Legislature(2017 - 2018)ADAMS ROOM 519

04/10/2018 01:30 PM House FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
<Bill Hearing Canceled>
<Pending Referral>
-- Public Testimony --
Heard & Held
-- Public Testimony --
Moved HCS SB 97(FIN) Out of Committee
<Bill Hearing Canceled>
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved SB 107 Out of Committee
-- Public Testimony --
Moved CSHB 316(FIN) Out of Committee
<Bill Hearing Canceled>
SENATE BILL NO. 97                                                                                                            
     "An Act relating to pension obligation bonds."                                                                             
2:43:49 PM                                                                                                                    
Co-Chair Foster relayed  that the last time SB  97 was heard                                                                    
was  April 19,  2017. At  that hearing  the committee  heard                                                                    
public testimony  and called for  amendments. There  was one                                                                    
amendment the committee would be  addressing. He invited the                                                                    
bill sponsor to refresh the committee about the bill.                                                                           
SENATOR  ANNA  MACKINNON,  SPONSOR, relayed  that  the  bill                                                                    
before the  committee addressed a reduction  of pension bond                                                                    
authority. The bill proposed to  move the pension obligation                                                                    
authority  from  $5 billion  to  $2.5  billion. It  required                                                                    
those  entities  that had  the  authority  to issue  pension                                                                    
obligation  bonds   (POB)  to  submit  a   proposal  to  the                                                                    
Legislative  Budget  and  Audit  Committee  outlining  their                                                                    
proposal. She recalled that  the administration proposed use                                                                    
and  started  shopping  to sell  pension  obligation  bonds.                                                                    
There  was  some  consternation in  Alaska  communities  and                                                                    
among legislators  in both houses  to know whether  the sale                                                                    
would affect  the state's credit  rating, how it  would work                                                                    
in  the market,  and what  it would  do to  Alaska's pension                                                                    
plans. She continued that included  in the legislation was a                                                                    
process  that gave  the legislature  the  time necessary  to                                                                    
actually  respond  and  interact with  the  general  public.                                                                    
Hence, taking  the acquisition or  proposal that  might come                                                                    
to  the   Legislative  Budget   and  Audit   Committee.  The                                                                    
administration supported  the bill before the  committee, as                                                                    
it still  left the tool  available to the  administration to                                                                    
address  pension shortfalls  but  reduced  the authority  by                                                                    
$2.5 billion.                                                                                                                   
Representative Wilson asked why  the bill sponsor settled on                                                                    
the  amount of  $2.5  billion.  Senator MacKinnon  responded                                                                    
that  the   number  was  a   compromise.  There   were  some                                                                    
legislators  that  thought   the  possibility  of  borrowing                                                                    
should  be eliminated  altogether. She  continued that  when                                                                    
the  Senate   Finance  Committee  started  looking   at  the                                                                    
proposal and the actions of  the administration, she went to                                                                    
the  governor  asking  for   his  thoughts  about  available                                                                    
authority. In  conversations with  the senate, she  had been                                                                    
talking  about what  could be  done with  an in  significant                                                                    
amount  available to  the  legislature  to bolster  Alaska's                                                                    
credit   standing  with   outside  national   credit  rating                                                                    
agencies.  Some of  the conversations  were around  reducing                                                                    
outstanding bonds  that Alaska could  put out. The  idea was                                                                    
to show  the market that the  state was going to  handle its                                                                    
debt  very  responsibly.  She indicated  that  she  and  the                                                                    
governor  had  discussed  a number.  She  chose  the  number                                                                    
rather  than  the governor.  The  number  was close  to  the                                                                    
number  the  administration  sought  in the  market  in  the                                                                    
previous year. She believed that  they were acquiring around                                                                    
$2.1  billion  to  $2.2  billion.  She  conveyed  that  $2.5                                                                    
billion was within the initial  figure considered to meet an                                                                    
unfunded liability.                                                                                                             
Senator  McKinnon  furthered  that  the  second  reason  was                                                                    
because  currently  the  state  had  about  a  $6.6  billion                                                                    
unfunded  liability  in  the  Public  Employees'  Retirement                                                                    
System   (PERS)  and   Techers'   Retirement  System   (TRS)                                                                    
combined. That was  with a criteria of an 8  percent rate of                                                                    
return and  a mortality rate  that needed to be  changed. If                                                                    
the percentage currently being used  to amortize the state's                                                                    
debt over  a period of  time adopted in state  statute, $2.5                                                                    
billion  represented almost  50 percent.  If the  state owed                                                                    
$6.6 billion  then $3.3 billion  would be 50 percent  of the                                                                    
unfunded  liability handled  through debt.  In working  with                                                                    
the House Finance co-chairs as  well as having conversations                                                                    
with the  administration and the  debt service  manager, she                                                                    
recommended to Senate Finance that  a $2.5 billion reduction                                                                    
be sent  to the  House side. She  concluded that  there were                                                                    
multiple reasons for the amount of $2.5 billion.                                                                                
2:48:46 PM                                                                                                                    
Co-Chair Seaton MOVED to ADOPT Amendment 1 (copy on file):                                                                      
     Page 3, line 17 following "2,500,000,000":                                                                                 
          Insert "or a funding ratio of actuarial assets to                                                                     
          accrued liability greater than 85 percent,                                                                            
          whichever is less"                                                                                                    
Representative Wilson OBJECTED for discussion.                                                                                  
Co-Chair  Seaton reviewed  the amendment.  He indicated  the                                                                    
purpose was to make sure the  bonds did not take the state's                                                                    
assets  to the  100  percent  or 105  percent.  There was  a                                                                    
provision in statute  that if the state  reached 105 percent                                                                    
of value, the  state would have to pay  out additional money                                                                    
into the post-retirement pension  adjustment to retirees. He                                                                    
relayed that  it made  sense in  a situation  where retirees                                                                    
had  put their  money  in  and the  period  that would  have                                                                    
earned money  over time. If  it earned more than  8 percent,                                                                    
the funding ratio would be  greater. In such an instance, he                                                                    
suggested  it would  make  sense to  bump  up retirement  by                                                                    
giving a  post-retirement pension adjustment in  addition to                                                                    
the  cost  of  living adjustment  (COLA)  increase  retirees                                                                    
received. In  the case  of doing bonds,  the state  would be                                                                    
taking  general  fund  monies  and  putting  them  into  the                                                                    
retirement  system. However,  if the  state reached  the 105                                                                    
percent funding, it  would be required to give  the money to                                                                    
the  retiree. The  amendment made  sure the  state kept  the                                                                    
funding ration  in a range  that was very stable  and useful                                                                    
without passing general  fund money for bonds  that would be                                                                    
sold and deposited. He had  tried a number of different ways                                                                    
to insert  language so that  there would be a  waterfall. It                                                                    
would  ensure that  the  fund grew  on  its own  investments                                                                    
instead of taking general funds.                                                                                                
2:51:29 PM                                                                                                                    
Representative   Guttenberg  wondered   if   there  was   an                                                                    
alternative to increasing the payout  once the state reached                                                                    
105 percent. Once  the amount was increased it  could not be                                                                    
reversed. He  wondered if the  state had the  flexibility to                                                                    
do  something  different.  Co-Chair MacKinnon  believed  the                                                                    
retirement  pension  board  had  the authority  to  look  at                                                                    
benefits  if  the  funding  went  beyond  105  percent.  She                                                                    
referred to the  amendment on page 3, line  17 following the                                                                    
$2.5  billion.  She  suggested inserting  the  words  "or  a                                                                    
funding  ratio  of  actuarial assets  to  accrued  liability                                                                    
greater than  85 percent, whichever  is less." She  asked if                                                                    
she  was   looking  at  the  correct   amendment  copy.  She                                                                    
explained that  $2.5 billion would be  the maximum allowable                                                                    
debt  to service  the unfunded  liability. She  and Co-Chair                                                                    
Seaton had talked about the  issue that was in state statute                                                                    
where  the state  had been  paying  for a  number of  years,                                                                    
specifically   on  the   PERS  and   TRS  side,   additional                                                                    
contributions  above  22  percent  or  the  12.56  or  12.58                                                                    
percent  for   TRS.  The  state  had   invested  heavily  in                                                                    
additional funding  of state support for  these systems with                                                                    
the recognition that  the state's liability was  to about 60                                                                    
percent of the  overall system in its  entirety (100 percent                                                                    
on  the TRS  side  and  a percent  on  the  PERS side).  The                                                                    
amendment was a  safeguard for all in the  scenario that the                                                                    
outside markets would  look at. She continued  that for that                                                                    
reason she would support the  amendment and ask for support.                                                                    
She  hoped Mr.  Mitchell  could speak  to confirm  whichever                                                                    
number was  lower to avoid decreasing  the state's liability                                                                    
enough to overfund the system.                                                                                                  
2:55:12 PM                                                                                                                    
DEVEN  MITCHELL, EXECUTIVE  DIRECTOR, ALASKA  MUNICIPAL BOND                                                                    
BANK AUTHORITY, agreed  that the amendment was  in line with                                                                    
the   goals   of   the   transaction   envisioned   by   the                                                                    
corporation's  board and  the  Department  of Revenue  (DOR)                                                                    
throughout the  various administrations that  had considered                                                                    
POBs. The target  he had was a maximum not  to exceed amount                                                                    
of  90  percent. He  thought  85  percent was  a  reasonable                                                                    
alternative  to 90  percent. It  was probably  slightly more                                                                    
conservative in the  event there were strong  returns in the                                                                    
years following  a pension  obligation bond  issuance. There                                                                    
could be an outcome of  an overfunding situation. He was not                                                                    
as confident as Senator McKinnon  that the ARM Board had the                                                                    
ability to  diminish benefits to past  employees. He thought                                                                    
those benefits were  strongly protected. Unfortunately, even                                                                    
though it  made sense if  there was  extra money put  in, it                                                                    
was his  personal belief, that those  employees could demand                                                                    
a  post  retirement  payment  if the  funding  went  up  105                                                                    
percent or greater.  He suspected that the  court would side                                                                    
with the retirees.                                                                                                              
Co-Chair  Seaton thought  there was  a misunderstanding.  He                                                                    
had  heard Senator  McKinnon saying  the same  thing he  had                                                                    
said. They had looked at  all of the ramifications but found                                                                    
that  once  the amount  was  there  it  could only  flow  to                                                                    
pensions.  A  pension  plan could  not  be  diminished.  The                                                                    
federal  restrictions  were  tight  so  that  no  one  could                                                                    
diminish   benefits.  Co-Chair   MacKinnon  clarified   that                                                                    
retired  Alaskans   were  guaranteed  their   benefits.  Her                                                                    
response was  to the 105  percent funding liability  that if                                                                    
the state  went above, it  could add additional  benefits in                                                                    
response  to   Representative  Guttenberg's   question.  She                                                                    
relayed that  the retirement  board had  the ability  to add                                                                    
but not  to diminish benefits  under existing state  law and                                                                    
supreme court rulings. A vote  of the people of Alaska would                                                                    
be required.                                                                                                                    
Representative Wilson WITHDREW her OBJECTION.                                                                                   
There being NO OBJECTION, Amendment 1 was ADOPTED.                                                                              
2:58:53 PM                                                                                                                    
Co-Chair Seaton MOVED to ADOPT Conceptual Amendment 2.                                                                          
     Page 3, line 17                                                                                                            
          Delete: "$2,500,000,000"                                                                                              
          Insert "$1,500,000,000"                                                                                               
Representative Wilson OBJECTED for discussion.                                                                                  
Co-Chair Seaton  had talked with  the bill sponsor  and with                                                                    
Mr.  Mitchell. He  wanted to  have them  come to  the table.                                                                    
There  was  general  agreement  that  $1.5  billion  was  an                                                                    
acceptable amount  and remained  a powerful tool  that could                                                                    
be used and  also lowered the amount of debt  the state had.                                                                    
Co-Chair  MacKinnon responded  that she  was not  opposed to                                                                    
the change. The only issue  she wanted consideration for was                                                                    
the number  she brought  before the  committee. She  had run                                                                    
the number  by the administration  and had support  for $2.5                                                                    
billion. She reported that there  were members in the Senate                                                                    
that  thought the  number should  be zero.  She agreed  that                                                                    
$1.5  billion  was  a more  conservative  number.  The  bond                                                                    
rating agencies  would see the  action favorably  because it                                                                    
was taking another $1 billion  away from the state to indebt                                                                    
itself.  She  thought it  would  remain  a functioning  tool                                                                    
available to the administration.  She also believed it would                                                                    
bring  more  comfort  to Alaskans  in  placing  the  state's                                                                    
unfunded liability into a bond market.                                                                                          
Representative  Pruitt referred  to the  actuarial worksheet                                                                    
in  members packets  (copy on  file). He  believed the  $1.5                                                                    
billion amount would  restrict the state from  being able to                                                                    
use the  pension obligation bonds.  He highlighted  that the                                                                    
state  would  cross the  85  percent  mark before  the  $1.5                                                                    
billion was available. He asked  Mr. Mitchell to explain how                                                                    
the  change would  affect  the state's  ability  to use  the                                                                    
bonds.  He wondered  if the  state  should get  rid of  them                                                                    
altogether. Mr. Mitchell responded  that he had not recently                                                                    
reviewed the actuarial worksheets.  He explained that it was                                                                    
based  on  total  liability rather  than  just  the  state's                                                                    
portion.  If  the  total  liability  was  $6.5  billion,  he                                                                    
thought the  state would still  have the ability to  use the                                                                    
$1.5  billion.  He would  have  to  review the  numbers.  He                                                                    
thought the  system's funding levels were  considerably less                                                                    
than  85 percent  even with  the  infusion in  2015 and  the                                                                    
positive market in the previous year.                                                                                           
Representative Pruitt was having to  process and do the math                                                                    
as the meeting was occurring.                                                                                                   
3:04:10 PM                                                                                                                    
Co-Chair MacKinnon  added that  in looking at  the amendment                                                                    
the  word "or"  was  included. The  amount  of $1.5  billion                                                                    
would remain available.                                                                                                         
Representative Guttenberg  asked how  the bill  would affect                                                                    
the state's  other pension bonds, capacity,  or ratings. Mr.                                                                    
Mitchell  suggested that  there  were  several factors  that                                                                    
played  into  the   answer  to  Representative  Guttenberg's                                                                    
question.  One of  the variables  was the  concept of  going                                                                    
from a  soft liability to  a hard liability.  Another factor                                                                    
had to  do with payments  on behalf of other  employers. The                                                                    
state was locking  in the relationship that  was a statutory                                                                    
relationship  that theoretically  could  be modified.  Also,                                                                    
there had  been an  evolution within the  pension obligation                                                                    
fund corporation to move forward  on a transaction since its                                                                    
inception to the present. The  corporation no longer had the                                                                    
ability to to  move forward without the firm  support of the                                                                    
legislature.  Firm support  meant that  an appropriation  of                                                                    
debt service  was necessary for market  participants to take                                                                    
the  state seriously  based  on its  failed  efforts in  the                                                                    
past.  He was  unsure  how the  reduction  would impact  the                                                                    
state's  debt capacity  or credit  rating. He  reported that                                                                    
when the  state was looking  at the transaction in  2016 one                                                                    
of  the three  rating agencies,  Standard and  Poors, had  a                                                                    
contingent downgrade  for the State  of Alaska in  the event                                                                    
the  $2.5 billion  was borrowed.  He indicated  that it  was                                                                    
based on  sheer magnitude.  It was easiest  to think  of the                                                                    
situation as  a refinancing.  The state  owed the  money and                                                                    
had a  constitutional obligation  to repay  it. There  was a                                                                    
statutory framework for the payment  on behalf of structure.                                                                    
The least  responsible way  to refinance  would be  to avoid                                                                    
the following year's payment. This  was Illinois' method. He                                                                    
provided  a   more  detailed  example.  He   continued  that                                                                    
reducing the  authorization to $1.5 billion  would limit the                                                                    
state's ability to impact the state's credit rating.                                                                            
Vice-Chair Gara agreed with the amendment.                                                                                      
3:08:51 PM                                                                                                                    
Representative Pruitt was  fine with $1.5 billion.  It was a                                                                    
policy call. He suggested that  there might be 3 years where                                                                    
the  85 percent/$1.5  billion threshold  would cross  before                                                                    
the state  reached a  funding ratio of  85 percent  based on                                                                    
the   actuarial.  He   concluded  that   $1.5  billion   was                                                                    
substantially more conservative than  the 85 percent funding                                                                    
ratio. He was fine with the amendment.                                                                                          
Co-Chair MacKinnon  relayed that,  at an  8 percent  rate of                                                                    
return,  it had  to do  with best  practice standards  for a                                                                    
pension  plan.  While  the committee  was  considering  $1.5                                                                    
billion of  potential debt against  a $6.6  billion unfunded                                                                    
liability and  seeing the state's  85 percent  funding ratio                                                                    
in sight, she cautioned members  in thinking that in 3 years                                                                    
the state  would be out of  the woods. She continued  that a                                                                    
.25 percent  reduction in earnings  estimated over  the life                                                                    
of  the state's  debt would  have huge  implications on  the                                                                    
unfunded  liability number.  She  highlighted that  Alaska's                                                                    
local  communities   were  carrying   that  debt   on  their                                                                    
financials  as well.  While the  state was  at $6.6  billion                                                                    
presently, she  expected (even  with positive  returns) that                                                                    
if  the ARM  Board made  a  decision to  reduce earnings  or                                                                    
accept the  new mortality rate (people  were living longer),                                                                    
she  did  not believe  the  state  would  be at  85  percent                                                                    
funding in  3 years. She was  working with the ARM  Board to                                                                    
see if there was another  way to adjust the assumed interest                                                                    
earning down. She  would be happy to  share that information                                                                    
at a later time.                                                                                                                
Representative Wilson WITHDREW her OBJECTION.                                                                                   
There  being NO  OBJECTION,  it was  so ordered.  Conceptual                                                                    
Amendment 2 was ADOPTED.                                                                                                        
Representative Guttenberg  relayed that on the  previous day                                                                    
the  committee had  heard a  bill on  PERS and  TRS and  the                                                                    
package options.  He thought the  bill might  correlate with                                                                    
the senator's bill.                                                                                                             
Vice-Chair Gara reviewed  the zero fiscal note for  SB 97 by                                                                    
the Department  of Revenue.  The appropriation  was Taxation                                                                    
and Treasury  and the allocation was  the Treasury Division.                                                                    
The OMB component number was 121.                                                                                               
3:13:02 PM                                                                                                                    
Co-Chair  Seaton  MOVED to  report  HCSSB  97 (FIN)  out  of                                                                    
Committee   with   individual    recommendations   and   the                                                                    
accompanying fiscal note.                                                                                                       
There being NO OBJECTION, it was so ordered.                                                                                    
HCSSB97  (FIN) was  REPORTED  out of  committee  with a  "do                                                                    
pass" recommendation and with a  new zero fiscal note by the                                                                    
Department of Revenue.                                                                                                          
3:13:32 PM                                                                                                                    
AT EASE                                                                                                                         
3:14:22 PM                                                                                                                    

Document Name Date/Time Subjects
HB 385 - Additional Documents - Diagram.pdf HFIN 4/10/2018 1:30:00 PM
HB 385
HB 385 - Additional Documents - FAQ's.pdf HFIN 4/10/2018 1:30:00 PM
HB 385
HB 385 - Additional Documents - HR 582.pdf HFIN 4/10/2018 1:30:00 PM
HB 385
HR 582
HB 385 - Additional Documents - Research.pdf HFIN 4/10/2018 1:30:00 PM
HB 385
HB 385 - Letter of Support - Alaska Fire Chief's Association.pdf HFIN 4/10/2018 1:30:00 PM
HB 385
HB 385 - Letter of Support - Alaska Firefighters Association.pdf HFIN 4/10/2018 1:30:00 PM
HB 385
HB 385 - Summary of Changes from Ver. A to D.pdf HFIN 4/10/2018 1:30:00 PM
HB 385
HB 385 - Letter of Support - AML.PDF HFIN 4/10/2018 1:30:00 PM
HB 385
HB 385 - Sponsor Statement.pdf HFIN 4/10/2018 1:30:00 PM
HB 385
HB 385 - Letter of Support - Fairbanks North Star Borough.pdf HFIN 4/10/2018 1:30:00 PM
HB 385
HB 385 - Reso 4829 in Support of HB 385 SB215.pdf HFIN 4/10/2018 1:30:00 PM
HB 385
SB 215
HB 385 - Amendment #1.pdf HFIN 4/10/2018 1:30:00 PM
HB 385
SB 97 - Amendment #1.pdf HFIN 4/10/2018 1:30:00 PM
SB 97
HB 316 - Amendment #1.pdf HFIN 4/10/2018 1:30:00 PM
HB 316
HB 316 Explanation of CS Changes_.pdf HFIN 4/10/2018 1:30:00 PM
HB 316
HB 316 Bill version N.pdf HFIN 4/10/2018 1:30:00 PM
HB 316