Legislature(2017 - 2018)SENATE FINANCE 532

03/02/2017 09:00 AM Senate FINANCE

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09:02:46 AM Start
09:04:21 AM SB57
09:40:35 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
<Above Item Removed from Agenda>
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                       March 2, 2017                                                                                            
                         9:02 a.m.                                                                                              
9:02:46 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair  MacKinnon  called  the  Senate  Finance  Committee                                                                    
meeting to order at 9:02 a.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Anna MacKinnon, Co-Chair                                                                                                
Senator Click Bishop, Vice-Chair                                                                                                
Senator Donny Olson                                                                                                             
Senator Mike Dunleavy                                                                                                           
Senator Peter Micciche                                                                                                          
Senator Natasha von Imhof                                                                                                       
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Gene  Therriault,  Energy  Policy Assistant,  Alaska  Energy                                                                    
PRESENT VIA TELECONFERENCE                                                                                                    
Brenda  Applegate,  Controller  and  Assistant  CFO,  Alaska                                                                    
Industrial  Development and  Export Authority  (AIDEA); John                                                                    
Springsteen,   Chief   Executive   Officer   and   Executive                                                                    
Director,   Alaska   Industrial   Development   and   Export                                                                    
Authority,  Department of  Commerce, Community  and Economic                                                                    
SB 57     AIDEA:DIVIDEND TO STATE;INCOME;VALUATION                                                                              
          SB 57 was HEARD and HELD in committee for further                                                                     
SENATE BILL NO. 57                                                                                                            
     "An  Act  relating to  the  dividends  from the  Alaska                                                                    
     Industrial Development  and Export  Authority; relating                                                                    
     to  the meaning  of 'mark-to-market  fair value,'  'net                                                                    
     income,'  'project or  development,' and  'unrestricted                                                                    
     net  income'  for  purposes of  the  Alaska  Industrial                                                                    
     Development and Export Authority;  and providing for an                                                                    
     effective date."                                                                                                           
Co-Chair  MacKinnon  introduced   two  guest  pages:  Meadow                                                                    
Stanley and Maisy Messing.                                                                                                      
9:04:21 AM                                                                                                                    
GENE  THERRIAULT,  ENERGY  POLICY ASSISTANT,  ALASKA  ENERGY                                                                    
AUTHORITY,   (AEA)   discussed   the   PowerPoint,   "Alaska                                                                    
Development  Finance  Authority;  SB  57  Proposed  Language                                                                    
Changes  to Modernize  AIDEA's  Dividend  Statute" (copy  on                                                                    
Mr.  Therriault  highlighted  slide  2,  "AIDEA's  Dividend:                                                                    
History,  Goal,  Statutory   Language,  and  Two  Accounting                                                                    
Problems Working  to Fix." The  goal was to  bring stability                                                                    
and predictability to the  Alaska Industrial Development and                                                                    
Export Authority  (AIDEA) dividend calculation.  He remarked                                                                    
that there  were two current problems.  The market valuation                                                                    
issue  was   triggered  by   some  new   general  accounting                                                                    
standards rules. The dividend  penalty dealt with infrequent                                                                    
right-downs of projects funded with outside sources.                                                                            
Mr.   Therriault  addressed   slide  3,   "Dividend  Statute                                                                    
Language  Needs   Modernizing,  As  Accounting   Rules  Have                                                                    
Evolved Over Time":                                                                                                             
     3  Accounting  Transaction  Types,  3  Causes  Dividend                                                                    
     1.  Entries  from  "real  transactions"  that  actually                                                                    
     occurred,  they  are   historic  in  nature.  Examples:                                                                    
     booking what  was paid  for an  asset, revenue  that is                                                                    
     generated, payroll  that is paid, taxes  paid, what was                                                                    
     cash received and why, etc.                                                                                                
     2. Entries from  "estimates and allocations". Examples:                                                                    
     booking  depreciation and  amortization expenses  which                                                                    
     recognizes and  records that an  asset used up  some of                                                                    
     it   estimated  useful   life   over   the  period   of                                                                    
     3. Entries  from "market value adjustments".  These are                                                                    
     entries  related to  transactions  that didn't  happen,                                                                    
     but, AIDEA  must record  them for  the audit  as though                                                                    
     they did  to comply with  G.A.S.B. and have  a G.A.A.P.                                                                    
     audit.  (SB   57  proposes   to  update   the  existing                                                                    
     "excluding…"  statutory  language and  remove  G.A.S.B.                                                                    
     "market   value"   impacts   on  the   AIDEA   dividend                                                                    
     calculation)  Example: booking  the gain  or loss  that                                                                    
     would  have  resulted   from  selling  your  marketable                                                                    
     securities on the last day of the year (GASB 31).                                                                          
Mr. Therriault looked at slide 4, "Sec. 44.88.088. Payment                                                                      
of dividend to state":                                                                                                          
     The Pertinent Language:                                                                                                    
     The authority  shall adopt  a policy  for payment  of a                                                                    
     dividend… to the state each fiscal year.                                                                                   
     The amount  of the  dividend payable…  may not  be less                                                                    
     than 25  percent nor  more than 50  percent of  the net                                                                    
     income …for the base fiscal year…                                                                                          
     …"net income" means the change  in net position, or the                                                                    
     equivalent  term  under generally  accepted  accounting                                                                    
     principles,  …  as set  out  in  the audited  financial                                                                    
     statements of  the authority for the  base fiscal year,                                                                    
     excluding  amounts  attributable  to  intergovernmental                                                                    
     transfers,    capital    contributions,   grants,    or                                                                    
     impairment  losses  on  development  projects  financed                                                                    
     under AS 44.88.172;                                                                                                        
Mr. Therriault highlighted slide 5, "Dividend Problem 1:                                                                        
"Market Value" Adjusting Entries":                                                                                              
     Problem 1:                                                                                                                 
     1.      G.A.A.P.     keeps      evolving,     requiring                                                                    
     booking/recording  "market  value"  adjusting  entries.                                                                    
     Essentially,  act like  something happened  that didn't                                                                    
     happen, and book it as though it did…                                                                                      
     2. The  result: AIDEA's "net income"  swings, sometimes                                                                    
     materially,  which means  the  State's dividend  swings                                                                    
     sometimes   materially  year-over-year,   SB  57   will                                                                    
     correct this.                                                                                                              
     3.  Ultimately, the  dividend payment  is a  cash based                                                                    
     transaction. (Paying  it when  cash hasn't  been earned                                                                    
     is a problem -- for AIDEA.  Not paying it when cash has                                                                    
     been earned is a problem -- for the State.)                                                                                
Mr.  Therriault addressed  slide  6, "Problem  1 Analogy  of                                                                    
'Market Value' Entries Impacts."                                                                                                
Mr. Therriault  looked at  slide 7,  "Money Based  Tax Payer                                                                    
Mr.  Therriault  highlighted  slide  8,  "Form  1040  Impact                                                                    
Analogy."  He showed  an example  of  a 10-40  tax form.  He                                                                    
stated that  the example suggested  that the  individual had                                                                    
wages of  $100,000, some  investment income,  dividends, and                                                                    
the  bottom showed  a  total of  $109,000  net income.  That                                                                    
number would then  go into their tax  calculation, and write                                                                    
a check to the federal government.                                                                                              
Mr. Therriault  discussed slide 9, "GASB  Statements 31, 68,                                                                    
72, and 75."  He stated that the slide showed  what would be                                                                    
required of  that individual based  on the  AIDEA dividend's                                                                    
current accounting rules.                                                                                                       
Mr. Therriault looked at slide  10, "Form 1040 Analogy - Add                                                                    
GASB Impacts":                                                                                                                  
     (Now adjust your 1040 total income as if "GASB Type"                                                                       
     adjustments were required at year-end)                                                                                     
Senator  von Imhof  remarked  that the  gains  could not  be                                                                    
recorded when  the asset was  sold. Mr.  Therriault deferred                                                                    
to Ms. Applegate for accounting information.                                                                                    
9:10:07 AM                                                                                                                    
BRENDA  APPLEGATE,  CONTROLLER  AND  ASSISTANT  CFO,  ALASKA                                                                    
INDUSTRIAL  DEVELOPMENT AND  EXPORT  AUTHORITY (AIDEA)  (via                                                                    
teleconference),   agreed  with   Senator  von   Imhof.  She                                                                    
explained  that the  unrealized gains  and losses  became an                                                                    
adjustment to the carrying basis  of those investments going                                                                    
forward. She stated  that there would be a  realized gain or                                                                    
loss on the books when  the investment was sold, which would                                                                    
be the  difference between  what was  actually paid  for the                                                                    
investment   and   the   sales  proceeds.   The   unrealized                                                                    
difference  would  flow back  to  the  unrealized gains  and                                                                    
losses in the year of sale.                                                                                                     
Senator von Imhof surmised that  the changes would result in                                                                    
a large  gain with  a significant  appreciation of  an asset                                                                    
over time  and a  large dividend.  Ms. Applegate  replied in                                                                    
the affirmative.                                                                                                                
Senator von Imhof  wondered how the elimination  of the four                                                                    
GASB rules  would "smooth out"  the dividend over  time. Ms.                                                                    
Applegate  replied that  it  would allow  for  payment of  a                                                                    
dividend  on the  available cash  for  the dividend,  rather                                                                    
than the  paper gains and  losses that would  fluctuate over                                                                    
time. She  remarked that there could  be a large gain  on an                                                                    
appreciated marketable security, but it would be real cash.                                                                     
JOHN  SPRINGSTEEN,  CHIEF  EXECUTIVE OFFICER  AND  EXECUTIVE                                                                    
DIRECTOR,   ALASKA   INDUSTRIAL   DEVELOPMENT   AND   EXPORT                                                                    
AUTHORITY,  DEPARTMENT OF  COMMERCE, COMMUNITY  AND ECONOMIC                                                                    
DEVELOPMENT (via teleconference),  furthered that the change                                                                    
would allow for more predictability and better planning.                                                                        
Mr. Therriault  addressed slide  11, "SB  57 Impact  To 1040                                                                    
     The "market value" unrealized adjustments would be                                                                         
     excluded from "Net Income."                                                                                                
Senator Micciche  remarked that  the GASB rules  was related                                                                    
to  transparency,  and  stressed  that  changing  the  rules                                                                    
eliminated  some of  the transparency  for  the public.  He,                                                                    
however, understood that the changes  would make the process                                                                    
easier for  AIDEA. He queried  an explanation to  the public                                                                    
of  the  reason  for  "sidestepping" the  most  recent  GASB                                                                    
recommendations   for   recording  the   transactions.   Mr.                                                                    
Therriault replied  that AIDEA would continue  to follow the                                                                    
rules in  order to get  its audited financial  statement. He                                                                    
stated that  the change was  to the statute  that instructed                                                                    
AIDEA how  to calculate the  dividend. He remarked  that the                                                                    
legislature  would  instruct AIDEA  on  what  number to  run                                                                    
through the  dividend calculation.  He pointed out  that the                                                                    
request was to change the  dividend calculation to true cash                                                                    
rather than an inflated or artificially deflated number.                                                                        
9:16:11 AM                                                                                                                    
Vice-Chair  Bishop surmised  that  the  attempt was  utilize                                                                    
actual  dividends to  achieve a  "smoothing" affect;  rather                                                                    
than  addressing  the  "peaks   and  valleys"  in  order  to                                                                    
calculate a  dividend. Mr. Therriault agreed,  and furthered                                                                    
that the  next two  slides would help  illustrate Vice-Chair                                                                    
Bishop's comment.                                                                                                               
Mr.  Therriault discussed  slide  12,  "AIDEA's Net  Income,                                                                    
Pre-G.A.S.B. 31 "Market Value"  Adjusting Entries." He noted                                                                    
that  the graph  line moved  up  and down  depending on  the                                                                    
amount of AIDEA activity.                                                                                                       
Mr. Therriault highlighted slide 13,  "GASB 31 Impact to Net                                                                    
Income." He remarked that the  graph had the impact of GASB-                                                                    
31  overlaying   the  current  situation.  He   noted  that,                                                                    
starting  in 1998  at the  initiation of  GASB, there  was a                                                                    
suggestion that  the true net  income was  artificially low.                                                                    
The  GASB  rule  had  artificially  inflated  the  true  net                                                                    
income.   He  furthered   that  the   rule  also   sometimes                                                                    
artificially depressed  the true  net income. The  peaks and                                                                    
valleys  were getting  steeper over  time. He  stressed that                                                                    
the  GASB rule  would  be followed  to  produce the  audited                                                                    
financial statement.                                                                                                            
Mr.  Therriault addressed  slide  15,  "Dividend Problem  2:                                                                    
"Dividend-Penalty" Effect Adjusting Entries":                                                                                   
     Problem 2:                                                                                                                 
     1. When the  value of a project has  been determined to                                                                    
     have  been   permanently  reduced,   G.A.A.P.  requires                                                                    
     recording an adjusting entry  between the Balance Sheet                                                                    
     and the Income  Statement to reduce some or  all of the                                                                    
     value of  an asset  or a  project from  AIDEA's Balance                                                                    
     2.  The   resulting  entry  reduces  net   income.  The                                                                    
     consequence  could either  reduce the  State's dividend                                                                    
     from a  project it funded  or have AIDEA  adjusting its                                                                    
     dividend  calculation   to  offset  the   reduction  in                                                                    
     project value.                                                                                                             
     3.  Thus, there  could  be up  to a  25  percent to  50                                                                    
     percent "dividend penalty" from  an adjusting entry. SB
     57 will correct this.                                                                                                      
9:21:04 AM                                                                                                                    
Senator  Micciche noted  that there  would be  a feasibility                                                                    
study,  instead of  an actual  "environmental impact  study"                                                                    
(EIS). Mr. Therriault agreed.                                                                                                   
Senator Micciche  wondered whether the reference  to GASB-68                                                                    
and  GASB-75 was  merely for  example purposes.  He wondered                                                                    
whether those rules  had an impact on  AIDEA. Mr. Therriault                                                                    
replied  that  they  would  have  an  impact  on  AIDEA.  He                                                                    
deferred to Ms. Applegate.                                                                                                      
Ms. Applegate furthered that  AIDEA had implemented GASB-68.                                                                    
She explained that  AIDEA was part of  the Public Employees'                                                                    
Retirement  System (PERS).  She remarked  that, as  employer                                                                    
under the  state, AIDEA had  a portion of the  pension costs                                                                    
and were  required to follow the  same accounting guidelines                                                                    
as the rest of the  state. She explained that AIDEA recorded                                                                    
a portion of  the pension expense that  was calculated under                                                                    
GASB-68,  and reduced  the  dividend  amount. She  explained                                                                    
that   GASB-75  was   the  other   post-employment  benefits                                                                    
Senator  Micciche assumed  that  the state  had carried  the                                                                    
employment  burden,  and  opposed  to  AIDEA  carrying  that                                                                    
burden individually.                                                                                                            
9:23:11 AM                                                                                                                    
Mr.  Therriault  discussed  slide  16,  "Hypothetical  State                                                                    
Funded Non-172 Project, if Stopped,  Impact to "Net Income".                                                                    
He remarked that  should AIDEA have written  off the project                                                                    
in FY 16, the graph displayed the situation.                                                                                    
Mr.  Therriault looked  at the  Sectional Analysis  (copy on                                                                    
     Section 1: Section 1 amends  AS 44.88.088(b) to include                                                                    
     a   definition   for    "mark-to-market   fair   value"                                                                    
     adjustments   that   are   mandated  by   the   General                                                                    
     Accounting   Standards  Board   (GASB)  and   Generally                                                                    
     Accepted  Accounting Principles  (GAAP).  It then  adds                                                                    
     these  adjustments   and  noncash   accounting  entries                                                                    
     relating  to pension  obligations and  benefits to  the                                                                    
     existing  statutory  list  of  items  that  are  to  be                                                                    
     excluded  from "net  income"  prior  to calculation  of                                                                    
     AIDEA's dividend to the state treasury.                                                                                    
     Section 1  also adjusts  the existing scope  of project                                                                    
     losses that are  to be excluded from  the definition of                                                                    
     AIDEA's  statutory  net  income  (dividend  base).  The                                                                    
     Legislature   previously    instructed   that   amounts                                                                    
     attributable  to  intergovernmental transfers,  capital                                                                    
     contributions and grants were to  be excluded so as not                                                                    
     to impact  the dividend  base. Additionally,  losses on                                                                    
     development  projects financed  under AS44.88.172  were                                                                    
     also  excluded. However,  the prior  policy instruction                                                                    
     did  not anticipate  periodic write  offs for  projects                                                                    
     financed  outside of  AS44.88.172 with  funds from  non                                                                    
     AIDEA sources.  In these limited cases,  project losses                                                                    
     would  affect  AIDEA  financial  statement  net  income                                                                    
    which could, in turn lower the calculated dividend.                                                                         
     Finally,   Section   1   applies   the   mark-to-market                                                                    
     adjustment,  noncash pension  and other  postemployment                                                                    
     benefit   adjustments   and  redefined   project   loss                                                                    
     exclusions discussed  above to all AIDEA  funds subject                                                                    
     to   the  dividend   statute   to  remove   unnecessary                                                                    
     volatility from the yearly dividend.                                                                                       
     Section  2:   Section  2  provides  for   an  immediate                                                                    
     effective date.                                                                                                            
9:27:38 AM                                                                                                                    
Senator  Micciche understood  the purpose  of the  bill, and                                                                    
expressed support for the legislation.  He remarked that the                                                                    
bill   expanded   AIDEA's   categories  of   projects.   Mr.                                                                    
Therriault replied that the  changes acknowledged that there                                                                    
had been  additional funds  added over  the years,  so those                                                                    
funds  were   added  to  the   list.  He  deferred   to  Mr.                                                                    
Springsteen and Ms. Applegate.                                                                                                  
Mr. Springsteen agreed with Mr. Therriault.                                                                                     
Ms.  Applegate  stated  that the  current  dividend  statute                                                                    
applied to projects financed under  the Section 172 statute.                                                                    
She  stated that  AIDEA had  been participating  in projects                                                                    
that did not fit into the  Section 172 statute, so there was                                                                    
a desire to include the projects in the bill language.                                                                          
9:29:34 AM                                                                                                                    
AT EASE                                                                                                                         
9:32:09 AM                                                                                                                    
9:32:13 AM                                                                                                                    
Senator Micciche  wondered whether  the purpose of  the bill                                                                    
was  to modernize  the  dividend statute  or  to expand  the                                                                    
scope of  AIDEA's ability to participate  in energy projects                                                                    
up to  and including existing  facilities in the  state. Mr.                                                                    
Therriault replied that the  bill allowed for predictability                                                                    
to the calculation of the  dividend. The bill did not expand                                                                    
AIDEA's authority to participate  in any projects beyond the                                                                    
current statutes.                                                                                                               
Co-Chair Hoffman  looked at line 5  and line 23, on  page 2,                                                                    
and  wondered why  impairment was  excluded. Mr.  Therriault                                                                    
deferred to Ms. Applegate.                                                                                                      
Ms.  Applegate   explained  that  the  word,   "losses"  was                                                                    
intended  to include  impairment. She  furthered that  AIDEA                                                                    
would also  like to  capture within  the word,  "losses" was                                                                    
related to whether  AIDEA were to sell a project  at a loss.                                                                    
The impairment loss would be on  a separate line item from a                                                                    
loss on the sale of an asset.                                                                                                   
Co-Chair  Hoffman  noted   that  the  Arctic  Infrastructure                                                                    
Development  Fund listed  AS 44.88.810,  and that  same fund                                                                    
was defined later  in a different statute.  He queried those                                                                    
differences in  definition. Mr. Therriault replied  that the                                                                    
first  one was  an  overall acknowledgement  of the  overall                                                                    
section of statute that set up  the program. The other was a                                                                    
specific project as listed in the section.                                                                                      
Co-Chair MacKinnon remarked that AS  44.88.900 was a list of                                                                    
definitions in statute.                                                                                                         
Co-Chair  MacKinnon  looked  at   page  16,  Section  1,  AS                                                                    
44.88.088 was the actual dividend calculation.                                                                                  
Mr. Therriault, in response  to Co-Chair Hoffman's question,                                                                    
looked at  Section 4 referenced  the definition  section for                                                                    
all the investment tools that  AIDEA was given. He explained                                                                    
that it  was were  the definition  of a  development project                                                                    
within each tool.                                                                                                               
Senator  von Imhof  looked at  slide 13,  and felt  that the                                                                    
legislation's intent  was relating to the  volatility in the                                                                    
market  related to  the large  fluctuations  of assets.  She                                                                    
argued  that suggesting  the changes  would not  necessarily                                                                    
eliminate the volatility, because  there would still be cash                                                                    
volatility.  She explained  that a  financial event  was the                                                                    
point  at which  the dividend  would be  paid. She  stressed                                                                    
that investments took a long time to mature. She wondered                                                                       
whether there was a simulation under the current proposal.                                                                      
Mr. Therriault deferred to Ms. Applegate.                                                                                       
Ms. Applegate agreed to provide that information.                                                                               
Co-Chair MacKinnon CLOSED public testimony.                                                                                     
9:39:40 AM                                                                                                                    
AT EASE                                                                                                                         
9:40:13 AM                                                                                                                    
SB 57 was HEARD and HELD in committee for further                                                                               
9:40:35 AM                                                                                                                    
The meeting was adjourned at 9:40 a.m.                                                                                          

Document Name Date/Time Subjects
SB057 Sectional Analysis.pdf SFIN 3/2/2017 9:00:00 AM
SB 57
SB057 Transmittal Letter.pdf SFIN 3/2/2017 9:00:00 AM
SB 57
SB 57 AIDEA Presentation 030217.pdf SFIN 3/2/2017 9:00:00 AM
SB 57