Legislature(2017 - 2018)ADAMS ROOM 519
04/10/2018 01:30 PM House FINANCE
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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 RECONVENED