Legislature(2017 - 2018)SENATE FINANCE 532
03/10/2017 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB26 | |
| 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 | |
| + | 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."
9:09:48 AM
Vice-Chair Bishop looked at FN 1, which was a zero fiscal
note from the Department of Administration (DOA). He
highlighted FN 2 from the Department of Corrections (DOC),
which had fiscal impact.
9:11:32 AM
JERRY BURNETT, DEPUTY COMMISSIONER, TREASURY DIVISION,
DEPARTMENT OF REVENUE, addressed FN 3, which was drafted by
the Tax Division in the Department of Revenue (DOR). He
explained that the note showed the change from undesignated
general fund (UGF) to non-UGF, because of the 5.25 percent
draw, and the reduction in the funding going to the
principal of the permanent fund due to the change of 50
percent to the constitutional 25 percent. He delineated the
changes in revenue over the next three-year period. He
stated that the note would need to be updated for FY 21,
22, and 23, because of the changes in the committee
substitute (CS).
9:13:00 AM
Vice-Chair Bishop addressed FN 4, which was zero from the
Department of Revenue (DOR). He continued to FN 5, a zero
fiscal note from DOA.
9:13:56 AM
Mr. Burnett offered an analysis of FN 6, prepared by DOR:
This legislation would modify how dividends are
calculated and funded. The annual Permanent Fund
Dividend to eligible Alaskans would be funded by
appropriation from the General Fund, instead of by
appropriation from the Earnings Reserve. Therefore, a
portion of the additional General Fund revenue would
be used to pay annual dividends. The appropriation for
dividends would be based on a combination of 20% of
the transfer from the Permanent Fund to the General
Fund, plus 20% of the value of mineral royalties
received during the year. Over the time horizon of
this fiscal note, the expected appropriation for
dividends under the stated assumptions would range
from $706 million to $844 million annually.
Co-Chair MacKinnon solicited amendment from the committee;
no amendments were offered.
9:15:30 AM
Senator Dunleavy offered his understanding of the
legislation. He understood that 25 percent of the
percentage of market value (POMV) would be used to pay
dividends to Alaskans.
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
agreed.
9:16:15 AM
Senator Dunleavy wondered why the word, "transfer" had been
changed to "appropriation."
9:16:29 AM
Co-Chair MacKinnon replied that the change constituted a
technical amendment for consistency in state statute. She
added that the change would not change the authority of the
governor to veto the bill.
9:16:43 AM
Senator Dunleavy surmised that it did not change the nature
of the dividend or its relationship with the permanent
fund.
Co-Chair MacKinnon agreed.
9:16:57 AM
Senator Dunleavy surmised that under the bill the dividend
would be $1000, for the next three years.
Commissioner Hoffbeck replied in the affirmative.
9:17:10 AM
Senator Dunleavy surmised that the bill would be a statute,
which would not constitutionally protect the earnings
reserve of the fund from exploitation by future
legislatures.
Commissioner Hoffbeck replied in the affirmative. He added
that the legislation would put a structure around the use
of the earning reserved that would prevent an overdraw, but
that the legislature would retain the power of
appropriation.
9:18:09 AM
Senator Dunleavy noted that there was a mechanism in the
bill for when oil revenue grew enough to mitigate a draw on
the permanent fund. He said that theoretically, there could
be so much oil revenue that there would be no draw on the
permanent fund.
Commissioner Hoffbeck responded in the affirmative.
9:18:37 AM
Senator Dunleavy asked whether a zero draw from the
permanent fund would bring the dividend to zero.
Commissioner Hoffbeck replied that the dividend was
calculated on the maximum draw, which meant that the
reduction in the amount used on government services would
not affect the size of the dividend.
9:19:00 AM
Senator Dunleavy understood that there could be a zero draw
for government spending, but dividends would still be
issued.
Commissioner Hoffbeck agreed.
9:19:10 AM
Senator Olson wondered how much the dividend amount could
be in the future as oil revenues increased.
Commissioner Hoffbeck replied that the first three years
would be $1000, and as oil revenue increased and tripped
the provision that reduced the size of the draw for
government services, the size of the dividend would
increase.
9:20:15 AM
Co-Chair Hoffman spoke to Page 3, section 7, of the bill.
He wondered whether the draw amount was too high.
Commissioner Hoffbeck stated that extensive modeling had
been done to determine what the maximum draw could be,
which still protecting the corpus of the fund and assuring
its growth at a rate of inflation over time. He said that
the 5.25 percent had been determined a comfortable limit
over time. He noted that in three years the draw would drop
to 5 percent; additionally, the percentage would be
periodically reviewed and adjusted as necessary.
9:22:09 AM
Co-Chair Hoffman queried how the department would approach
the legislature if the draw were to be deemed too high in
the future.
Commissioner Hoffbeck replied the intent was to put in
place a system for use of the earnings reserve in a
sustainable fashion. He said that the department would come
to the legislature, if necessary, with suggestions to make
the draw sustainable. He stressed that the idea was that
the permanent fund should be multigenerational, which meant
that it had to grow with inflation.
9:23:28 AM
Co-Chair Hoffman asked whether any modeling had reflected a
failure of the fund.
Commissioner Hoffbeck replied that the modeling under the
legislation had a less than 1 percent failure rate.
9:23:52 AM
Co-Chair MacKinnon asked whether it would be up to the
legislature to appropriate the funds after the
administration calculated the draw.
Commissioner Hoffbeck replied yes.
Co-Chair MacKinnon asserted that the legislature would be
prudent with any transfers.
Commissioner Hoffbeck hoped that was the assumption.
9:24:21 AM
Co-Chair MacKinnon she wondered whether the amount could be
an "up to" amount because the legislature would need to
make the transfer each year.
Commissioner Hoffbeck replied in the affirmative. He felt
that the bill listed the maximum that should be drawn, but
that drawing less was certainly an option.
9:25:27 AM
Senator Olson expressed concern for the possible actions of
future legislatures and the potential lack of political
will to decrease the draw if necessary.
Commissioner Hoffbeck replied that the best way to address
the concern was to reflect on the history of the earnings
reserve. He said that the earnings reserve had always been
available for appropriation, and for over 30 years the
legislature had followed the statues that dictate the use
of the earnings reserve for dividends and inflation
proofing.
9:26:16 AM
Senator von Imhof remarked that generating returns more
than 5.25 percent put pressure on the permanent fund, which
was difficult in down markets. She stressed that the time
value of money would make a difference over time. She
thought that 5.25 percent was high, and relayed that she
would be more comfortable with 4.75 percent. She spoke to
Section 7(c). She understood that the inflation proofing
mechanism would allow more money to go back into the fund
over time, but she questioned whether the practice kept the
state dependent on oil. She felt that the spending cap
provision in the bill would keep the operating budget in
check, and if oil revenue did increase the state would be
able to utilize the growth for capital for deferred
maintenance, PERS and TRS, and other government expenses.
Commissioner Hoffbeck replied that the primary reason for
the dollar for dollar reduction once $1.2 billion in oil
and gas tax and royalty revenue was realized was to remove
volatility out of revenue available for government
expenditures. He added that by beginning to turn the use of
the earnings reserve off when it was no longer necessary to
fund government services would prevent the issue of "super
heating" government expenditures. He explained that the
section prioritized where money was spent at a time of
excess revenue.
9:29:50 AM
Senator von Imhof felt that the provision inside the bill
with a spending cap helped stave any super heating
expenditures.
9:30:19 AM
Senator Dunleavy asserted that the decades old legislative
practice of not using the earnings reserve to pay for
government had ended in 2017. He noted that the house was
currently vetting legislation that would use billions of
earnings reserve dollars. He felt that the status quo would
work for the next few years, and he expressed concerns for
the protection of the earnings reserve. He lamented that
the people of Alaska were at the mercy of the decisions of
the legislature. He concluded that the only thing that
would protect Alaskans from the legislature was the
Constitution.
9:32:47 AM
Co-Chair Hoffman cited Page 11 of the presentation,
"Permanent Fund Protection Act, Monday, March 6, 2017"(copy
on file). He felt that it would behoove the commissioner to
address specific protections of the fund.
Commissioner Hoffbeck replied that the people of Alaska
viewed the fund as a multigeneration fund that needed
protection, and that the dividend needed protection as
well. He relayed that the plan was structured with the
intention that the fund would grow with the rate of
inflation, or greater, so that the buying power of the
permanent fund would not be reduced over time. He said that
the dividend had to be preserved, even if it meant a
smaller dividend that lasted into perpetuity.
9:36:04 AM
Co-Chair Hoffman thought that if action was not taken soon,
the dividend would disappear entirely. He believed that
inaction by the legislature, such as not passing SB 26,
could put the dividend in jeopardy.
9:36:31 AM
Senator Dunleavy wondered why the dividend would disappear
if the legislature failed to act soon.
Commissioner Hoffbeck explained that the constitutional
budget reserve (CBR) would eventually run out, at which
time the earnings reserve would be tapped. As the state
spent down the earnings reserve, the money that paid for
dividends would be used for government services. He said
that once it got to the point where the state paid
dividends, or paid bills, bills would need to be paid and
the dividend would not be distributed.
9:37:58 AM
Senator Dunleavy appreciated the explanation. He warned
that the dividend could disappear because of the actions of
the current legislature. He suggested that it would be
easier to use the earnings reserve than to impose an income
tax on Alaska residents.
Commissioner Hoffbeck expounded that when facing a billion-
dollar deficit there were 3 options: raise a billion
dollars in new revenue through taxes, cut a billion dollars
from government spending, or take a billion dollars out of
savings. He agreed that the easiest solution was to use
savings. He added that lack of structure around the use of
the earnings reserve was the biggest threat to the
durability of the earnings reserve because of depletion due
to unplanned draws.
9:38:40 AM
Senator Dunleavy wondered whether the people of the state
supported the legislation.
Commissioner Hoffbeck replied that the public had been
supportive of the legislation.
9:39:47 AM
Senator Dunleavy asked if the administration would support
a public vote on using the earnings reserve.
Commissioner Hoffbeck responded that the legislature was in
the best position of the proper use of the earnings reserve
to balance the state's fiscal situation. He thought that a
public vote against could create more controversy.
9:41:11 AM
Senator Dunleavy understood that the administration did not
support a public vote on the matter.
Commissioner Hoffbeck believed that the decision needed to
be made promptly by the legislature.
9:41:29 AM
Senator von Imhof appreciated that the administration had
worked to inform the public on the use of the earnings
reserve for government spending. She expressed concern over
the future of the earnings reserve if draws were needed
again in the future. She thought that the best way to
preserve the fund, and avoid additional appropriations,
while allowing the fund to grow over time, would be to
consolidate the fund into one large fund. She felt that one
large and appropriately managed endowment would allow the
state to maximize return on investment and ensure inflation
proofing.
Commissioner Hoffbeck replied that although the permanent
fund had a distinction between the principal and the
earnings reserve, it was managed as one large fund. He
furthered that there was no distinction between the way
those pieces of the fund were invested. He admitted that
the earnings reserve piece of the bill entirely and go
straight POMV, 5.25 percent of the full value of the fund,
which had been considered by the administration. He said
that there was concern that doing that could lessen the
security of the earnings reserve. He believed that an
investment construct could be set up within the department
to use the CBR as a liquidity bank to pay bills throughout
the year. He furthered that as the fund realized gains, the
annul transfer could be made; as long as the CBR was paid
back by the state within the fiscal year DOR would be
within the statutory authority of using the CBR.
9:46:57 AM
Senator Olson asked whether there was a concern that the
earnings reserve would be the only resource that would be
used for filling the deficit gap, rather than also
considering a broad-based tax.
Commissioner Hoffbeck responded that the governor felt that
a comprehensive plan was necessary in order to reach a
viable fiscal solution. He asserted that the governor
preferred a revenue solution to fully closing the fiscal
gap.
9:48:40 AM
Senator Olson lamented that a comprehensive plan had not
been presented to the senate, and that the best plan
offered so far was SB 26.
Commissioner Hoffbeck said that many ideas were currently
under discussion, and that it would be premature to say
that SB 26 was the final solution. He stated that the
administration was working under the presumption that a
comprehensive fiscal plan would be crafted by the
legislature.
9:49:51 AM
Co-Chair MacKinnon relayed that the public was educating
itself on Alaska's budgetary issues. She said that the
state had been fortunate over the past 30 years to have
only one source of volatile revenue that had maintained
services across the state. She spoke of the declining oil
production, and price, in relation to the state budget
crisis. She hoped that the decline would be reversed, but
until then savings were being spent rather than generating
revenue. She said that people in her community were
"shouting for reductions in government." She expounded on
the financial troubles the state currently faced. She
offered a summary of budget cuts made over the past few
years. She worried about the state being downgraded in its
credit rating. She worried about increased property taxes
in her district. She relayed that she had heard that one of
every three dollars spent in local government came from the
state. She reminded the committee that state services
included roads and airports.
9:55:19 AM
Co-Chair MacKinnon adamantly disagreed that taxes could
help to close the fiscal gap. She stressed that SB 26 would
close the gap, while maintaining downward pressure to cut
the budget and right-size the government for the people of
Alaska. She lamented that urban areas were contributing too
much, and that rural Alaska was not contributing what they
should, toward education; the largest cost driver for the
state of Alaska.
9:56:38 AM
Co-Chair Hoffman MOVED to REPORT CSSB 26 (FIN) with
individual recommendations and the accompanying fiscal
notes.
9:57:17 AM
Senator Dunleavy OBJECTED for discussion.
9:57:24 AM
Senator Dunleavy agreed that taxes would be the "death of
Alaska's future." He opined the high cost of living in the
state. He expounded on the evils of taxes. He did not
support the legislation, and offered a brief history of
dividend payments. He recalled past actions by the
committee. He asserted that if the legislature did not cap
the operating budget, there would be no tax base imaginable
that would catch the projected expenditures. He believed
that the bill was one component of a lager discussion that
needed to occur.
10:04:52 AM
Senator Dunleavy continued to highlight his concerns.
Senator Dunleavy REMOVED his OBJECTION.
10:05:27 AM
Co-Chair MacKinnon OBJECTED for discussion.
10:05:34 AM
Co-Chair Hoffman offered comments on the legislation and
the state's current fiscal climate. He supported the
legislation.
10:07:34 AM
Vice-Chair Bishop remarked that he wanted to protect the
dividend. He felt that there was some continuity and
consistency with ensuring a $1000 dividend.
10:08:36 AM
Senator Micciche argued that the senate was not trying to
raid the permanent fund. He demanded protection for the
permanent fund and for a perpetual dividend program. He
likened using the earnings reserve to the use of a college
savings account. He contended that the state was not
meeting the constitutional requirements for public safety
in the state. He asserted that the bill was necessary to
fund state government without cutting essential services.
10:15:07 AM
Senator Olson reminded the committee that experts had
testified in the past that even cutting government spending
by 100 percent would not solve the state's budget woes. He
10:17:44 AM
Senator Dunleavy spoke to the complexity of making budget
cuts. He spoke of ways that state dollars had been spent in
the past that may not have been particularly prudent. He
thought that the focus of the legislature should be to
protect the rights and properties of Alaskans.
Co-Chair MacKinnon REMOVED her OBJECTION. There being NO
OBJECTION, it was so ordered.
CSSB 26 (FIN) was REPORTED out of committee with a "do
pass" recommendation and with two new fiscal impact notes
from Department of Revenue, and one new fiscal impact note
from Department of Corrections; and three previous
published zero fiscal notes: FN1 (ADM), FN4 (REV), and FN5
(ADM).
10:19:40 AM
AT EASE
10:20:51 AM
RECONVENED
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB26CS(FIN) Sectional Analysis 03.11.2017.pdf |
SFIN 3/10/2017 9:00:00 AM |
SB 26 |
| SB 26 Support Letter AGCoA.pdf |
SFIN 3/10/2017 9:00:00 AM |
SB 26 |
| SB 26 Support Ltr Signed NRIM.pdf |
SFIN 3/10/2017 9:00:00 AM |
SB 26 |
| SB 26 Support Letter RDC.pdf |
SFIN 3/10/2017 9:00:00 AM |
SB 26 |