Legislature(2017 - 2018)SENATE FINANCE 532
03/06/2017 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB26 | |
| SB21 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 21 | TELECONFERENCED | |
| *+ | SB 26 | TELECONFERENCED | |
| += | SB 70 | TELECONFERENCED | |
SENATE BILL NO. 26
"An Act relating to the Alaska Permanent Fund
Corporation, the earnings of the Alaska permanent
fund, and the earnings reserve account; relating to
the mental health trust fund; relating to deposits
into the dividend fund; relating to the calculation of
permanent fund dividends; relating to unrestricted
state revenue available for appropriation; and
providing for an effective date."
9:02:47 AM
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
wanted to walk through SB 26, and noted that many of the
slides were very similar to what was discussed the previous
week when the committee considered SB 70. He informed that
he would highlight the differences between the two
presentations in slides 1 through 25.
Co-Chair MacKinnon asked if Commissioner Hoffbeck could
review the document for the benefit of the public.
Commissioner Hoffbeck discussed the presentation "Permanent
Fund Protection Act," (copy on file). He turned to slide 2,
"BASIC ELEMENTS OF SB 26":
The Permanent Fund Protection Act proposes:
1. A framework for sustainable withdrawals from the
earnings reserve account (ERA) and
2. A sustainable dividend formula.
Commissioner Hoffbeck noted that there were several
companion documents [a 5 critical tests document, a one-
page overview of the Alaska Permanent Fund Protection Act,
a 12-page narrative white paper, and a sectional analysis].
He considered that the two points on the slide were
critical for the durability of any plan.
Commissioner Hoffbeck looked at slide 3, "PRESENTATION
OVERVIEW":
Part I: The Permanent Fund's Role in a Solution
Part II: Structure for Using the Permanent Fund
Part III: Modeling Background
Part IV: Draw Durability
Part V: Dividend Durability
Part VI: Fund Durability & Inflation Proofing
Part VII: Fiscal Plan Impact
Commissioner Hoffbeck informed that there was seven parts
to the presentation.
9:04:59 AM
Commissioner Hoffbeck read slide 4, "Part I - THE PERMANENT
FUND'S ROLE IN A SOLUTION."
Commissioner Hoffbeck spoke to slide 5, "USE OF PERMANENT
FUND EARNINGS":
"This proposal, if approved, would amend the
Constitution of the State of Alaska by …
establish[ing] a constitutional permanent fund into
which at least 25 percent of all [mineral royalties]
received by the State would be paid. The principal of
the fund would be used only for income-producing
investments permitted by law and the income from the
fund would be deposited in the general fund of the
State and be available to be appropriated for
expenditure by the State unless otherwise provided by
law."
Ballot Proposition No. 2
Permanent Fund from Non-Renewable Resource Revenue
Constitutional Amendment
Commissioner Hoffbeck highlighted the last line of the
slide. He thought there had always been intent within the
structuring of the Permanent Fund that it would eventually
be used for state expenditures.
Commissioner Hoffbeck discussed slide 6, "WHY USE PERMANENT
FUND EARNINGS,":
FY18 Budget $4.3 billion
FY18 Budget Gap $2.8 billion
Potential Tools to Close the Gap
Motor Fuels Tax Increase $0.1
Broad Based Tax $0.6
Oil Tax Credit Reform $0.1
Max. Cuts Proposed (over 3 years) $0.75
SB26 (net dividend) $2.0
Commissioner Hoffbeck expanded that SB 70 had generated
about $1.9 billion; the difference between it and SB 26 was
how royalties were treated between the dividend and the
income. He stated that the governor had expressed a
preference for a revenue solution, but was open to a broad
discussion on revenues versus expenditure reductions. The
governor had expressed in an op-ed piece that he would
accept whatever the legislature agreed upon within terms of
a revenue solution.
9:06:52 AM
Commissioner Hoffbeck turned to slide 8, "STRUCTURE FOR
USING THE PERMANENT FUND":
1. Rule-Based Framework (Saving, Spending, Dividend)
2. Stabilize the Budget
3. Protect the Dividend
4. Protect the Permanent Fund
5. Maximize the use of the Earnings Reserve
Commissioner Hoffbeck relayed that the slide listed the
five tests the administration used for reviewing any plans
being presented that involved changing the Permanent Fund.
The various plans had a robust hearing history. He thought
SB 26 was very similar to SB 128 [legislation from 2016
dealing with the Alaska Permanent Fund Corporation], and he
would discuss the differences in a later slide. There had
been many hearings, community meetings, and a review of
global best practices as to how a sovereign wealth fund
should be used.
Commissioner Hoffbeck looked at slide 9, "STRUCTURE FOR
USING THE PERMANENT FUND":
A plan to use the fund should be …
1. Rule-Based (Saving, Spending, Dividend)
· Greatest threat to long term fund durability is
unplanned withdrawals
· Withdrawals need to occur under a set of
statutory rules
o Designed to protect the fund and guard
against unsustainable uses
o Ensure the ERA holds enough to bridge years
of low earnings ("ERA durability")
Commissioner Hoffbeck stated that it was critical to know
how much could be spent in order to still maintain a
sufficient balance in the Permanent Fund and the Earnings
Reserve Account (ERA). He stated that a great deal of time
had been spent modelling various bills to ensure that plans
were durable and would last over time.
Commissioner Hoffbeck reviewed slide 10, "STRUCTURE FOR
USING THE PERMANENT FUND":
A plan to use the fund should be …
2.Stabilizing:
· Over the long term, economies that experience
repeated ups and downs grow slower than stable
economies.
· Because commodity prices are volatile, economies
dominated by a single commodity industry, like
the petroleum industry, experience more (and more
pronounced) cycles.
· Permanent Fund Earnings can play a central role
in reducing four decades of boom and bust
budgeting cycles.
Commissioner Hoffbeck noted that stability was associated
with economic growth. He mentioned the "resource curse,"
which described a funding source that was primarily based
on a volatile and singular revenue stream, which tended to
slow economic growth over time. He thought it was critical
to stabilize the government component of the economy to the
extent it was possible. He thought it was possible to
structure income from investments and oil together in such
a way to reduce volatility out of the budgeting process for
state expenditures.
9:09:33 AM
Commissioner Hoffbeck looked at slide 11, "STRUCTURE FOR
USING THE PERMANENT FUND":
A plan to use the fund should…
3. Protect the Dividend
· Reflects the current and future economic
realities of shrinking oil and gas tax revenue.
· Recognizes that too large a dividend limits
available options for full fiscal solutions.
· Provides for a sustainable dividend for all
generations of Alaskans.
Commissioner Hoffbeck discussed the one-page document
"Permanent Fund Protection Act," dated February 6, 2017
(copy on file).
Commissioner Hoffbeck noted that protecting the Permanent
Fund Dividend (PFD) became a critical issue after speaking
around the state and talking with constituents. He had
found relative consensus regarding use of the Permanent
Fund, but people considered that the dividend was part and
parcel of the economics of the state and should be
preserved at some level.
Commissioner Hoffbeck reviewed slide 12, "STRUCTURE FOR
USING THE PERMANENT FUND":
A plan to use the fund should…
4. Protect the Permanent Fund
· Meant to provide for funding state expenditures
for all generations of Alaskans.
· Maintain or grow the real (inflation-adjusted)
value of the permanent fund.
· Withdrawing too much is unsustainable and risks
damaging the fund.
Commissioner Hoffbeck discussed slide 13, "STRUCTURE FOR
USING THE PERMANENT FUND":
A plan to use the fund should …
5. Maximize the use of the Permanent Fund Earnings:
· As North Slope production declines, the fund's
earnings will be increasingly important in
eliminating the fiscal imbalance in order to
sustain public services.
o Similar to petroleum revenue, investment
earnings can be highly variable.
o Unlike petroleum, our financial reserves are
a renewable resource.
· Withdrawing too little limits future options for
full fiscal solutions.
· Other proposed new revenues and cuts could reduce
the deficit by millions, the fund can sustainably
contribute billions.
Commissioner Hoffbeck stated that in order to maintain the
durability of the Permanent Fund, there needed to be
situation where there was less chance of an unplanned
unstructured draw. In order to do so, it was necessary to
put as money as possible in the structured portion of the
fund in order to close the fiscal gap to the greatest
extent possible.
Commissioner Hoffbeck looked at slide 15, "MODEL
SOPHISTICATION and VETTING":
· Key aspects of the model
•Probabilistic treatment of oil prices, oil
production, investment returns
•Focus on detail of how money flows between
permanent fund, general fund, and dividends
•Assumptions from objective sources
•Monte Carlo simulations
· Vetted by McKinsey last year
•Found no major mechanical errors, reasonable
assumptions
•Approved of Monte Carlo probabilistic method
•Suggested improvements, some of which the
Department of Revenue (DOR) has incorporated (for
example, probabilistic oil production,
autocorrelation)
Commissioner Hoffman relayed that there had been robust
probabilistic modelling of production and price.
9:13:02 AM
Commissioner Hoffbeck reviewed slide 16, "METHOD, INPUTS,
ANDASSUMPTIONS":
· Permanent Fund Starting Value: $54.9 billion
•Realized portion of corpus: $37.9 billion
•Realized portion of earnings reserve account (ERA):
$9.7 billion
•Unrealized earnings held by the fund: $6.3 billion
•Starting value based on
•APFC forecast for end of fiscal year 2017
(FY17), without inflation proofing transfer for
FY17
•Because APFC accounts for October 2017 dividends
in FY17, scenarios starting with $1,000 per
person dividends begin with a higher realized ERA
balance of $10.6 billion and a total fund balance
of $55.8 billion.
· Investment Return: Callan Associates' 10-year
forecast
•Total return: 6.95% geometric, 12.32% standard
deviation
•Statutory return: 6.24% mean, 2.24% standard
deviation
•Inflation rate: 2.25%
Commissioner Hoffman stated that the base assumptions
discussed in the slide were consistent with all the
Permanent Fund bills that the department considered. The
assumptions were based on the Permanent Fund's forecast for
the end of the year FY 17. He stated that the numbers on
the slide were lower than what actually resided in the
fund, due to an unexpectedly higher year of returns; which
resulted in another level of conservatism in the
projections. The department had used Callan and Associates'
ten-year forecast for total returns, statutory returns, and
an inflation rate.
Commissioner Hoffbeck discussed slide 17, "METHOD, INPUTS,
and ASSUMPTIONS":
· Petroleum Revenues:
o Oil price: Probabilistic analysis of ANS oil
prices using a PERT distribution from the fall
2016 price forecasting session.
o Production: Probabilistic analysis of ANS oil
prices using a PERT distribution from the DNR
forecast in Fall 2016 RSB
· CBR: $4.4 billion beginning of year 2018 balance & a
2.25% rate of return.
Commissioner Hoffman noted that the probabilistically
modelled oil price and production and were noted in the
Fall Revenue Forecast.
Commissioner Hoffbeck displayed slide 18, "BUDGET
ASSUMPTIONS," which showed a graph depicting the baseline
for UGF revenues for all revenues except unrestricted
royalties and production taxes, which were modelled
separately. The blue line was the ten-year Office of
Management and Budget (OMB) forecast, which was extended
with inflation after ten years.
Senator Micciche asked to go back to slide 18, and inquired
if the assumption for inflation was 2.25 percent.
Commissioner Hoffbeck answered in the affirmative.
Senator Micciche asked if the first four years were flat
because of assumed reductions.
Commissioner Hoffbeck needed to look at the details as to
why the years were flat, and conveyed that the first three
years assumed some budgetary restraint.
Senator Micciche asked if the commissioner would agree that
the most challenging part of the model was assuming what
the future would be, and which plan covered the largest
portion of the gap. He thought the OMB ten-year plan did
not account for revenues, and was just a comparison based
on what was known of the past for growth.
Commissioner Hoffbeck stated that there was a challenge
both in forecasting and the reality of some of the formula
programs that were currently in statute, and that tended to
grow over time. He recounted that there had been $240
million to $260 million in the current budget between one-
time expenditures and formula growth that needed to be
stripped from the budget to get to a zero budget. He
thought there were a lot of issues to consider when holding
the line on expenditures, and even more issues when
reductions were considered. He also thought there were many
issues to consider when pondering new revenues.
9:17:00 AM
Commissioner Hoffbeck looked at slide 19, "LAST SESSION'S
WORK":
Last year, the 29th Legislature held 39 hearings on
the Permanent Fund Protection Act (SB128, HB245, and
SB5001):
· SSTA: 10 hearings, including 2 days of public
testimony
· SFIN: 10 hearings, including 1 days of public
testimony
· HFIN: 19 hearings, including 4 days of public
testimony
Other bills addressing the use of permanent fund
earnings were also considered:
· SB114: 7 hearings in SSTA, 9 hearings in SFIN
· HB303: 4 hearings in HFIN
· HB224: 4 hearings in HFIN
SB26 is a slimmed down version of the Permanent Fund
Protection Act passed by the Senate last year. It is
the same as the CS for SB128, but without provisions
re.:
· CBR management
· APFC procurement
· Spending cap
Commissioner Hoffbeck noted that the slide talked about the
genesis for SB 26, which was largely based on SB 128. He
discussed the provision for moving Constitutional Budget
Reserve (CBR) management to the Alaska Permanent Fund
Corporation (APFC), which had been left out of SB 26. He
recounted that APFC Executive Director Angela Rodell had
testified that she would have similar struggles in terms of
investment returns on the CBR until there was a structure
around the timing of draws.
Commissioner Hoffbeck showed slide 20, "PFPA: SCENARIO":
· Corpus Deposits:
o 25% of royalties
o Any ERA balance over 4 times the full POMV
calculation (after the current year draw) is
transferred to the corpus (inflation
proofing mechanism or "4 times" rule).
· Draw Calculation:
o Maximum POMV: 5.25% of the average fund
value in the first 5 of the last 6 years.
o Draw Limit: The maximum POMV amount is
reduced by $1 for every $1 that UGF
royalties and production taxes exceed $1.2
billion.
· Dividend Calculation:
o 20% of the maximum POMV payout before
reductions, plus 20% of UGF royalties
o Overwriting the above calculation, the
October 2018 dividend is $1,000 per person
(the 2017 dividend is reflected in the
starting fund value)
Commissioner Hoffbeck informed that the treatment of the
corpus deposits was the same as under SB 70 as was the draw
calculation for the first 4 or 5 years. The dividend
calculation under SB 70 was 25 percent of POMV, while under
SB 26 the dividend calculation was tied to investment
returns and oil and gas development and success.
Commissioner Hoffbeck displayed slide 21, "Part IV - DRAW
DURABILITY."
Commissioner Hoffbeck turned to slide 22, "POMV DRAW,":
· 5.25% of the average fund value in the first 5 of
the last 6 years
· Example: draw calculation for fiscal year 2018
•Average fund value in the first 5 of the last 6
years = $48.1 billion
•5.25% of $48.1 = $2.5 billion
•Effective POMV: = 4.7% of 2017 value
· Aggressive, but sustainable … if the draw limit is
applied
Commissioner Hoffbeck stated that the slide was a review of
the POMV draw at 5.25 percent, and was the same as shown
under SB 70. The slide showed the net effect of a 5.25
percent draw when using five of the prior six years. The
draw was effectively a 4.7 percent draw.
Commissioner Hoffbeck showed slide 23, "THE EFFECTIVE
POMV":
Based on historic fund values, these "snapshot" POMV
calculations demonstrate that, 5.25 percent of the
fund's average market value in the first 5 of the
preceding 6 years is generally less than 5.25 percent
of the fund's current value.
Commissioner Hoffbeck stated that the bar graph on slide 23
showed the effective Percent of Market Value (POMV) draw in
five-year increments back through 1995. The draw was
generally in the 4 percent to 4.5 percent range; with the
exception of 2006-2010, which was at 5.32 percent. There
would be variation in the POMV, but it appeared as though
it would be within the range of 4.5 to 5 percent, which was
modelled as durable.
9:21:40 AM
Commissioner Hoffbeck discussed slide 24, "DRAWLIMIT
· Reduces the POMV draw by $1 for every $1 that UGF
production taxes and royalties exceed $1.2 billion.
· Does not apply to the portion of the POMV going to
dividends.
Commissioner Hoffbeck looked at slide 25, "POMV & DRAW
LIMIT," which graphically showed the ERA draw started to
reduce over time. He recalled that Senator Micciche had
posed some questions about the location of trigger points.
The oil production tax reached $1.2 billion somewhere
between $65/bbl and $70/bbl. A reduction in the draw could
be seen at about $72/bbl, and at around $100/bbl there was
no draw on the ERA.
Commissioner Hoffbeck displayed slide 26, which showed a
graph entitled "Median UGF Revenue and Budget." He recalled
a question by Senator Micciche about the unfunded portion
of government expenditures under the plan, which the green
bars on the graph were trying to forecast. The dark blue
represented status quo revenue, the yellow was the planned
Permanent Fund withdrawals, and the green were other fiscal
measures necessary to balance the budget over the life of
the plan. He observed that there was a short-term window of
opportunity to close the fiscal gap, but a long-term issue
to address as well.
Co-Chair MacKinnon asked for a footnote to illustrate that
the green bars representing "Other Fiscal Measures" could
include any combination of budget cuts.
Commissioner Hoffbeck agreed with Co-Chair MacKinnon, and
indicated that the wordage had signified it could be either
cuts or new revenues.
Commissioner Hoffbeck turned to slide 27, "STATUS QUO
UNRESTRICTED GENERAL FUND REVENUE," which showed a chart
depicting the impact of additional production and
additional price on the amount of revenue available for
government expenditures. The slide reflected total UGF
revenue, and included all of the revenues including oil and
gas taxes and royalties. He noted that income taxes
adjusted with oil price and production changes. He thought
it was possible to see where the fiscal gap could be closed
with increased production and oil price.
Commissioner Hoffbeck turned to slide 29, "DIVIDEND
FORMULA":
· $1,000 per person for the first 2 years, then
· 20% of UGF royalties (15% of all royalties), plus
20% of the 5.25% POMV draw (about 1% POMV)(expected
to be about $1,000 per person into the future)
Commissioner Hoffbeck stated that the dividend formula was
slightly different than what was under SB 70.
9:25:42 AM
Commissioner Hoffbeck looked at slide 30, "PFPA, FULL
FISCAL PLAN," which showed a graph illustrating the
dividend per person under the Permanent Fund Protection Act
(PFPA). He stated that the median was the intersection of
the yellow and blue bars, which was the most likely
occurrence of the dividend amount. The graph showed the
2041 median value of the dividend to be $1,468 in nominal
dollars. The dividend's real buying power would be reduced
over time. He compared the value with the dividend
projection under SB 70, which had a nominal dollar value of
$1,603. The dividend grew faster under SB 70 than under SB
26.
Commissioner Hoffbeck turned to slide 31, "20/20 DIVIDEND
(OCT. 2017)," which was a new slide to show the relative
impacts at higher oil production and higher price.
Commissioner Hoffbeck discussed slide 33, "INFLATION
PROOFING TRANSFERS":
· AS 37.13.145(c) currently provides for annual
inflation proofing transfers from the ERA to corpus.
· The ERA needs a sufficient balance to be able to
meet the draw each year ("ERA durability" concern).
· To address this concern, the bill provides that the
ERA balance over 4 times the maximum draw (after
current year draw) is transferred to corpus instead.
· This "4 times" rule is designed to grow the corpus
in pace with inflation over time.
Commissioner Hoffbeck looked at slide 34, "PFPA, FULL
FISCAL PLAN," which showed a graph that demonstrated how
much the Permanent Fund itself would grow under the full
fiscal plan, with no unplanned draws against the fund. He
pointed out that the graph started out at approximately
$54.9 billion as an assumed fund balance, which would grow
to $61 billion during the 24 years of the modelling. He
pointed out that the ERA fail rate over 24 years was
approximately 1.52 percent. He recalled that under SB 70,
the real value of the fund grew to about $66 million. The
fund grew slightly higher under SB 70 than under SB 26, and
the failure rate under SB 70 was less than 1 percent. Both
rates of failure were within the errors of the modelling
and indicated that there was little chance of either of two
plans having a failure during the life of the modelling.
Commissioner Hoffbeck presented slide 36, "FUND SIZE
COMPARISON," which showed a line graph that compared the
relative fund value over time for SB 26, SB 70, SB 21, and
the status quo. He observed that the fund value grew in a
very similar fashion over time for all the plans. He
commented that all were substantially greater than the
growth from the status quo.
9:30:33 AM
Commissioner Hoffbeck showed slide 37, "UGF REVENUE
COMPARISON," which showed a line graph depicting the amount
of monies available for government expenditures under the
three plans. He observed that the PFPA yielded just
slightly more than SB 70. He considered that there was an
issue with SB 21 in that it provided substantially less
money available for government expenditures, and in doing
so created a greater risk of unplanned draws from the
Permanent Fund.
Commissioner Hoffbeck showed slide 39, "Conclusion," which
was a narrative comparison of plans shown on a table. He
stated that it was similar to the chart used for SB 70, but
with a few changes reflecting some of the comments by
members at the committee hearing. He pointed out that all
of the plans had substantial risk if the fiscal problem was
not fully dealt with. He reiterated the risk of unplanned
draws. If there weren't a sufficient amount of expenditure
reductions or sufficient additional revenue, the only other
source of income after the CBR was depleted was the ERA.
Commissioner Hoffbeck summarized that the three bills being
considered in the meeting were all rules-based, and all had
a five-year averaging of the POMV and had some investment
income stabilization. He continued that SB 21 had no
defined plan as to how to deal with the total revenue
issues, while the PFPA had a partial stabilization of total
revenues with the four-times draw and the turning off of
the ERA flows from oil price increases. The bill did not
deal with volatility of other revenues within the system.
Commissioner Hoffbeck continued to discuss slide 39, and
pointed out that SB 70 had a spending cap, and had more of
an ability to deal with other revenues. All three plans
protected the dividend. Both SB 26 and SB 70 protected the
corpus of the Permanent Fund. Under SB 21, the fund would
grow and keep it's buying power over time, but there was no
process for moving monies back into the corpus. Without
such a process the corpus would remain flat and all of the
growth would reside in the ERA. He did not feel SB 21 used
enough money to close the fiscal gap by maximizing use of
the ERA. The PFPA maintained a 5.25 draw, which he
considered the maximum draw; while SB 70 maintained a 5
percent draw over time.
9:34:20 AM
Commissioner Hoffbeck looked at slide 40, "Conclusion,"
which showed another table that examined the amount of
money actually available for government expenditures and
providing government services. He acknowledged that the
state was in the position of needing to use Permanent Fund
earnings for government services, and must examine how much
could be taken under each of the plans. He reviewed the
potential dividends under the various plans. He reviewed
the assumed budget under each plan, and highlighted
Unrestricted General Fund (UGF) revenues under the plans.
The revenues were a bit higher under SB 70, as there was no
draw on the royalties. He addressed the ERA draws; and
observed that while there was no planned draw under the
status quo, there was various draws under the under plans.
Commissioner Hoffbeck continued discussing the table on
slide 40. He addressed the bottom row, 'Additional Measures
Required for a Full Fiscal Plan,' noting that under status
quo, $2.8 billion was needed. Under SB 21 $1.5 billion was
needed, and under both SB 26 and SB 70 there was an
approximately 700 million gap to close. He found it was
significant that to close the $1.5 deficit under SB 21 it
would require all of the cuts proposed by the Senate as
well as all of the revenues proposed by the House. By
paying the larger dividend and having a lower draw, there
would be a need for substantially more pieces to achieve a
solution.
Commissioner Hoffbeck looked at slide 41, "PFPA (SB 26)":
· Provides a rule-based framework for use of the fund
earnings
· Stabilizes UGF revenues
· Protects the dividend
· Protects the permanent fund
· Maximizes the use of the earnings reserve
Co-Chair MacKinnon noted that there had been a similar
presentation the previous week, which was available for
review by the public. There had been substantial questions
from the committee at the previous presentation.
Senator Dunleavy asked if the governor was able to veto a
dividend under SB 26.
Commissioner Hoffbeck answered in the affirmative.
Senator Olson asked if there were any bills being
considered that would preclude the governor's ability to
veto the PFD.
Commissioner Hoffbeck understood that the governor would
have veto authority under all the bills being considered.
9:38:31 AM
EMMA POKON, ATTORNEY, DEPARTMENT OF LAW, discussed the
sectional analysis for SB 26 (copy on file):
Section 1 - Legislative Intent
Section 1 expresses legislative intent to reevaluate
the use of permanent fund earnings in three years.
Section 2 - Dedicated Mineral Royalties
Section 2 amends AS 37.13.010(a) to reduce the
percentage of mineral royalties directed to the
principal (or corpus) of the permanent fund from about
30% of all mineral royalties received by the state
(25% from pre-1980 leases and 50% from later leases)
to 25% of the total.
Section 3 - Conforming Amendment
Section 3 deletes the definition of "income available
for distribution" in AS 37.13.140. An amended
definition of this term will appear in a new
subsection, AS 37.13.140(b), created by section 4 of
this bill.
Section 4 - Draw formula (the amount to appropriate
from the ERA to the general fund)
Replacing the language removed in section 3, section 4
adds new subsections (b) and (c) to AS 37.13.140.
These new subsections contain the new formula for
determining "the amount available for distribution
each year" from the earnings reserve account (ERA).
This "draw formula" has two parts: (1) a percent of
market value (POMV) calculation and (2) a "draw
limit."
Contained in new subsection (b), the POMV calculation
is 5.25% of the average value of the fund for the
first 5 of the last 6 years. The 5.25% POMV is the
maximum amount that would be taken from the ERA under
the plan. This amount may be reduced by the draw limit
contained in new subsection (c).
New subsection (c) provides that after calculating the
5.25% POMV, the draw limit reduces that amount by one
dollar for every dollar by which unrestricted (i.e.,
non-dedicated) production taxes and mineral royalties
exceed $1.2 billion. Basically, when oil revenues go
up the draw from the permanent fund goes down.
Together, the POMV calculation and the draw limit
create a draw formula that: (1) stabilizes general
fund revenues; (2) avoids using permanent fund
earnings when oil revenues are high; (3) allows larger
withdrawals (larger than what would be sustainable
under a simple POMV) when oil revenues are low; and
(4) creates more opportunities for the permanent fund
to grow, resulting in larger dividends and more
funding available for the general fund when it is most
needed.
Section 5 - Conforming Amendment
This conforming amendment updates a cross-reference to
the calculation of the "amount available for
distribution" or the "draw formula." The cross-
reference is in AS 37.13.145(d) which exempts income
from the Amerada Hess portion of the fund from the
calculation of the amount available for distribution,
directing it to the Alaska capital income fund
instead.
Section 6 - Appropriations out of the ERA
Defining two types of appropriations out of the ERA,
one to the general fund and one to the principal,
section 6 adds new subsections (e) and (f) to AS
37.13.145.
To the general fund: New subsection (e) contemplates
an appropriation from the ERA to the general fund of
the amount determined by the draw formula in section
4. This provision specifies that the appropriation is
"up to" the amount determined by the draw formula.
To the principal: New subsection (f) amends the timing
and amount of transfers from the ERA to the corpus
(the inflation proofing mechanism) currently in AS
37.13.145(c). The current inflation proofing mechanism
in AS 37.13.145(c) contemplates an annual
appropriation from the ERA to the principal of the
amount necessary to offset the effect of inflation in
the prior year. AS 37.13.145(c) would be repealed by
section 13 of this bill.
To replace AS 37.13.145(c), new subsection (f) instead
contemplates appropriating any balance of the ERA that
exceeds four times the maximum 5.25% POMV draw (after
the transfer to the general fund contemplated in new
subsection (e)). In other words, when the ERA reaches
21% of the total value of the fund (5.25% multiplied
by four) any money in the account over that amount
goes to the principal. Over time, these transfers will
inflation proof the principal (grow the principal in
pace with inflation). This new formula also means that
the timing of inflation proofing transfers changes
from a fixed annual event to a more flexible "as we
can" schedule.
of protecting the permanent fund. However, depleting
the ERA would create pressure to realize earnings
based on general fund needs rather than on good
investment policy. Thus, to ensure investment
decisions remain independent of political
considerations, the ERA should hold a balance
sufficient to bridge several years of low or negative
investment returns (and low oil revenues). This more
flexible inflation proofing mechanism helps bolster
the ERA balance to prepare for that possibility while
keeping a mechanism for transfers to the corpus in
place.
Section 7 - Appropriations from the General Fund to
the Dividend Fund
Adding a new section (AS 37.13.146), section 7
effectively amends AS 37.13.145(b) (which is repealed
in section 13) to change the dividend calculation. The
new formula has two parts. It contemplates an
appropriation from the general fund to the dividend
fund of an amount equal to:
(1) 20% of non-dedicated royalties (which is about 15%
of all royalties), plus
(2) 20% of the POMV calculation (or about 1% of the
total value of the fund).
This only relates to the total amount appropriated for
dividends. The rest of the formula for per person
dividend check is in the dividend fund statute.
Section 8 - Conforming Amendment
Like the conforming amendment in section 5, this
provision updates a cross-reference to the "amount
available for distribution" or the "draw formula." The
update is in AS 37.13.300(c), which exempts income
from the mental health trust fund from the calculation
of the amount available for distribution.
Section 9 - Conforming Amendment
This conforming amendment updates a cross-reference to
the formula for the amount to appropriate to the
dividend fund.
Section 10 - 2018 and 2019 Dividends
Section 10 specifies that, notwithstanding the new
dividend formula, dividend checks in 2018 and 2019
will be $1,000 per person.
Section 11 - Conforming Amendment
Section 11 updates AS 43.23.045(a), specifying that
the dividend fund consists of money appropriated to it
under the new section AS 37.13.146 (section 7 above).
Section 12 - Conforming Amendment
Amends AS 43.23.055 to clarify that, once funds are
appropriated to the dividend fund under AS 37.13.146
(section 7 above) to pay dividends the Department of
Revenue may pay dividends without another
appropriation.
Section 13 - Repeals
Section 13 repeals three provisions in current
statute:
1. AS 37.10.430(c), which creates a CBR subaccount and
requires that the main account be invested short-term
if the Department of Revenue anticipates a need for
those funds within 5 years;
2. AS 37.13.145(b), which contains the current formula
for appropriations to the dividend fund that would be
replaced by the formula in section 7 of this bill;
3. AS 37.13.145(c), which contains the current
inflation proofing formula that would be replaced by
the new mechanism in section 6 of this bill.
Section 14 - Repeal
Section 14 repeals AS 42.23.025(c) on June 30, 2020.
Created by section 10 (above), this provision applies
to dividends in 2018 and 2019 and will be superfluous
after the October 2019 dividend distribution.
Section 15 - Immediate effective date
Co-Chair MacKinnon asked if there was a reason that there
was not a severability clause in the bill.
Ms. Pokon had not previously discussed the issue.
Co-Chair MacKinnon thought that dividends were very close
and personal to Alaskans and expected that someone could
take the state to court after any changes of any kind were
made to the dividend. She referenced past litigation.
SB 26 was HEARD and HELD in committee for further
consideration.
9:42:58 AM
AT EASE
9:46:13 AM
RECONVENED
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 21 PP Edited.pdf |
SFIN 3/6/2017 9:00:00 AM |
SB 21 |
| SB26 Supporting Document - DOR POMV Test Document (02.06.17).pdf |
SFIN 3/6/2017 9:00:00 AM |
SB 26 |
| SB26 Supporting Document - Sectional Analysis (03.06.17).pdf |
SFIN 3/6/2017 9:00:00 AM |
SB 26 |
| SB26 Supporting Document - DOR White Paper 1.30.17.pdf |
SFIN 3/6/2017 9:00:00 AM |
SB 26 |
| SB26 Supporting Document - SFIN Permanent Fund Protection Act - 3.6.17.pdf |
SFIN 3/6/2017 9:00:00 AM |
SB 26 |