Legislature(2003 - 2004)
05/09/2004 12:10 PM 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 second hearing for this bill in the Senate Finance Committee. Co-Chair Wilken stated that this legislation would repeal the Constitutional Budget Reserve (CBR) subaccount and, thereby, allow "the entire CBR to be invested in fixed income securities." He informed the Committee that the Department of Revenue would be responding to concerns raised during the first hearing on this bill regarding the investment policy pertinent to the $400 million subaccount. TOMAS BOUTIN, Deputy Commissioner, Department of Revenue, reminded that Committee that, in the year 2000, legislation was adopted that transferred $400 million from the CBR into a separate subaccount to be "invested under the assumption that it would not need to be available for five years or longer." Mr. Boutin stated that the Department has determined that this subaccount "is no longer appropriate" in light of the manner in which the CRB is currently being utilized. He shared that the subaccount has experienced "a great deal of volatility" and, in fact, did not obtain its original investment level until December 2003. He declared that "the fundamental investment policy" of the Department is that the CBR should be in fixed income accounts rather than being "market timers." Senator Olson asked the current value of the subaccount and its anticipated year-end projection. Mr. Boutin stated that the current balance of the subaccount is $419 million, and that no projections have been undertaken. Co-Chair Wilken recalled that this subaccount was established with the goal of investing for the long-term in order to achieve higher yields than those realized by the CBR, which, due to the State's need to be able to access CBR funds to cover State deficits, "was invested on a somewhat short-term basis that have lower returns." He also understood that the revenue generated by the subaccount investments has never achieved the revenue stream level required to provide bond support. Mr. Boutin affirmed that this is correct. He also recounted that the Department had notified the Legislature that the CBR fund could not be used as security for the issuance of tax-exempt bonds, according to Internal Revenue Service (IRS) code guidelines for "replacement proceeds". Therefore, he continued, a yield restriction is "placed on the entire CBR and any part of it then pledged as security for tax exempt debt." Co-Chair Wilken acknowledged that yield restriction parameters exist. JAMES ARMSTRONG, Staff to the bill's sponsor, Representative Bill Williams, noted that the bond support provisions were removed from the year 2000 legislation before it was adopted. Co-Chair Wilken acknowledged the clarification. Senator Hoffman commented that in light of Governor Frank Murkowski's position that the CBR should maintain a specified minimum dollar balance, the Legislature could "contemplate" designating that the minimum balance amount be invested for the long-term in order to "potentially" obtain higher yields. Mr. Boutin clarified that the Governor's position is to maintain a one billion minimum CBR balance. He informed that projections indicate that this "threshold amount" might be breached in the spring of 2006. He stated that, "if and when that one billion dollar account balance is reached," it should be maintained in liquid investments as traditionally, in addition to the possibility that a CBR draw might be required in order to balance the State's budget, a minimum cash flow of $400 million has historically been required, annually, to fund fire suppression, highway projects, and other projects that would later be federally reimbursed or funded later in the year. In addition, he stated that CBR funds might also be required were crude oil prices, which are a factor in the State's budgeting process, to plummet. He stated that the CBR account balance, including the subaccount balance, is currently $2,074,400,000. Senator Hoffman asked the rationale of abandoning this subaccount prior to its long-term five-year maturity date, as he argued, doing so would not allow proper evaluation of the concept. Mr. Boutin responded that, contrary to procedures that were in place when the subaccount was established, the Department does not currently maintain five-year time horizon projections. Senator B. Stevens asked whether the current $2 billion cash balance is an accrued balance or a cash balance. Mr. Boutin clarified that it is the cash balance. Senator B. Stevens asked for further information regarding the accrued balance, or money owed from reimbursement. Mr. Boutin stated that there are no borrowings against the CBR, as it has not been used to provide security or debt. However, he stated that "suspend account" items such as outstanding warrants from fire suppression efforts and other reimbursable funds are not included in the cash balance amount. Senator B. Stevens asked what the CBR balance would be were suspend accounts included. Mr. Boutin stated that each weekday morning a reconciliation of outstanding warrants is conducted. Senator B. Stevens informed that, according to a recent Legislative Finance Division report [copy not provided], $300 million of CBR funds were allocated to but not utilized by Departments and should be swept back into the CBR. Co-Chair Wilken interjected that David Teal, the Director of Legislative Finance, has informed him that the cash balance of the CBR is approximately two billion dollars and that were all outstanding warrants reimbursed, the cash balance would be $2.4 billion. Co-Chair Wilken commented that reconciling the cash balance of the CBR is not pertinent to this legislation. Senator B. Stevens stated that he does not support this legislation. Senator Hoffman asked the Department whether a CBR draw is anticipated this fiscal year due to the fact that crude oil prices are hovering in the $40 per barrel range. Mr. Boutin responded that, based on recent calculations, this year's CBR draw could be between $50 and $70 million. Senator Hoffman asked whether this draw is factored into the $2.1 billion cash balance. Mr. Boutin responded in the negative. Senator Bunde moved to report the bill from Committee with individual recommendations and accompanying fiscal notes. There being no objection, CS HB 422(STA) was REPORTED from Committee with negative $125,000 fiscal note #1, dated February 9, 2004 from the Department of Revenue.