Legislature(2003 - 2004)

04/07/2004 01:44 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 422                                                                                                            
                                                                                                                                
     An Act  repealing the special subaccount  established in                                                                   
     the constitutional budget  reserve fund; relating to the                                                                   
     powers of  the Department of Revenue for  the investment                                                                   
     of amounts  in the  constitutional budget reserve  fund;                                                                   
     and providing for an effective date.                                                                                       
                                                                                                                                
Co-Chair Harris commented that  Minority Leader Berkowitz had                                                                   
expressed  concerns about  this bill,  and he  asked if  this                                                                   
would  merge accounts  in the  Constitutional Budget  Reserve                                                                   
(CBR).                                                                                                                          
                                                                                                                                
JAMES ARMSTRONG,  STAFF TO REPRESENTATIVE  WILLIAMS explained                                                                   
that this  would repeal  the law enacted  in 2000  by Senator                                                                   
Torgerson that  created a subaccount  within the CBR  of $400                                                                   
million. The  subaccount has  a long-term investment  horizon                                                                   
of five years and the goal is to capture a higher yield.                                                                        
                                                                                                                                
Co-Chair Harris  asked if that  has occurred.   Mr. Armstrong                                                                   
affirmed that there  has been a higher yield over  the past 6                                                                   
or 7 months. Co-Chair Harris asked  about the historical life                                                                   
of the separate  fund.  Mr. Armstrong replied  that it hasn't                                                                   
made as much as had been anticipated, perhaps $20 million.                                                                      
                                                                                                                                
TOMAS  BOUTIN,  DEPUTY COMMISSIONER,  DEPARTMENT  OF  REVENUE                                                                   
(DOR), discussed  the returns of the subaccount  and the main                                                                   
fund of the CBR, referring to  information he had provided to                                                                   
the committee.                                                                                                                  
                                                                                                                                
TAPE HFC 04 - 79, SIDE B                                                                                                      
                                                                                                                                
Co-Chair  Harris asked,  with  the subaccount  invested  more                                                                   
liberally, which account has earned  more. Mr. Boutin replied                                                                   
that the subaccount  hasn't existed for 5 years.  The 3- year                                                                   
timeframe  shows  an  earned  rate of  1.8%  return  for  the                                                                   
subaccount, while  the main fund  has earned around 6%.   The                                                                   
strong recovery  in equities  over the  past year has  pulled                                                                   
the  Fund   back  into   "the  black."   He  explained   that                                                                   
fundamentally, the way the CBR  has been used doesn't suggest                                                                   
a  long-term investment  horizon  or anything  but the  fixed                                                                   
income investments of the type in the main Fund.                                                                                
                                                                                                                                
Co-Chair Harris  asked if the  DOR anticipates not  less than                                                                   
$1  billion   would  remain  in  the  Constitutional   Budget                                                                   
Reserve. Mr.  Boutin said that  is correct.   Co-Chair Harris                                                                   
asked the  current balance in the  CBR for a draw  this year.                                                                   
Mr. Boutin  explained that the  Department uses the CBR  as a                                                                   
checking account  that is repaid  from the General  Fund. The                                                                   
CBR  draw  at the  end  of  this  fiscal  year would  be  $50                                                                   
million, if the  average daily price of oil  continues upward                                                                   
and oil  is higher than the  spring forecast on which  the FY                                                                   
05 budget is based.                                                                                                             
                                                                                                                                
Co-Chair  Harris asked  if oil  is averaging  $29 per  barrel                                                                   
this year. Mr.  Boutin clarified that it is  about $30.60 per                                                                   
barrel for the fiscal year to date.                                                                                             
                                                                                                                                
Representative  Foster asked  the net  to the state  treasury                                                                   
when the  oil price  increases one dollar  for the  year. Mr.                                                                   
Boutin said  that he used "a  rule of thumb" of  $65 million,                                                                   
which is fairly accurate.                                                                                                       
                                                                                                                                
Co-Chair  Williams questioned  putting in  a trigger  to keep                                                                   
the CBR working. Mr. Boutin expressed  that if the entire CBR                                                                   
had been  put into equities a  year ago, there wouldn't  be a                                                                   
problem  today,  but market  timing  is  not a  strategy  for                                                                   
public   funds,    which   follow   fundamental    investment                                                                   
principles.  Even  with  agreement  that  the  Constitutional                                                                   
Budget Reserve could  not fall below $1 billion,  about $300-                                                                   
400 million  would be  needed for  revenues and  expenditures                                                                   
each year,  and the balance of  $600 million would  be needed                                                                   
for  the oil  price plummet  that will  ultimately occur.  He                                                                   
argued that this  suggests a fixed income  investment, rather                                                                   
than a long-term investment of real estate or equities.                                                                         
                                                                                                                                
Representative Croft  discussed the concept of  a trigger and                                                                   
switching  between  investment  strategies. He  thought  that                                                                   
with  the diminishing  Constitutional Budget  Reserve,  it is                                                                   
almost imperative to repeal the subaccount.                                                                                     
                                                                                                                                
Co-Chair   Harris   commented   that   the   Legislature   is                                                                   
anticipating  nearly a $400  million draw  from the  CBR this                                                                   
year. Representative Croft replied  that although technically                                                                   
$400 million was withdrawn, all  of it would not be needed if                                                                   
oil prices  hold steady  for another  few months. He  thought                                                                   
that it  has become more of  a legal question of  whether the                                                                   
Majority  had the  authority  for  the CBR  draw,  and it  is                                                                   
almost moot with the current oil prices.                                                                                        
                                                                                                                                
Co-Chair  Williams asked  for a  comparison of  how much  the                                                                   
subaccount lost  last year in  relation to the main  CBR. Mr.                                                                   
Boutin referred to the table,  "Constitutional Budget Reserve                                                                   
Subaccount"   (copy on file).   In response to a  question by                                                                   
Mr.  Armstrong,  Mr.  Boutin clarified  that  it  is  current                                                                   
through 12-31-03.                                                                                                               
                                                                                                                                
Mr. Boutin  stated that  even if  there had  not been  a bear                                                                   
market and  these equities were  doing well, the  fundamental                                                                   
investment principles  used by  DOR and other  state agencies                                                                   
argue for not having this long-term investment horizon.                                                                         
                                                                                                                                
Co-Chair  Harris  MOVED  to  report   CSHB  422(STA)  out  of                                                                   
Committee with the accompanying  fiscal note.  There being NO                                                                   
OBJECTION, it was so ordered.                                                                                                   
                                                                                                                                
CSHB 422(STA) was REPORTED out  of Committee with a "do pass"                                                                   
recommendation  and  with  one  previously  published  fiscal                                                                   
impact note.                                                                                                                    
                                                                                                                                

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