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November 11 and 12, 2002
Taggart Room, Holiday Inn
Riverton, Wyoming
Representative Fred Parady, Chairman;
Senators Hank Coe, Keith Goodenough, Bill Hawks, April Brimmer Kunz, Curt Meier and Jayne Mockler;
Representatives Mike Baker, Chris Boswell, Roger Huckfeldt, and Doug Osborn.
Dave Gruver, Jason Raymond and Steve Sommers
Please refer to Appendices 1a and 1b to review the Committee Sign-in Sheet for a list of other individuals who attended the meeting.
Representative Wayne Reese
All meeting materials and handouts provided to the Committee by the Legislative Service Office (LSO), public officials, lobbyists, and the public are referenced in the Meeting Materials Index, attached to the minutes. These materials are on file at the LSO and are part of the official record of the meeting.
Chairman Parady called the meeting to order at 9 a.m. The following sections summarize the Committee proceedings by topic. Please refer to Appendix 2 to review the Committee Meeting Agenda.
The minutes from the September meeting were approved.
LSO staff reviewed the changes made last session to the state spending policy for investment earnings by Senate File 45. This year the State Loan and Investment Board has recommended no further modifications to the spending policy. A draft report prepared for the Committee agreed with that recommendation and proposed no legislative changes to the spending policy provisions for this session. (Appendix 3) After the Committee reviewed the report, Senator Hawks moved that the report be adopted, and Senator Meier seconded. The motion carried.
State Treasurer Cynthia Lummis addressed the Committee, as required by law, to make recommendations adjusting limitations on legislatively designated investments (LDIs). Treasurer Lummis submitted a report to the Committee outlining all LDI programs, showing the current amounts authorized by individual statutes for LDIs total $647,950,000.00. If all of the individually authorized amounts were used, that cumulative amount would exceed the overall limit of $500 million imposed by the Legislature. (Appendix 4) However, currently only $229,013,817.00 is being used. The Treasurer recommended that the Committee eliminate programs where the specific purpose of the program has been completed and all funds have been repaid or the program has not been used for years. The Treasurer further recommended generally that the Legislature remove one-time LDI funding projects as they are completed through the revisor bill process. For this year that would include the Natrona County regional water treatment project and the Green River/Rock Springs water treatment plant.
The Committee discussed farm loans rate of returns, the use of farm loans in the current economic environment, the interest rates being offered in the farm loan program, and the possibilities in lowering interest rates or otherwise expanding the program. The Treasurer explained that the State Loan and Investment Board was not currently planning to lower interest rates and that the expectation was that more borrowers would use the program when private lending interest rates increased. In response to Committee questions, the Treasurer stated that loans to independent irrigators have a 6% interest rate while irrigator district loans are 4%.
Committee members asked about WCDA mortgage loans and questioned why the Treasurer was recommending removing a separate moderate income mortgage loan investment from the authorized LDIs, under W.S. 9-4-701(d). The Treasurer explained why demand for the separate program has waned to nothing since the early 1980s. After discussion, Senator Meier moved that the Treasurer’s recommendation on the two completed water projects and the repeal of W.S. 9-4-701(d) be drafted as a bill for Committee sponsorship in the upcoming session. Representative Osborn seconded. LSO staff discussed the ability to accomplish the Treasurer’s recommendations in the revisor’s bill, and suggested that while the first two recommendations could be done in the revisor’s bill, the third recommendation should be done in a different bill. Senator Meier's motion was restated to make the changes recommended by the Treasurer in a bill separate from the revisor’s bill. The motion carried. Senator Goodenough requested a list of each type of loan and its performance. The Treasurer agreed to submit a response through the LSO.
Treasurer Lummis introduced the presenters from UBS/Paine Webber, Bob Doherty, Jeff Hyman and J.J. Ament and John Bonow, who was appearing for Keith Curry, the state of Wyoming’s independent financial advisor. The presenters provided to Committee members materials entitled “Tobacco Securitization Discussion” dated November 11, 2002. (Appendix 5)
Review of the Master Settlement Agreement
UBS/Paine Webber representatives explained the basic terms of the master settlement agreement (MSA), which is the agreement signed in 1998 between state governments, including Wyoming and the major tobacco companies. Payments made by the tobacco companies under the MSA to state governments are based upon domestic consumption including sales over the Internet and Indian reservations. While payments are to continue in perpetuity, payments can only come from the tobacco divisions of diversified companies. Responding to a question from Senator Kunz, the presenters said the companies can invoke bankruptcy protections under the MSA. The Committee discussed the types of risks to continuous payments to the states under the MSA. UBS/Paine Webber representatives stated that some $14 billion dollars worth of tobacco securitizations bonds have been issued, and opined that some narrowing of the market for these bonds is possible.
Tobacco Securitization proposal
The representatives set out the factors that affect the decision to securitize tobacco payments, including risks to tobacco companies and funding priorities. The basic concept of a securitization is for a state to sell its rights to receive tobacco payments for a period of years (41 years under the current proposal) to a separate corporation in return for a lump sum payment that is discounted. The corporation issues bonds at interest rates high enough for bond purchasers to accept the increased risks. The corporation is separate from the state and the state cannot be held liable for the corporation's debts.
UBS/Paine Webber representatives explained that the bond market community sees the risk to continued tobacco payment as serious enough to require that a very conservative estimate of future payments be used. Revenues from the difference between these conservative estimates and actual payments made by the tobacco companies can be used to speed up paying off the corporation’s obligations under the bonds it has issued. This is called the “turbo” option. Other options allow the state to retain excess revenue not used to pay off tobacco bonds, but result in either a lower lump sum payment or higher interest rates. Committee members engaged in extensive discussion on the advantages and disadvantages of these options.
Committee members asked questions directed to the structure of the draft legislation. The Committee was informed that some states do issue taxable bonds. The presenters discussed the timing of the securitization and opined that it was important for a state to have enabling legislation to be able to securitize quickly if it chose to do so. Restrictions on the ability to securitize was discussed, including restrictions against securitizing if the interest rate would exceed a legislatively-set limit or only if the securitization would bring a certain amount of money. Mr. Bonow told the Committee that it was more practical to have a limit prohibiting a securitization unless it would realize a specific amount of money. Further discussion was had concerning the exact amount of discounting that would occur from a securitization. The presenters did confirm that a lower interest rate could be obtained by the State of Wyoming if it issued general obligation bonds.
Public Comment
Bev Gross from the American Cancer Society, Jan Drury from the American Heart Association, and Kevin Bohenblust also from the American Heart Association spoke against securitization of the tobacco payments. Dan Baxter from Kaiser & Co. said that the state already has a non-profit corporation on hand, the Wyoming Building Corporation, currently involved with the state prison project. He also spoke to the Committee about alternative funding options that would be less expensive than securitizing the tobacco payment stream.
State financial consultant presentation
John Bonow, from Public Financial Management, Inc., spoke to the Committee in the role of consultant to the State, and provided written materials. (Appendix 6) Mr. Bonow compared the value of money realized by securing tobacco payments against the direct value of the aggregate tobacco payments. Securitization is used when a large amount of money is required in the near term, or a great risk of payment interruption is perceived. If there were no risk perceived to the continued flow of tobacco payments, then he would not recommend the State securitize the tobacco receipts. However, as it will become more expensive to securitize tobacco payments as fewer investors will be willing to buy bonds, if the State chooses to securitize, he would recommend that it be done sooner rather than later.
Review of draft legislation, 03 LSO 0217.W3
Senator Coe moved that the Committee work 03 LSO 0217.W3, and the motion carried. (Appendix 7) LSO staff provided background on the bill draft, explaining how LSO worked with UBS/Paine Webber and others, including bond counsel with expertise with other tobacco securitizations by other states. Staff explained that in order for the bonds to be exempt from federal income taxes, the State would have to expect to spend eighty-five percent of the proceeds from the tobacco securitization (which might generate about $220 million) within three years in a manner consistent with federal tax laws.
LSO staff then reviewed how other revenue sources would be redistributed to meet federal tax law requirements. Staff relayed the advice of the bond counsel that any redistribution of proceeds should not be linked with the funds generated by the securitization. LSO staff explained that in the current draft the remote corporation that would sell bonds to generate proceeds to pay the State for its tobacco revenue stream would be run by the five elected officials, who hold positions in the corporation ex officio. Senators Kunz and Goodenough expressed concern over this corporate structure. The Committee discussed alternative structures for the corporation. Staff provided a chart showing the changes to the revenues streams under the draft (appendix 8) and then reviewed the remainder of the bill draft.
Review of amendments to draft legislation
Representative Huckfeldt moved consideration of the first amendment to the bill draft, and was seconded by Senator Goodenough. (Appendix 9) The amendment would change the draft to distribute proceeds of tobacco securitization to the school capital construction and local government capital construction accounts and removes the distribution of funds to the Permanent Wyoming Mineral Trust Fund. Senator Meier requested the inflation rate on the construction of school buildings. After discussion on current and future monetary values, the amendment failed.
The Committee did not take up a second amendment to the bill draft, and a third amendment was withdrawn. (Appendices 10 and 11) The Committee then examined a fourth proposed amendment that would transfer the current tobacco settlement trust account (the statutorily designated "inviolate" fund) to the permanent Wyoming mineral trust fund. (Appendix 12) Senator Hawks moved the amendment; Senator Goodenough seconded, and the motion passed.
Further amendments to the draft legislation
Senator Meier proposed that the bill draft direct the state to use the “residual” method of paying bond indebtedness from tobacco securitization. Senators Hawks seconded. The amendment passed.
Senator Meier then proposed an amendment in concept that would provide the corporation the ability to repurchase tobacco securitization bonds with funds appropriated by the Legislature. Senator Kunz seconded, and that amendment passed.
Senator Kunz moved that an amendment be prepared that could be considered the following day changing the structure of the corporation in the bill draft. The amendment removed the five state elected officials, holding office ex officio, and put in its stead a structure similar to the corporate structure of the Wyoming Community Development Authority. Senator Meier seconded, and the motion carried.
Representative Baker moved to change the funding stream in the bill draft, to move funds received from the securitization to the general fund. The motion failed.
Senator Mockler reviewed the activities of the subcommittee appointed at the last meeting in Laramie, including contacts with George Parks, executive director of the Wyoming Association of Municipalities and officials from the State Loan and Investment Board (SLIB). Mr. Parks addressed the Committee about the new rules adopted by SLIB and how funds are distributed to local governments. Mr. Parks suggested that rather than changing the SLIB program, there are other options the Legislature could consider, including additional funding.
The Committee discussed reporting of revenues received by local governments. Fremont County Commissioner Tom Satterfield told the Committee that counties have not had uniform reports and the state does not require such reports. He believed that SLIB was correct to focus on funding health and safety projects, and that landfill requirements are being changed by Department of Environmental Quality Rules. The counties do not have funds for economic development, according to Commissioner Satterfield.
Steve Payne, from Cody, addressed how the cities manage long-term capital needs and how maintenance of capital expenditures is done. He pointed out that the GASB 34 show what individual cities are spending. He also talked about how the smaller cities have to compete against the larger ones for SLIB grants. Ken Lewis from the city of Cheyenne testified that it is too easy for local governments to defer necessary maintenance. Mickey Simmons and Sharon Anderson from the city of Lander testified that they have not asked for SLIB grants for city streets because of the impression that such grant requests are turned down in favor of health and safety priorities. Treasurer Lummis said that SLIB does not have enough funds to fund even health and safety priorities. Mr. Parks stated that overall the health and safety needs of the cities are being met.
Senator Mockler noted that the testimony provided helpful insight as to the scope of the issue and that it was necessary to continue to determine the scope of local government capital construction needs.
Mr. George Parks spoke on behalf of the bill that he had requested the Committee draft at the last meeting in Laramie, 03 LSO 0243.W2. (Appendix 13) The bill would expand the ability of municipalities to use revenue bonds for municipal improvements. After discussion, Representative Osborn moved that the bill be sponsored as a Committee bill in the upcoming session, and Senator Meier seconded. The motion passed unanimously.
Mr. Ken Lewis spoke on behalf of 03 LSO 0167.C1 (appendix 14), which would allow cities and towns to issue bonds to construct and purchase electric generation and delivery facilities necessary to supply customers with electricity, and allow revenue bonds for electric light and power plants, distribution systems and transmission lines. Mr. Lewis explained that if the changes were made the City of Cheyenne could have lower rates and save Cheyenne residents about $12.4 million per year. Mr. Robert Tarantola representing PacificCorp spoke against the bill draft.
Chairman Parady stated the bill was not directed at bonding issues and was not within the purview of the Committee. Representative Osborn moved to sponsor the bill as a Committee bill. The motion was seconded and failed 4-7. (Senators Goodenough, Kunz, Meier and Mockler voting "aye".)
The Committee recessed at 6:00 p.m. for the evening.
Chairman Parady called the meeting to order at 8:30 a.m.
LSO staff provided a brief update on the school capital construction account. (Appendix 15).
LSO staff provided background to the bill draft. (Appendix 16) Staff explained the current draft was drawn from 2002 HB 103 and incorporated changes made in the last session, and further amendments incorporating the establishment of the school facilities commission and others as requested by the Committee at the last meeting. The Committee discussed the protection of certain local school revenues found in article 15, section 17 of the Wyoming Constitution. Chairman Parady suggested the issue could be forwarded to the Management Council.
Mr. Gruver reviewed the bill and provided a summary to Committee members. (Appendix 17) LSO staff reviewed changes proposed by state financial consultant Keith Curry. (Appendix 18) The Committee discussed the amount of bonding that would be allowed under the bill draft, and whether the financing of bonding needs should be done under the state capital financing commission set up in the bill draft or provided to the school facilities commission. The Committee also discussed the level of bonding authority that the bill should provide. In conjunction with this discussion, the Committee discussed school capital construction needs and the amount of revenue required to cover debt service.
Representative Huckfeldt moved the Committee sponsor the bill in the upcoming session. Senator Coe seconded. The following actions were taken on the draft:
1. Representative Osborn moved to reduce the flows of federal mineral royalties for school capital construction from $32 million to an amount 1.5 times that necessary for coverage for bond debt service. Senator Kunz seconded and the motion passed. Senator Kunz asked LSO to provide materials regarding the exclusion of UW and local government FMRs from being used as "backstopping" revenue streams for the school capital construction bonds.
2. Senator Kunz moved that the bill should also reflect a 1.5 times coverage for debt service for the state capcon bonding provisions. Senator Meier seconded and the motion passed.
3. Senator Kunz requested that the Committee be provided with a one-page memorandum showing the status of the University of Wyoming’s federal mineral royalties, what is being used and what is not.
4. Representative Baker moved that page 8 lines 7-8 of the bill draft, which provided that appointed commission members shall receive fifty dollars per day, be amended to increase that amount to $125 per day. Representative Osborn seconded and the motion passed.
5. Representative Huckfeldt moved that at page 8, line 22, after "state project" insert the following language: “In conducting these activities the capital financing commission shall consult with the school facilities commission as appropriate”. Senator Meier seconded. Senator Coe's suggestion to replace "consult" with "coordinate" was accepted. The motion, as amended, passed.
6. Representative Baker moved to amend page 14, line 4, to allow refunding of bonds of the commission to a period that may exceed the initial term and par amount of the original bond. LSO was directed to develop the appropriate language. Senator Meier seconded, and the motion passed.
7. Senator Coe moved to delete page 38 line 13 to page 40 line 17, removing the provisions in the bill draft pertaining to general obligation bonds. Senator Goodenough seconded and the motion passed.
8. Representative Baker moved to delete page 47, lines 4-5. Representative Osborn seconded and the motion passed.
9. Representative Huckfeldt moved to change the word “management” to “assessment” on page 50, line 2. Senator Meier seconded and the motion passed.
10. Senator Coe moved to change page 35, line 7, and other relevant parts of the bill to broaden the reserve fund and make conforming amendments to other provisions in accordance with Mr. Curry's recommendations on appendix 18. Representative Osborn seconded and the motion passed.
Senator Kunz moved that every bill draft approved by the Select Committee have the appropriation removed and placed in the budget bill. Staff noted that the Committee could remove the appropriation in bills it sponsored, but could only recommend amendments to the budget bill to the JAC. Senator Kunz' motion was seconded by Representative Huckfeldt and passed.
The vote on the main motion to sponsor 03 LSO 0221.W1 as amended was taken. Senator Goodenough voted no. All other members voted "aye" (with Chairman Parady noting that Senator Mockler and Representative Boswell had left proxies voting in favor of sponsoring the bill.)
Senator Kunz reviewed her proposed amendment to 03 LSO 0217, which would change the structure of the corporation issuing bonds to one similar to the WCDA. (Appendix 19) Senator Kunz requested that staff remove references to “employees” from the amendment and that the provisions of W.S. 9-7-118, redrafted to conform with 03 LSO 0217, be added. A copy of W.S. 9-7-118 was provided to Committee members to help outline the full scope of the amendment’s provisions. Senator Kunz expressed concern that under the current corporate structure in the draft, the state would have increase risk of liability and the possibility that the corporation’s veil could be pierced. Representative Baker took issue with the complete removal of all elected officials, particularly the Governor, from the corporation. After further discussion, Senator Kunz’s amendment passed.
The Committee then discussed 03 LSO 217.w3, as amended, and a vote on the motion to sponsor it was taken. Senator Goodenough and Representatives Baker and Osborn voted no. All other members voted "aye" (with Chairman Parady noting that Senator Mockler and Representative Boswell had left proxies voting in favor of sponsoring the bill.)
As there was no further business this interim for the Select Committee, Chairman Parady thanked the Committee members for their efforts and adjourned the meeting at 12 p.m.
Respectfully submitted,
Representative Fred Parady, Chairman