Legislature(2015 - 2016)BARNES 124

02/17/2016 03:15 PM LABOR & COMMERCE

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Audio Topic
03:30:56 PM Start
03:31:17 PM HB268
04:52:28 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Delayed to 3:30 p.m. Today --
Heard & Held
-- Testimony <Invitation Only> --
        HB 268-AIDEA:DIVIDEND TO STATE;INCOME;VALUATION                                                                     
                [Contains discussion of SB 149]                                                                                 
3:31:17 PM                                                                                                                    
CHAIR OLSON  announced that the  only order of business  would be                                                               
HOUSE BILL  NO. 268, "An Act  relating to the dividends  from the                                                               
Alaska Industrial  Development and Export Authority;  relating to                                                               
the  meaning  of  'mark-to-market   fair  value,'  'net  income,'                                                               
'project  or  development,'  and 'unrestricted  net  income'  for                                                               
purposes  of   the  Alaska  Industrial  Development   and  Export                                                               
Authority; and providing for an effective date."                                                                                
3:32:22 PM                                                                                                                    
MICHAEL  E.  LAMB,  Chief Financial  Officer,  Alaska  Industrial                                                               
Development  and   Export  Authority,  Department   of  Commerce,                                                               
Community   &  Economic   Development,   provided  a   PowerPoint                                                               
presentation  entitled, "Alaska's  Development Finance  Authority                                                               
Proposed Changes to AIDEA Dividend  Statutes HB 268/SB 149."  Mr.                                                               
Lamb  said  his  presentation   would  address  AIDEA's  dividend                                                               
history,  goal, statutory  language, and  two problems  that have                                                               
been revealed  by annual audits,  both of which are  corrected by                                                               
the language  of the  bill [slide  2].   Mr. Lamb  explained that                                                               
AIDEA's dividend program covers  three years; slide 3 illustrated                                                               
that  the  year ending  6/30/95  was  the  first year  of  actual                                                               
results of  operations of  which the dividend  is based.   During                                                               
the three  years of the dividend  program, the first year  is the                                                               
operation, the second  year is the audit, and the  third year the                                                               
dividend is paid.  The first  dividend was $15 million payable in                                                               
fiscal year 1997  (FY97).  Further shown was that  AIDEA has paid                                                               
about $380 million  to the state, and  the state's capitalization                                                               
was about $332 million.  Slide  4 stated AIDEA's goal: share with                                                               
the state  - through an annual  dividend that is stable  and more                                                               
predictable -  the financial benefits  of AIDEA's  actual results                                                               
of operations.   Slide 5  displayed pertinent  language excerpted                                                               
from  Sec. 44.88.088.  Payment of  Dividend  to State.   Slide  6                                                               
displayed  "Dividend   Calculation  Stack  Visual"   as  follows:                                                               
dividend to the  state; based on statutorily  defined net income;                                                               
based on  audited statements of  revenues, expenses,  and changes                                                               
in  net  position; audit  must  include  market value;  generally                                                               
accepted  accounting  principles  (GAAP);  and  adopt  applicable                                                               
governmental accounting  standards board  (GASB).  Mr.  Lamb said                                                               
the additional information inserted in  the red box is related to                                                               
the changes  in HB  268/SB 149, which  would remove  market value                                                               
adjustments   and/or  write-down,   or  loss,   entries  in   the                                                               
calculation of the dividend.                                                                                                    
3:39:07 PM                                                                                                                    
MR. LAMB  continued, noting  there are  three types  of financial                                                               
transactions:  real transactions  that actually occurred, such as                                                               
booking what  was paid for  an asset; estimates  and allocations,                                                               
such  as  booking  depreciation and  amortization  expenses;  and                                                               
market  value adjustments,  which  didn't really  happen and  are                                                               
what AIDEA seeks to remove [slide 7].                                                                                           
REPRESENTATIVE  JOSEPHSON  asked  for an  example  to  illustrate                                                               
market value adjustments.                                                                                                       
MR.  LAMB  explained components  of  the  first dividend  problem                                                               
[slide 9]:                                                                                                                      
    ·  the dividend payment is a cash-based transaction and in                                                                  
      the  third year  AIDEA writes  a check  to the  state -  if                                                               
      market value  adjustments are factored in,  AIDEA is paying                                                               
      the state  for operations  that did  not have  revenues, or                                                               
      the state does not receive dividends on unrealized losses                                                                 
    ·  over time, GASB continues to make changes to GAAP                                                                        
    ·  GAAP-based income is derived from results of operations                                                                  
      plus market value entries                                                                                                 
    ·  as a result, AIDEA's net income swings and the state's                                                                   
      dividend swings                                                                                                           
MR.  LAMB   described  four  adjustments  to   AIDEA's  financial                                                               
activities that are  required by GASB [slide 10].   As a means to                                                               
explain the  problem, he provided an  analogy of AIDEA as  a U.S.                                                               
taxpayer and  how GASB Statements  No. 31,  68, 72, and  75 would                                                               
affect a taxpayer's income tax return [slides 11-23].                                                                           
3:47:15 PM                                                                                                                    
REPRESENTATIVE LEDOUX asked for the purpose of GASB standards.                                                                  
MR. LAMB recalled  that GASB Statement No. 31  originated over 20                                                               
years  ago  after the  treasurer  in  Orange County,  California,                                                               
pooled money  for several  cities and  when "the  market actually                                                               
turned," their  assets lost  liquidity.   In further  response to                                                               
Representative  LeDoux, he  said the  treasurer probably  did not                                                               
buy junk  bonds because when  investing at the  government level,                                                               
officers strive for safety first,  then liquidity and yield.  Due                                                               
to changes  in the  market, the investments  lost value  and they                                                               
were liquidated  at a loss.   Therefore, government  agencies now                                                               
want to  know the  current market value  of securities,  and GASB                                                               
Statement No.  31 requires AIDEA  to establish a market  value of                                                               
all of its securities on the last day of its fiscal year.                                                                       
REPRESENTATIVE LEDOUX  questioned whether this  information would                                                               
show in a financial statement.                                                                                                  
MR.  LAMB  explained  that  most   transactions  in  a  financial                                                               
statement  are  historic-based  on real  transactions;  financial                                                               
statements  show  what  really  happened  but  will  not  reflect                                                               
billions of  dollars' worth of  investments, and if there  are no                                                               
real  transactions,  their  sale  value is  unknown.    So,  GASB                                                               
Statement No.  31 requires AIDEA  to act  like it sold  its whole                                                               
portfolio  of marketable  securities to  determine an  unrealized                                                               
gain or loss.                                                                                                                   
3:55:14 PM                                                                                                                    
REPRESENTATIVE   KITO   observed   that  AIDEA   statutes   allow                                                               
AIDEA  to  pay   a  dividend  of  between   25  percent   and  50                                                               
percent,   therefore,   AIDEA  has  flexibility   to  level   the                                                               
payment  to  the   state,  and  there  is  already   a  means  to                                                               
accommodate    for  items   accounted    for   under   the   GASB                                                               
accounting  rules.   He gave  an example  of a dividend  that  is                                                               
paid   for  an   investment   that  realizes   a   loss  in   the                                                               
following  year.   He suggested  that  the proposed  legislation                                                                
may  result in  more money  coming  to the  state  over a  longer                                                               
period  of time,  or less,  or the same  amount;  in fact, it  is                                                               
a  small amount  of  money,  when  considering  the  billions  of                                                               
dollars  of debt.   Representative   Kito  said, "I'm  not  quite                                                               
sure  why this  is  necessary  and  what it  is actually   trying                                                               
to accomplish."                                                                                                                 
MR. LAMB  that the  AIDEA board of  directors has  flexibility in                                                               
setting  the dividend;  historically, the  amount is  50 percent.                                                               
However, it is  difficult to determine whether  the dividend will                                                               
create a problem  for AIDEA in the future.   Currently, AIDEA has                                                               
investment policies that  require AIDEA to have  two years' worth                                                               
of operating  cash available; as  CFO, he said  his job is  to be                                                               
risk-adverse with public money,  especially related to marketable                                                               
securities.   The proposed  legislation will  eliminate "swings,"                                                               
and  another component  is  to  have cash  available  to pay  the                                                               
dividend when due;  also, he said he was  unsure about marketable                                                               
securities  that are  externally  managed,  and are  "constantly"                                                               
being bought  and sold.  Mr.  Lamb cautioned that AIDEA  does not                                                               
have control, and remarked:                                                                                                     
     The basic question  of, "In the end does  it even out?"                                                                    
     I don't  know the answer  to that.   And in  fact, when                                                                    
     there  was   a  changeover  in  one   of  the  external                                                                    
     managers, they sold  a lot of the  portfolio, and there                                                                    
     was actually to, [because]  they wanted different types                                                                    
     of investments, and there were  losses and so that will                                                                    
     never  level itself  out. ...  We're not  in a  buy and                                                                    
     hold scenario.                                                                                                             
4:02:31 PM                                                                                                                    
REPRESENTATIVE  KITO  expressed  his   concern  that  making  the                                                               
proposed  change   may  establish  a  varied   number  of  higher                                                               
dividends paid to the state, over  a long period, which would put                                                               
too much pressure on AIDEA's liquid cash.                                                                                       
MR. LAMB said  he sought these changes to  stabilize the dividend                                                               
and comport with GASB.  He  said he was unsure whether AIDEA will                                                               
be better  off in the  future; however, the  relationship between                                                               
AIDEA and  the state  is perpetual  and calculating  dividends is                                                               
ongoing.    Furthermore,  the second  problem  addressed  by  the                                                               
proposed  legislation   is  related  to  AIDEA's   investment  in                                                               
projects, and  to avoid paying  a dividend penalty  for investing                                                               
in a project.  As CFO, he opined  that this is the right and fair                                                               
thing to  do in order for  AIDEA to share in  operations with the                                                               
state, promote economic activity, and be self-sustaining.                                                                       
REPRESENTATIVE   HUGHES  inquired   as  to   whether  AIDEA   has                                                               
determined  how   the  proposed   changes  would   have  affected                                                               
dividends that were paid in past years.                                                                                         
MR.  LAMB  said no.    He  added  that  that information  is  not                                                               
material to the swings in the  market today, and remaining is the                                                               
problem of  insufficient cash on  hand for paying dividends.   He                                                               
restated  his  intent  to  remove   volatile  market  swings  and                                                               
stressed the  need to address  the impacts of GASB  Statement No.                                                               
68 - on the pension obligation  - and the unknown impacts of GASB                                                               
Statement No. 72.                                                                                                               
4:08:58 PM                                                                                                                    
REPRESENTATIVE  HUGHES  asked  how  the  proposed  changes  would                                                               
affect dividends over the next five years.                                                                                      
MR. LAMB  said he  did not know.   He said  he expected  that for                                                               
2016, if  market conditions  continue as they  are and  without a                                                               
change  to statute,  AIDEA will  have  an unrealized  loss and  a                                                               
reduced  dividend  to   the  state.    In   further  response  to                                                               
Representative Hughes,  he said  more information in  this regard                                                               
will be provided later in the presentation.                                                                                     
REPRESENTATIVE LEDOUX  noted that  AIDEA is  owned by  the state;                                                               
without GASB,  how would the legislature  know AIDEA is not  in a                                                               
position similar to that of the public entity in Orange County.                                                                 
MR. LAMB  reminded the committee the  statutory language requires                                                               
an audit based  on GAAP and GASB, and which  requires a certified                                                               
public accountant opine that the  financial statement is correct.                                                               
Part of Mr.  Lamb's responsibility as a  state financial manager,                                                               
is to  represent that the  value of  AIDEA's assets are  true and                                                               
correct, and this statement is validated by the audit.                                                                          
REPRESENTATIVE LEDOUX  asked whether  the Orange  County entities                                                               
were audited.                                                                                                                   
MR.  LAMB pointed  out  that GASB  Statement No.  31  was not  in                                                               
effect  at that  time.    He restated  the  requirements of  GASB                                                               
Statement No. 31.                                                                                                               
REPRESENTATIVE  LEDOUX  surmised  that   as  far  as  income  tax                                                               
reporting, AIDEA would  not use GASB Statement No.  31, but AIDEA                                                               
would  continue  to  use  GASB Statement  No.  31  for  financial                                                               
MR. LAMB said right.                                                                                                            
4:16:48 PM                                                                                                                    
GENE THERRIAULT,  Deputy Director for Energy  Policy Development,                                                               
Alaska Energy Authority/Alaska  Industrial Development and Export                                                               
Authority,   Department  of   Commerce,   Community  &   Economic                                                               
Development,  clarified   that  for   purposes  of   the  audited                                                               
financial statement,  AIDEA would  continue to  apply all  of the                                                               
GAAP  and  GASB rules;  however,  as  policy makers,  legislators                                                               
determine  upon what  the dividend  paid  to the  state would  be                                                               
based,  and  at that  point  market  value evaluations  would  be                                                               
"backed out."                                                                                                                   
4:17:49 PM                                                                                                                    
REPRESENTATIVE  HUGHES  asked  for  the original  intent  of  the                                                               
legislation as currently written.                                                                                               
MR. LAMB  said that GASB  Statement No. 31  was not in  effect at                                                               
that  time and  since  then, three  more  market value  adjusting                                                               
entries have  been added.   There  are two  questions:   (1) what                                                               
AIDEA should report  on an audited financial  statement; (2) what                                                               
AIDEA should share with the state in the form of a dividend.                                                                    
MR. LAMB,  in response to Chair  Olson, said he did  not serve on                                                               
the  Alaska Retirement  Management  Board  (ARMB), Department  of                                                               
Revenue.   He discussed  the impacts of  GASB 31,  GASB Statement                                                               
No.  67 (GASB  67), and  GASB  Statement No.  68 (GASB  68) to  a                                                               
retirement fund.                                                                                                                
4:23:32 PM                                                                                                                    
MR. LAMB  returned to slide  14, which illustrated the  effect of                                                               
GASB 31,  and proceeded through  slide 23, which  illustrated the                                                               
effects of  GASB Statement  Numbers 68 (GASB  68), 75  (GASB 75),                                                               
and 72 (GASB 72).   He said any of the tax  analogies could go in                                                               
any  direction, considering  pension and  retirement obligations,                                                               
which is  why he  wants to  take these factors  out of  the AIDEA                                                               
dividend to the state.  Mr.  Lamb opined that the dividend should                                                               
not be  based on the  foregoing non-cash transactions.   Slide 21                                                               
was a graph  that illustrated the impact of GASB  31 on AIDEA net                                                               
income.   The green line  represented audited numbers, and  in FY                                                               
98 - the first fiscal year impacted  by GASB 31 - net income went                                                               
from about $45  million of income from actual  activities, to $52                                                               
million, after adding  in income that AIDEA really  didn't get as                                                               
required by GASB, and the dividend  was based on 25 percent to 50                                                               
percent  of  $52 million,  which  included  revenue AIDEA  really                                                               
didn't earn.   Whether  the state  has received  more or  less in                                                               
dividends after  the effect of  GASB is  unknown.  All  the areas                                                               
above the green  line were areas where AIDEA  would pay dividends                                                               
on more  than it had  earned, and all  the areas below  the green                                                               
line were  areas where AIDEA could  have paid more to  the state.                                                               
Whether the  state has received  more or less in  dividends after                                                               
the  effect of  GASB is  unknown.   Slide  22 was  a chart  which                                                               
illustrated  dividend  trend  information for  2012/2013  through                                                               
2014/2015.  Mr. Lamb pointed  out that the operating revenues and                                                               
operating expenses are stable; however,  there are huge swings in                                                               
unrealized  gains/losses.   For  example, in  2012  there was  an                                                               
unrealized gain  of $7.14 million,  and one year later  there was                                                               
an unrealized  loss of  almost $22  million, which  adds up  to a                                                               
variance  of  almost $29  million  in  two  years.   He  provided                                                               
further  examples.   Slide 23  illustrated the  final tax  return                                                               
analogy.   Mr. Lamb stressed that  HB 268 and SB  149 would "take                                                               
out those [unrealized gains and  losses], act like you don't have                                                               
to do them."                                                                                                                    
4:32:57 PM                                                                                                                    
MR. THERRIAULT said the policy  question the proposed legislation                                                               
poses to legislators is as follows:                                                                                             
     Do  you want  the AIDEA  dividend to  be based  on real                                                                    
     cash  transactions, or  do you  want them  to be,  that                                                                    
     number,   to   be   swung   by   these,   these   paper                                                                    
     transactions? ...  The solution for this  first problem                                                                    
     is that  those things would  just be backed  out, still                                                                    
     would  all be  followed for  the GASB  compliance, GAAP                                                                    
     compliance, but  when it came  time for  calculation of                                                                    
     the  actual dividend,  those non-cash  things would  be                                                                    
     backed out.                                                                                                                
REPRESENTATIVE  HUGHES inquired  as  to whether  the AIDEA  board                                                               
supports  the legislation,  and the  time  of the  origin of  the                                                               
proposed legislation.                                                                                                           
4:34:02 PM                                                                                                                    
MR.  LAMB answered  that during  the FY  2015 audit,  sometime in                                                               
July, he talked  to the AIDEA executive director,  and the board,                                                               
and suggested there should be  legislative statutory changes.  He                                                               
assured the  committee the board  is aware of, and  supports, the                                                               
proposed  legislation.    He  pointed   out  AIDEA's  mission  is                                                               
employment,  financing,  to  generate  income, and  to  be  self-                                                               
sustaining.  In  addition, it is important for  AIDEA's income to                                                               
be stable and predictable when  it approaches rating agencies for                                                               
bonds and  financing, and  he characterized  the changes  as "the                                                               
right thing to  do ... a fair  thing to do."  Mr.  Lamb turned to                                                               
the  second  problem,  the   dividend  penalty  effect  adjusting                                                               
entries,  which he  said  is  a complex  problem.    He said  the                                                               
problem is again leading to more  or less net income - upon which                                                               
the  dividend is  based  - and  depending  on the  circumstances,                                                               
which may or may not affect  the dividend.  Although this problem                                                               
does not arise  frequently, he urged for changes  to address both                                                               
problems.   For a variety  of reasons,  AIDEA may decide  to stop                                                               
work on  a project and remove  the asset from its  balance sheet,                                                               
which  reduces net  income,  and could  have  a dividend  penalty                                                               
effect  [slide  25].   He  described  a hypothetical  project  to                                                               
illustrate  the potential  effect  of an  adjustment  to a  state                                                               
funded  investment,  or  to a  federally  funded  project,  which                                                               
resulted in a $13.2 million loss to the state [slide 26].                                                                       
4:40:30 PM                                                                                                                    
REPRESENTATIVE  LEDOUX questioned  whether the  amount taken  off                                                               
the balance sheet was ever an asset on the balance sheet.                                                                       
MR. LAMB said yes, the amount  was an asset.  In the hypothetical                                                               
example,  the  state gave  AIDEA  $8.8  million  to invest  in  a                                                               
project and the funds were  converted to pay for preliminary work                                                               
to be used in the future for the  project.  He said, "So you keep                                                               
it on  the books, on  the balance sheet  - it has  future value."                                                               
Mr. Lamb gave another example.                                                                                                  
REPRESENTATIVE LEDOUX asked:                                                                                                    
     If you  put it  on the  balance sheet  as an  asset and                                                                    
     then it turns out not to  be an asset, then wouldn't it                                                                    
     make sense  to write it  off ... and  put it down  as a                                                                    
     loss because now it is a loss?                                                                                             
MR. LAMB  said yes, although,  the next question is  whether that                                                               
affects  the dividend.   He  returned attention  to slide  26 and                                                               
restated  the  circumstances   of  the  illustrated  hypothetical                                                               
project.   He  stressed  that AIDEA's  revolving  funds were  not                                                               
invested  in the  asset:   the  state or  the federal  government                                                               
provided the  funds, the funds  were used, and then  written down                                                               
which reduced  the net income,  and thereby reduced  the dividend                                                               
to the  state.  He  advised that this should  not be part  of the                                                               
dividend calculation.                                                                                                           
4:44:38 PM                                                                                                                    
REPRESENTATIVE  LEDOUX   questioned  whether  the   initial  $8.8                                                               
million  to  AIDEA  from  the  state was  part  of  the  dividend                                                               
MR. LAMB said "it actually gets removed."  He added:                                                                            
     Otherwise what  would happen is,  the state  would give                                                                    
     us money,  it would show up  as a revenue, and  then we                                                                    
     would have to give you 25  to 50 percent of it back, so                                                                    
     you  wouldn't have  money to  do  the project.   So  it                                                                    
     comes out - what's missing is the other side of that.                                                                      
MR. TERRIAULT pointed  out that in the example, the  funds were a                                                               
GF appropriation  or a federal  grant, outside of  AIDEA's normal                                                               
revenue  stream.   When  a project  is written  off,  there is  a                                                               
question of  whether that transaction should  impact the dividend                                                               
to  the state  that comes  from  AIDEA's normal  operations.   He                                                               
     And the  suggestion is that  no, those were  funds that                                                                    
     were outside  the normal course of  AIDEA's utilization                                                                    
     of its  income stream and  so it should not  impact the                                                                    
     calculation of the dividend.                                                                                               
MR. LAMB  presented slide 27 which  was a graph of  the impact of                                                               
GASB  31  to  the  state's  dividend  on  the  same  hypothetical                                                               
project.  Slides  28 and 29 presented  an additional hypothetical                                                               
investment to show  the reverse impact when a project  is sold at                                                               
a loss.   Slides 31-33  displayed the statutory  language changes                                                               
included  in  HB  268  and  SB 149.    He  highlighted  that  the                                                               
substance of the  changes sought to correct  both "problem number                                                               
one" and  "problem number two"  are in Section 1,  paragraphs (2)                                                               
and (3)  of the  bill, which  define "mark-to-market  fair value"                                                               
and  "net  income."   He  summarized,  noting that  the  proposed                                                               
statutory change achieves the following [slide 33]:                                                                             
    ·  removes the "market value" entries that impact the                                                                       
      dividend and which will stabilize the dividend                                                                            
    ·  connects the actual payment of a dividend to actual                                                                      
      revenue earned                                                                                                            
    ·  removes the dividend penalty                                                                                             
    ·  aligns statutory language to the fact that the dividend is                                                               
      a cash-based transaction, and brings the language current                                                                 
      with GASB statutes                                                                                                        
[HB 268 was held over.]                                                                                                         

Document Name Date/Time Subjects
HB268 Ver A.pdf HL&C 2/17/2016 3:15:00 PM
HB 268
HB268 Transmittal Letter.pdf HL&C 2/17/2016 3:15:00 PM
HB 268
HB268 Hearing Request.pdf HL&C 2/17/2016 3:15:00 PM
HB 268
HB268 Sectional Analysis.pdf HL&C 2/17/2016 3:15:00 PM
HB 268
HB268 Fiscal Note-DCCED-AIDEA-11-20-15.PDF HL&C 2/17/2016 3:15:00 PM
HB 268
HB268 AIDEA Presentation to HLAC 02-17-16.pdf HL&C 2/17/2016 3:15:00 PM
HB 268