Legislature(2015 - 2016)BILL RAY CENTER 208
06/14/2016 08:30 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB138 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 245 | TELECONFERENCED | |
| + | SB 128 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
FOURTH SPECIAL SESSION
June 14, 2016
8:38 a.m.
8:38:28 AM
CALL TO ORDER
Co-Chair Thompson called the House Finance Committee
meeting to order at 8:38 a.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative David Guttenberg
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Craig Richards, Attorney General, Department of Law; Angela
Rodell, Executive Director, Alaska Permanent Fund
Corporation; David Teal, Director, Legislative Finance
Division; Randall Hoffbeck, Commissioner, Department of
Revenue; Representative Paul Seaton; Representative Andy
Josephson; Representative Craig Johnson; Representative
Adam Wool; Representative Bob Herron; Representative Louise
Stutes, Representative Liz Vasquez; Representative Sam Kito
III; Representative Lora Reinbold; Representative Ivy
Spohnholz.
SUMMARY
HB 245 PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS
HB 245 was SCHEDULED but not HEARD.
SB 128 PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS
SB 128 was HEARD and HELD in committee for
further consideration.
CS FOR SENATE BILL NO. 128(FIN)
"An Act relating to the Alaska Permanent Fund
Corporation, the earnings of the Alaska permanent
fund, and the earnings reserve account; relating to
management of the budget reserve fund (art. IX, sec.
17, Constitution of the State of Alaska) by the Alaska
Permanent Fund Corporation; relating to procurement by
the Alaska Permanent Fund Corporation; relating to the
mental health trust fund; relating to deposits into
the dividend fund; relating to the calculation of
permanent fund dividends; relating to unrestricted
state revenue available for appropriation; and
providing for an effective date."
8:39:13 AM
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
stated that he would be providing a brief overview of the
bill. He remarked that there were many misunderstandings
related to the components of the legislation. He remarked
that the state had lost approximately three-quarters of its
revenue. He relayed that the Permanent Fund Earnings were
examined as a potential source of future revenue. He did
not feel that there was a temporary decline in revenue;
rather there was a structural shift in the price of oil,
which was fostered by changes in technology. He felt that
oil prices would remain between $35 and $65 per barrel. He
stressed that there was not enough oil and gas tax and
royalty revenue to support government spending. He stressed
that the state needed to examine alternative sources of
revenue. He pointed out that the Permanent Fund earnings
was the largest source of available revenue. He remarked
that other sources could provide nearly $100 million; but
the Permanent Fund earnings could provide $1 billion or
more to solve the deficit problem. He pointed out that
there was an approximately $3.7 billion deficit. The
legislature had cut nearly $1.2 billion over two years, but
there remained a substantial deficit. He stressed that
there needed to be immediate action. He remarked that there
were two major economic drivers within the state: the oil
and gas industry; and government spending. He stressed that
there was not much that could be done related to oil and
gas prices. He furthered that the state could stabilize the
government spending, and in doing so provide some stability
for the economy. He stated that the private industry was
unwilling and/or unable to make large scale investments
with the uncertainty of the Alaska economy. He felt that
the legislation provided a level of security. He stressed
that there was no other available action option. He noted
that the current year was the last year that the
constitutional budget reserve (CBR) could be used to cover
the state deficit. He noted that Standard and Poors (S&P)
had mad strong statements regarding the state's credit
rating. He noted that there were many residents that were
moving from Alaska to places that were perceived as a more
stable economy. He felt that using the earnings in a
systematic fashion would stabilize the economy.
Representative Wilson announced that she had some
clarifying questions.
Co-Chair Thompson stressed that he would like to hear the
entire presentation before addressing specific questions.
8:46:47 AM
CRAIG RICHARDS, ATTORNEY GENERAL, DEPARTMENT OF LAW, shared
that he would address the mechanical provisions of the
bill. He stressed that the committee was familiar with the
administration's goal to optimally use the sovereign wealth
assets. He remarked that the governmental budgets grew when
oil prices were high. He remarked that during the early to
mid-1980s and the early 2000s showed a time of high oil
prices and high oil prices. The governor's original bill
looked to address the problem of the "commodities price
roller-coaster."
8:50:12 AM
Co-Chair Thompson recognized Representative Johnson,
Representative Josephson, and Representative Seaton.
Attorney General Richards announced that the bill's initial
focus was the Percentage of Market Value (POMV). He stated
that the governor's original proposal said to put the oil
revenues in the Permanent Fund and withdraw $3.3 billion.
He stated that the bill was not the governor's original
proposal, because it did not place additional petroleum
revenues into the Permanent Fund. The bill left production
taxes and royalties, except for the constitutionally
mandated 25 percent to the corpus, in the general fund. He
stated that the bill would draw approximately 5 percent out
of the Permanent Fund. Therefore, approximately 5 percent
of the value of the fund would be withdrawn from the
Permanent Fund annually. He explained that 20 percent of
that amount would be used for the dividend, and 80 percent
would go to the general fund. He stated that the amount
would be approximately $1.9 billion on an ongoing basis. He
explained that it would be a fairly consistent amount
because the POMV was based on the value on the fund and the
average of prior years.
Co-Chair Thompson acknowledged Representative Kito III and
Representative Reinbold in the room.
8:58:01 AM
Commissioner Hoffbeck reported that for the first 3 years
the dividend payout would be $1000, and then would be
converted to a formula. He explained that the formula would
be 20 percent of POMV and 20 percent of the general fund
royalties would establish the dividend. He explained that
the governor's original proposal was entirely based on the
royalties, but would provide for a volatile dividend
stream. He shared that the current legislation created a
stable dividend. He stated that 20 percent of the POMV
would represent approximately 75 percent of the total value
of the dividend.
Co-Chair Neuman thought the commissioner was inaccurate
regarding the shock to the economy. He felt that there
would be a shock to the state economy.
Commissioner Hoffbeck shared that his comment referred to
an interjection of money into the economy that were not
otherwise there as related to using the earnings. He
stressed that the earnings currently paid the dividend, and
the remainder was put in savings. He acknowledged that the
dividend size had an effect on the economy.
Co-Chair Thompson acknowledged Representative Wool in the
room.
9:02:44 AM
Co-Chair Neuman pointed out that he had been a part of a
similar discussion in Fairbanks. He remarked that currently
people were moving out of the state and their homes. He
stressed that the bill had a significant impact on the
economy. He felt that a $700,000 reduction to the economy
would result in the closure of business. He noted that the
CBR balance was expected to be approximately $3 billion at
the beginning of the next fiscal year. He remarked that
there was still between $7 billion and $8 billion in the
earnings reserve for a total of $10 billion to $11 billion
even after the current year's deficit. He stressed that
there would be enough money to cover the deficit in the
following year.
Commissioner Hoffbeck felt that there could not be a draw
on the CBR the following year, because the state must start
using the earnings reserve. He remarked that there would be
approximately $3 billion in the CBR, but money needed to be
left in there. The CBR was an emergency fund.
Co-Chair Neuman disagreed that it was not an option to not
take action. He felt that there would be enough money to
cover the following year's budget. He felt that the
assertion that bills could not be made without actions was
incorrect and wrong.
9:06:30 AM
Commissioner Hoffbeck replied that he did not mean to imply
that the state could not pay its bills.
Co-Chair Neuman argued that the assertion that the state
could not pay its bills was not true.
Co-Chair Neuman stressed that the state did not waste money
over the past few years. He felt that the communities who
received those funds thought those funds were well spent.
The money spent reflected the needs of the communities. He
remarked that the budget had been reduced significantly,
and disagreed with those who thought differently. He
expressed concern about a spending limit. He was concerned
about the ability of future legislatures. He was attempting
to understand both sides of the conversation, because he
was in charge of the operating budget. He stressed that he
understood the current deficit. He felt that restricting
the legislature was wrong.
Co-Chair Thompson was concerned with a spending limit
because of deferred maintenance projects.
9:11:39 AM
Vice-Chair Saddler asked about where Commissioner Hoffbeck
was getting his information about people leaving the state
due to the outlook of the economy. He wondered whether
people were leaving the state because they were losing
their jobs. He understood that there were approximately
2300 jobs lost in the oil patch.
Commissioner Hoffbeck replied that he was referencing news
articles that stated that transportation companies had full
vans of people moving south.
Vice-Chair Saddler felt that the Permanent Fund should not
be considered a "sovereign wealth fund", because the
definition of "sovereign wealth fund" was that it was owned
by the government. He stated that the Permanent Fund was
owned by the people of Alaska. He wondered if there was a
conflict between the administration's view of the Permanent
Fund as a government pool of money versus the
constitution's assertion that the Permanent Fund was the
people's money.
Attorney General Richards clarified that it was just
vernacular. There was no distinction in his mind between
the two terms.
Vice-Chair Saddler felt that there was a conflict in the
bill between the Statehood Act and the bill.
Attorney General Richards replied that he did not see any
conflict, rather saw policy decisions. He stressed that the
legislature had the policy power to use, under the
constitution to use mineral royalties or Permanent Fund
earnings in a matter that it chooses to incorporate them.
He explained that the Permanent Fund earnings were
historically saved, issue dividends, or provide other
services.
Vice-Chair Saddler wondered if he had considered a
potential conflict with the Statehood Act.
Attorney General Richards replied that he had discussions
about the issue. He was familiar with Section 6 of the
Statehood Act, which set aside the revenues from mineral
deeds to the State of Alaska for patrimony. He was
confident that the legislature had the discretion to use
the earnings in a manner that it saw fit.
Vice-Chair Saddler wondered if there were any limitations
for the use of the Permanent Fund.
Attorney General Richards replied in the affirmative. He
explained that, under the state constitution, the Permanent
Fund corpus could be spent through the earnings on the
corpus, and were subject to appropriation by the
legislature.
9:16:23 AM
Representative Wilson felt that "just because the
legislature has the discretions, does not necessarily make
it the right way to go." She wanted clarification regarding
the assertion that using money from the earnings reserve
would have less impact. She felt that using the earnings
reserve, once the dividend was paid and inflation proofing
occurred, may be considered savings. She felt that there
would be an impact to the economy, because the money would
be taken from the dividend.
Commissioner Hoffbeck replied that there would be an impact
to the economy. He explained that the other part of the
savings: the interjection of money that would otherwise be
put into savings, was the only piece that allowed the
opportunity to deal with the deficit without a shock to the
economy.
Representative Wilson agreed that the state had previously
had $1000 dividend payouts. She felt that the economy was
different at that time, with higher government spending.
She stressed that the largest current budget cut was in the
capital budget. She asserted that the dividend limit would
have a greater impact than it may have in the past.
Commissioner Hoffbeck relayed that there had been other
things affecting the payout amount including stock market
crash, and its implications. He agreed that there was a
higher oil price, so there was robust government spending,
but there were unrelated shocks to the economy.
Representative Wilson wanted more straightforward answers
regarding the exact impact of the legislation. She stressed
that the bill did not only use earnings reserve. She
remarked that the money would be taken from the dividend.
She wondered whether the spending limit would limit the
actual money the government could spend on operations.
Attorney General Richards replied in the affirmative, if
the terms of the limit were met. He was concerned about the
lack of clarity around the definitions of the terms related
to spending limits. He felt that there would be open
questions for when the limit would apply as a practical
matter. He felt that providing clarity with those terms may
result in limited spending.
Representative Wilson hoped that there would be
clarification with those terms before the bill was brought
to a vote. She explained that limiting spending to $3
billion would limit the use of other savings accounts, and
actually limit the money that would go into the everyday
operating budget.
Attorney General Richards responded that it would limit it
to the previous year's unrestricted general fund
appropriation.
Representative Wilson wanted to ensure that the legislature
could not change that limit at the time of appropriation.
9:21:40 AM
Representative Gara thought everyone could count votes.
Currently, there were not enough votes to pass the bill. He
thought the version needed to be changed, as there were not
enough votes to pass it in its current form. One of the
negatives of the bill - according to Institute of Social
and Economic Research (ISER) it would equate to 8000 jobs.
He also had a problem in the bill with the
constitutionality of the bill. He thought it would be
difficult to enforce the bill.
Commissioner Hoffbeck responded that there was only so much
money in the system. He shared that more flexibility with
the increase in oil prices required an examination of the
sustainable draw. He remarked that there may be a reduction
in the underlying baseline draw in order to gain that
flexibility when prices increase. He remarked that there
may be a trade-off of short-term higher draws for long-term
flexibility. He stressed that it was a math equation,
because there was limited money in the system. He wanted to
ensure that the future generations had the same advantages
in the current structure.
Attorney General Richards added that the administration was
open to new ideas. He stated that the current proposal was
not in its original form. He remarked that the
administration had an entirely different method to address
the volatility. He remarked that the current proposal was
from Senator Stoltze in the Senate State Affairs Committee.
He pointed out that the current revenues from petroleum
taxes was forecasted at approximately $600 million, and the
limit did not "kick in" until $1.2 billion. He stressed
that there was an additional $700 million in revenue before
the limit would occur. He noted that the projections of the
moment the limit was enacted did not show hitting that
limit in the ten-year horizon of the DOR oil price
projections. He stressed that the limit would only occur at
a fundamental change in the oil pricing situation.
9:28:12 AM
Representative Gara had a problem with the limit because
with the formula at 80 a barrels would not have any impact
under any of the forecasted oil prices. He queried the
circumstances that there would be out of savings and
circumstances that savings would still be intact at the end
of FY 17.
Commissioner Hoffbeck replied that the CBR would be
approximately $3 billion after FY 17. He remarked that
examining the FY 16 versus the FY 17 was approximately $3.8
billion. He stressed that there would not be enough money
the following year to do the same actions in the current
year. He stated that the problem was compounded by the
recognition that there should be money retained in the CBR
for the unknown financial problems. He stressed that the
legislature was in a position to have the exact discussion
the following year, if no action was taken in the current
year.
Representative Gara felt that the only way for the spending
cap to be enforceable was when the people call each other
out on the violation. He stressed that using a spending cap
reduced the amount of money available year by year. He
stressed that the job of the finance committee was to
balance a way to maintain fiscal stability in the state and
represent the people of the state. He remarked that people
were also leaving the state because their jobs were being
cut due to reductions in funding for their jobs.
Commissioner Hoffbeck responded that there were many people
that would leave because of the diminishment of the life in
Alaska.
Representative Gara remarked that he was willing to come to
a compromise to protect the dividend. He did not want to
currently address the imbalance to the plan. He felt that
he was concerned with the 50 percent of the population of
the state who received 20 percent of their total income
from the dividend.
Co-Chair Thompson noted Representative Vasquez and
Representative Herron in the room.
Vice-Chair Saddler felt that the bill showed a three-year
review. He noted the three-year guarantee of permanent fund
dividends (PFDs) at $1000. He wondered whether the three-
year guarantee was an element of the governor's original
bill.
9:33:01 AM
Attorney General Richards replied that the governor's
original bill had a one-year guarantee, and the current
version extended to three years.
Vice-Chair Saddler queried the reason for the guarantee at
any rate.
Attorney General Richards replied that there were logical
policy reasons for the guaranteed dividend, particularly to
monitor the formula over time. He asserted that the
dividend formula was stable enough to provide for a $1000
PFD regardless of change in policy. He felt that there did
not even need to be a guarantee, because of the stability
of the PFD.
Commissioner Hoffbeck responded that there had been a lot
of feedback that one year was not enough time to make the
transition a different kind of dividend.
Vice-Chair Saddler remarked that the bill had some elements
that included a three-year review. He wondered whether the
three-year provision was a temporary provision or a promise
for every three years.
Commissioner Hoffbeck replied that the intent was a long-
term solution. He stated that the review did not have a
sunset, but rather was an instruction to the legislature to
ensure that it was working properly.
9:36:24 AM
Representative Pruitt wondered about the effective date of
July 1, 2016. He remarked that the budget was already
passed with the Permanent Fund. He wondered whether the
governor must veto a portion of the Permanent Fund
currently in the operating budget.
Commissioner Hoffbeck replied in the negative. He explained
that there was no mandate to spend all the money
appropriated into the dividend account. The formula would
dictate the amount of the dividend payout, and the
appropriation would remain in the fund.
Representative Pruitt queried the consequences of the bill
not passing. He wondered if the governor would veto
regardless of bill passage.
Commissioner Hoffbeck replied that the governor was waiting
to see what landed on his desk to see what received.
Representative Pruitt wondered whether Commissioner
Hoffbeck stood behind the FY 17 numbers in the Revenue
Sources Book.
Commissioner Hoffbeck replied that there were numbers in
the book that were accurately tracked. He stated that the
operational cost forecast were almost exactly correct. He
stated that the capital costs were slightly higher than
forecast. The oil price was higher than the forecast. He
shared that FY 16 forecast was exceeded by two or three
dollars per barrel. He shared that FY 17 was forecast of in
between $39 per barrel, but the current oil price was
approximately $10 higher than the forecast. He remarked
that there was a historic peak at the current point in the
year, followed by a reduction in oil price in the end of
the year. He remarked that there was a possibility that the
oil price could drop. He felt that the current oil price
level would result in approximately $300 million additional
budget for the following year.
Co-Chair Thompson wondered whether the amount of credits
was the reason for the increased capital costs.
Commissioner Hoffbeck replied in the affirmative and stated
that it was the amount of money spent by the oil industry.
He stated that some would impact credits and others were
not credit eligible.
Representative Pruitt wondered how the administration
viewed the $1.92 billion available from the legislation. He
wondered if it was seen as new money or taken from one of
the savings accounts.
Commissioner Hoffbeck answered that it was not new money.
He stated that the bill provided a structure for the use of
the earnings reserve, to prevent the corpus of the fund. He
stressed that using the money from the earnings reserve or
CBR was each considered savings.
Representative Pruitt surmised that the core of the
discussion was about whether the state would pay a
dividend. He stated that it was about the $700 million. He
believed they were deciding who to give the money to - the
public or government. He opined that the remainder was
merely about guidelines. He remarked that the public was
frustrated because it appeared that the state was playing a
game.
9:42:26 AM
Commissioner Hoffbeck answered that the size of the
dividend was key; it was $700 million that would not flow
out of the system under the plan. He remarked that the
long-term stable plan allowed the ability to draw out the
5.25 percent, because of the longer horizon. He plan
allowed for some additional revenue in downturn years. He
stressed that the bill did not only relate to the dividend,
but allowed for stable structure across all years.
Representative Pruitt remarked on Commissioner Hoffbeck's
earlier statement about how if changes were not made there
would not be enough to sustain government. He asked if
Commissioner Hoffbeck was comfortable with the current
government level.
Commissioner Hoffbeck responded that he believed the
governor had made it clear that he thought more cuts needed
to be made.
Representative Pruitt stressed that it was the peoples'
dividends they were talking about. He thought residents
were concerned that using money from the fund represented a
slow creep of use of the funds. He wanted to show to the
public that the legislature would not keep taking the
money.
Commissioner Hoffbeck could not answer the question
completely - part of it was there would still be a deficit
the following year and there would continue to be downward
pressure.
Representative Guttenberg observed that he was the oldest
member in the room. He recalled that there was a
legislative session during Governor Murkowski's term that
dealt with POMV. He remarked that there was a basic
fundamental bill that did not have major policy decisions
of the current bill. He felt the bill may be too dense
because of all of the policy requirements. He urged the
creation of a stable structure with a stable flow of cash
for the state. He wondered what could be removed from the
bill to create a stable POMV. He remarked that the bill was
asking the people to change their relationship with
government by changing the PFD.
9:48:40 AM
Commissioner Hoffbeck replied that there was a fundamental
disagreement that a straight POMV would stabilize anything.
He asserted that a straight POMV would interject more money
into the system, and there could be a risk of being accused
of growing government by putting the POMV without any other
restriction. He stressed that the bill did not ask people
to give up their dividend to grow government. Rather,
government was shrinking, and the attempt was to maintain a
level of government services that people have enjoyed. He
reiterated that the intention was not to inflate the size
of government.
Representative Guttenberg remarked that almost all of the
projections on the table had been seen by the committee
over time. He spoke to being asked to consider a snapshot.
He was concerned that the bill was too myopic. He would
like to see something past, but he believed the bill was
too top heavy.
9:51:30 AM
Representative Edgmon was on board with the premise behind
the legislation. He spoke to plummeting oil revenue. He
stated that the political support for the bill was not
there. He asked if there was public consent to make the
change.
Commissioner Hoffbeck answered that the dividend program
had to survive in some way. Typically, after explaining to
people that the state had to do something.
Attorney General Richards stated that the administration
was pretty flexible.
Representative Edgmon felt that there was a fundamental
disconnect within the residents of the state related to the
bill. He wondered whether there was another option
available.
Commissioner Hoffbeck responded in the negative. He
remarked that all of the economists in the state had
examined the problem and declared that there was no path to
a solution without using the earnings reserve to fund
government services.
9:58:24 AM
Representative Edgmon remarked that the legislature had not
come up with a plan, and it was June. He wondered what
would occur without the necessary votes.
Commissioner Hoffbeck stated that the governor has said
that the legislation was critical. He felt that they may
need to revisit the issue.
Representative Edgmon wondered how the CBR would remain a
fiscal shock absorber with the management transferred to
the Permanent Fund Corporation for investment.
Commissioner Hoffbeck replied that the mandate to move the
CBR management from DOR to the Permanent Fund Corporation
should require a conversation to work through the process
related to cash management and liquidity issues. He
remarked that both parties were capable of managing the
fund. He stated that the idea that the Permanent Fund
Corporation management's ability to provide returns
comparable to the other assets was probably not accurate,
because they would face the same liquidity issues as DOR.
He remarked that the $3 billion could not be put into
private equity and expect the higher returns. He remarked
that the money needed to be available for fundamental
services.
Co-Chair Thompson remarked that the controversy with the
bill was related to the limit of the PFD. He wondered if
the $1000 limit was acceptable to the people.
Attorney General Richards stated that the acceptability of
the size of the dividend was up to the legislature. The
governor was comfortable with the amount of $1000 and
thought it was acceptable.
Co-Chair Thompson noted the governor appeared on television
where he held up a check for the amount of $1000. He felt
that the governor had set the amount, and had created a
bill to force the legislature to reach that $1000. He felt
that the people were not yet convinced of the importance of
the bill. He wondered what would occur should the
legislature fail to approve the legislation.
10:03:37 AM
Representative Wilson stated that the state would be
issuing less than the projected amount without any change
in legislation. She had received phone calls and emails
that claimed otherwise.
Commissioner Hoffbeck replied that there was feedback from
various organizations around that state who had claimed
that $1000 was near the appropriate amount. He remarked
that the public opinion was unknown until the amount was
released. He stressed that it was a policy call to
determine an appropriate PFD amount. He stressed that DOR
was flexible, but noted the importance of the legislation.
Representative Wilson asked how much money was currently in
the earnings reserve account.
Commissioner Hoffbeck replied that there was approximately
$7 billion in the earnings reserve. He furthered that there
were deposits in the current year from the Permanent Fund
Corporation of approximately $2 billion. He announced that
the total was approximately $9 billion.
Representative Wilson noted that there was between $7
billion and $9 billion in the earnings reserve account
(ERA). She wondered if the account would maintain $7
billion with the removal of inflation proofing and dividend
payouts.
Commissioner Hoffbeck replied in the affirmative.
Representative Wilson asked how much of the $7.5 billion
would make in the current year.
Commissioner Hoffbeck replied that it would be
approximately 7.25 percent, which would be approximately
$500 million.
Representative Wilson felt that the state could use the
$500 million in the budget, and the governor could veto the
current budget and request a reduction of $500 million. She
felt that those actions would still result in the same as
the legislation.
Commissioner Hoffbeck replied that there would be
approximately $1.9 billion from the earnings reserve
required for flow.
Representative Wilson asked how much money would be used in
the GF with the use of the ERA if the bill was passes.
Attorney General Richards replied that $1.9 billion would
be required.
Commissioner Hoffbeck furthered that $1.9 billion would be
used from the ERA to supply the money required from the
CBR. The change in the actual number spent would be $700
million reduction in the size of the dividend.
10:08:48 AM
Representative Wilson remarked that, without the
legislation, the state would need to find $700 million in
some other aspect. She queried the job impacts of removing
an additional $500 million from the budget. She remarked
that there was already an 8000 job loss projection.
Commissioner Hoffbeck replied that the impact of cutting
government jobs or government spending was greater than the
impact of reducing the size of the impact.
Representative Wilson felt that there were too many
provisions in the legislation. She felt it was already
difficult to understand all the aspects of the legislation.
10:11:25 AM
Representative Gara claimed that there were a number of
reasons why the bill would not pass. He posed the question
whether it was fair. He personally thought it was
intolerable spending money on oil taxes and asking while
asking people for their dividend. He stated that if the
legislature waited to negotiate and wait until November,
there would be great impacts to the state. He wondered if
the state would have $3.5 billion less in savings at that
point.
Commissioner Hoffbeck replied that the full dividend would
be paid at that point, and then half of the spending would
be spent at that point.
Representative Gara queried the disadvantages about
returning to further discuss the concept.
Commissioner Hoffbeck replied that nothing would be
different in November. He remarked that there was no
purpose in waiting.
Representative Gara asked about the estimated costs of
deferred maintenance.
Co-Chair Thompson confirmed the money Representative Gara
talked about.
10:16:09 AM
Vice-Chair Saddler remarked that the projections would only
cover approximately one-half of the deficit, and the
administration had claimed to fill the gap with income tax
or other types of taxes. He remarked that the governor did
not consider the budget situation a fiscal crisis, but
rather a cash flow problem. He asserted that a cash flow
problem had two major dynamics: the out flow of expenses
and the income. He felt that the attention was too greatly
focused on the income. He stressed that there was not
sufficient attention placed on the expense portion of the
cash flow. He remarked that the governor had promised a 16
percent budget reduction, but was too focused on the
revenue. He stressed that the administration was a
significant opponent to the legislature's efforts to cut
the budget. He noted the three years of increased education
funding, by $250 million in the foundation formula. He
noted the automatic pay raises for state employees retained
through the contracts. He stressed that there was an
attempt to cut the budget by approximately 16 percent. He
wondered what would be recommended to the governor to cut
to address the problem on the expenditure side of the cash
flow.
Commissioner Hoffbeck replied that the discussions about
the budgets and the cut recommendations would be best
directed at Pat Pitney. He noted that there was still an
over $1 billion deficit. The governor recognized that
additional cuts were part of the solution. He stressed that
the administration and legislature had been working on
cutting the budget.
Co-Chair Thompson would rather use the word, "reductions"
than the word, "cuts.
Vice-Chair Saddler wondered whether Commissioner Hoffbeck
advised the governor on spending.
Commissioner Hoffbeck replied that he advised the governor,
as well as other members of the administration.
Vice-Chair Saddler asked if Commissioner Hoffbeck would
tell the governor what cuts to make.
Commissioner Hoffbeck replied in the negative.
Attorney General Richards agreed with Commissioner
Hoffbeck. He shared that there was always a dialog in the
cabinet regarding the direction of the governor and the
state. He announced that he, as the attorney general, did
not weigh in on the budgets for other departments.
Vice-Chair Saddler expressed concern about only focusing on
the revenue without making cuts to spending.
10:21:36 AM
Representative Pruitt felt that there was no political will
in the House to move forward with the legislation. He was
concerned about the prospect of the governor continuing to
call the legislature into session. He noted that the
sustainable draw would be $2.4 billion, but maintaining the
dividend in its current state would allow another $1
billion to keep the sustainable draw, but may offset some
of the utilization of the CBR-requiring a separate
appropriation bill. He wondered whether the earnings
reserve could be used with an offset by $1 billion from the
CBR; or was there to much a focus on reducing the deficit
that the former was not an option. He expressed concern
that people would be more entrenched in their views, and
result in a deadlock to not move forward. He queried a way
to see a bipartisan solution. He stressed that the
Permanent Fund Corporation should have procurement
discussions and ensure that the CBR was managed. He
wondered whether it was possible to not deal with the PFD.
He did not want to continue in the entrenched position,
incurring cost to the state and creating larger divisions
within Alaskans as the legislature remains in session.
Commissioner Hoffbeck stated that the governor had made it
clear that a draw from the Permanent Fund without a
structured plan was not acceptable. He shared that the
governor was flexible with how the dividend fits into the
structure.
Representative Pruitt announced that Commissioner
Hoffbeck's answer "did not work." He stressed that there
was no plan for the following year on how to spend the
money. He wondered how there could be the assertion that
there must be structure, with no structure for the
following year. He felt that there was a disingenuous
disconnect that would force the legislature to be stuck in
Juneau. He stressed that the situation was bad for the
state. The longer the legislature remained in session, the
angrier people would become. He asked that the governor
consider meeting the legislators in the middle, because
everyone was dealing with the issue together.
Co-Chair Thompson indicated there would be a break. He
stressed that the House of Representatives would not
approve the proposal, because of the outcry from their
constituents.
10:27:40 AM
AT EASE
10:47:00 AM
RECONVENED
Co-Chair Thompson asked for an additional scenario to be
discussed. He invited Commissioner Hoffbeck and Ms. Rodell
to the table.
10:47:39 AM
ANGELA RODELL, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, introduced herself.
Co-Chair Thompson asked about the effects on the earnings
reserve if the bill was not passed.
Commissioner Hoffbeck explained the calculation of the PFD.
Ms. Rodell stated that, under current statute, the ERA was
invested alongside of the corpus of the fund. She stated
that there were accounting entries to move the money and
allocate it to the ERA, but was continually invested. She
remarked that the trustees must reconsider some investments
redirected to liquid accounts if the ERA was used as a
budget reserve.
Co-Chair Thompson wondered how long it would take to
drastically reduce the ERA if no action was taken on the
bill.
Commissioner Hoffbeck answered that the ERA would be used
in the following year.
10:51:31 AM
Co-Chair Thompson asked about the possibility of a repeat
of 2008.
Ms. Rodell responded that obviously the incident of 2008
the corporation would prefer not to revisit that event.
Co-Chair Thompson asked about down grading by Fitch.
Commissioner Hoffbeck stated that Fitch had just downgraded
Alaska to double A plus. The other bond rating agencies
would follow.
Co-Chair Neuman wondered if there was a plan for bond sales
in the next two years.
Commissioner Hoffbeck replied that there was not a general
obligation bond sale scheduled, but DOR had the authority
to sell bonds.
Co-Chair Thompson referred to a recent newspaper article
that indicated that the Board of Regents and President of
the University of Alaska were considering bonding for the
engineering building. He wondered if the bond rating would
affect the cost of their bond.
Commissioner Hoffbeck replied in the affirmative.
Co-Chair Neuman asked about the costs effects of the bond
rating change.
Commissioner Hoffbeck replied that the impact was not known
until the market reflected the impact.
10:55:59 AM
Co-Chair Neuman asked for a value on bonding. He stated
that he could not even get a value from the commissioner of
revenue.
Commissioner Hoffbeck replied that the spreads vary, so the
impact was not known until the market was known. He stated
that AIDEA, AHFC, and the municipal bond bank were all tied
to the state's bond rating.
Co-Chair Neuman relayed that the state had over $70 million
in assets and he did not understand how the state could use
for investments
Commissioner Hoffbeck responded that the state's spending
affected the state's bond rating.
Co-Chair Neuman asked why Sections 2 and 3 were in the
legislation.
Ms. Rodell stated that the sections did not remove the
Alaska Permanent Fund out of the Executive Budget Act. The
sections provided an exemption from the State Procurement
Code that was already utilized by a number of different
agencies, including AHFC and UA. She stated that the reason
for the language was because there were circumstances which
the State Procurement Code limited the ability to respond
quickly to investment opportunities. She stated that she
wanted to hire third party consultants, and were not
fiduciary to the fund.
11:01:08 AM
Co-Chair Neuman asked if a new invested officer had been
hired.
Ms. Rodell stated that they had just hired an officer which
took 6 months.
Co-Chair Neuman asked about the salary of that person.
Ms. Rodell stated that the person was being hired at a
salary of $400 thousand.
Co-Chair Neuman wondered if it was wrong to hire a new
person at that salary.
Ms. Rodell thought it was important to note that the
corporation would come to the legislature each year with
request for appropriation, because the corporation was
subject to the Executive Budget Act. She was happy to meet
with the legislature any time. She thought a heavy burden
was being placed on the fund. She wanted all the tools
available to manage the fund.
Co-Chair Neuman thought it would more appropriate to ask
the legislature for more procurements. He did not
understand the necessity of this in the bill.
Co-Chair Thompson wondered if there were any indications
from the bonding agencies that would downgrade the state.
Commissioner Hoffbeck stated that there could be an
additional downgrade by S and P as well as by Moody's.
Co-Chair Thompson asked if the state could reverse that
effort.
Commissioner Hoffbeck responded affirmatively.
11:05:49 AM
Representative Wilson wondered why the state would want to
take on more debt.
Commissioner Hoffbeck responded that debt can be both a
burden and a tool. He explained that borrowing money at
lower rates would be a tool for the state's rating.
Representative Wilson queried the benefit for the state to
bond for Alaska Industrial Development and Export Authority
(AIDEA) and municipalities.
Commissioner Hoffbeck replied that those entities were
required to pay that debt, so it did not necessarily effect
the state's books. He remarked that it provided a benefit
to those entities.
11:07:51 AM
Representative Wilson remarked that the debt still rose for
the state. She asserted that the bond rating would be
reduced, so the percentage payback would be increased for
those entities that wanted to borrow from the state.
Commissioner Hoffbeck responded in the affirmative.
Representative Wilson stated that further conversation
would be necessary.
Vice-Chair Saddler wanted a range of numbers about what the
down tick in the bond rating really meant, and the
financial impact to the state.
Commissioner Hoffbeck asked to be able to provide something
in writing.
Vice-Chair Saddler referred to Sections 2, 3, 4, 5, and 7,
related to the management of Permanent Fund Corporation,
and did not relate to the POMV plan. He wondered whether a
bill with only those sections would see support as a means
to reduce the "top heaviness" of SB 128.
Ms. Rodell responded that in terms of reporting certain it
would actually lessen some of the responsibilities of the
corporation.
Vice-Chair Saddler wondered if Ms. Rodell would support
that type of bill.
Ms. Rodell replied that she could support that type of
bill.
Vice-Chair Saddler wondered if the Permanent Fund was seen
as a sovereign wealth fund or the people's fund.
Ms. Rodell agreed with Attorney General Richards comments,
stating that the government's money was the peoples' money.
Vice-Chair Saddler asked if she agreed with Attorney
General Richards.
Ms. Rodell replied in the affirmative.
11:13:04 AM
Co-Chair Neuman stated that the reason why the state was
concerned was because the state had money. He asserted that
the money could be accessed for less than the money made in
the savings account. He wanted to understand the cost
dynamic.
Co-Chair Thompson relayed that the commissioner would
provide the information.
Commissioner Hoffbeck agreed to provide that information.
Co-Chair Neuman wondered whether the discussion matters.
Representative Gara asserted that some people were
concerned with the PFD level in the bill. He wanted to know
what would occur, if the legislature returned in November.
He asked how much money would be used from either the ERA
or CBR that was irretrievable.
Commissioner Hoffbeck responded that there would be $1.4
billion from the ERA into the dividend fund, unless that
draw was from the CBR. He stated that it would be
approximately one-half of the draw.
Representative Gara asked for rough numbers. He wondered if
the state would be down $1.5 billion in savings.
Commissioner Hoffbeck replied in the affirmative.
Representative Gara wondered whether waiting put more
pressure later.
Commissioner Hoffbeck responded affirmatively.
11:18:46 AM
Representative Munoz noted that there was growth potential,
because of the tie to the Permanent Fund. She wondered if
there might be a conflict between the premises with the
POMV draw and the spending limit.
Commissioner Hoffbeck responded affirmatively.
Representative Munoz announced that the provision was a
limit on oil and gas revenue in addition to the POMV draw.
She surmised that it was not calculated on the POMV draw.
Commissioner Hoffbeck agreed.
Representative Munoz remarked that there had been a lot of
discussion about the oil and gas tax credit reform bill.
She asked the commissioner to provide feedback.
Commissioner Hoffbeck stated that HB 247 was a compromise.
The bill actually went further than the governor's version
of the bill.
11:26:03 AM
Representative Gara stressed that the oil and gas credit
bill allowed for the state to pay the oil companies 35
percent of their losses. He stressed that many legislators
were coming to terms with that idea. He stressed that he
wanted to reach a principled compromise that protected the
dividend.
Vice-Chair Saddler commented that he had heard rhetoric
concerning the assertion that the bill would take money
from Alaskans and give it to "greedy oil companies." He
wondered if that was true.
Commissioner Hoffbeck stated there was no direct connection
between the two bills.
Representative Pruitt asked about the provisions that
allowed the PFC to manage the funds.
11:28:51 AM
AT EASE
11:29:41 AM
RECONVENED
Ms. Rodell stated that it was currently in statute that the
commissioner of DOR could ask the Permanent Fund
Corporation to manage the assets of the CBR. She noted that
the insertion of Section 4 was the corollary of the
insertion Section 18, which repealed the statute that
"handcuffed" the commissioner of DOR. She remarked that,
currently, could transfer management, the Permanent Fund
Corporation would be bound by the same limitations without
repealing. The commissioner was currently constrained by
those limitations.
Representative Pruitt wondered whether the current
restrictions allowed for a maintained liquid assets.
Ms. Rodell answered in the affirmative.
Representative Pruitt asked if the individuals would still
be needed to manage at APFC.
Commissioner Hoffbeck answered that the same individuals
were also investing in Alaska Retirement Management Board
(ARMB) funds.
Ms. Rodell agreed; no additional personnel would be needed
to manage the CBR.
11:32:25 AM
Vice-Chair Saddler asked what the effect would be on the
sustainability of guaranteeing a $1500 PFD.
Commissioner Hoffbeck replied that Mr. Teal may have
already done some of the modelling. He elaborated that it
would take approximately $350 million with a $1500 draw;
and another $175 million with a $1250 draw.
Vice-Chair Saddler asked if the administration had a
position on the issue.
Commissioner Hoffbeck answered that the administration was
willing to consider options.
Representative Guttenberg spoke to changes in investment
strategy. He asked about the impacts of the bill if it
passed.
Ms. Rodell responded that APFC was not being directed to
change any of its investments under the legislation. The
question would go to the trustees to determine whether any
changes needed to be made to the asset allocation of the
fund. She spoke about the fund's level of risk.
11:37:24 AM
Representative Guttenberg asked what the lower risk would
do to the projected rate of return.
Ms. Rodell answered that lower risk meant lower returns.
Co-Chair Thompson asked Mr. Teal to address the fiscal
note.
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
remarked that the governor's office was preparing a fiscal
note. He stated that there were no fiscal notes originally
attached to SB 128. He remarked that the special session
did not have an appropriation bill. He stressed that there
was no appropriation bill necessary to implement SB 128. He
furthered that there were fiscal impacts in the bill. He
shared that there would be fiscal notes primarily for
informational purposes. He felt that addressing the fiscal
impacts, even without the physical fiscal notes, was
important to the upcoming public testimony. He shared that
the largest fiscal impact was the reduction in PFD from
roughly $2000 per capita to $1000 per capita; which totaled
approximately $700 million in the ERA. He remarked that the
bill did not affect the ERA, because there was an FY 16
appropriation from the ERA to pay the dividends. He
stressed that, should the bill pass with the cap on
dividends, the governor would likely veto half of the $1.4
billion appropriation in the operating budget bill-reducing
the dividend to $1000. He remarked that the legislature did
not have control over the operating bill, because it was
already passed from the legislature. He stated that should
the bill not pass and the PFDs were paid in full, there
would be $3 billion remaining in the CBR. He felt that it
was a sufficient amount to bring the state through FY 18.
He stated the CBR would be expelled by the end of FY 18, at
which time the ERA would be used. He remarked that, at that
point, the projection was that PFDs would be eliminated in
2023. He stated that, under the Permanent Fund Protection
Act and with a $700 million reduction in PFDs, it was
expected that dividends would drop to $1000 and would
continue to be paid for the foreseeable future at roughly
$1000 per year.
11:42:48 AM
Mr. Teal addressed another provision related to the
management of the CBR. He emphasized that the treasury was
not investing poorly. There was a law that stated that the
money needed in five years must be invested in liquid
funds. He remarked that the CBR earned roughly 1.5 percent.
He stated that transferring management to the Permanent
Fund Corporations and repeal of the handcuffing investment
provisions, the earnings for the CBR would be significantly
higher-translating to approximately $300 million per year
in additional earnings. The CBR could be spent, but the
bill did not close the deficit. He remarked that there was
a fiscal note from the Permanent Fund Corporation that
showed an approximately $13 million increase in management
fees to manage the CBR. He remarked that the fees would
decrease as the balance of the CBR decreased. He remarked
that moving the management of the CBR without the remainder
of the bill, the management fees and the CBR would be gone
by 2023-resulting in no extra money and no extra fees. He
looked at the royalty provision which changed the
dedication of royalties to the corpus of the Permanent
Fund. He stated that it was currently 50 percent on new
fields and 25 percent on old fields, which averaged to
about a 30 percent deposit to the Permanent Fund. The bill
would reduce that deposit to 25 percent for all fields,
yielding an additional $40 million to $50 million per year
flowing to the general fund. That money would be spendable,
and would reduce the deficit. He stated that, with smaller
dividends, the PFD felon funds would decline by roughly $20
million in money that would normally go to convicted felons
and incarcerated individuals. He stated that cutting the
PFD to half, the PFD felon funds available to the
Department of Corrections (DOC) would be reduced from
approximately $20 million to $10 million. All of the
remaining fiscal impacts would be to the revenue. He stated
that the DOR fiscal notes did not require an appropriation,
so they were only drafted with information.
11:47:02 AM
Co-Chair Neuman referenced a fiscal note related to the
transfer to the CBR and the ability of the management of
the CBR's investment limitations. He stressed that DOR had
certain restrictions as to how they could invest money,
which was different than the Permanent Fund Corporation's
restrictions. He wondered whether the Permanent Fund
Corporation had better ability to invest with greater
interest.
Mr. Teal replied in the affirmative. He furthered that
there was also an advantage in management of liquidity,
because the CBR must be held in liquid form, should it be
the only available reserve. He explained that the liquidity
issues would disappear, if the CBR was comingled with the
permanent fund itself because the size of the corpus
allowed for movement of money from one liquid investments
to non-liquid investments.
Co-Chair Thompson noted that there was a portion in the
bill that repealed the statutes requiring liquidity, which
restricts the types of investments. He wondered whether the
statute would still exist related to liquidity if the
commissioner of DOR wanted to transfer authority to the
Permanent Fund Corporation.
Mr. Teal replied in the affirmative, and explained that
Commissioner Hoffbeck explained that the restrictions
caused the lower return. He stressed that removing the
restrictions allowed the commissioner of DOR to continue to
manage the CBR and receive a slightly higher return. He
restated the liquidity concerns, and remarked that there
would not be a 7 percent return at the current rate of
withdrawal from the CBR.
Co-Chair Neuman spoke to the note that addressed the cost
of the management of the reserve funds. He wondered if the
cost for management would be absorbed within the fund
itself, rather than the general fund.
Mr. Teal responded that CBR management fees were an odd
deal, because management were an expenditure. He stated
that paying the management fees from the CBR required a
supermajority vote by the legislature.
11:52:51 AM
Representative Gara referred to the first part of the
formula that stated that for every dollar in revenue was a
lost dollar in pay out, so it remained flat. He queried the
reason for the longer state deficit up to $100 per barrel
as opposed to up to $80 per barrel.
Mr. Teal replied that less revenue would be available from
the payout. Therefore, a lower payout at any given level of
spending, required a need to fill the gap from the CBR.
There was not an opportunity to break even until $105 per
barrel of oil.
Representative Gara wondered whether the fiscal plan showed
that the real dollar budget continued to decrease.
Mr. Teal responded that revenue was not always flat. He
stated that only oil dollars would be replaced. He
explained that the oil companies tended to make more money
at increased oil prices, therefore corporate income tax
would increase. He stressed that there would be as much as
$200 million available in corporate income tax. He
announced that it did not apply to any other revenue
sources such as motor fuels income, etc. He stressed that
the revenue was not necessarily flat.
11:56:07 AM
Representative Gara assumed the existing revenues at $75
barrels of oil would provide about approximately $4.5
billion. He wondered whether a dollar increase in oil
revenue resulted in a loss of a dollar in POMV revenue.
Mr. Teal pointed to the right hand side of the chart, and
noted that the revenue did not remain flat; it was rising
until $75, at which point the curve turned downward.
Representative Gara wondered whether the top line remained
flat.
Mr. Teal relayed that the line was flat because of the
assumed level of expenditures. He explained that it was a
line extended from current expenditure levels. He stressed
that the actual expenditure levels were unknown, because
those were determined by the legislature. The graph only
showed FY 17, and was not a time series. He stressed that
the graph stated that in FY 17 the budget was approximately
$5.1 billion without dividends; and approximately $4.5
billion excluding dividends. He stressed that it could not
extend to 2018 or any other year.
Representative Gara wondered whether the $4.5 billion was
combined capital and operating budget.
Mr. Teal responded in the affirmative.
Representative Gara wondered whether the number combined
designated and undesignated general funds.
Mr. Teal responded that it did not combine the two. He
stated that the number was only unrestricted general funds.
Representative Gara asked whether spending more money would
exhaust the CBR.
Mr. Teal responded in the affirmative. He remarked that
there were discussions related to a spending limit. He
remarked that it should not be considered a "spending
limit." He explained that the provision did not limit the
spending. He asserted that the provision would limit the
amount of revenue received in the POMV payout. He stressed
that it did not limit revenue from other sources. He noted
that it could be converted to be seen as a revenue limit
actually limiting spending. He remarked that revenue and
spending were related, but were not the same. He stressed
that there was other, unlimited revenue. He remarked that
the reserves were not limited. He stated that the revenue
limit would limit the draw from the ERA, but did not limit
spending. He explained that the savings rule occurred in a
surplus situation. He announced that a savings rule was
also not a spending limit. He explained that a savings rule
stated that at the point of surplus, half of the surplus
would be put in the CBR and half of the surplus would be
put in the corpus. He stressed that savings did not allow
for spending. He felt that calling those actions "spending
limits" confused the issue, because it made people believe
that money could not be spent beyond a fixed amount. He
stressed that the savings rule was very weak, because it
allowed for the legislature to spend in the supplemental
budget, and end up with no surplus.
Representative Gara agreed that he also would not use the
term, "spending limit." He remarked that, in order to "keep
up" with the actual costs, the CBR would need to be used or
come up with new revenue.
Mr. Teal stated that Representative Gara was correct. He
stated that there were many people who wanted to make more
cuts, and the governor agreed with those people. He stated
that the remaining appropriations after cuts, may be able
to keep up with inflation. He could not predict how much
the legislature would spend in 2022. He stressed that there
were many factors that affect spending: oil, economic
impacts, and the legislature at the time. He stressed that
rules would be set up for a future legislature to follow.
He felt that guidelines for future legislators could be
broken
Representative Gara did not feel that the legislature
should adopt rules that were made to be broken.
Vice-Chair Saddler asked if the bill would require that the
CBR be paid back in full, and queried that amount of money.
Mr. Teal responded that the amount would be the highest
balance of the CBR. He stated that, at one point, the CBR
was approximately $12 billion. The CBR was now at $7
billion, because there were a couple of $3 billion
withdrawals. He stressed that all of the money needed to be
repaid. He stated that there would be an annual sweep of GF
to the CBR, and required a supermajority vote to reverse
that action.
Vice-Chair Saddler noted that the highest balance of the
CBR was approximately $12 billion, and must be repaid at
some point.
Mr. Teal agreed.
Vice-Chair Saddler noted that the bill eliminated the need
to repay the CBR. He wondered whether there was money to
begin to fill that obligation. He asked if the repayment of
the CBR had any functional effect on the fiscal plan.
Mr. Teal stated that until the price of oil reached $110,
the CBR had to be swept every year. He remarked that, under
the current price projections, the state would not reach
$110 per barrel of oil. He remarked that the savings rule
would not be enacted, and furthered that there was no
projection of $75 per barrel of oil for the revenue limit.
He explained that the issue of the revenue limit and
savings rule would not occur within the next five years. He
remarked that they state may see the rule and limit, but
stressed that the $75 limit only applied to FY 17. He
stated that, as oil production fell and production costs
increased, the price kept moving further out. He felt that
the limit would not occur, unless there was another spike
in oil prices. He could not say how long or if they would
pay back the CBR.
12:07:52 PM
Vice-Chair Saddler wondered whether the calculation of the
5.25 percent draw on POMV was actually closer to 4 percent,
because it was calculated on the most recent 5 of the last
6 years. He wondered whether other endowment plans used a
similar management target.
Mr. Teal stated that the 5.25 nominal payout was based on
the average balance of the past six years. He explained
that it was based on the average of three years prior. He
remarked that paying 5.25 percent on a three year balance
was roughly the same as paying 4.8 percent on the current
balance. He remarked that endowments had different payouts,
with 5 percent being on the high side, however not
"outlandishly high." He stated that the Permanent Fund
investments were expected to be able to cover that 5
percent, with approximately 2 percent remaining that would
not be paid out. The 2 percent could be considered
inflation proofing, but stressed that it was not an
endowment with extra earnings into the corpus. The earnings
beyond the payout remained in the ERA, and were the
"buffer" to ensure that the ERA was not emptied in bad
investment years.
12:10:36 PM
Vice-Chair Saddler noted that the bill proposed that
dividends would be paid through royalties. He wondered if
there was a possibility for royalties from minerals such as
gold, silver, or lead to reach equal or approach the value
of the royalties from oil.
Mr. Teal responded in the negative.
Representative Wilson thanked Mr. Teal for clarifying that
there was not actually a spending cap. She noted that the
savings rule only related to the oil and gas revenue, and
did not come from other revenue. She remarked that the bill
did not cap how much the legislature was able to spend.
Mr. Teal agreed. He explained that there was downward
pressure on the budget, but was not necessarily because of
the bill. He stressed that the bill did not solve the
state's fiscal problems. The bill shifted the deficit by
half. He stressed that $1.6 billion was a significant
deficit. He remarked that the current revenue covered less
than one-third of the expenditures. He stated that the bill
would cover half the deficit, but there was still a one-
third deficit, forcing a downward pressure to balance the
budget. He felt that there was probably a time to create
taxes and reduce expenditures.
Representative Wilson wondered whether a spending limit
could be put into the bill in order to help the pressure
for future legislatures.
Mr. Teal replied that there were several versions of the
bill that had an actual spending limit. He explained that
many saw that as impractical and unenforceable. He remarked
that the constitutional spending limit was in place, that
some people consider unenforceable. He stressed that future
legislatures could break the rule.
ADJOURNMENT
12:17:59 PM
The meeting was adjourned at 12:17 p.m.
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