Legislature(2003 - 2004)

02/26/2004 08:03 AM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 422-BUDGET RESERVE FUND INVESTMENT                                                                                         
Number 0495                                                                                                                     
CHAIR WEYHRAUCH announced  that the next order  of business would                                                               
be HOUSE BILL  NO. 422, "An Act repealing  the special subaccount                                                               
established in  the constitutional budget reserve  fund; relating                                                               
to the powers of the Department  of Revenue for the investment of                                                               
amounts in the constitutional budget  reserve fund; and providing                                                               
for an effective date."                                                                                                         
Number 0411                                                                                                                     
JAMES  ARMSTRONG, Staff  to Representative  William K.  Williams,                                                               
presented HB 422 on behalf  of the House Finance Committee, which                                                               
Representative Williams co-chairs.  He  explained that HB 422 was                                                               
sponsored by  the House Finance  Committee at the request  of the                                                               
Department   of  Revenue   to  repeal   the  subaccount   in  the                                                               
constitutional  budget reserve  fund (CBRF)  created in  the year                                                               
Number 0296                                                                                                                     
REPRESENTATIVE  BERKOWITZ stated  that it  would be  more helpful                                                               
for the  committee to have  the backup  information, particularly                                                               
about  the  rates of  return  for  the  different accounts.    He                                                               
reminded   the   committee   that  then-Senator   Torgerson   had                                                               
introduced  this   legislation  initially  with  the   intent  of                                                               
increasing the rate of return  for the CBRF portions that weren't                                                               
likely to be used to fund the government on a regular basis.                                                                    
REPRESENTATIVE BERKOWITZ pointed out  that this is an opportunity                                                               
for the  House State  Affairs Standing  Committee to  address the                                                               
minimum balance  of money that [the  state] needs to keep  in the                                                               
CBRF.   He  noted that  Governor Murkowski  prefers a  $1-billion                                                               
minimum.   Representative  Berkowitz shared  that he  thought $1-                                                               
billion was too  low.  He followed that up  with his beliefs that                                                               
a  $1-billion minimum  jeopardizes bond  ratings and  [the state]                                                               
risks losing  the interest income that  comes from the CBRF  as a                                                               
way to  bridge the fiscal  gap.   He asked what  the expectations                                                               
from [the Department of Revenue] are by drawing down the CBRF.                                                                  
TAPE 04-24, SIDE A                                                                                                            
Number 0001                                                                                                                     
TOMAS  H. BOUTIN,  Deputy  Commissioner,  Department of  Revenue,                                                               
explained the derivation  of HB 422, stating that  the CBRF isn't                                                               
being  replenished, it  is being  drawn down  regularly, and  now                                                               
some $7 billion is owed to  it.  He added that investing equities                                                               
for a time horizon of  five years isn't an appropriate investment                                                               
and [the Department of Revenue]  feels that it is better fiscally                                                               
to  repeal the  subaccount in  the  CBRF and  thus had  requested                                                               
introduction of HB 422 to do so.                                                                                                
Number 0148                                                                                                                     
CHAIR WEYHRAUCH  asked for clarification  on the amount  of money                                                               
owed to  the CBRF, and how  much money the CBRF  currently has in                                                               
MR. BOUTIN  stated that $7 billion  has been taken from  the CBRF                                                               
and the current  balance of the CBRF is  $1.89 billion, including                                                               
the subaccount that is involved in HB 422.                                                                                      
Number 0202                                                                                                                     
CHAIR WEYHRAUCH asked  why the sum of the money  owed to the CBRF                                                               
is $7 billion.                                                                                                                  
MR. BOUTIN  replied that the  money hasn't been  replenished, and                                                               
if it had been replenished, then  he believes another look at the                                                               
range of investments would be in order.   But the way the CBRF is                                                               
being used now, it doesn't  suggest that a five-year time horizon                                                               
is financially responsible.                                                                                                     
Number 0306                                                                                                                     
REPRESENTATIVE  HOLM asked  if he  was correct  in thinking  that                                                               
right  now [the  state] borrows  the money  [from the  CBRF], and                                                               
never pays it back.                                                                                                             
MR. BOUTIN stated it was  his understanding that is what happens.                                                               
He qualified the  borrowing from the CBRF by  explaining that the                                                               
Department of  Revenue, Treasury Division, borrows  from the CBRF                                                               
regularly for  cash flow  reasons.   He went  on to  explain that                                                               
because of the  mismatch in cash flow throughout the  year, it is                                                               
often necessary  to draw from the  CBRF early in the  fiscal year                                                               
and  then reimburse  it  when  they collect  the  money from  the                                                               
federal government  or the  other sources of  revenue.   He added                                                               
that within the last six weeks  $100 million was paid back to the                                                               
CBRF  from  the general  fund  for  cash  flow purposes,  and  it                                                               
doesn't look as  though there will be another draw  from the CBRF                                                               
this fiscal year.                                                                                                               
Number 0466                                                                                                                     
MR. BOUTIN  further explained that  his previous  comments didn't                                                               
really relate  to HB  422.   He stated that  HB 422  was directed                                                               
towards eliminating  the five-year investment subaccount  that is                                                               
currently in effect because it  isn't good fundamental investment                                                               
policy and it should be a part of the main CBRF account.                                                                        
REPRESENTATIVE BERKOWITZ  asked Mr.  Boutin to contrast  the rate                                                               
of return on  the subaccount with the rate of  return on the main                                                               
MR. BOUTIN, referring  to the "CBR subaccount"  graph, noted that                                                               
the  subaccount  has had  a  "rollercoaster"  ride and  has  just                                                               
recently gotten  back to the original  amount that it had  in the                                                               
year 2000.   He added  that the most  recent numbers that  he has                                                               
for the  subaccount are from  the second quarter for  fiscal year                                                               
2003 and that the  rate of return is at 7.81  percent.  He stated                                                               
that the  main CBRF's  rate of  return for  fiscal year  2004, to                                                               
date, is at 0.78 percent.                                                                                                       
Number 0711                                                                                                                     
REPRESENTATIVE BERKOWITZ  asked for clarification on  the request                                                               
to  move money  from the  subaccount  that is  yielding almost  8                                                               
percent to an account that is yielding less than 1 percent.                                                                     
MR. BOUTIN stated that [the  Department of Revenue employees] are                                                               
not  "market   timers";  they  just   use  the   best  investment                                                               
methodologies  that they  adopt in  the quarterly  meetings.   He                                                               
said  that it  wouldn't  be appropriate  for  [the Department  of                                                               
Revenue]  to be  market  timers.   He  added  that the  long-term                                                               
investment horizon  that is in  effect with the  subaccount isn't                                                               
appropriate for the way  that the CBRF is used by  the state.  He                                                               
explained  that  the Department  of  Revenue,  on behalf  of  the                                                               
[Alaska  State]  Pension  Investment Board,  has  investments  in                                                               
private  equity  and  real  estate,   and  major  investments  in                                                               
equities.   He continued that  the way the  CBRF is used,  from a                                                               
fundamental standpoint,  doesn't suggest that anything  besides a                                                               
fixed income should be used.  He  said that if the CBRF were used                                                               
differently  later,  then  the   investment  strategy  should  be                                                               
revisited.   But the  way it  is used  now, it  isn't financially                                                               
sound to have the five-year horizon.                                                                                            
Number 0876                                                                                                                     
REPRESENTATIVE   BERKOWITZ  pointed   out   that  the   7-percent                                                               
difference that would exist if  the $400 million was shifted from                                                               
the subaccount to  the main CBRF account would  yield $28 million                                                               
less per  year, which is substantially  in excess of most  of the                                                               
revenue-raising  measures   that  the  current   legislature  has                                                               
passed.  He  voiced his concern that the  Department of Revenue's                                                               
proposal  portrays a  real  pessimism  about [the  legislature's]                                                               
ability to solve  the fiscal gap.  He stated  his opinion that he                                                               
wasn't  sure   if  HB  422   is  the  prudent  course   for  [the                                                               
legislature] to take at this point.                                                                                             
Number 0937                                                                                                                     
REPRESENTATIVE GRUENBERG  stated that the amendment  in Section 1                                                               
wasn't   really   necessary   because  if   the   management   of                                                               
responsibility is  not transferred  to the Alaska  Permanent Fund                                                               
Corporation,   then  automatically   the   commissioner  of   the                                                               
Department of Revenue would invest the money in the CBRF.                                                                       
REPRESENTATIVE  BERKOWITZ   asked  if  the   managerial  function                                                               
proposed in Section  1 of the bill would be  something that could                                                               
be done by executive order.                                                                                                     
Number 1042                                                                                                                     
MR.  BOUTIN answered  that he  wasn't really  sure if  that could                                                               
REPRESENTATIVE BERKOWITZ  asked about  the impact on  the state's                                                               
bond rating if the change proposed in HB 422 is put in effect.                                                                  
MR.  BOUTIN said  that there  would be  no bond-rating  impact by                                                               
changing from one  investment to another.  He  explained that the                                                               
CBRF is  used by the state  as a cash flow  buffer, and commented                                                               
on  the importance  of a  cash flow  buffer to  the credit-rating                                                               
agencies.    He added  that  he  doesn't  believe the  choice  in                                                               
investments  that money  managers can  decide from  is a  credit-                                                               
rating  issue.   He went  on  to explain  that if  the cash  flow                                                               
buffer is  invested in something  other than liquid  assets, like                                                               
real estate, then it may be an issue.                                                                                           
Number 1158                                                                                                                     
REPRESENTATIVE BERKOWITZ  asked if the Department  of Revenue had                                                               
checked with any  of the bond-rating entities.  He  said he feels                                                               
that removing  one of  the bulwarks of  protection from  the CBRF                                                               
could  have  some  adverse  consequences.   He  stated  that  due                                                               
diligence would  require the  Department of  Revenue to  at least                                                               
ask the credit-rating agencies before proceeding.                                                                               
MR. BOUTIN said  that the Department of Revenue is  in touch with                                                               
all   three  major   credit-rating  agencies,   and  moving   the                                                               
subaccount  from equities  into fixed  income does  not pose  any                                                               
Number 1211                                                                                                                     
REPRESENTATIVE BERKOWITZ  asked if the Department  of Revenue has                                                               
been affirmatively told  by a credit-rating agency  that it would                                                               
have no effect, or if Mr.  Boutin was pulling from his experience                                                               
dealing with the credit-rating agencies.                                                                                        
MR. BOUTIN  said that this issue  doesn't rise to the  level that                                                               
would require direct  input from the credit-rating  agencies.  He                                                               
explained  it was  an investment  management move  and that  they                                                               
need the authority to do it.   He added that if the Department of                                                               
Revenue was proposing  to eliminate the CBRF, then  that would be                                                               
a  credit-rating issue,  but shifting  a $400-million  subaccount                                                               
over time from equities to  a fixed-income account has no credit-                                                               
rating issues.                                                                                                                  
Number 1281                                                                                                                     
REPRESENTATIVE BERKOWITZ  asked if the Department  of Revenue was                                                               
signaling to the credit-rating agencies  that something was wrong                                                               
by raiding  this $400  million dollar  subaccount to  balance the                                                               
state budget.   He added that it seems like  a very strong signal                                                               
to Wall Street.                                                                                                                 
MR.  BOUTIN  explained that  the  Department  of Revenue  is  not                                                               
spending  any money  from  the CBRF  with HB  422;  it is  merely                                                               
moving investments  from one account  to another.  He  added that                                                               
if this were  an expenditure of $400 million, it  may be a credit                                                               
issue.   Mr. Boutin clarified  that HB  422 would just  allow the                                                               
Department  of Revenue  to transfer  investments  to a  different                                                               
account  that it  feels is  a  more prudent  type of  investment,                                                               
given the way the CBRF is currently used.                                                                                       
Number 1382                                                                                                                     
CHAIR WEYHRAUCH summarized  the questions that he  felt needed to                                                               
be answered by the Department of  Revenue the next time the House                                                               
State  Affairs Standing  Committee heard  HB 422.   He  explained                                                               
that some  of the concerns  are somewhat philosophical  in terms,                                                               
relating  to  long-term  versus short-term  investments  and  the                                                               
relationship  to the  creditor bond  rating, since  HB 422  would                                                               
remove the money from a long-term account.                                                                                      
[HB 422 was held over.]                                                                                                         

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