Legislature(2003 - 2004)
04/15/2004 09:06 AM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SENATE BILL NO. 65 "An Act authorizing the Department of Corrections to enter into agreements with municipalities for new or expanded public correctional facilities in the Fairbanks North Star Borough, the Matanuska-Susitna Borough, Bethel, and the Municipality of Anchorage." This was the second hearing for this bill in the Senate Finance Committee. State of Alaska Credit Outlook Presentation Credit Analyst, Standard and Poor's Co-Chair Green shared with the Committee that she had recently heard a Standard & Poor's (S&P) report regarding the State's financial condition and funding mechanism options that might be available to fund in-State correctional facilities. She noted that numerous municipalities and boroughs have offered to participate in a "bonding process" to further the correctional facility objective; however, she explained, she has received conflicting reports about how this endeavor might impact "the State's bonded-indebtedness" or credit rating. Therefore, she continued, to clarify the information, she requested S&P to present to the Committee in this regard. She noted that, as standard, S&P would also provide the members with general financial information. ALEX FRASER, State and Local Government Analysts Manager, Southwest and Western Regions of the United States, Standard & Poor's, testified via teleconference from an offnet site in Dallas, Texas, and stated that this is an opportunity for the Members to ask questions relating to the State's credit ratings as well as an opportunity for S&P to follow-up on their presentation to the Conference of Alaskans. He stated that the focus of that presentation was "to stress the need for the State to develop, and continue to develop, a long-term strategy to balance revenues and expenses." That, he attested, "is a very key credit consideration for any government, particularly a state like Alaska, where there is such a need to look at some of those long-term events in the revenue streams." Continuing, he shared that leasing and public finance are mechanisms that "have gained acceptance" during the past twenty-five years and have "become a critical mechanism" for those states that "have limited ability to issue general obligation (GO) debt." He disclosed that various authorities have been created with financing being "dependent on regular, annual appropriations from the state or other government to meet the debt service payments." Mr. Fraser stated that, "it is critical" that any lease- financing arrangement be supported by both the legislative and executive branches, as, he stressed, "this adds a large degree of support to the ultimate credit decision, if we know that the project being contemplated" has garnered long-term support. He attested that, while it is expected that the terms of the bonds would be supported for the life of the bonds, it has been experienced that a future body questioned a decision of earlier bodies. He stressed that "any disruption in the lease payment is taken into account, often taken quite harshly on the general obligation credit." Therefore, he continued, the development of a flaw could negatively impact a state's GO rating. He avowed that rather than endorsing any particular project, S&P usually becomes involved "at the point" where the financing is about to be undertaken. Senator Dyson asked whether a state's implementation of a Constitutional spending limit might affect its credit rating. Mr. Fraser "supposed" that, "having mechanisms to enforce fiscal discipline would be good;" however, he stated that a balance must be obtained that would allow "flexibility." He stated that without the complete details of the program, it is difficult to provide an answer. GABRIEL PETEK, Primary Analyst for Alaska, Standard & Poor's, testified via teleconference from an offnet site in San Francisco, California, and responded that, were a spending limit in place, S&P would "focus on the progress that the State could make toward achieving structural balance, whether that were achieved" as the result of "a change in the State's revenue base or through spending controls." He acknowledged the efforts the State has implemented in regards to spending controls over the past several years. He attested that S&P does "not take a real pointed position on how it's achieved, it's more our interest that" structural balance is achieved." He stated that, "the only caveat about a spending limit is to the extent that the emphasis or the priority became meeting the policy or meeting the targets of the spending limit plan as opposed to focusing on the bottom line of structural balance or the fundamentals." Sometimes, he shared, states get into trouble when they, in order to demonstrate an accomplishment in an accounting base, move some payments from one month into the next month in order to perhaps "move it into the next fiscal year in order to adhere to some spending plan that has been put in place." He declared that a policy like that does not lend to improving the fundamental credit quality of a state. Therefore, he summarized that S&P's focus is on the structural quality of the budget in regards to ongoing revenue and expenditures. Senator Hoffman asked whether the State's ability to manage the Permanent Fund and the Earnings Reserve Account (ERA) favorably affects the State's credit rating. Mr. Petek replied "absolutely." He shared that 92-percent of all states' credit ratings range from a AA- rating to AAA rating, and that of all the states, 34 percent, including Alaska, have an AA rating. He continued that, while Alaska has "a strong and high credit rating," it's within the normal range for states. He opined that were states recognized as a sector, they would be one of the highest credit quality sectors that S&P follows. At the same time, he warned, there are issues that Alaska must address "in the not too distance future" in regards to its credit; specifically its structural budget gap, which he pointed out "is much larger than any other state." He stressed that, "if it were not for the State's Permanent Fund and other underlying resources and, more recently, the Constitutional Budget Reserve (CBR) … it would be unlikely that the State's rating would be at the current level." While noting that the State's prudent management of its resources is reflected favorably in its AA credit rating, he communicated that S&P's two-year time horizon on its bond rating for Alaska would either be stable, positive or negative depending on the current trend. He specified that the State currently has a AA rating with a stable outlook; however, he cautioned that "at the time when the CRB is projected to be depleted within that two-year horizon, that stable outlook" could potentially be downgraded to a negative outlook were changes not made to the budget. Senator Hoffman asked why "the substantial funds" in the Permanent Fund Earnings Reserve Account (ERA) would not be a factor, as he continued, that account could be accessed with a simple majority vote were the State to have a budget deficit. Continuing, he asked whether funds like the ERA could be factored into the rating scenario. Mr. Petek responded that while such funds are considered, they would be "treated as a one-time non-recurring resource that could provide a buffer;" however, he commented that S&P does not recognize that "as equating to structural budget balance." Furthermore, he continued, were "the State to rely on the earnings from the Permanent Fund as an on-going revenue source" in such a manner as proposed by the Percent of Market Value (POMV) plan's concept of treating it "like an endowment fund," S&P would recognize it as a reasonable idea and "would be comfortable in analyzing that in the context." He noted that endowment funds are factored into the ratings of universities and other institutions and that analysts are comfortable with including them in the process as procedures have been established for their inclusion. He stated, therefore, that the State's incorporation of the POMV would be "one way to approach this;" however, he qualified that while the POMV could be a "reasonable approach" to the issue, S&P does not desire to comment on policy proposals as it desires to remain objection. He continued that, "absent a defined plan, and just having the Permanent Fund available… is less desirable," as S&P would desire some "specific approach to utilizing the earnings." Mr. Fraser commented that POMV would be viewed as a stream of payments rather than as one lump sum. Senator Hoffman clarified that his comments did not pertain to changing the manner through which the Permanent Fund might be invested under POMV. Rather, he attested, his comments were that "the Permanent Fund earnings are not a one-time account" as both the Permanent Fund and the earnings are permanent. Furthermore, he attested, the earnings go into the Permanent Fund Earnings Reserve Account and "the Legislature has not decided to spent those earnings on government but has spend them on dividends and inflation proofing." He characterized the account as a re- occurring account, whose revenues should be viewed accordingly, and, he stressed that the State's "rating should remain on the positive note rather than being viewed in a negative light because the CBR is on the decline." Mr. Fraser responded that were the Permanent Fund to produce a predictable flow of funds, or "regular payments based on some formula" it would be viewed similar to endowments and other credits. He stated that this would provide a "relatively strong revenue stream; it would be very predictable from year-to-year, and would be a strength." Mr. Petek informed the Committee that in recent internal S&P committee reviews, there has been an interest "in having a detailed explanation about where this State stands with this structural gap and if, there is movement on that front." Senator B. Stevens asked whether the presenters have taken into consideration that "it appears" there would not be a structural budget gap in FY 04. Mr. Petek responded yes, that they had recently received an updated revenue trends report. He referenced his earlier comments regarding the two-year time horizon ratings outlook forecast, and commented that "that probably won't happen until the CBR is projected to be depleted within that timeframe, so to the extent oil prices and revenues remain strong as they are, I guess it buys a little extra time. But the fact of the matter is, its probably temporary." He stated that it would not "be conservative fiscal planning to assume the revenues would remain at the current levels." Senator B. Stevens noted that he would "tend to agree with that statement." Continuing, he asked the presenters their views on recent State discussions regarding modifying "the existing tax structure that surrounds the oil industry"; specifically, he asked how the State's bond rating might be affected were the State "to restructure the oil industry and generate more money" from oil even though, he acknowledged, that the State would remain dependent on this one revenue source. Mr. Petek responded that the details of the proposal would be a factor. He continued that the revenues currently being received from that industry, the State's reliance on that industry, and future expansions in that industry and other industries such as tourism and service sectors are currently factored into the S&P credit reports. He opined that restructuring of the oil industry's tax structure might align with the current report; however, he commented that S&P could be more specific once the details of the proposal were available. Senator B. Stevens acknowledged the response. He communicated the understanding that, from comments he had originally heard in Fairbanks at the Conference of Alaskans and again today, the CBR, which is not a guaranteed annual funding stream but which could be accessed by the Legislature, is viewed as a contributing factor to the State's stable credit rating. However, he voiced being confused regarding the S&P position of not factoring into the credit report, the ERA and the unrealized gain of the ERA "which are statutorily eligible for and classified as funds available for appropriation." Therefore, he asked for further explanation regarding why the ERA, which consists of the realized earnings account that amounts to approximately one billion and the unrealized earnings account of approximately $3.5 billion are not factored into the S&P bond rating analysis. Mr. Petek supposed that the State could divert the money that is specified for the Permanent Fund Dividend payments to the general fund; however, he stated that S&P "looks at things as they actually play out" as opposed to "what is legally available," as it is recognized "that there are practical limitations sometimes to utilizing all resources available." Mr. Fraser agreed. He noted that were those balances deposited into the CBR, it might "forestall for a few more years the point at which the rating could be reconsidered due to the structural budget imbalance." Senator B. Stevens voiced that it is difficult to understand why the CBR, which was established in 1990, and whose balance is currently near the average balance of those 14 years, "has not evolved into a funding mechanism instead of a structural imbalance." Although voicing understanding of the S&P position on the ERA, he reiterated that, "it is classified as funds available for appropriation." Senator Bunde understood that the ERA funds are not classified by S&P as part of the State's revenue stream because the State has not previously "shown the interest or the willingness" to access those funds. Mr. Petek responded that that "would be a fair way" to state it. Senator Bunde asked whether implementing statutory language to provide a regular revenue stream from those earnings would have a positive impact on the State's bond rating, even though he admitted, statutory language could be altered from one Legislature to the next. Mr. Fraser underscored Senator Bunde's last comment by stating that S&P has witnessed a number of policy changes pertaining to such things as rainy day funds in states throughout the country. However, he voiced that any revenue stream being reviewed as part of an overall structural budget is evaluated for such things as "any concentration in one source, its predictability, its volatility" and other factors. Senator Bunde surmised therefore that, in order to ensure the State's high credit rating, the State could constitutionally institute such things as the POMV program and dedicate those earnings to State government or it could statutory use some of the excess earnings of the Permanent Fund. Both of these avenues, he declared, "would be considered a revenue stream to government" and would assist in ensuring the State's good credit rating. Mr. Fraser stated that the details of these two options would require review; however, he stated that were the end result to be "structural balance, regardless of how we got there, that would be the important thing." Senator B. Stevens, following-up to Senator Bunde's questioning voiced the understanding that the State would not be able to claim the ERA as a stable funding source unless the State established a law specifying that a specific amount of the ERA would be used to create a sustainable funding stream for government. Continuing, he questioned the reasoning behind the credit rating position that the State would have to spend the money in order for it to be deemed as a sustainable funding source as opposed to not factoring that money in, in light of the Legislature's current ability to access the funds in the event of a shortfall. Mr. Petek responded that the difference in the two scenarios is that one would be viewed as a savings account that would be considered as a one-time funding source as opposed to one being treated as an ongoing portion of the revenue base for the State. He exampled that were "the ongoing revenue base short of the ongoing expenditures, and the reliance is on an existing reserve fund, then it's viewed more like sort of plugging the gap verses having a predictable, projected, and forecasted stream of revenue from the earnings that would be built into the budget as an on-going source." Therefore, he stated that the rating is calculated on how the reserve would be treated. Co-Chair Green concurred with Senator B. Stevens's understanding that the State would be required to spend out of a fund in order for it to be classified as revenue. [Note: With the exception of the following excerpt, the remainder of the discussion with Standard & Poor's addressed the State's prison situation. Those minutes are forthcoming.] Senator Bunde inquired as to whether the presenters could comment on how Governor Frank Murkowski's recent POMV proposal might address the State's credit rating concern. Mr. Petek stated that S&P is aware of the proposal. He reiterated, "that the POMV concept is something that we are accustomed to seeing with institutions that have large endowments." Therefore, he continued, "it could actually provide an ongoing source of revenue that could help address this budget gap." However, he stressed that rather than voicing a position on public policy issues, S&P would "focus on the bottom line." Senator Bunde stated that the Governor's proposal includes dedicating a portion of the POMV funds to the Permanent Fund dividend, thus making them inaccessible for government spending. He asked whether this would positively or negatively affect the State's credit rating. Mr. Petek responded that the POMV concept would provide predictability, as it would not "fluctuate dramatically with market returns from one year to the next." Therefore, he continued it would be a "credit enhancer." He stated that he could not comment on the proposal's dividend component. Senator Bunde asked whether dedicating half of the POMV funds to a dividend would negatively affect the credit rating as opposed to the POMV funds being fully utilized to fund State government. Mr. Petek remarked that due to the fact that none of the funds have ever been utilized to fund State government, it would be positive. Senator Bunde concurred. Senator Dyson understood that the State's credit rating is affected by "the lack of economic diversity" in that it is so dependent on oil revenue. Following up on Senator B. Stevens earlier questioning in this regard, he asked for further clarification as to whether the State's credit rating could be positively impacted were changes made to make the oil industry more viable with a longer-term future. Mr. Petek responded that it might; however, he expressed that the concept is "too general" and that the particulars would be required. Mr. Fraser interjected that "on the corporate side," Exxon Mobil Corporation, which is "a very strong company and very dependent on oil revenues," has a credit rating of AAA. Therefore, he stated that the particulars of the proposal would be important. Senator Dyson voiced the understanding that, regardless of whether larger oil reserves became available for exploration or development and transportation route developed that would guarantee a longer life span and improved delivery methods, it would not enhance the State's credit rating as the State would continue to be a "single factor economy." Mr. Fraser responded that "were the returns to the State so massive that it really outweighed everything else then there really wouldn't be any constraint there on the rating." The bill was HELD in Committee.