Legislature(2003 - 2004)
04/07/2004 01:44 PM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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.