Legislature(2007 - 2008)BELTZ 211

04/04/2008 01:30 PM Senate JUDICIARY


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ HJR 28 CONST. AM:BUDGET RES.FUND/OIL& GAS TAX TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
+= HB 286 IMPERSONATING A PUBLIC SERVANT TELECONFERENCED
Moved SCS CSHB 286(JUD) Out of Committee
      CSHJR 28(FIN)-CONST. AM:BUDGET RES.FUND/OIL& GAS TAX                                                                  
                                                                                                                              
1:49:25 PM                                                                                                                  
CHAIR FRENCH announced  the consideration of HJR  28. [Before the                                                               
committee was CSHJR 28(FIN).]                                                                                                   
                                                                                                                                
REPRESENTATIVE SAMUELS, Co-Sponsor of  HJR 28, explained that HJR
28 establishes  an endowment-type fund out  of the Constitutional                                                               
Budget Reserve  (CBR) with  a 5  percent payout  to automatically                                                               
flow into the general fund.  Then the legislature each year would                                                               
have  the  prerogative  to  spend  the  payout  as  it  saw  fit.                                                               
Initially  the bill  did not  incorporate the  CBR; the  original                                                               
draft had a separate constitutionally  created fund that for five                                                               
years  would receive  all the  progressive feature  of ACES  [the                                                               
petroleum tax]. He decided on  that for three reasons: because he                                                               
wanted  the public  to understand  that  endowments aren't  evil,                                                               
because it would be an opportunity  to save money, and because it                                                               
would provide  a separate cash-flow mechanism  into state coffers                                                               
that wasn't associated with the price of a commodity.                                                                           
                                                                                                                                
1:52:11 PM                                                                                                                    
The House Finance Committee broadened  the scope and instead of a                                                               
new  fund  decided on  using  the  constitutional budget  reserve                                                               
(CBR).  Doing that  would  make the  endowment  a more  effective                                                               
cash-flow mechanism by applying  the concept of front-loading. He                                                               
described his  401k with Pen Air  and said that every  dollar you                                                               
put in during  the first years makes a real  difference. After it                                                               
gets built up  where money can be spent from  the fund, the money                                                               
you put in  is less relevant because the money  that's already in                                                               
the fund  is working for you.  The thinking is that  "while we've                                                               
got money, you want to put  as much money [as possible] into this                                                               
endowment so that it actually  becomes a real-life cash flow," he                                                               
said.                                                                                                                           
                                                                                                                                
REPRESENTATIVE SAMUELS  relayed that  at the  end of  the session                                                               
the  CBR is  expected  to  be $6-7  billion.  He  added that  for                                                               
purposes  of  an  easy-math  example, suppose  the  CBR  has  $10                                                               
billion.  At a  5  percent payout  rate  the cash-flow  mechanism                                                               
going into the  general fund would be about $500  million a year.                                                               
Philosophically the CBR  was created so that as the  price of oil                                                               
rises  and falls,  massive state  government  budget cuts  aren't                                                               
inevitable. The  trade-off with HJR  28 is that  government would                                                               
not  have the  ability to  access that  $10 billion  in order  to                                                               
balance the budget.  If production or the price of  oil drops the                                                               
painful but healthy  debate on spending caps  and revenue sources                                                               
will happen  sooner than it would  had the $10 billion  been left                                                               
open to  government spending. The  reason for doing this  is that                                                               
as the budget  continues to increase and  production continues to                                                               
decrease, the longer you wait to  have the debate on state fiscal                                                               
planning, the more draconian the answers will be.                                                                               
                                                                                                                                
1:56:59 PM                                                                                                                    
REPRESENTATIVE  SAMUELS emphasized  that  if the  $10 billion  is                                                               
already gone,  the problem is  worse: there would be  no cushion,                                                               
there would  be no $500  million cash  flow, the budget  would be                                                               
higher,  and   production  would  have  dropped.   "I  think  the                                                               
discussion is inevitable,  and it is healthier  for the community                                                               
to  have it  sooner rather  than later,"  he said.  Decisions are                                                               
better made when it's not a crisis situation.                                                                                   
                                                                                                                                
1:58:52 PM                                                                                                                    
REPRESENTATIVE SAMUELS  said almost  all members  have questioned                                                               
what to  do if there's a  short term interruption in  the revenue                                                               
stream from  Prudhoe Bay, and  there are  a couple of  answers to                                                               
that. At  one point  the House Finance  Committee discussed  a 5-                                                               
year phase-in  of the 3/4 vote  money and the endowment  money to                                                               
provide some sort of cash-flow  mechanism to accommodate a short-                                                               
term  needs.  But  when  the  Senate  put  $1  billion  into  the                                                               
statutory  budget reserve  in the  supplemental bill,  he decided                                                               
that is  a better mechanism  for short-term cash needs.  That way                                                               
the legislature  the following year  could debate whether  to put                                                               
more  money  into the  endowment  or  into the  statutory  budget                                                               
reserve.                                                                                                                        
                                                                                                                                
REPRESENTATIVE  SAMUELS said  that  in the  current version,  the                                                               
sweep  provision goes  away so  that gets  rid of  the sweep  and                                                               
reverse  sweep that  has become  the normal  course of  business.                                                               
That wasn't  the intent;  the intent  was to have  a 3/4  vote to                                                               
access the money for emergencies.  Under HJR 28, everything would                                                               
go  immediately  into  the  general  fund  and  every  year  each                                                               
legislature  would  choose  whether  to  put  the  money  in  the                                                               
endowment, in  the statutory budget  reserve, spend it,  or leave                                                               
it in  the general fund.  What you do get  to do is  take current                                                               
revenue and endow it so that the  money is not gone when the next                                                               
generation   of  Alaskans   and  the   next  generation   of  the                                                               
legislature  comes along.  Needs  don't  disappear and  everybody                                                               
gets a  little bit throughout time.  Nobody gets to spend  all of                                                               
this non-renewable resource, everybody  gets a piece. The concern                                                               
about the  need for short-term  cash can be alleviated  by saving                                                               
some  money in  a short-term-cash-need  statutory budget  reserve                                                               
type fund,  he said. You  can save as much  money as you  want in                                                               
the short-term  fund - tapped  in by  majority - but  his problem                                                               
with that is that if it's available  it will be spent and then it                                                               
won't be  available. "It will be  an emergency as defined  by the                                                               
legislature."  In   general  that's   what  the  bill   is  about                                                               
practically and philosophically, he said.                                                                                       
                                                                                                                                
2:02:31 PM                                                                                                                    
REPRESENTATIVE  SAMUELS  said  Mr.  Teal would  walk  through  an                                                               
interactive  model to  point out  various scenarios  with general                                                               
fund growth  and production decline.  He met with  the Department                                                               
of  Revenue (DOR)  and they  had  two ideas  for amendments.  One                                                               
addresses  a bond  rating issue  related  to locking  up a  large                                                               
amount of  cash. The other  amendment is  a work in  progress. It                                                               
deals with  keeping the ability for  DOR to use a  line of credit                                                               
without ending up with a  fund that's totally invested for short-                                                               
term credit-line needs.                                                                                                         
                                                                                                                                
2:04:04 PM                                                                                                                    
REPRESENTATIVE DOOGAN, Co-Sponsor of  HJR 28, asked the committee                                                               
to  think about  two  things as  it  considers this  legislation.                                                               
First,  is that  although  $500 million  doesn't  look like  much                                                               
money right  now, it looks  pretty good weighed against  the $300                                                               
million  the state  would get  if  the personal  income tax  were                                                               
reinstated under roughly the same  terms as when it was abolished                                                               
back  in 1980.  He next  drew  attention to  three salient  facts                                                               
about the  state's financial  picture: first is  the rate  of oil                                                               
production,  second is  the value  of a  barrel of  oil, and  the                                                               
third is  the growth  in the operating  budget. He  believes that                                                               
over  the last  five years  the  growth in  the operating  budget                                                               
annualizes to  about 10 percent  a year. If it's  compounded, the                                                               
growth  is  67 percent,  making  it  clear that  continued  large                                                               
growth in  the operating budget  will make it the  largest single                                                               
factor. There's  been discussion abut  this as a  spending limit,                                                               
he said,  and insofar as it  works that way he  agrees, but yo-yo                                                               
budgeting  never really  looked very  good to  him looking  at it                                                               
from the outside  and it probably didn't look  any better looking                                                               
from the inside. Think about those two things, he said.                                                                         
                                                                                                                                
2:06:52 PM                                                                                                                    
REPRESENTATIVE  SAMUELS added  using figures  from the  statewide                                                               
sales tax  debate that went  on in  2002 and 2003,  the estimated                                                               
$500 million  cash flow stream  would be  akin to a  five percent                                                               
statewide sales tax.                                                                                                            
                                                                                                                                
2:07:35 PM                                                                                                                    
CHAIR  FRENCH  noted  that  it's  been  a  long  time  since  the                                                               
legislature last put  money in the corpus of  the permanent fund,                                                               
and he believes the reason that  it's not being considered now is                                                               
because the money is then out of reach.                                                                                         
                                                                                                                                
REPRESENTATIVE  DOOGAN responded  that  the  difficulty with  the                                                               
permanent fund is that to use  the earnings you have to solve all                                                               
the  political  problems  associated   with  the  permanent  fund                                                               
simultaneously. You have  to do something about  the dividend and                                                               
you have  to convince the voters  that the tradeoff is  worth it.                                                               
Several  years ago  the idea  of capping  the dividend  didn't go                                                               
anywhere because the groundwork hadn't  been done. So if you want                                                               
to talk about  that, you're talking about a  several year process                                                               
to  work out  the terms  to present  the idea  clearly and  often                                                               
enough so that people whose job  is not to pay attention to these                                                               
things understand what you're trying to do.                                                                                     
                                                                                                                                
2:10:10 PM                                                                                                                    
REPRESENTATIVE SAMUELS  said he  believes that from  one-third to                                                               
one-half of the  money in the permanent fund  comes from deposits                                                               
that  weren't  constitutionally   mandated.  If  the  legislature                                                               
hadn't  put  that  money  away  it would  have  been  spent,  the                                                               
permanent  fund  would  be  smaller,  and  there  would  be  less                                                               
resource to draw  on going forward toward  that inevitable fiscal                                                               
planning debate. In  the long term the earnings  of the permanent                                                               
fund, cutting budgets,  and some broad-based tax will  all play a                                                               
role in  the debate. But  with a  $40 billion permanent  fund the                                                               
decisions are easier and the road is less rocky, he said.                                                                       
                                                                                                                                
2:11:23 PM                                                                                                                    
SENATOR THERRIAULT joined the meeting.                                                                                          
                                                                                                                                
CHAIR FRENCH  questioned why  the legislature  this year  isn't a                                                               
good counter  argument to his  position. It's spending a  lot but                                                               
it's saving a  lot, too. "At some  level isn't that a  check on a                                                               
legislature run wild?"                                                                                                          
                                                                                                                                
REPRESENTATIVE  SAMUELS   responded  that  five  years   ago  the                                                               
legislature spent  $2.5 billion  from the  general fund  and this                                                               
year  it will  spend $4.1  to  $4.4 billion.  The legislature  is                                                               
doing a  good job of  saving money, but  part of that  is because                                                               
there  is so  much  money  right now.  When  Mr.  Teal does  some                                                               
modeling,  you'll  see some  interesting  numbers  on what  could                                                               
continue, he said.                                                                                                              
                                                                                                                                
2:13:30 PM                                                                                                                    
SENATOR McGUIRE  drew an analogy  between the permanent  fund and                                                               
having  two  $20,000  certificates  of deposit  (CD)  versus  one                                                               
$40,000 CD. She  believes it would be more  efficient and provide                                                               
a  better payout  to pool  the assets,  but something  else comes                                                               
into  play with  the permanent  fund. In  her first  year in  the                                                               
legislature she learned that there  is a philosophical difference                                                               
of  opinion on  what  to do  with money  that's  perceived to  be                                                               
"government  money" and  money that's  perceived  to be  "citizen                                                               
money."  The money  we're talking  about in  this legislation  is                                                               
perceived as  government money while  the money in  the permanent                                                               
fund is  perceived as citizen  money. Other people  don't believe                                                               
there's a lot  of difference and the money  that's generated from                                                               
oil  wealth  is  invested  into  roads  and  schools  to  benefit                                                               
everyone.  But  because of  that  difference  in perception,  you                                                               
never  get around  the  practical,  political, and  philosophical                                                               
problem  of trying  to combine  those two  savings accounts,  she                                                               
said.                                                                                                                           
                                                                                                                                
2:15:40 PM                                                                                                                    
SENATOR McGUIRE said that the  advantages of doing something like                                                               
this is  that it  removes the  guesswork about  whether or  not a                                                               
future legislature will be fiscally  prudent, and it provides the                                                               
advantage of having an endowment.                                                                                               
                                                                                                                                
CHAIR FRENCH asked  the sponsor his view on  creating a statutory                                                               
budget reserve to do the same thing.                                                                                            
                                                                                                                                
REPRESENTATIVE SAMUELS  replied he  believes that  if it  were in                                                               
statute it would  still be easier to go after  the corpus than to                                                               
have the debate.  The 3/4 vote was meant to  make it difficult to                                                               
access money from the CBR but  it became a way of doing business.                                                               
It was  easier to  get the  vote than to  have the  debate. Doing                                                               
this in statute isn't the way  to go because the legislature will                                                               
always hedge  to the middle and  take the easier path.  Under HJR
28 you  get your  five percent  payout and  the $10  billion will                                                               
last for the long term.                                                                                                         
                                                                                                                                
2:19:33 PM                                                                                                                    
REPRESENTATIVE  DOOGAN added  that it's  difficult to  figure out                                                               
the idea of a democratic  government having savings. The model is                                                               
set up so  that the legislature can decide how  much to spend and                                                               
then  set the  tax rates  for that  year. Then  the next  year it                                                               
starts over  from zero. The  difference is  that this state  is a                                                               
resource owner in  addition to being a sovereign so  it has other                                                               
revenue  that  comes in.  Resource  revenues  vary, so  sometimes                                                               
there are surpluses and sometimes  there are deficits so you have                                                               
to think about what it really  means to save money in a realistic                                                               
sense of  the word.  The more  he thinks about  it the  more he's                                                               
come to conclude that it  isn't really saving unless there's some                                                               
sort of barrier to overcome in  order to spend the money. The 3/4                                                               
vote for  accessing money in  the CBR  seems like a  barrier, but                                                               
he's told that  the legislature has always found a  way around it                                                               
so you  can question whether  that is long-term savings.  But the                                                               
more  difficult it  is to  access the  surplus revenue,  the more                                                               
likely it  is that the  money really is  saved. In times  of high                                                               
revenue you  want to save money  as best you can  otherwise it'll                                                               
be used  and that will  be the end  of the discussion.  The point                                                               
is, he  said, is  that it's  an odd sort  of circumstances  for a                                                               
democratic government to have excess revenue.                                                                                   
                                                                                                                                
2:21:55 PM                                                                                                                    
SENATOR HUGGINS joined the meeting.                                                                                             
                                                                                                                                
SENATOR McGUIRE commented on discussions  she's had about being a                                                               
resource-based economy with a highly  volatile income stream that                                                               
isn't  set up  in  the traditional  democratic  way. That's  what                                                               
makes this  sort of constitutional  provision so  necessary; it's                                                               
about eliminating volatility in the best way you can.                                                                           
                                                                                                                                
She  suggested  the  sponsors consider  a  fallback  position  of                                                               
implementing  an  endowment  approach  in  the  statutory  budget                                                               
reserve. She  believes that  legislators would  come up  with all                                                               
sorts of  reasons and  excuses to  use the  money so  it wouldn't                                                               
happen.  That's   the  problem  with  statutory   as  opposed  to                                                               
constitutional fixes, they're very amendable.                                                                                   
                                                                                                                                
2:25:08 PM                                                                                                                    
SENATOR  THERRIAULT   pointed  out  that  with   respect  to  the                                                               
statement about the  statutory budget reserve, it  doesn't bind a                                                               
future  legislature.  Constitutions  are things  that  limit  the                                                               
powers of  branches of government.  Money that was parked  in the                                                               
statutory budget reserve has a  different name and may be earning                                                               
a different  return, but really  it's just the general  fund. The                                                               
Science  and Technology  Fund is  a good  example of  creating an                                                               
endowment. That was general fund  money with a different name and                                                               
when the time  came it was spent just like  general fund money. A                                                               
small  constituency   advocated  to   protect  it,   but  finally                                                               
succumbed to  the demand  for dollars that  year. He  agrees with                                                               
the   comments   Representative   Doogan   made   on   democratic                                                               
governments  taxing at  a  level to  support  services, and  that                                                               
being  a  resource-based  state  is  a  different  mechanism.  He                                                               
recalled heated debates with a  former senator about changing the                                                               
oil tax to  more than it took to operate  the government for that                                                               
year  and  whether that  would  have  an  adverse affect  on  the                                                               
economy. My view, he said,  was that the constitution doesn't say                                                               
to sell  the resource for  less than market value  simply because                                                               
the  money isn't  needed that  particular year.  Because of  high                                                               
commodity prices  we have a  surplus now, and it's  intriguing to                                                               
look at  a creative mechanism to  carry some of that  forward. "I                                                               
understand some of the criticisms  and concerns, but I'm thankful                                                               
that you're having  the hearing today so that we  can look at it,                                                               
play with  modeling a little bit  and see how it  might work," he                                                               
said.                                                                                                                           
                                                                                                                                
CHAIR FRENCH opened public testimony.                                                                                           
                                                                                                                                
2:28:00 PM                                                                                                                    
JASON  BRUNEY, Executive  Director, Resource  Development Council                                                               
(RDC),  stated support  for HJR  28. RDC  is a  statewide private                                                               
economic development  organization whose  mission is to  grow the                                                               
Alaska economy  through responsible resource development.  It has                                                               
a diverse  membership including all  the basic  Alaska industries                                                               
as well as construction  companies, labor organizations, regional                                                               
Native corporations, local  communities and many industry-support                                                               
firms. For  over a decade  RDC's number one  legislative priority                                                               
has  been the  development of  a comprehensive,  responsible, and                                                               
long-range fiscal plan. Alaska residents  are fortunate to get an                                                               
annual permanent fund dividend and  not pay federal income taxes,                                                               
yet he knows  for a fact that companies that  invest in the state                                                               
are worried  that their taxes will  be increased in order  to pay                                                               
for state  services. HJR 28 provides  an avenue to pay  for those                                                               
services  without  burdening   industry.  The  increased  revenue                                                               
generated from the  recent higher tax on the  oil industry should                                                               
be saved  for a  rainy day.  Just about one  third the  oil flows                                                               
through the  Trans Alaska Pipeline  System (TAPS)  today compared                                                               
to the late '80s, but prices are  high so now is the time to make                                                               
a concerted effort  to save the excess. HJR 28  does that and the                                                               
sponsors  are to  be  commended. However,  RDC  does not  support                                                               
institutionalizing progressivity  in the constitution. RDC  is on                                                               
record supporting  reconsideration of the gigantic  tax increases                                                               
of the  last several years, but  as that is unlikely  it supports                                                               
the  state doing  everything  in  its power  to  save the  excess                                                               
money.  Coupled  with  the  hopeful   passage  of  HB  125,  this                                                               
constitutional amendment will go a  long way in helping the state                                                               
to achieve  a responsible fiscal  plan. RDC has long  supported a                                                               
percent of  market value use  of the  permanent fund and  as this                                                               
has yet  to happen, it  is very  supportive of creating  this new                                                               
endowment and the subsequent five  percent annual usage for state                                                               
services.                                                                                                                       
                                                                                                                                
2:31:33 PM                                                                                                                    
ARLISS  STURGELEWSKI, representing  herself,  stated support  for                                                               
HJR 28. She  congratulated legislators for doing a  good job this                                                               
session  on the  issue of  predictability and  said the  issue of                                                               
sustainability needs more work. Passing  the bill calling for the                                                               
ten-year financial  outlook was good,  but the percent  of market                                                               
value  on the  permanent fund  is  missing. Passing  HJR 28  will                                                               
allow the  fund to  be invested more  with market  conditions. "I                                                               
congratulate you  for what you've  done, I hope you'll  pass this                                                               
legislation and  realize that you  have worked toward  that issue                                                               
that we've all  been yammering for, which is a  fiscal plan," she                                                               
said.                                                                                                                           
                                                                                                                                
2:35:27 PM                                                                                                                    
WAYNE  STEVENS,  President  and  CEO,  Alaska  State  Chamber  of                                                               
Commerce (ASCC) stated support for HJR  28. He said that ASCC has                                                               
long  urged  the  legislature to  adopt  a  comprehensive  fiscal                                                               
policy and recognizes that the first  problem is to have a common                                                               
definition  of  fiscal  policy. While  ASCC  recognizes  that  no                                                               
legislature  can bind  another,  the policy  should reflect  long                                                               
term  sustainability.  HJR  28  is an  excellent  start  in  that                                                               
process, he said.                                                                                                               
                                                                                                                                
2:36:30 PM                                                                                                                    
DAVID  TEAL,  Legislative  Fiscal  Analyst,  Legislative  Finance                                                               
Division,  showed   a  model  of  several   different  oil  price                                                               
scenarios. The  spring forecast uses the  revenue model developed                                                               
for  the November  session. It  takes  each price  and tells  the                                                               
revenue  that's generated.  It shows  that the  surcharge revenue                                                               
kicks in somewhere  around $60 and increases  rapidly beyond that                                                               
price. He  said that we  used to talk  about $100 plus  under the                                                               
gross  tax and  as oil  production fell,  we fell  from producing                                                               
$120 million  for each dollar change  in price down to  last year                                                               
it approached  $60 million for  each dollar change. With  the tax                                                               
change, that's  closer to  $100 million  per dollar  change until                                                               
the progressivity  surcharge kicks in.  Right now, at a  price of                                                               
$100, you're  talking about  each dollar change  in the  price of                                                               
oil  generating about  $200 million  in  additional revenue.  You                                                               
have a  substantial gain  plus you get  money from  royalties and                                                               
the base  tax, but the surcharge  is large at current  prices and                                                               
that's  what  is  being  deposited  into the  CBR  to  start  the                                                               
proposed endowment. That's  on top of the  current balance, which                                                               
is  on  the order  of  $6  billion,  $7  billion, or  $8  billion                                                               
depending on  how much is spent  in this budget cycle.  The fixed                                                               
deposits were  3.6 plus  the 400 plus  the billion,  but anything                                                               
that  isn't spent  will be  swept into  the CBR.  The number  the                                                               
sponsors are using is plus or  minus a couple billion dollars and                                                               
that's what it is.                                                                                                              
                                                                                                                                
CHAIR FRENCH said the amount will be settled on June 30.                                                                        
                                                                                                                                
2:39:56 PM                                                                                                                    
MR.  TEAL said  yes; in  '08 and'09  the money  that isn't  spent                                                               
somewhere else will go to the CBR.                                                                                              
                                                                                                                                
Turning back to the model, he  said you can select the production                                                               
decline, but  that's not a driver  in this model because  it uses                                                               
the actual spring  production forecast until after  2020 and then                                                               
you get the decline that you  specify. He said there's been a lot                                                               
of talk about  a six percent annual rate of  decline, but out ten                                                               
years we're still  at 90 percent of current  production, he said.                                                               
So in ten  years a ten percent  decline is a long way  from a six                                                               
percent  annual  rate  of  decline. He  said  he  discounts  that                                                               
because the interesting part of the  model is the early years and                                                               
not the later years. That's  because you either have enough money                                                               
to make  it go, or  it's failed by then.  What the model  does is                                                               
take  price and  production and  it  figures out  how much  total                                                               
revenue  was and  how much  was due  to a  surcharge and  then it                                                               
adjusts it downward by production.  Then it adds non oil revenue,                                                               
which he fixed at approximately current value.                                                                                  
                                                                                                                                
2:41:46 PM                                                                                                                    
CHAIR FRENCH asked what the non oil revenue is.                                                                                 
                                                                                                                                
MR. TEAL  explained that oil  revenue is property  tax, corporate                                                               
petroleum income tax  and non oil revenue is  everything else. He                                                               
continued to  say that when you  look at the CBR,  with a current                                                               
balance of  about $3 billion,  basically it could have  a balance                                                               
of $6 billion  to $7 billion at  the end of '08.  As the sponsors                                                               
said,  what  happens is  that  it  takes  the oil  surcharge  and                                                               
contributes  that.  So  at  any   price  of  oil,  it  takes  the                                                               
surcharge, subtracts  it from the  revenue stream and puts  it in                                                               
the CBR instead.  It also adds the payout to  the revenue stream.                                                               
The payout  starts fairly  small because  it takes  the five-year                                                               
average and  five years  ago that  was about  $2 billion.  But it                                                               
quickly  rises as  the  five-year average  brings  in the  larger                                                               
numbers. So the  payout should be somewhere on the  order of $500                                                               
million per year  as the sponsors discussed, starting  in 2013 to                                                               
2015. Then it  continues to rise assuming that  the CBR continues                                                               
to grow  because of  the surcharge. That,  of course,  depends on                                                               
the  oil revenue  forecast.  You  can then  look  at the  surplus                                                               
deficit  calculations. That  is simply  taking available  revenue                                                               
plus  the  payout  to  get   total  revenue.  Then  you  look  at                                                               
expenditures,  which is  a key  variable. He  showed expenditures                                                               
growing four  percent annually and  said that growth rate  is the                                                               
big argument along with what oil  is going to do. That determines                                                               
whether the proposal works or not.                                                                                              
                                                                                                                                
2:44:09 PM                                                                                                                    
CHAIR FRENCH asked what happens if  the general fund grows at ten                                                               
percent a year.                                                                                                                 
                                                                                                                                
MR. TEAL  said he'd show  that next.  Returning to the  model, he                                                               
said it shows a  surplus and in the early years  it's due to high                                                               
oil  prices so  you end  up with  not simply  a CBR  balance that                                                               
approaches $20  billion, but  reserves outside  the CBR  are also                                                               
substantial, approaching  $20 million  by 2020. He  restated that                                                               
that's based on the spring oil forecast.                                                                                        
                                                                                                                                
2:45:30 PM                                                                                                                    
Responding  to the  request, he  suggested first  looking at  the                                                               
current situation; under the fall  oil forecast it shows that the                                                               
CBR built up a little and  you've soon overspent. That's with $45                                                               
oil  and we  know we  need  oil at  $60  or more  to support  the                                                               
current  level of  the budget  so it  should be  no surprise,  he                                                               
said, that you're looking at  some very large deficits. He showed                                                               
the same thing under the current oil forecast.                                                                                  
                                                                                                                                
2:46:41 PM                                                                                                                    
MR. TEAL showed  that under the base assumptions  of four percent                                                               
growth  in expenditures  and  the spring  forecast,  there was  a                                                               
surplus  out  until  the  mid  2020s. But  if  you  increase  the                                                               
expenditure growth to  ten percent, you hit deficits  by 2013 and                                                               
are completely out  of control with an  unsustainable budget. The                                                               
point is that you just can't  do it because you can't spend money                                                               
you don't have, he said.                                                                                                        
                                                                                                                                
He acknowledged that there's a  big argument over the growth rate                                                               
and if it's four percent. That's  what the governor hopes to hold                                                               
it  to, and  that's one  reason he  used it.  He then  showed the                                                               
percent  of general  fund  surplus after  operating  is spent  on                                                               
capital and said you might want  to compare that to the operating                                                               
budget  growth. He  looked  at operating  budget  growth and  the                                                               
surplus in a given year and  highlighted that in recent years the                                                               
growth has sometimes exceeded 20  percent and in others it's down                                                               
around 15 percent, but in those  years the surplus is also large.                                                               
I  don't think  it's a  coincidence, he  said. He  then showed  a                                                               
number  of  years when  there  was  virtually  no growth  in  the                                                               
operating budget and that's because  there wasn't any money That,                                                               
too,  was  not a  coincident.  When  there  were deficits  or  no                                                               
surplus revenue, there was no growth, he said.                                                                                  
                                                                                                                                
2:49:16 PM                                                                                                                    
CHAIR FRENCH  observed that one  of the points that  the sponsors                                                               
are  making is  that  a surpluses  spur  government growth.  "The                                                               
upward pressure is just too great  for all of us to withstand. If                                                               
there's no  money, we can  resist upward growth because  we don't                                                               
have the  ability to print  money. But with the  surplus floating                                                               
around the building, there's just  too many yeses compared to the                                                               
no's  as far  as each  individual  project comes  forward it  all                                                               
makes  sense. We  like it,  we spend  money on  it." He  asked if                                                               
that's a truism.                                                                                                                
                                                                                                                                
MR. TEAL  replied that's  what history  indicates. When  you have                                                               
money, the  budget grows and it  doesn't when there is  no money.                                                               
He  said  he doubts  that  growth  will  continue at  20  percent                                                               
because when  you look at  the cause  of those recent  20 percent                                                               
growth  rates, the  growth is  much less  than the  numbers would                                                               
indicate unless  you think  about where the  money was  spent. In                                                               
recent years  $450 million was  put into the retirement  system -                                                               
that's  annual. That  was  a big  chunk of  money  but we're  now                                                               
stabilized so  you had  to accept  it as a  large chunk  of money                                                               
spent and next year it won't be spent.                                                                                          
                                                                                                                                
CHAIR FRENCH added that you could  spend $450 million each of the                                                               
next  ten  years  on  retiring the  PERS/TRS  liability,  but  it                                                               
doesn't represent growth because it's the same $450 million.                                                                    
                                                                                                                                
MR. TEAL said  it's the same with  the $200 million or  so in the                                                               
tax credits under the new production tax.                                                                                       
                                                                                                                                
CHAIR FRENCH  commented that  he likes  this argument  because it                                                               
will help him defend what the  legislature did when he returns to                                                               
his district.                                                                                                                   
                                                                                                                                
MR. TEAL  said the 20  percent growth isn't something  he expects                                                               
to continue, but  when you look at the history  you see that when                                                               
you  have  a surplus,  the  operating  budget grows.  As  Senator                                                               
McGUIRE  said,  it's  unattainable   because  once  it's  in  the                                                               
operating budget it's difficult to get it out.                                                                                  
                                                                                                                                
2:51:27 PM                                                                                                                    
SENATOR  THERRIAULT   observed  that  it's  a   good  thing  that                                                               
substantial  amounts of  money will  be swept  into savings,  but                                                               
it's not  necessarily good if  it masks the  unsustainable growth                                                               
in governmental spending that's going along with the surplus.                                                                   
                                                                                                                                
MR. TEAL  explained that what he  did in computing the  growth is                                                               
to subtract savings  from spending. Now you see  a FY09 operating                                                               
budget of $5.2  billion, but it's talked about as  a $4.2 billion                                                               
operating budget because  $1 billion is savings. But  if you look                                                               
at the bill and at the  operating system, and at the reports, you                                                               
see a $5.2  billion budget because a  savings appropriation isn't                                                               
differentiated  from a  spending  appropriation.  It's simply  an                                                               
appropriation  and that's  what is  counted. For  that reason  he                                                               
manually  removed savings  from  the recent  years before  taking                                                               
these numbers. He agreed with  Senator Therriault that it doesn't                                                               
matter what you save, what matters  is what you spend because you                                                               
will spend what you're saving at  some point in the future unless                                                               
oil prices stay where they are.                                                                                                 
                                                                                                                                
CHAIR FRENCH  said another possibility  is to create  a permanent                                                               
fund that can't be touched.                                                                                                     
                                                                                                                                
SENATOR McGUIRE commented  that there was a  similar debate years                                                               
ago  on Garvey  Bonds. It's  borrowing from  the future  and over                                                               
stimulating particular sectors of the economy.                                                                                  
                                                                                                                                
2:54:21 PM                                                                                                                    
MR.  TEAL  showed a  bar  graph  indicating  the percent  of  the                                                               
surplus spent  on capital. When  there are zeros, it  means there                                                               
was  no surplus  to spend.  It shows  that the  current level  of                                                               
spending  the surplus  on capital  projects is  high relative  to                                                               
these years but historically this  year's capital spending is not                                                               
out of  line with past surpluses.  In the '80s 50  percent of the                                                               
surplus was spent  on capital budget. The Senate  proposal was 18                                                               
percent of the surplus being spent  on capital and there was more                                                               
than  that spent  in '06  and '07,  which were  also big  surplus                                                               
years.                                                                                                                          
                                                                                                                                
He then showed  that 10 percent growth is  not sustainable. Using                                                               
the  DOR forecast  and with  10 percent  growth, shows  a decline                                                               
from over  $20 billion to breaking  the system in about  2020 and                                                               
$100 billion cumulative deficits further out.                                                                                   
                                                                                                                                
2:56:15 PM                                                                                                                    
SENATOR  WIELECHOWSKI  asked  what oil  production  decline  he's                                                               
anticipating.                                                                                                                   
                                                                                                                                
MR. TEAL  replied it's a  two percent decline beyond  2020, using                                                               
the spring  forecast; some  years it's even  and some  years it's                                                               
up.   Mr.  Andrews   might  provide   an  explanation,   but  the                                                               
assumptions are  that there  is a reduction  in major  fields and                                                               
that  new fields  are coming  on line.  That hasn't  happened, he                                                               
said; these are just projections.  He continued to show different                                                               
projections and said that when you  have a surplus, in theory you                                                               
hang on  to it.  But the  graphs on percent  of surplus  spent on                                                               
capital and operating  tell you that if the money  is held in the                                                               
general fund it  will likely be spent. You can  choose to put the                                                               
money into  the endowment, but  it doesn't flow  in automatically                                                               
like the surcharge  revenue. He said that he would  argue that at                                                               
high  oil  prices   this  system  isn't  going   to  work  unless                                                               
additional money is contributed to the endowment.                                                                               
                                                                                                                                
At medium to  low oil prices there may be  nothing to contribute,                                                               
but contributing no  more than what's required  will still result                                                               
in a  large and  balance and  there will still  be a  payout that                                                               
grows to $1 billion a year.  Putting more money in will result in                                                               
a larger payout, but that's a legislative choice.                                                                               
                                                                                                                                
3:00:17 PM                                                                                                                    
SENATOR WIELECHOWSKI asked if  the projections include additional                                                               
revenue from a gas pipeline.                                                                                                    
                                                                                                                                
MR. TEAL said no.                                                                                                               
                                                                                                                                
SENATOR WIELECHOWSKI said he anticipates  a gas pipeline in 15-20                                                               
years and wonders if  this is the best policy to  take to get the                                                               
state's fiscal  house in order  to get through those  years until                                                               
gas comes in.                                                                                                                   
                                                                                                                                
CHAIR  FRENCH asked  Mr. Teal  to  model a  5 percent  production                                                               
decline from this year forward.                                                                                                 
                                                                                                                                
3:03:35 PM                                                                                                                    
MR. TEAL  said the  model indicates that  the reserve  balance is                                                               
gone  in  2020  with  a   4  percent  expenditure  growth  and  a                                                               
production decline.                                                                                                             
                                                                                                                                
SENATOR WIELECHOWSKI  questioned where the money  would come from                                                               
to support schools,  roads and other things if in  four years the                                                               
price of oil drops to $40 and the surplus is out of reach.                                                                      
                                                                                                                                
3:05:16 PM                                                                                                                    
REPRESENTATIVE  SAMUELS replied  you'd either  cut the  budget or                                                               
raise the money somewhere else.                                                                                                 
                                                                                                                                
SENATOR WIELECHOWSKI added that someone  might try to take it out                                                               
of the permanent fund.                                                                                                          
                                                                                                                                
REPRESENTATIVE  SAMUELS  said  there  would be  debates  on:  the                                                               
permanent funds earnings, a state  income tax, a sales tax, large                                                               
budget  cuts, and  small budget  cuts. It  comes down  to raising                                                               
more money versus cutting the budget.                                                                                           
                                                                                                                                
CHAIR FRENCH said  some people might argue to  turn the permanent                                                               
fund into an endowment.                                                                                                         
                                                                                                                                
REPRESENTATIVE  SAMUELS  responded  that   he's  voted  for  that                                                               
several times.                                                                                                                  
                                                                                                                                
SENATOR  WIELECHOWSKI  commented  that   he'd  rather  spend  the                                                               
billions  of dollars  in savings  than either  a tax  increase or                                                               
taking money from the permanent fund.                                                                                           
                                                                                                                                
REPRESENTATIVE SAMUELS said the problem  with that is that as you                                                               
try and prop  things up the budget will continue  to increase and                                                               
production  to   decline.  He  reiterated  that   the  debate  is                                                               
inevitable, but  the longer you wait,  the wider the gap  and the                                                               
more draconian the answers will be. It'd  be easy to get to a day                                                               
when  you can't  get  enough  revenue or  cut  the budget  enough                                                               
without having a real shock to  the economy like happened back in                                                               
the mid '80s. Anytime you remove  a lot of money from the economy                                                               
it's a shock.                                                                                                                   
                                                                                                                                
3:08:33 PM                                                                                                                    
SENATOR  WIELECHOWSKI said  that if  oil  drops to  $30 a  barrel                                                               
there will be  shock to the economy regardless  of anything else.                                                               
Also, he  said, there's nothing  to prevent the  legislature from                                                               
doing this even if this doesn't pass.                                                                                           
                                                                                                                                
SENATOR  McGUIRE said  she, too,  doesn't  like the  generational                                                               
shift of liability  and responsibility as opposed  to providing a                                                               
cushion for the years ahead.                                                                                                    
                                                                                                                                
REPRESENTATIVE DOOGAN commented that  the gas pipeline will never                                                               
pay like  Prudhoe Bay, so the  idea that everything will  be okay                                                               
once gas  flows isn't correct.  In particular it won't  work like                                                               
that  if the  operating budget  continues to  increase. Mr.  Teal                                                               
made a  very salient  point that  was glossed  over, and  that is                                                               
that  the  non oil  revenue  is  $700  million.  If you  add  the                                                               
expected gas revenue to that  $700 million, you can't even afford                                                               
the  budget today  let alone  one that's  been run  up another  4                                                               
percent a year.  When he looks at the numbers  he doesn't see the                                                               
challenge as  bridging until gas  flows because that  doesn't get                                                               
you where  you want  to go.  It's more a  matter of  figuring out                                                               
what to  do with the  remains of an incredibly  valuable resource                                                               
to make sure there is benefit  for people today and for those who                                                               
are in fourth  grade now. This is an important  discussion and he                                                               
supports this  approach because you  can have the best  hopes for                                                               
the gas pipeline, but the odds that  gas will be worth as much as                                                               
oil are low.  We have to be  realistic about what we  can do once                                                               
the gas pipeline is running, if we can get it built, he said.                                                                   
                                                                                                                                
3:12:28 PM                                                                                                                    
BRIAN ANDREWS, Deputy Commissioner,  Department of Revenue (DOR),                                                               
referred to the  sponsor's comments about saving  to a retirement                                                               
account when you're young, and  relayed that Albert Einstein once                                                               
described compounded earnings  as the most powerful  force in the                                                               
universe. Turning to the bill, he  said that DOR has two concerns                                                               
with HJR 28.  The first relates to locking up  the corpus of what                                                               
HJR 28  is trying to do.  This blocks access for  payment of debt                                                               
service for the state's bonds.  Currently the annual debt service                                                               
on  the state's  general  obligation bonds,  the certificates  of                                                               
participation, and the state's sponsored  leases amounts to about                                                               
$70  million per  year. Those  can  obviously be  handled in  the                                                               
budget, but if  there's an event in the future  and those dollars                                                               
were locked  up, the  rating agencies  would take  a dim  view of                                                               
that.  The state  just got  a rating  increase and,  at the  very                                                               
least, he'd like to maintain that.                                                                                              
                                                                                                                                
MR.  ANDREWS said  the second  concern relates  to the  liquidity                                                               
factor that  the constitutional  budget reserve fund  provides to                                                               
the  general  fund.  He  directed  attention  to  several  graphs                                                               
showing the  various cash  flow requirements  from the  CBR since                                                               
FY94. Although  there wasn't a need  to draw on the  CBR the last                                                               
three years,  there was  need in prior  years. He  explained that                                                               
from an  earnings/loss standpoint  when structuring  an endowment                                                               
you  want  to  keep  5  to 10  percent  allocated  to  short-term                                                               
investments  or cash  equivalents. He  would suggest  that rather                                                               
than  lending that  money  to the  U.S.  treasury, the  endowment                                                               
should  have the  capability  to  lend that  money  to the  state                                                               
treasury.  That would  help  with cash  flow  needs and  wouldn't                                                               
impact the overall  earnings of the endowment. On $6  billion a 5                                                               
percent allocation to cash equivalents  would be $300 million and                                                               
10 percent  would be $600  million. That would cover  the general                                                               
fund cash needs in most years, he said.                                                                                         
                                                                                                                                
3:17:03 PM                                                                                                                    
CHAIR FRENCH asked what the CBR  has been earning in the last few                                                               
years.                                                                                                                          
                                                                                                                                
MR. ANDREWS explained that the  CBR has two components. The major                                                               
component is  in very liquid  short-term investment  profile with                                                               
earnings that  are 4 to 5  percent or a money  market equivalent.                                                               
The sub  account within  the CBR is  invested in  domestic stocks                                                               
and longer  term domestic fixed-income securities.  In FY07 those                                                               
earnings were 14 to 15 percent.  He agreed with Chair French that                                                               
that money is captured within the CBR and doesn't migrate.                                                                      
                                                                                                                                
SENATOR WIELECHOWSKI  asked how  they decide  what goes  into the                                                               
sub account.                                                                                                                    
                                                                                                                                
MR. ANDREWS  explained that  for the most  part the  viewpoint is                                                               
that  the CBR  is there  for liquidity  and safety  of principal,                                                               
which is why it's invested for the short term.                                                                                  
                                                                                                                                
3:18:37 PM                                                                                                                    
SENATOR McGUIRE asked  how much is in the sub  account versus the                                                               
more liquid component.                                                                                                          
                                                                                                                                
MR. ANDREWS replied  there's currently about $300  billion in the                                                               
constitutional budget  reserve fund; $600  million is in  the sub                                                               
account and the remainder is in the liquid portion.                                                                             
                                                                                                                                
CHAIR FRENCH asked  what law prevents putting the 4  to 5 percent                                                               
money into the 15 percent money.                                                                                                
                                                                                                                                
MR.  ANDREWS replied  it's at  the  call of  the commissioner  of                                                               
revenue.  He  added   that  there  is  intent   language  in  the                                                               
supplemental bill to place the  majority of the contribution into                                                               
the sub account.                                                                                                                
                                                                                                                                
CHAIR FRENCH  asked for a  simple description  of how much  is in                                                               
the permanent fund, the earnings  reserve, the CBR, the education                                                               
fund, the capital account to  build the pipeline, and the various                                                               
other pots of money that are being held by the state government.                                                                
                                                                                                                                
MR. ANDREWS agreed to provide that rather extensive list.                                                                       
                                                                                                                                
CHAIR FRENCH held HJR 28 in committee.                                                                                          

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