Legislature(2003 - 2004)

04/15/2004 09:06 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= 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                                                               
     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                                                               
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                                                               
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                                                               
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                                                               
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.                                                                                                 

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