Legislature(2007 - 2008)BELTZ 211
04/04/2008 01:30 PM Senate JUDICIARY
| Audio | Topic |
|---|---|
| Start | |
| HB286 | |
| HJR28 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HJR 28 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 286 | TELECONFERENCED | |
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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