Legislature(2003 - 2004)
05/07/2004 08:44 AM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
CS FOR HOUSE BILL NO. 422(STA) "An Act repealing the special subaccount established in the constitutional budget reserve fund; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken stated that this bill would repeal the Constitutional Budget Reserve (CBR) subaccount and thereby allow the Constitutional Budget Reserve (CBR) account balance, in its entirety, "to be invested in fixed income securities." He stated that CS HB 422(STA), Version 23-LS1527\S, and its accompanying fiscal note #1 from the Department of Revenue, is before the Committee. JAMES ARMSTRONG, Staff to Representative Bill Williams, the bill's sponsor, specified that this bill would repeal an act enacted in the year 2000 that created a $400 million subaccount within the CBR Fund. This action, he continued would "collapse" those funds back into the primary CBR account. He stated that this subaccount "was targeted to obtain a higher yield for the investment strategy." Furthermore, he noted, that the Commissioner of the Department of Revenue was instructed to assume that the subaccount would not be accessed for five years. He stated that this legislation is requested by the Department of Revenue. Senator Dyson asked regarding the rate of return experienced by the subaccount. TOMAS BOUTIN, Deputy Commissioner, Department of Revenue, responded that during the last three years, the subaccount achieved a 4.70 percent rate of return as compared to the primary CBR account's 5.44 percent rate of return. Senator Dyson asked whether these are gross or net return rates. Mr. Boutin expressed that these returns "are gross of fees." However, he noted that the subaccount has an annual fixed management fee amounting to $125,000. He stated that the CBR's fixed income accounts are managed internally, at an annual "rule of thumb cost" of approximately three basis points. Senator Dyson declared that contrary to the goal of generating a higher yield, the subaccount actually returned a lesser rate than the primary CBR account. Mr. Boutin opined that the timing of establishing the account "couldn't have been poorer" in that it ventured into equities in the spring of the year 2000. Senator Bunde communicated that the reason that CBR Funds are not positioned in "more aggressive management" is that access to the funds must be available on "a short-term basis" in order to be used to balance the State's budget. This, he asserted, was and continues to be a concern regarding the establishment of this subaccount. He communicated that because a higher rate of risk accompanies the decision to achieve a higher rate of return, the investment must remain invested in the financial market over a long-term in order to amortize the risk. He stated that this is contrary to being able to access CBR funds as budgeting factors might require. Mr. Boutin responded that that is "exactly the reason" the Department of Revenue has requested this legislation. He distributed two handouts titled " Constitutional Budget Reserve" and "Constitutional Budget Reserve Subaccount" [copies on file]. Senator B. Stevens reviewed the "Constitutional Budget Reserve Subaccount" handout and asked whether eliminating the subaccount at this time would result in selling at a loss as opposed to continuing the account until the loss could be "recaptured." Mr. Boutin qualified that neither the Department of Revenue nor the Legislature are "market timers," and therefore, he reiterated that this is the reason the Department of Revenue believes that "fixed income is appropriate." He noted that the Commissioner of the Department of Revenue, as the fiduciary for this money, could invest it, limited by the prudent investor rule, for the highest rate of return. He disclosed that the Department conducts quarterly evaluations of the Fund's "targets" to determine the appropriate investment strategy. He declared that because the CBR is currently utilized as the State's "checking account," the Department has determined that long-term investments are not the proper strategy at this time. Senator B. Stevens voiced that, "at this point," he does not support this legislation, as he calculated, that there would not be "a significant draw" on the CBR, which currently amounts to approximately $1.5 billion, until June 30, 2005. He opined that that a three-year and five-year "time horizon on an investment cycle is short-term." He stated that were the Legislature "forced to liquidate the $420 million that was originally invested for a long-term horizon, prematurely, we are destined to lose money." He spoke against the legislation as he reiterated that the money is not required at this time and should continue to be invested, as established, in the long-term equity market investment for a minimum of five years. Co-Chair Wilken ordered the bill HELD in Committee for further consideration.