273 2005 Absentee
Return Study Methodology & Summary," which was provided by the
Permanent Fund Dividend Division.
8:26:23 AM
SHARON BARTON, Director, Central Office, Permanent Fund Dividend
Division, Department of Revenue, in response to requests for
clarification, explained that there is a handout in the
committee packet that is identical to the one just mentioned by
Chair Seaton, except that it has a cover letter on it dated
December 9, 2005. The one with the cover letter should be
disregarded, she said. To further clarify the correct handout,
she said the bottom line shows the amount of $15.4 million. She
explained that the handout is an updated summary that was
requested from the division by the House State Affairs Standing
Committee.
8:27:52 AM
MS. BARTON noted that the handout shows "did not return"
percentages for the following groups, based on a ten-year
period: "Accompanying" at 81 percent - which includes children
and spouses accompanying those with allowable absences; Students
at 64 percent; Active Military at 66 percent; and Medical at 40
percent - which includes those who are out of state on allowable
absences for medical reasons. She said the medical group is
different, because it includes a lot of elderly people who don't
come back [because they die while Outside].
8:31:15 AM
MS. BARTON said currently [the PFD program] is "way out of
alignment." She indicated that the assumptions that led to the
allowable absence laws being adopted were that people would
return, but so many people don't return. She cited information
from the handout, which read [original punctuation provided]:
Applying these percentages to each year 1996-2005
indicates that a total of $154,206,323 was paid over
the ten year period to individuals who have not or
will not return to the state, an average of $15.4
million each year.
8:32:47 AM
MS. BARTON, in response to a question from Chair Seaton,
confirmed that if the approximately $154 million had not been
paid over a ten-year period to those individuals who did not
return to the state, that money would have been divided amongst
the rest of the qualified Alaskans receiving a PFD.
8:32:51 AM
REPRESENTATIVE GARDNER asked Ms. Barton if she would agree that
the longer a person is away, the less likely it is that he/she
will come back.
8:33:10 AM
MS. BARTON said she had thought that the point at which people
were not likely to come back was probably at the five-year mark;
however, her studies have shown that that point is actually
after just one year.
8:34:02 AM
REPRESENTATIVE GARDNER asked Ms. Barton if she has numbers
showing how long a person in the military is likely to be gone
if stationed overseas, or "how quickly" a college student comes
back.
8:34:28 AM
MS. BARTON answered no. In response to a question from Chair
Seaton, she said she would be happy to look up that information,
beginning with a "smaller sampling" and moving to a bigger one.
8:35:18 AM
CHAIR SEATON mentioned the second page of the handout, which
shows the total numbers of individuals absent in the previously
mentioned categories.
8:36:13 AM
MS. BARTON, in response to a question from Chair Seaton
regarding the division's study, said, "We just took a
statistically valid sample - a sample that would be 95 percent
reliable, plus or minus 5 percent - and I think the total
sampling was something like 360-370."
8:36:28 AM
CHAIR SEATON concluded, "So, we would have taken more from the
accompanying and we would have less from the medical, so that it
reflects that actual ... number of applicants that qualify for
these."
8:37:24 AM
MS. BARTON, in response to questions from Representative Lynn,
said the "active duty" category includes only those who are
active duty in the military. As to whether most National Guard
members from Alaska return to Alaska, she said although that
sounds like a reasonable assumption she hasn't looked at the
figures to know that that's the case.
8:37:45 AM
CHAIR SEATON opined that the amount of money being sent out of
state to people who never return to the state is shocking. He
said that shows the significance of the proposed legislation.
8:38:12 AM
MS. BARTON said she understands there is interest in making
exceptions to various groups, but she emphasized the importance
of asking attorneys to first look at the constitutionality of
making such exceptions. She said the division has been advised
that it is walking on thin ice in this regard.
8:39:13 AM
CHAIR SEATON said hopefully Representative Gardner's amendment
that was adopted to give people two years to return will take
care of some of the problems. He said he would not anticipate
that someone in the National Guard would be called on active
duty for more than two years, but he said it's possible.
8:40:14 AM
REPRESENTATIVE LYNN asked who would get the interest on the
money that would be held back.
8:40:45 AM
MS. BARTON said the permanent fund gets it. In response to a
follow up from Representative Lynn, she said that's the way it
is in statute.
8:41:22 AM
REPRESENTATIVE LYNN said that issue ought to be looked at. He
stated that he has a lot of concerns regarding the bill. He
said when a military spouse returns home, he/she needs the money
to make ends meet. Those in the military are not the highest
paid in the world. It's hard to say how long someone will be
oversees, he commented. He stated that it seems like it is
almost an insult to military families for the state to hold
hostage their dividend.
8:43:16 AM
MS. BARTON said the committee will have to weigh that issue when
dealing with HB 273. She said, "Our hearts all go out to those
folks." Notwithstanding that, she noted that the dividend was
not created based on needs.
8:44:26 AM
CHAIR SEATON said he would be reopening public testimony.
8:44:41 AM
REPRESENTATIVE LYNN asked Ms. Barton if the term "hold hostage"
is unfair in her opinion.
8:44:59 AM
MS. BARTON said it seems to her there is a responsibility to
realign with the original purposes of the dividend. She
explained, "We've gone way out with these allowable absences and
now we now that they don't work the way we thought they were
going to work." The dividend was meant for people who are
Alaskans and intend to live and remain in Alaska. She said,
using the term "hold hostage" goes a little further than she
would.
8:46:04 AM
REPRESENTATIVE LYNN asked how much feedback Ms. Barton has
received from those in the military - especially from family
members - regarding the subject.
8:46:32 AM
MS. BARTON answered that the division has not heard a lot of
feedback and she suspects that the legislature is getting more
feedback on this issue.
8:47:01 AM
REPRESENTATIVE GARDNER said she would like Ms. Barton to come
back to the committee with figures showing return patterns
after she has had a chance to look at the statistics again.
8:47:53 AM
REPRESENTATIVE GRUENBERG said he would like time to work on the
language in the bill. He stated his wish to have legislative
findings and purpose included in the bill, adding that he would
like them to embrace Ms. Barton's study. Regarding students and
their need for money, he proposed the idea of having students
sign an affidavit that they do plan to come back within a year
of their studies. If they don't come back then the amount they
got would be payable to the state with a modest interest. He
said he realizes there would be some cost associated with this,
but said, "There's no perfect justice here."
8:51:20 AM
MS. BARTON responded that currently the people leaving on a 180-
day absence certify that their intention is to return, thus, no
affidavit is needed.
REPRESENTATIVE GRUENBERG interjected, "But at least they would
be ... notified that because of the unusually high rate of
nonreturn, ... this is subject to recoupment."
MS. BARTON again cautioned about carving out an exception for
certain groups of people.
8:52:16 AM
REPRESENTATIVE GRUENBERG concurred, but said, "But we go down
that road once we start with the military."
8:52:34 AM
MS. BARTON added that [Representative Gruenberg's suggestion]
would slightly change the fiscal note because of the collections
effort that would be required to get repayment.
8:53:01 AM
REPRESENTATIVE LYNN, regarding Representative Gruenberg's point
that the students need the money now rather than later,
submitted that those in the military also need the money now.
8:53:39 AM
KIM SMITH, testifying on behalf of herself, said she is married
with three children and has a daughter going to graduate school
at the University of Pennsylvania. Ms. Smith said her daughter
claimed Alaska residency while in undergraduate school and spent
every possible chance in Alaska, but now that she is in graduate
school she no longer collects a PFD. Ms. Smith said that she
has two sons, 18 months apart, which creates a special burden
[regarding putting them through school]. She stated that her
children worked hard to get to where they are. One son is a
junior at Yale and the other attends Connecticut College. Both
sons spend each summer in Alaska, working and contributing to
the Alaska economy. They are both registered voters in Alaska.
She emphasized the boys' desperate need to have their PFDs now.
She stated:
It doesn't matter right now whether I know Evan and
Jamie will come back to the state after they graduate.
What I hope they do is that they actually don't come
back right away, because I want them to come to grad
school. Right now, while they are undergrads, they
are Alaskans. They live here; this is their home.
Your legislation is counterintuitive and your logic is
wrong if you want to encourage students to come back.
What we need are different issues around getting them
back to Alaska. Holding their permanent fund
dividends hostage - I will use that word - is flawed
logic. Holding their money will not bring them back
here. What's going to bring them back are job
opportunities ....
MS. SMITH questioned whether some students will want to go to
college in the first place, without a PFD. She said she and her
husband are struggling to afford their children the opportunity
to go to a private college. She said her boys are only given
tuition by their parents; everything else they pay for on their
own from the money they earned in Alaska, including the money
from their PFD. The PFD, for example, often provides the money
needed for the boys' airfare home.
MS SMITH said this is a constitutional issue. She concluded,
"You cannot tell me that my sons are not Alaskans right now and
should [not] be provided the same opportunity to receive those
funds."
8:59:15 AM
CHAIR SEATON asked if her sons and daughter received any student
aid or scholarships.
8:59:32 AM
MS. SMITH noted that both her sons were valedictorians and
received some community scholarships. Both boys are attending
colleges that cost $40,000 a year.
9:00:09 AM
CHAIR SEATON remarked that most people who get student aide
"have to subtract right from it their income."
9:00:35 AM
MS. SMITH responded that the federal government has just made it
more difficult to get student loans. She said, "All three of my
children are student-loaned to the max through the State of
Alaska and through [Free Application for Federal Student Aid
(FAFSA)]."
9:01:02 AM
CHAIR SEATON explained that the committee has been given the
information that a student's income is subtracted directly from
the amount for which he/she qualifies for a loan. Under HB 273,
other than the first two years away at school, the PFD would be
conditional upon the students' returning, thus, "that would not
be subtracted from their student aid money."
9:01:53 AM
MS. SMITH told Chair Seaton that "that whole equation is going
to change ... because of what's happening at the federal
government level."
9:01:58 AM
REPRESENTATIVE RAMRAS shared his experience of having gone to
school out of state - at times for longer than the allowable
absence - while never feeling that he was not an Alaskan. He
mentioned student loans. He stated that there is abuse by both
students and those in the military who have no intent of
returning to the state. Conversely, he noted that there is
tremendous retention within his district of people who live off-
post who have been in the service for many years and have chosen
Fairbanks as home. Furthermore, he said there are many students
who have lived in Alaska all their lives who are going out of
state for school. He asked Ms. Smith to put herself in the
position of a committee member and share her thoughts regarding
"how you balance those two very delicate points on this
spectrum."
9:05:15 AM
MS. SMITH responded that for five years she was the division
supervisor for juvenile justice in Homer, during which she dealt
with criminals. She said she thinks HB 273 is not "separating
out the issues." She said it is wrong to say the discussion is
not about fraud, because "we are talking about criminals who are
bilking the system." She indicated that there needs to be a
logical separation made between those who are currently Alaskans
and intend to come back to Alaska and those who are committing
crimes by lying to the system. She suggested one delineation
might be students whose parents live in Alaska, for example.
She said the Alaskan students studying out of state are already
paying out-of-state tuition and HB 273 would punish them
further.
9:07:49 AM
REPRESENTATIVE GARDNER mentioned Ms. Smith's letter [included in
the committee packet]. She said she has three children who have
gone out of state for college. One of the three has returned to
the state. The other two are still in school, but come home at
every opportunity. She said her children consider themselves
Alaskans. Notwithstanding that, she said she recognizes that
the longer they are away, the less likely it is that they will
come back to Alaska permanently. She said that's why she
offered the amendment that was adopted, which allowed students
two years without their PFD being held.
9:09:41 AM
MS. SMITH clarified that she is not recommending an "indefinite
... provisional thing out there." She suggested that graduate
students from Alaska could be required to come home during the
summer. She said there are not many opportunities for students
to attend graduate school in Alaska.
9:11:43 AM
CHAIR SEATON pointed out that [the existing allowable absences]
have been made over time as exceptions to the requirement that
people be Alaskans residing in Alaska in order to qualify for a
PFD. He stated, "We do have the burden of looking to the system
and making sure that the people that do reside in Alaska get the
maximum benefit of the permanent fund dividends." He explained
that's why the bill would require people to come back to Alaska
to get the dividends that had been issued while they were out of
state. Chair Seaton said there may be more amendments to the
bill.
9:13:24 AM
REPRESENTATIVE LYNN said he agrees with Ms. Smith that the
concern is with fraud, but he rejects the notion that military
and students are more likely to commit fraud than anybody else.
9:14:04 AM
KEITH APPLEMAN, testifying on behalf of himself, told the
committee that he has been a resident of Alaska for over 50
years and has a son in college and a daughter in high school.
He said he concurs with Ms. Smith's testimony. He said it seems
to him that a student who goes out of state to school, comes
home on the holidays, works in Alaska during the summer, and has
the right to a resident's fishing license, should qualify for an
allowable absence.
9:16:46 AM
CHAIR SEATON, in response to a remark made by Mr. Appleman,
clarified that the bill would not exclude any student from
Alaska from getting an allowable absence, it would just hold the
PFD after the first two years' absence until that student
returned to Alaska.
9:17:25 AM
MR. APPLEMAN responded that he doesn't think the PFD should be
held back.
9:17:43 AM
VIOLA "VI" JERREL, Ph.D. testified on behalf of herself in
opposition to HB 273. She suggested that the bill could be
thrown out and the legislature could be focusing on bills to
create more jobs. She opined that HB 273 is unconstitutional.
She emphasized that both military personnel and college students
from Alaska who go Outside intend to come back to Alaska. She
related her experience regarding the military. She indicated
that those presently in the military are not even aware of
what's happening [regarding HB 273], but they would oppose the
legislation. She predicted that if HB 273 passes, lawsuits will
happen.
9:21:58 AM
CHAIR SEATON closed public testimony.
9:22:36 AM
REPRESENTATIVE GRUENBERG said that in view of the fact that
there are some legal questions, he would like the committee to
seek legal opinion.
9:23:54 AM
CHAIR SEATON, in response to Representative Lynn, suggested that
any amendment he has to offer be drawn up for the next hearing.
9:24:59 AM
REPRESENTATIVE LYNN noted that his amendment would be designed
to protect the PFD for the military.
9:25:31 AM
CHAIR SEATON announced that HB 273 was heard and held.
HB 278-RETIREMENT SYSTEM BONDS
9:25:43 AM
CHAIR SEATON announced that the next order of business was HOUSE
BILL NO. 278, "An Act relating to the Alaska Municipal Bond Bank
Authority; permitting the Alaska Municipal Bond Bank Authority
or a subsidiary of the authority to assist state and municipal
governmental employers by issuing bonds and other commercial
paper 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 and
authorizing governmental employers to contract with and to issue
bonds, notes, or commercial paper to the authority or its
subsidiary corporation for that purpose; and providing for an
effective date."
9:26:10 AM
CHAIR SEATON noted that he had listened to tapes that had been
presented to the Alaska Retirement Management (ARM) Board and
would share highlights from them. He stated that the workforce
influences the investment strategy. For example, a young
workforce would have an aggressive investment strategy, a
workforce that is "going along with the system" would have a
more intermediate investment strategy, and a system that is
ending because of an older workforce getting ready to retire
would have a more conservative investment strategy. He said the
committee has been talking about a 25-year amortization, but
many of the payments need to happen in the next 20 years for all
the retirees for which the state did not collect enough money.
He explained that consideration needs to be made regarding the
amount of money that needs to be pulled out of a pension bond
for the schedule of payments, because there can be no long-term
strategy if payments are needed right away for the past service
cost. He said it is a balancing act. He suggested one possible
solution would be to make a balloon payment. He added, "And I
think that that is what we would be looking at, scheduling
something of a balloon payment on a mortgage, if we were going
to have lower payments at the beginning. Currently, he noted
the contribution can go up no more than 5 percent a year. He
said, "If we issued amortized pension bonds, you would
immediately go to the higher rate; it's going to be lower than
the overall rate under the current system by about 3 percent,
but you immediately jump to it." He said balloon payments have
their own problems.
9:29:15 AM
REPRESENTATIVE GARDNER said she would like to hear from experts
regarding the immediate jump that Chair Seaton just mentioned.
9:30:07 AM
CHAIR SEATON said there is also a possibility of making a
balloon payment at the end. He said Seattle Northwest talked
about variable versus fixed rates. He concurred with
Representative Gardner regarding getting more information.
9:31:03 AM
JULI LUCKY, Staff to Representative Mike Hawker, Alaska State
Legislature, on behalf of Representative Hawker, sponsor, agreed
that it would be a good idea to hear from experts. She said:
What I have been discussing with them is that you can
pretty much structure it how you want to structure it,
but that would be something ... down the line that the
person that's entering into the agreement would ...
[discuss] with their financial advisor. Basically,
you'll ... sell the bonds and get a lump sum of money,
and how that is repaid would be a structure that would
be able to be worked out in the financial agreements.
9:32:02 AM
CHAIR SEATON offered to loan the previously mentioned cassette
tapes to any legislators or staff who may want to listen to
them.
9:32:43 AM
REPRESENTATIVE GARDNER asked Ms. Lucky if an employer who
switched to a POB would automatically be converting a soft debt
to a hard one.
9:32:58 AM
MS. LUCKY stated her understanding that that is not necessarily
the case. She said with a lump sum liability, the bond is being
repaid rather than the unfunded liability. She said it is her
hope that a more official answer to that question will be made
available.
9:33:58 AM
REPRESENTATIVE GARDNER responded that that would assume that the
bond covers the entire amount of the liability, which is not
necessarily the case.
9:34:22 AM
MS. LUCKY said discussion is taking place on the specifics of
what a particular plan might look like, but there is not
necessarily a plan.
9:35:06 AM
CHAIR SEATON reiterated his comments about the information on
the tapes for Representative Hawker who had just arrived in the
committee room.
9:35:18 AM
REPRESENTATIVE MIKE HAWKER, Alaska State Legislature, testifying
as sponsor of HB 278, explained as follows:
The transactions contemplated are a structured debt
transaction. A public entity borrows money on the
international capital markets. The terms for the
repayment of that a money can be structured in ... [a]
myriad of choices for how to structure that payment.
In fact, frankly, some of the structures would not be
advisable in this circumstance. ... But a structure
that allows the repayment curve not to - ... in all
cases - be less than our current 5 percent annual
incrementing normal pension contribution can be
structured. ... You could structure these so that
they pay off in their entirety in one balloon payment
25 years down the way. That, of course, would be ...
a very inappropriate decision for someone to make.
But the point is that the markets are extremely
adaptable, extremely flexible, very creative, ...
limited only by the creativity of both bond council,
the borrowing organization, the public entity that
might be interested in pursuing this, and their
financial advisors.
9:37:13 AM
CHAIR SEATON said the other issue highlighted by the tape is
that when less is paid up front, not as much is saved. He
clarified that the previously mentioned 5 percent [cap for
contributions] is not the same as interest rates. He said an
issue discussed by the State Bond Council was in relation to
Article 9, Section 11, which read as follows [original
punctuation provided]:
The restrictions on contracting debt do not apply to
debt incurred through the issuance of revenue bonds by
a public enterprise or public corporation of the State
or a political subdivision, when the only security is
the revenues of the enterprise or corporation. The
restrictions do not apply to indebtedness to be paid
from special assessments on the benefited property,
nor do they apply to refunding indebtedness of the
State or its political subdivisions.
CHAIR SEATON said there is question regarding whether
municipalities would be allowed to take debt without a vote of
the people.
9:39:51 AM
REPRESENTATIVE HAWKER said the state, municipal, and school
district employers have, in fact, already entered into a debt
contract via the employees' pension plans, which they have a
constitutional obligation to provide. He said the inner
structure by which municipalities manage themselves and choose
what goes before their public is certainly adequate. He advised
against opening up the issue of the state usurping local
decision-making authority. Representative Hawker stated his
belief that the existing statutory structure at both the state
and local levels is adequate to provide an appropriate
protection for the public good.
9:43:00 AM
CHAIR SEATON suggested that Representative Hawker might like to
listen to the tapes, as well. He reiterated the subject of
differing requirements for investment strategies for various
types of pension plans. He stated that the committee is in
somewhat of a conundrum, because the bill proposes issuing
pension bonds, but the investment strategy that would be
employed either "makes it work or makes it not work." He said
it is necessary to ascertain when the structured payments on
past service costs accrue. He continued:
It's not like we have the principal and we can just
leave it there and invest it, and have it grow over 25
years. Because we are going to be making payments -
in 8 or 10 years - of that money; we've got to take
that principle out and make ... scheduled payments on
that.
9:46:14 AM
REPRESENTATIVE HAWKER emphasized that the bill before the
committee authorizes nothing; "it grants empty authority for the
investment banking community to work with the state's public
employers to find a way to ... ultimately save our taxpayers
money through a potential transaction." He continued:
Essentially, the decision was made last legislative
session to terminate the previous plan, which means
ultimately there will be a final payout, the last
employee will die, and the plan will be liquidated and
it will be no more. The sensitivity of ... the
investment decision will be driven very much by when
... this new money being put into the plan [will] be
needed. I would offer that if we were in an
extraordinarily underfunded position and we needed the
money immediately in order to meet payments to
beneficiaries - the money that we would be potentially
securing through [an] issuance of [an] obligation
bond, we very definitely would have to invest that
money short, and ... truly the transaction would not
be viable, because we wouldn't be able to invest for
the arbitrage that is what this is all about.
However, the State of Alaska's plans - both PERS and
TRS - on aggregate are truly exceptionally well funded
today. ... I can't tell you the numbers right off the
top of my head, but despite the fact that we are
arguably, actuarially $6 billion underfunded today, we
still have a tremendous amount of money in those
plans. That money is there invested, will remain
invested to meet obligations that are going to go --
we've got an employee that started today that's 18
years old; they will vest in that plan ....
Potentially, if they become a permanent state
employee, that plan will be in existence for the ...
actual lifetime of employees today that may be as
young as 16 or 18 years old.
So, again, we have the luxury before us today of time:
time to manage these investments, time to achieve what
is again we've demonstrated over and over again is the
ability of the State of Alaska's investment managers,
whether they be Department of Revenue, whether they be
the pension managers, or whether it be the permanent
fund, to obtain a 10-year return in excess of 8
percent.
And again, ... we're looking a ... potentially bonded
indebtedness transaction that would be designed to
work over a 20-25 years period that is still well
within the expected anticipated existence of our
current pension plan structure. So, again, we could
create ... hypothetical transactions or circumstances,
but facts are that to make a transaction contemplated
under this bill work, you will have the best and the
brightest financial counselors from Wall Street, the
best and the brightest bond council, and, quite,
frankly, as we certainly like to think of ourselves,
we have a very competent public administration of all
municipalities and the state making judicious
decisions.
... I have faith in the markets, the legal community, and the
elected officials statewide.
9:50:14 AM
REPRESENTATIVE RAMRAS expressed his appreciation of
Representative Hawker's abilities and efforts. He said, "I hope
that as we go forward with this you don't see these people from
the state of Washington trotting around here, flipping out their
business cards from Merrill, et al, and that we look further
south or further east for counsel in how to structure a POB
program should we go forward with that."
9:50:57 AM
REPRESENTATIVE HAWKER, regarding the investment bankers that
have been providing counsel through this process, stated that
Merrill Lynch is a global, credible, and major Wall Street firm.
He said the credibility that Seattle Northwest Securities brings
is that it has been very active and successful in this type of
transaction, having represented the State of Oregon. He said
Representative Ramras brings up a good point. He said
investment banking is a competitive market and the best and
brightest will be vying for the work.
9:52:25 AM
CHAIR SEATON said the committee will take up the bill again when
it gets the information back that it has requested.
9:53:52 AM
REPRESENTATIVE HAWKER said he wants to regroup with Chair Seaton
when all the information is gathered to ensure all issues have
been covered. He said the bill was originally crafted to focus
on the larger, more sophisticated municipalities; however, if
the committee decides it would be appropriate to expand that
authority, he would be amenable to the idea. Regarding Chair
Seaton's previously stated concern about cash flow, he said he
is working on getting professional comments on that issue.
9:55:50 AM
CHAIR SEATON said if it's structured so that less money is up
front, he wants to know if there will be the same percentage
drop, regarding the 2.6 percent of wage-base contributions by
the employers. He mentioned a presentation from Jeff Sinz,
which showed two scenarios with a decrease in payroll
contribution of 2.6 percent or 3.8 percent. He said he would be
interested in finding out whether that was structured on an
amortized payment that frontloaded up to 26 percent of payroll
as soon as the bonds are issued, or whether that would be the
collared payment.
9:57:15 AM
REPRESENTATIVE HAWKER answered, "They structured their
amortization for a hypothetical issue ..., and yes, they did in
fact incorporate into that a ramping up paralleling the deferred
structure of the current state system that did not immediately
jump into a fixed amortization period." He offered further
details.
[HB 278 was heard and held.]
ADJOURNMENT
There being no further business before the committee, the House
State Affairs Standing Committee meeting was adjourned at
9:59:00 AM.