Select Committee on Capital Financing and Investments

Capitol Building, Room 302                                                                                                April 10, 2001

Cheyenne, Wyoming

PRESENT:      Representative Fred Parady, Chairman

                        Senators Hank Coe, Keith Goodenough, April Brimmer Kunz, Curt Meier and Jayne Mockler

                        Representatives Mike Baker, Chris Boswell, Roger Huckfeldt, Doug Osborn and Wayne Reese.

                        Legislative Service Office:  Dave Gruver, Steve Sommers and Don Richards

                        Others:  Please see Appendix 1.

ABSENT:        Senator Bill Hawks

AGENDA:       Please see Appendix 2.

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Chairman Parady called the meeting to order at 8:30 a.m.  He noted the Committee had at least two items to address.  One is deciding on bonding options legislation for handling school capital construction requirements in light of the Supreme Court ruling (noting that the decision on whether to bond is not a decision which has been made or is to be made by the Committee).  The second is a carryover from last session's, Senate File 9, and includes a number of proposals for simplifying the flow of state revenues.  There may be additional topics identified by the State Treasurer.

State Treasurer Lummis and LSO staff provided a brief history of Committee activities.  (See appendix 3).  The State Treasurer noted the importance of investment policy with interest earnings now being the second largest revenue source for the general fund.  LSO staff reviewed appendix 3.  Generally legislation passed over the past 6 years concerning the Committee's activities and those of its predecessor, recognizes the importance of the issues of investments and capital financing to the state, takes a more holistic approach to those issues, recognizes the need for the Legislature to become more involved in the decision making process related to those issues, recognizes the dynamic situation, and spreads the decision making process to the five state elected officials and the Legislature, while allowing the State Treasurer and experts hired by the State Treasurer to make recommendations and handle the day to day decision making within the broadly established policies.  The requirement for a state investment policy, adoption of the prudent investor standard and allowing sales at a loss on a comprehensive investment policy basis were key legislative pieces according to the State Treasurer.

Treasurer Lummis introduced Dan Baxter of Kaiser and Company to address the Committee.  Mr. Baxter and Todd Bishop provided written material (appendix 4) and reviewed that material for the Committee. Under current statutes the State has a number of options to fund school capital construction projects.  Under W.S. 21-15-111(m)(ii)(A) the State may make direct grants to school districts from the school capital construction account.  Under W.S. 21-15-108 the state may issue up to a maximum of $100  million in state revenue bonds.  Under this option, specified amounts normally allocable to the school capital construction account and the common school account would be pledged in support of bond payments and would not be available to be spent from those accounts for school major maintenance payments or mill levy supplement payments on district bonded indebtedness.

A third option is to finance the state's project costs through a  capital leasing arrangement under W.S. 21-15-112.  The school district would agree to lease the proposed site to the established non-profit corporation.  The corporation would issue tax exempt lease revenue bonds to fund the project and would lease the facilities back to the school district. The state would agree to make the lease payments from the general fund or some other source for the facilities.  The lease payments are subject to annual appropriation, thus no debt of the state is created.  The general statute is in place for this third option, as is the Wyoming Building Corporation, and the arrangement has been used for financing the ongoing state prison project.  Slight statutory changes would be required.

The Committee discussed the possible benefits of each option. 

The Committee next discussed tax and revenue anticipation notes (TRANS).  Glen Schaefer, chief financial officer with the State Treasurer's Office explained that TRANS are method for the state to pay its bills without liquidating assets when there are inadequate cash flows at certain times of the year.  The difference between the state's investment returns and cost of borrowing is the benefit to the state.  The State Treasurer introduced Representative Nicholas, who is serving as bond counsel.  Representative Nicholas pointed out that the TRANS issue is not new, the State has long issued warrants, which are a promise to pay at a certain date.  The Committee was provided copies of the official statements for both the education and general fund TRANS issuance in July, 2000, showing the date of issuance, principal amount, due date and interest rate.  (Appendices 5 and 6).

In the TRANS context, bond counsel considers whether there is authority in statute, whether the constitutional debt limits are violated and whether the interest is non-taxable under the Internal Revenue Code.  Debt is not created in the Constitutional use of that term because the obligation is paid from current year's tax revenues.  Regarding the last issue, Representative Nicholas noted the state cannot create an artificial debt, there must be a legitimate business reason  for the existence of debt, otherwise an arbitrage situation is created which is not allowed under the federal tax laws.  Representative Nicholas noted the state did have legitimate business reasons for the existence of debt at certain times of the year.  He suggested the Committee should have bond counsel address methods by which the Legislature may "save money" and still take advantage of TRANS.  Chairman Parady stated this would be an agenda item at a future meeting.

State Treasurer Lummis addressed state asset classifications.  She provided written material overviewing state investments (appendix 7) and the annual report for the last fiscal year issued by her Office. (Appendix 8).  The overview addressed recent investment activities, future areas of focus and an excerpt from the state's summary of its investment plan.  "The investment program for Wyoming is built on the cornerstone of a long-term conservative strategy and not on speculation or market-timing."  The overview also addressed criteria for investment strategy, manager guidelines, the prudent investor rule, which is applied to state investments, asset allocation and investment return allocation.  The state is currently invested 9.7% in equities, 71% in debt instruments and the remainder in cash.

The Committee discussed the reports, accounting methods and specific asset allocation of different accounts.  In discussing the establishment of state investment strategy, Committee members noted they might be interested in attending the July meeting being held by the State Treasurer to discuss investments.  The State Treasurer noted she would provide an agenda of the meeting to the Committee.

After lunch, the Committee heard from Karla Semler, of the State Treasurer's Office concerning the WYOSTAR program.  The program allows local governmental entities to invest short term cash with the State Treasurer's Office.  The Treasurer then pools the funds and can invest a percentage in longer term investments and an amount based on historic need (60% to 70%) in overnight repurchase agreements.  This makes the funds available to any single governmental entity within 24 hours and yet allows a higher return than could be earned by individual entities investing their funds since a portion can be invested in longer term investments.  Committee members noted some banks have expressed concern with the program competing with the private sector.  The Committee requested a printout from the Treasurer's Office of the entities investing with the Office and the amounts each has invested.

LSO staff addressed revenue projections.  Steve Sommers provided appendix 9, providing a revenue update for general fund sources and breakdown for mineral severance taxes, federal mineral royalties and coal lease bonus projections.  Overall actual revenue receipts are above projections through February 2001.  A projected fiscal profile was also provided, showing for FY 03-04, (with a growth rate of 6.8% and excluding school foundation program amounts and school capital construction spending) there is a projected $1,497.7 million in revenues and $1,345.8 in projected needs.  The school foundation program shortfall, assuming a 9.44% external cost adjustment, is $37.8 million.  The school capital construction account shortfall, assuming major maintenance at 2.5% and not taking into account the Supreme Court's ruling, (for which a rehearing has been granted) is $24.3 million. Potential coal lease bonus increases over current forecasts for FY 02, 03 and 04 were $90.9 million.

The State Treasurer discussed the RFP for an independent financial consultant to advise on capital financing.  Deputy Treasurer Sharon Garland presented an outline of the RFP and timeline for the hiring.  (Appendix 10)  The Committee supported the proposal and discussed whether the consultant would be available to help this interim.  Treasurer Lummis noted the consultant would, but the funding would need to come from her Office's budget for this year.  Senator Kunz moved the Committee recommend the Treasurer proceed with the RFP and present the proposal to the State Land and Investment Board with the support of the Committee with the funding to come from the State Treasurer's 900 series budget.  The motion passed with Senator Goodenough voting "no".

The Committee heard from Sam Doyle, Chris Blackwood and Chad Daffer of Kirkpatrick Pettis regarding a possible "farm loan securitization program".  They provided written material outlining a proposal for the state to pool its farm loans and sell participations in the pool.  (Appendix 11)  The bondholders would hold participations in the pool, giving them the right to receive a portion of the loan payments.  The state would be the servicing agent and would receive the "up-front" cash from the sale of the bonds, and fees as the servicing agent.  The state would control the restructuring and foreclosure of delinquent loans.  The proposal works under the current market conditions (interest rates) which are significantly below the weighted average for the farm loans. 

Committee members questioned the risk that would be retained by the state and whether there exists statutory authority for the proposal. The representatives from Kirkpatrick Pettis noted a legal opinion had been issued on the matter.  Chairman Parady directed LSO staff to review the issue and with the Attorney General's Office advise the Committee regarding the authority to implement the proposal.  Senator Coe noted this might be an appropriate issue for the new financial consultant to review and make a recommendation to the Committee.

Greg Schaefer, Arch Coal, addressed the issue of coal lease bonuses. He provided appendix 12, which outlines the coal lease bonus process, estimated coal bid bonus revenues through the 2012 fiscal year and revenues which will flow to the school capital construction account.  The material also compares estimated coal lease bonus funds to equivalent statewide mill levies and equivalent taxes on coal.  The actual amounts to be received are unknown until the leases are bid.  Chairman Parady questioned how the financial markets consider the potential revenue streams of coal lease bonuses.  State Treasurer Lummis noted she would visit with bond underwriters and report back to the Committee.  Mr. Schaefer noted that current high coal prices won't immediately translate into greater revenue for the state due to the length of contracts, but if the high prices hold through the summer, severance taxes on coal will likely be higher than current projections.

The Committee next considered last session's de-earmarking bill and issues remaining after that bill.  LSO staff provided an explanation of last session's bill, comparing revenue streams before and after the bill.  (Appendix 13)  Senator Mockler explained that there were failed amendments to last session's bill and other bills on related items that could be addressed by the Committee.  LSO staff provided a memo (appendix 14) setting forth three items that could be addressed: 1. Legislation from the 2000 session, to be effective in 2002, placing a portion of shallow gas well severance tax revenues in the permanent Wyoming mineral trust fund (PWMTF); 2.  Addressing the time limited aspect of the "BRA diversion"; 3. Replacing flows to PWMTF, if they are removed under items 1 and 2.

The Committee discussed with Randy Bohls, Department of Revenue, administrative difficulties in implementing the tax on shallow gas wells.  The problem is that producers do not report well production in the manner the statute is written, rather the wells are reported on a group basis, thus without requiring industry to report in a different manner, the production attributable to only shallow gas wells is unknown.  LSO staff noted the Mineral Committee was considering this issue as an assigned topic.  Committee members also discussed additional issues with the de-earmarking legislation and some members expressed concern that the Committee was "revisiting" the entire de-earmarking issue. 

Chairman Parady summarized the issues he believed were before the Committee.  Senator Mockler moved that LSO draft a bill for the next meeting raising the "pool" severance tax cap to $200 million, with all entities' shares held harmless assuming revenues meet the cap, place 75% of the additional $45 million to the PWMTF with the remaining 25% to the PWMTF policy spending reserve account.  The changes are to be effective July 1, 2005.  Senator Meier suggested the "overflows" should be split 1/3 to the BRA, general fund and PWMTF.  He agreed to bring the proposal as an amendment to the draft bill.  The main motion passed.

Senator Mockler requested that the State Treasurer provide the Committee with the investment "primer" R.V. Kuhns had provided in other years.  The Committee tentatively scheduled its next meeting to be held as a joint meeting with the State Land and Investment Board meeting on August 2. 

The meeting was adjourned at 4:25 p.m.

Respectfully submitted,

Representative Fred Parady

Chairman

All appendices referenced are on file at the Legislative Service Office.