Legislature(2015 - 2016)HOUSE FINANCE 519

04/19/2016 08:30 AM FINANCE

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Audio Topic
08:35:37 AM Start
08:36:16 AM HB245
11:07:18 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to a Call of the Chair --
+= HB 245 PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 245                                                                                                            
                                                                                                                                
     "An  Act   relating  to  the  Alaska   Permanent  Fund;                                                                    
     relating  to  appropriations   to  the  dividend  fund;                                                                    
     relating  to  income  of  the  Alaska  Permanent  Fund;                                                                    
     relating to  the earnings reserve account;  relating to                                                                    
     the Alaska  Permanent Fund dividend;  making conforming                                                                    
     amendments; and providing for an effective date."                                                                          
                                                                                                                                
Co-Chair Neuman MOVED to ADOPT the proposed committee                                                                           
substitute for HB 245, Work Draft (29-GH2859\I). There                                                                          
being NO OBJECTION, it was so ordered.                                                                                          
                                                                                                                                
8:37:24 AM                                                                                                                    
                                                                                                                                
DAVID TEAL,  DIRECTOR, LEGISLATIVE FINANCE  DIVISION, stated                                                                    
that he would  be focusing on the  cash-flow related changes                                                                    
in  the  newly adopted  bill  version  I.  He spoke  to  the                                                                    
document,  "Cash  Flow  under HB  245,  Legislative  Finance                                                                    
Division," which discussed cash flow by bill section:                                                                           
                                                                                                                                
     Sec 7                                                                                                                      
     Reduces royalties dedicated to  the Permanent Fund from                                                                    
     new   oil  fields   (post  1980)   from   50%  to   the                                                                    
     constitutional minimum  of 25%. That  increases general                                                                    
     fund revenue  by about $50m  annually depending  on the                                                                    
     price of oil.                                                                                                              
                                                                                                                                
     Sec 8                                                                                                                      
     Deletes   the  definition   of  income   available  for                                                                    
     distribution.  That  formula   was  based  on  earnings                                                                    
     during the preceding 5 years.                                                                                              
                                                                                                                                
     Sec 9                                                                                                                      
          (b)  Replaces  the earnings-based  "available  for                                                                    
          distribution"  formula in  section 8  with a  POMV                                                                    
          calculation.  The nominal  payout  to the  general                                                                    
          fund is  5.25%, but  the effective payout  will be                                                                    
          about  4.8% (in  the long-term)  if the  Permanent                                                                    
          Fund  corporation's   projections  regarding  real                                                                    
          earnings  of   5%  and  inflation  of   2.25%  are                                                                    
          realized. The  effective payout is lower  than the                                                                    
          nominal 5.25% payout because the payout is based                                                                      
          on the average balance during the past 6 years.                                                                       
                                                                                                                                
Mr. Teal  noted the  chart under Section  9 that  showed how                                                                    
the POMV was  computed; the table computed  the FY17 payout,                                                                    
the year-end balance  looked back 6 years - FY  17 would use                                                                    
the FY11 through FY15 balance.                                                                                                  
                                                                                                                                
8:42:15 AM                                                                                                                    
                                                                                                                                
Mr. Teal  explained that  the 5.25 percent  payout on  the 6                                                                    
year  lookback average  would be  $2.4  billion, which  when                                                                    
divided by  the FY16  balance, resulted in  a payout  of 4.6                                                                    
percent. That  percentage would move  through the  years and                                                                    
stabilize at approximately 4.8 percent.                                                                                         
                                                                                                                                
8:42:43 AM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler asked why the  calculation was based on 5                                                                    
of the preceding 6 years and not simply the last 5 years.                                                                       
                                                                                                                                
Mr.  Teal  replied  that  the   provision  existed  so  that                                                                    
legislators  would   be  aware  at  the   beginning  of  the                                                                    
legislative session how much money was available.                                                                               
                                                                                                                                
8:43:53 AM                                                                                                                    
                                                                                                                                
Vice-Chair    Saddler   asked    whether   any    unintended                                                                    
consequences would result from the 1 year gap.                                                                                  
                                                                                                                                
Mr. Teal replied  in the negative. He related  that a higher                                                                    
nominal  payout percentage  could be  used without  actually                                                                    
paying  the  money  out  and   failing  to  keep  pace  with                                                                    
inflation.                                                                                                                      
                                                                                                                                
8:44:57 AM                                                                                                                    
                                                                                                                                
Representative  Gara  asked  why a  flat  percentage  payout                                                                    
amount had not been used in the equation.                                                                                       
                                                                                                                                
Mr. Teal acquiesced  that it was clear  that the computation                                                                    
appeared to be based on a  flat percentage, but it was based                                                                    
on  earnings,  which  was a  volatile  revenue  stream.  The                                                                    
equation  could be  stabilized by  having a  moving average.                                                                    
Using  a  method  that  relied   on  balances,  rather  than                                                                    
earnings,  would  stabilize  cash flow  immensely  for  both                                                                    
dividends,  and   for  payout.  He  noted   that  the  model                                                                    
reflected flat  dividends, which was  the result of  using a                                                                    
moving average of balance instead of the interest earnings.                                                                     
                                                                                                                                
8:47:47 AM                                                                                                                    
                                                                                                                                
Representative Gara  asked whether  the percentage  used was                                                                    
based on the last 5 years of the earnings on the fund.                                                                          
                                                                                                                                
Mr.  Teal stated  that it  was  not. He  explained that  the                                                                    
current formula  used earnings, the  bill would  change that                                                                    
to  the  use  of  the  balance.  He  said  that  this  major                                                                    
difference  would stabilize  the payout,  both to  dividends                                                                    
and to the General Fund.                                                                                                        
                                                                                                                                
8:48:29 AM                                                                                                                    
                                                                                                                                
Representative  Wilson  wondered   whether  the  legislature                                                                    
could  cap  the  dividend without  instituting  the  changes                                                                    
proposed in the legislation.                                                                                                    
                                                                                                                                
Mr. Teal replied in the affirmative.                                                                                            
                                                                                                                                
Representative   Wilson   hypothesized  that   rather   than                                                                    
implementing   the  changes   proposed  in   the  bill   the                                                                    
legislature could simply cap the dividend payout.                                                                               
                                                                                                                                
8:49:51 AM                                                                                                                    
                                                                                                                                
Mr. Teal  responded that  the legislature  could appropriate                                                                    
on  an  annual basis  to  do  what  the bill  intended.  The                                                                    
difference was  that the bill  laid out a plan,  rather than                                                                    
acting on an  ad hoc basis. He relayed  that the legislature                                                                    
had not  spent from  the Earnings  Reserve Account  (ERA) in                                                                    
the past, and  that doing so would be  a significant change.                                                                    
He  warned that  a  plan of  action needed  to  be laid  out                                                                    
before  the decision  was made  to  spend from  the ERA,  in                                                                    
order  to maintain  the  safety of  the  Permanent Fund.  He                                                                    
believed  that the  bill was  referred to  as the  Permanent                                                                    
Fund Protection Act because, while  it removed earnings from                                                                    
the Permanent  Fund, the fund  would be shielded  from being                                                                    
overdrawn.                                                                                                                      
                                                                                                                                
Representative  Wilson  recognized  the  separation  of  the                                                                    
corpus of the fund from  the ERA. She asked whether leftover                                                                    
funds from a  capped dividend could be used  directly in the                                                                    
state budget.  She expressed confusion  that there  were two                                                                    
separate  conversations  occurring  about  the  use  of  the                                                                    
Permanent Fund.                                                                                                                 
                                                                                                                                
Mr. Teal  indicated that the  legislature could  just simply                                                                    
reduce the PFD payout in  the first year, which would reduce                                                                    
government  expenditures by  $700 million.  He thought  that                                                                    
the concept  of the bill was  that the state would  begin to                                                                    
draw money  from the  earnings reserve  to fill  the current                                                                    
fiscal gap. He stated that  the $700 million reduction would                                                                    
be insufficient;  the ERA balance,  and the earnings  of the                                                                    
fund  itself,  could supply  a  payout  of approximately  $2                                                                    
billion  annually  to the  General  Fund.  He lamented  that                                                                    
under either scenario the state  would still face a deficit.                                                                    
He thought  that the administration's motivation  behind the                                                                    
bill  was that  if  the deficit  was going  to  be filed  by                                                                    
taking money from  the ERA, then the  account would decline.                                                                    
He warned that  the decline would result  in the eventuality                                                                    
that the reserve  would no longer fund  government - revenue                                                                    
would need to  be raised or severe cuts  to government would                                                                    
need to be  implemented. He thought that  the plan attempted                                                                    
to  plan  for  the  future sustainability  of  the  fund  by                                                                    
determining the  amount that  could be  drawn from  the ERA,                                                                    
while  still maintaining  the real  value  of the  Permanent                                                                    
Fund. He  asserted that the  governor's intent was  that the                                                                    
bill would be accompanied  by raising of additional revenues                                                                    
and  cuts to  expenditures. The  fiscal gap  was too  big to                                                                    
fill by any one solution.                                                                                                       
                                                                                                                                
8:56:48 AM                                                                                                                    
                                                                                                                                
Representative Wilson felt that  she was witnessing a "shell                                                                    
game." She  thought that the  public should  understand that                                                                    
the bill was essentially a tax.                                                                                                 
                                                                                                                                
Co-Chair  Thompson noted  that  Representative Paul  Seaton,                                                                    
Randall  Hoffbeck,  Commissioner,   Department  of  Revenue,                                                                    
Craig  Richards, Attorney  General, Department  of Law,  and                                                                    
Angela  Rodell, Executive  Director,  Alaska Permanent  Fund                                                                    
Corporation   were  in   the  gallery   and  available   for                                                                    
questions.                                                                                                                      
                                                                                                                                
8:58:07 AM                                                                                                                    
                                                                                                                                
Representative  Munoz   asked  what  would  happen   to  the                                                                    
dividend  calculation when  oil prices  were higher  and the                                                                    
POMV was no longer withdrawn.                                                                                                   
                                                                                                                                
Mr. Teal asked her to restate her question.                                                                                     
                                                                                                                                
Representative  Munoz  asked  what happened  to  calculation                                                                    
when the POMV went to zero.                                                                                                     
                                                                                                                                
Co-Chair  Thompson  believed  that  her  question  would  be                                                                    
answered further in the presentation.                                                                                           
                                                                                                                                
8:58:55 AM                                                                                                                    
                                                                                                                                
Mr. Teal continued with his presentation:                                                                                       
                                                                                                                                
     (c) Ensures that  20% of the payout  goes to dividends.                                                                    
     Under the Spring  forecast, that will be  about $500 to                                                                    
     $600 million annually. The remaining  80% of the payout                                                                    
     is  subject to  a dollar  for dollar  reduction as  oil                                                                    
     revenue   rises  above   $1.2  billion   (adjusted  for                                                                    
     inflation). The impact of the payout limit is:                                                                             
                                                                                                                                
     1.  Zero when  oil  is below  about  $75/bbl. ($75  oil                                                                    
     generates about  $1.2 billion  in production  taxes and                                                                    
     royalties  (after   reserving  20%  of   royalties  for                                                                    
     dividends).                                                                                                                
     2. The payout  is reduced by a dollar  for every dollar                                                                    
     of oil revenue (less the  20% portion of royalties that                                                                    
     goes to dividends) between $1.2  billion and about $3.1                                                                    
     billion.  The reduction  occurs at  oil prices  between                                                                    
     about  $75/bbl  and  $100/bbl as  shown  in  the  graph                                                                    
     below.                                                                                                                     
     3. When oil  prices are above about  $100/bbl, the POMV                                                                    
     payout is  reduced to zero  and additional  oil revenue                                                                    
     is spendable.  General fund revenue available  to spend                                                                    
     will be lower (relative to  revenue without a limit) by                                                                    
     about $2 billion.                                                                                                          
                                                                                                                                
Mr.   Teal  stated   that   payout   limit  scenarios   were                                                                    
illustrated on  the bar graphs on  Page 2. He said  that the                                                                    
bars  at the  bottom of  the boxes  represented non-volatile                                                                    
revenue, which included  taxes and fees that  did not depend                                                                    
greatly  on the  price of  oil.  He added  that the  revenue                                                                    
included  corporate  income tax  for  oil  companies, so  it                                                                    
increased with oil prices,  but was considered non-volatile.                                                                    
He  furthered that  the green  line on  the left  hand chart                                                                    
represented the  $2 billion payout,  which was  not expected                                                                    
to be  reduced in the  future; however, the  chart reflected                                                                    
only FY17 numbers.  He said that as the  Permanent Fund grew                                                                    
the 5.25  grew as  well, which  meant that  in 10  years the                                                                    
payout could grow from $2 billion to $2.5 billion.                                                                              
                                                                                                                                
9:03:04 AM                                                                                                                    
                                                                                                                                
Representative Gara  proclaimed that the state  budget would                                                                    
be  unsustainable until  a reliable  source  of revenue  was                                                                    
established.  He highlighted  some  of  the consequences  of                                                                    
cuts to the budget like the  flat funding of schools and the                                                                    
meager capital  budget. He contended  that no member  of the                                                                    
committee would  be able to  secure funds for  projects that                                                                    
were  important  to   their  constituency  (he  specifically                                                                    
mentioned the  Knik Arm Crossing)  because the state  had no                                                                    
money  to spend.  He  spoke to  the charts  on  Page 2,  and                                                                    
lamented that  the scenario  on the right  would not  fund a                                                                    
capital  budget. He  preferred  the chart  on  the left.  He                                                                    
labeled the chart on the  right a "pathway to austerity." He                                                                    
reminded   the  committee   that  financial   patterns  were                                                                    
cyclical,  and  that  the  legislature  should  be  debating                                                                    
austerity measures and not the administration.                                                                                  
                                                                                                                                
Co-Chair  Neuman called  a point  of order.  He argued  that                                                                    
letters  from the  Department of  Transportation and  Public                                                                    
Works had  indicated that completing  the Knik  Arm Crossing                                                                    
would not cost the state any additional dollars.                                                                                
                                                                                                                                
Co-Chair  Thompson interjected  that the  committee was  not                                                                    
debating specific projects.                                                                                                     
                                                                                                                                
Co-Chair Neuman agreed.                                                                                                         
                                                                                                                                
Representative Gara attempted to clarify his remarks.                                                                           
                                                                                                                                
9:06:39 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:07:01 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Mr. Teal  agreed that  some people could  view the  chart on                                                                    
the right  as a pathway  to austerity. He suggested  that it                                                                    
could  also be  a  pathway to  sustainability. He  explained                                                                    
that  $5 billion  on  the  left chart  could  be reached  at                                                                    
$90/bbl.  However, the  right chart  showed  that oil  would                                                                    
need to be at $110 in  order to reach $5 billion. The entire                                                                    
point  of the  provision  in  the bill  was  to establish  a                                                                    
revenue limit, which would then  limit expenditures. He said                                                                    
that the prior draft of  the bill had elicited two responses                                                                    
from Governor Walker;  one was to inflation  proof the fund,                                                                    
and the other  was to recognize the importance  of a revenue                                                                    
limit.  He   thought  that  the   revenue  limit   that  the                                                                    
administration and  the division  had arrived at  would work                                                                    
and  was flexible.  He asserted  that  he legislature  could                                                                    
make the  limit work however  they wished, but it  would not                                                                    
change  the fact  that the  revenue in  the Spring  Forecast                                                                    
would still leave the state  with a deficit. He thought that                                                                    
the  question should  be whether  the proposed  plan in  the                                                                    
bill  should  be executed  independently,  or  should it  be                                                                    
rolled  in with  revenue measures  and expenditure  cuts. He                                                                    
understood that  rolling everything  together could  be more                                                                    
complicated,  and suggested  that executing  the plan  alone                                                                    
would  allow for  a based  to  be established,  and for  the                                                                    
state  to know  how much  revenue was  available; the  state                                                                    
would also be able to establish  how much of a gap remained,                                                                    
and could  then focus  the debate  on whether  the remaining                                                                    
gap  was  filled  with  expenditure  reductions  or  revenue                                                                    
enhancements. He warned  that to try to do all  three at the                                                                    
same time would result in too many levers moving at once.                                                                       
                                                                                                                                
9:10:10 AM                                                                                                                    
                                                                                                                                
Co-Chair Thompson indicated that  there had been discussions                                                                    
about limiting  the level of government  by creating funding                                                                    
restraints for future legislatures.                                                                                             
                                                                                                                                
9:10:44 AM                                                                                                                    
                                                                                                                                
Representative Wilson  wanted to see  a spending cap  in the                                                                    
model.                                                                                                                          
                                                                                                                                
Mr. Teal replied that the  bill would limit volatile revenue                                                                    
and  would flatten  available revenue  at  $4.1 billion.  He                                                                    
said  that the  revenue  limit would  leave  the state  with                                                                    
deficits; even  as the state  was reducing the  POMV payout,                                                                    
withdrawals  from the  constitutional  budget reserve  (CBR)                                                                    
would be required, which would  require a supermajority vote                                                                    
and would exert downward pressure on the budget.                                                                                
                                                                                                                                
9:12:04 AM                                                                                                                    
                                                                                                                                
Representative Wilson  asserted Mr. Teal was  incorrect. She                                                                    
spoke again of  putting a revenue cap in the  bill. She said                                                                    
that the Fairbanks Northstar Borough  had a cap that limited                                                                    
spending.  She  suggested  adding  a revenue  cap  into  the                                                                    
actual operating budget.                                                                                                        
                                                                                                                                
Mr.  Teal stated  that  there  had been  a  great amount  of                                                                    
debate on the issue. He  rebutted that while the payout from                                                                    
the POMV could be capped,  the ERA would still be available,                                                                    
which would  allow for  more than  the cap  to be  spent. He                                                                    
explained  that if  rules were  to  be set  in statute,  and                                                                    
followed,  the proposed  plan would  prove to  be a  revenue                                                                    
cap. He  stated that there was  not a cap until  oil reached                                                                    
$75/bbl,  the  cap  would  be   in  place  from  $75/bbl  to                                                                    
$100/bbl, after that the POMV  would be zero and any revenue                                                                    
above  $100/bbl  would  become spendable.  He  said  that  a                                                                    
spending   limit  could   be  implemented,   but  that   the                                                                    
legislative  legal  services  had  advised  that  there  was                                                                    
already  a  constitutional  spending limit,  and  any  limit                                                                    
imposed that was stronger than  the one that already existed                                                                    
would be in  conflict with the Constitution.  He shared that                                                                    
the problem with the constitutional  spending limit was that                                                                    
it had  never affected  spending; the  limit simply  did not                                                                    
work, and  the computations  had always exceeded  the amount                                                                    
of expenditures that the legislature  had made. He said that                                                                    
although the  revenue from  the payout  could be  limited, a                                                                    
future legislature could  not be bound to  by the limitation                                                                    
of expenditures.                                                                                                                
                                                                                                                                
9:14:59 AM                                                                                                                    
                                                                                                                                
Representative   Wilson   asked  what   the   constitutional                                                                    
spending limit was for the coming fiscal year.                                                                                  
                                                                                                                                
Mr.  Teal  responded  that  the  limit  was  based  on  1981                                                                    
expenditures, inflated  by the cost performance  index (CPI)                                                                    
and by population growth, and  was typically several billion                                                                    
dollars more than any proposed budget.                                                                                          
                                                                                                                                
Representative  Wilson voiced  that the  Constitution needed                                                                    
to be changed.                                                                                                                  
                                                                                                                                
Vice-Chair Saddler queried whether  payout of less than 5.25                                                                    
was an attempt at inflation proofing.                                                                                           
                                                                                                                                
Mr. Teal  responded that  the payout  could not  be computed                                                                    
for any year except for  FY17 using the numbers available in                                                                    
the document.  He referenced  the box on  Page 1,  the years                                                                    
FY11 through FY16 were the first  5 of the preceding 6 years                                                                    
that would  be used  to calculate the  numbers for  FY17. He                                                                    
reminded the committee  that the balances before  FY 17 were                                                                    
past  balances,  the current  balance  was  higher, and  the                                                                    
payout was 4.62 percent of  the current balance. He believed                                                                    
that there was stability in looking back 5 years.                                                                               
                                                                                                                                
9:18:35 AM                                                                                                                    
                                                                                                                                
Representative  Gattis  referred  to  the  notion  that  one                                                                    
legislature could  not bind  future legislatures.  She asked                                                                    
whether the revenue limit had been modeled.                                                                                     
                                                                                                                                
Mr. Teal responded that the  revenue limit had been modeled,                                                                    
but that  the modeling had  never worked because  the Spring                                                                    
Forecast did  not have  oil prices  high enough  to generate                                                                    
the revenue required to trigger the limit.                                                                                      
                                                                                                                                
9:19:52 AM                                                                                                                    
                                                                                                                                
Representative  Pruitt explained  that  the Spring  Forecast                                                                    
had  not forecasted  prices  above $75,  which  was why  the                                                                    
modeling could not be done.                                                                                                     
                                                                                                                                
Mr. Teal  indicated that Representative Pruitt  was correct.                                                                    
He added  that the revenue  limit had been designed  to hold                                                                    
revenue down  at sustained high  prices and to respond  to a                                                                    
one-year spike. He  said that the problem  that the division                                                                    
faced in  the modeling was  that under the  Spring Forecast,                                                                    
the  state was  nowhere near  reaching the  limit. He  added                                                                    
that  if the  price  of oil  went  up in  a  year, then  the                                                                    
reserves  would  also increase  because  they  would not  be                                                                    
spendable.                                                                                                                      
                                                                                                                                
9:22:02 AM                                                                                                                    
                                                                                                                                
Representative  Gattis  stated  that her  desire  to  reduce                                                                    
spending outweighed her ability to embrace the legislation.                                                                     
                                                                                                                                
Mr. Teal  said that even  with the POMV and  forecast prices                                                                    
the  available  revenue  would   never  go  up  beyond  $4.1                                                                    
billion.  He stated  that having  the  $4.1 available  meant                                                                    
that there  would always be  pressure to spend no  more than                                                                    
that, to do so would use  up reserves and put the state back                                                                    
in  the position  that it  now  faced. He  relayed that  the                                                                    
limit would  not change how  the money was spent,  but would                                                                    
change where the  financial burden would be  felt because of                                                                    
the spending choices.                                                                                                           
                                                                                                                                
9:23:39 AM                                                                                                                    
                                                                                                                                
Mr. Teal moved on to Section 10:                                                                                                
                                                                                                                                
     Sec 10                                                                                                                     
          (e)  Allows  an  appropriation from  the  earnings                                                                    
          reserve   account   (ERA)-where   Permanent   Fund                                                                    
          earnings  accumulate-to  the   general  fund.  The                                                                    
          allowable appropriation  is reduced by  the payout                                                                    
          limit  if oil  prices are  sufficiently high.  The                                                                    
          amount of this appropriation  that is reserved for                                                                    
          dividends is unaffected by the payout limit.                                                                          
          (f)  Outlines an  inflation proofing  methodology.                                                                    
          If the  ERA balance is  "comfortably high"-defined                                                                    
          as  four times  the maximum  allowable payout-then                                                                    
          the  excess balance  may  be  appropriated to  the                                                                    
          Permanent Fund principal.                                                                                             
                                                                                                                                
Mr.  Teal pointed  out that  subsection (e)  would establish                                                                    
the revenue  limit, and  made clear that  25 percent  of the                                                                    
payout would be reserved  for dividends; 20 percent reserved                                                                    
for dividends would  not be reduced as oil  revenue rose. He                                                                    
spoke  to  subsection  (f)  and  noted  that  the  inflation                                                                    
proofing methodology  would differ  from the  current method                                                                    
by  making it  so that  the  state did  not inflation  proof                                                                    
until  the  ERA  balance  was high  enough  to  make  people                                                                    
comfortable that future payouts were  not in danger. He said                                                                    
that  when  the  balance  was more  than  4  years-worth  of                                                                    
payouts the excess would be  transferred to the principal of                                                                    
the fund, this  would serve as inflation  proofing. He added                                                                    
that the  revenue limit  was tied in  because as  the payout                                                                    
form the  ERA balance was  restricted at higher  oil prices,                                                                    
the  balance  would  grow  and  trigger  inflation  proofing                                                                    
transfers.                                                                                                                      
                                                                                                                                
Mr. Teal discussed Section 11:                                                                                                  
                                                                                                                                
     Sec 11                                                                                                                     
          Provides for dividends comprised of                                                                                   
          1. 20% of  the POMV payout described  in section 8                                                                    
          (AS 37.13.140(b)).  This amount is not  reduced by                                                                    
          the payout limit in AS 37.13.140(c)                                                                                   
                                                                                                                                
          plus                                                                                                                  
                                                                                                                                
          2. An amount equal to  20% of prior year royalties                                                                    
          deposited in the general fund.                                                                                        
Mr. Teal  explained that the projections  for dividends were                                                                    
relatively stable at approximately $1000.                                                                                       
                                                                                                                                
Co-Chair  Thompson understood  that  the way  that the  bill                                                                    
presently read, Alaska residents  would receive dividends of                                                                    
$1000,  over the  next three  years, but  that number  could                                                                    
fluctuate.                                                                                                                      
                                                                                                                                
Mr. Teal answered  that the dividends would  increase as oil                                                                    
prices  increased. He  shared  that  production decline  had                                                                    
been  built   into  the  model  and   that  royalties  would                                                                    
nominally affect  the amount of  the dividend. He  said that                                                                    
the real impact on dividends  came from the POMV payout. The                                                                    
reserve balance  would rise with oil  prices, increasing the                                                                    
Permanent  Fund balance;  as  interest  rates increased  and                                                                    
earnings  rose,  the Permanent  Fund  balance  would go  up.                                                                    
Therefore,  5.25 percent  payout  would go  up,  and the  20                                                                    
percent of  that that went  to dividends would  increase. He                                                                    
communicated  that the  model was  responsive to  oil prices                                                                    
and to earnings rates.                                                                                                          
                                                                                                                                
Vice-Chair Saddler asked how adjustments  to the states take                                                                    
of oil production taxes affected the model.                                                                                     
                                                                                                                                
Mr.  Teal  answered that  as  taxes  on oil  increased,  the                                                                    
volatile revenue would increase,  resulting in more money at                                                                    
any given oil  price, which meant that the  limit would kick                                                                    
in earlier. Dividends would also increase.                                                                                      
                                                                                                                                
Representative Gara  did not believe  that the  current bill                                                                    
version would result in a balanced state budget.                                                                                
                                                                                                                                
9:32:08 AM                                                                                                                    
                                                                                                                                
Representative  Wilson wondered  how  the legislation  would                                                                    
financially impact Alaskan residents.                                                                                           
                                                                                                                                
Mr. Teal  responded that  the economic  impact could  not be                                                                    
projected by  the model or any  of the cash flow  charts. He                                                                    
believed that the  intent of the legislation  was to protect                                                                    
dividends.  He  warned  that  without  the  legislation,  or                                                                    
something similar,  deficits would  increase by  $2 billion.                                                                    
He asserted  that the real  concern should be  the financial                                                                    
impact of  not passing  the bill. He  said that  not passing                                                                    
the  bill would  result in  a $3  billion shortfall,  rather                                                                    
than  a  $1  billion  shortfall, which  would  have  greater                                                                    
economic  impact. He  relayed that  a  $3 billion  shortfall                                                                    
would drain  reserves quickly, and having  no reserves would                                                                    
make maintaining current spending levels impossible.                                                                            
                                                                                                                                
9:34:19 AM                                                                                                                    
                                                                                                                                
Representative Wilson  felt that  it was  the responsibility                                                                    
of the  legislature to understand  the fiscal impact  of the                                                                    
bill.                                                                                                                           
                                                                                                                                
Mr.  Teal  responded  that there  were  three  major  levers                                                                    
available to  address the  deficit and  he believed  that it                                                                    
would take a  combination of all three in order  to fill the                                                                    
deficit.                                                                                                                        
                                                                                                                                
Co-Chair Thompson  invited the administration to  the table.                                                                    
He asserted  that it  was not  Mr. Teal's  responsibility to                                                                    
speak on behalf of the governor.                                                                                                
                                                                                                                                
Mr.  Teal relayed  that the  projected  economic impacts  of                                                                    
various actions on families of  various sizes could be found                                                                    
at http://www.legfin.akleg.gov/. He  contended that the bill                                                                    
did   not   address   expenditure  reductions   or   revenue                                                                    
enhancement, which were the other  two levers in the overall                                                                    
fiscal  plan.  He  said that  implementing  the  bill  would                                                                    
reveal  how much  of the  financial problem  remained, which                                                                    
could help  determine whether  the remaining  problem should                                                                    
be addressed by expenditure or by revenue.                                                                                      
                                                                                                                                
Co-Chair  Thompson reinforced  that if  the legislature  did                                                                    
nothing,  and  things  continued  at  the  status  quo,  the                                                                    
reserves would run  out in four years and there  would be no                                                                    
dividend.                                                                                                                       
                                                                                                                                
Mr.  Teal  responded  affirmatively. He  warned  that  there                                                                    
would be no  reserves available in 3 to 4  years which would                                                                    
force the state to revisit  the idea of cutting expenditures                                                                    
and/or  raising taxes  by a  combination of  $4 billion.  He                                                                    
said that the  bill would lower the deficit  that would need                                                                    
to be filled, to $1 billion.                                                                                                    
                                                                                                                                
9:39:40 AM                                                                                                                    
                                                                                                                                
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
stated that  Gunnar Knapp had  made it very clear  that that                                                                    
state should use the earnings  of the Permanent Fund to help                                                                    
fund government.                                                                                                                
Representative Wilson  argued that  the legislature  was not                                                                    
going to be inactive on the  budget. She felt that the ideas                                                                    
that  had  been presented  to  fill  the  gap had  not  been                                                                    
presented  clearly so  that the  economic  impacts could  be                                                                    
studies  by the  legislature. She  felt that  levers in  the                                                                    
governor's overall plan existed in "silos."                                                                                     
                                                                                                                                
Commissioner  Hoffbeck responded  that specific  modeling on                                                                    
how each  lever would  economically affect  Alaskan families                                                                    
was not yet available. He  contended that the various levers                                                                    
put  for the  by the  governor  were being  considered as  a                                                                    
total, overall  package. He said  that one problem  that the                                                                    
administration faced was people holding  on to the hope that                                                                    
government  spending  would  rise   back  to  past  spending                                                                    
levels, and  that the financial crisis  would be short-term.                                                                    
He  stated that  DOR's Spring  Forecast was  consistent with                                                                    
what other  oil price  forecasting agencies  had forecasted.                                                                    
He stated  that the only way  that the state would  fill the                                                                    
budget gap was by  making reductions in government spending,                                                                    
using funds  from the ERA, and  exploring additional revenue                                                                    
sources.                                                                                                                        
                                                                                                                                
9:43:55 AM                                                                                                                    
                                                                                                                                
Mr. Teal  clarified that the  model was designed to  run the                                                                    
results of  any combination  of levers,  and was  capable of                                                                    
merging results.  He stressed  that the  bill only  spoke to                                                                    
one  of  the  levers.  He hoped  that  the  committee  would                                                                    
consider that  the bill could  not contain  revenue measures                                                                    
or appropriation  changes; the  single subject rule  and the                                                                    
inability  to  combine  appropriation bills  with  bills  of                                                                    
substance allowed  for only one  topic to be addressed  at a                                                                    
time. He explained  that the bill attempted  to maximize use                                                                    
of Permanent Fund earnings in a sustainable way.                                                                                
                                                                                                                                
9:45:19 AM                                                                                                                    
                                                                                                                                
Representative  Kawasaki understood  that the  bill was  the                                                                    
largest  part of  the overall  fiscal plan  proposed by  the                                                                    
administration.  He  shamed  previous legislatures  for  not                                                                    
reigning in spending. He spoke  to the great things that had                                                                    
been done  when oil  was at $100/bbl.  He asked  whether the                                                                    
revenue  payout  limit  would  hamper  the  ability  of  the                                                                    
administration to positively impact the state.                                                                                  
                                                                                                                                
Commissioner Hoffbeck  thought it  was important to  look at                                                                    
the trigger points within the  model. He said that the limit                                                                    
would not kick  in until oil hit $70/bbl, and  at that point                                                                    
there would  be a  reduction in the  draw from  the earnings                                                                    
reserve.  He said  that as  a  commitment to  the people  of                                                                    
Alaska, when oil  prices became more robust the  draw on the                                                                    
earnings reserve would be reduced.                                                                                              
                                                                                                                                
9:49:00 AM                                                                                                                    
                                                                                                                                
CRAIG RICHARDS,  ATTORNEY GENERAL, DEPARTMENT OF  LAW, added                                                                    
that when oil  prices returned to the level  where the state                                                                    
had  a sustainable  budget,  money would  not  be drawn  for                                                                    
expenditures that were above a sustainable level.                                                                               
                                                                                                                                
9:50:03 AM                                                                                                                    
                                                                                                                                
Representative  Edgmon   understood  that  draws   from  the                                                                    
Permanent  Fund would  cease when  oil reached  $70/bbl, but                                                                    
that that was predicated on $4.1 billion spending.                                                                              
                                                                                                                                
Commissioner Hoffbeck replied in the affirmative.                                                                               
                                                                                                                                
9:51:02 AM                                                                                                                    
                                                                                                                                
Representative  Edgmon  understood  that   the  bill  was  a                                                                    
component of a multi-year plan.  He asserted that there were                                                                    
political components  in terms  of revenue  enhancements. He                                                                    
contended that  the "reordering of Alaska's  fiscal reality"                                                                    
could not  happen in one  legislative session. He  asked Mr.                                                                    
Teal to respond to his comments.                                                                                                
                                                                                                                                
Mr. Teal retorted  that he could not speak  to the political                                                                    
elements of the  comments. He referred to  the document "LFD                                                                    
Fiscal  Model"(copy  on  file)   He  said  that  there  were                                                                    
expenditure reductions  built into the model  that the state                                                                    
had already reached,  and that the model  reflected a decent                                                                    
representation of  the FY17 budget,  without taxes.  He said                                                                    
that  if  further expenditure  cuts  were  not made,  or  if                                                                    
additional revenue  was not added, the  state would continue                                                                    
to  have  deficits.  He  said  that  to  some,  the  deficit                                                                    
problems needed  to be immediately addressed  - while others                                                                    
point out that  reserves continue to grow,  and the interest                                                                    
earnings on  those reserves was  sufficient to fill  the gap                                                                    
without  reducing the  reserves.  He  asserted that  holding                                                                    
expenditures flat was unrealistic.  He stated that as fiscal                                                                    
gaps went up, reserves would  go down, the CBR combined with                                                                    
the  earnings  reserve had  a  lifespan  of approximately  7                                                                    
years before  they were exhausted.  He said that  there were                                                                    
many arguments at play; the  future was uncertain. He opined                                                                    
that all that  could be shown was what was  considered to be                                                                    
a reasonable  projection of  the future.  He said  that each                                                                    
legislator  had  to  judge  how   essential  it  was  to  do                                                                    
everything this  year, or whether  the problem could  wait a                                                                    
year or longer.                                                                                                                 
                                                                                                                                
9:55:02 AM                                                                                                                    
                                                                                                                                
Representative Edgmon  felt that  an interactive  model that                                                                    
revealed  the impacts  of  the  governor's proposed  revenue                                                                    
enhancements would be helpful to  the committee. He spoke to                                                                    
possible changes  in oil tax  credits that could  also alter                                                                    
the model numbers. He  wondered whether interactive modeling                                                                    
could  be made  available  in order  to  help with  decision                                                                    
making.                                                                                                                         
                                                                                                                                
Co-Chair Thompson remarked  that when the model  was live in                                                                    
Excel,  revenue variables  from sales  tax, income  tax, and                                                                    
motor fuel tax  could be modeled. He shared that  as each of                                                                    
the  taxes were  increased the  amount  of draw  on the  CBR                                                                    
would be reduced.                                                                                                               
                                                                                                                                
Mr. Teal responded in the affirmative.                                                                                          
                                                                                                                                
9:57:19 AM                                                                                                                    
                                                                                                                                
Representative  Gara felt  that the  revenue cap  discussion                                                                    
was coming late  in the game. He  offered his interpretation                                                                    
of what would happen if  the bill passed. He pontificated on                                                                    
oil tax legislation.                                                                                                            
                                                                                                                                
Co-Chair  Thompson   interjected  that  the   committee  had                                                                    
discussed the  issue and  had agreed on  the revenue  cap in                                                                    
order to limit the growth of government.                                                                                        
                                                                                                                                
10:00:02 AM                                                                                                                   
                                                                                                                                
Mr. Teal agreed that it was  late in the session to have the                                                                    
discussion.  He  said that  the  revenue  limit had  been  a                                                                    
primary part  of the governor's  original bill, and  that he                                                                    
had  objected to  the rewrite  because  both the  volatility                                                                    
limit and the revenue limit, had been left out of the bill.                                                                     
                                                                                                                                
10:00:46 AM                                                                                                                   
                                                                                                                                
Representative Gara  felt that  more cuts  were going  to be                                                                    
necessary, which  would result in  further loss of  jobs. He                                                                    
wondered  why version  I of  the  bill was  better than  the                                                                    
previous version.                                                                                                               
                                                                                                                                
Commissioner Hoffbeck noted that  the current version of the                                                                    
bill was  not much different  than the previous  version. He                                                                    
said  that the  current version  would give  the state  more                                                                    
flexibility, and  included $400 million  in oil and  gas tax                                                                    
cuts  and credits,  and  $450 million  in  new revenues.  He                                                                    
contended  that   taxes  and   expenditure  cuts   would  be                                                                    
addressed in other legislation.                                                                                                 
                                                                                                                                
10:03:21 AM                                                                                                                   
                                                                                                                                
Vice-Chair Saddler  asked whether the state  would gain form                                                                    
building up  the corpus of  the Permanent Fund, or  suffer a                                                                    
net loss of 1 to 1, if  the state did not inflation proof at                                                                    
the 100 percent level of the CPI for several years.                                                                             
                                                                                                                                
Mr. Teal  responded that  inflation proofing  was more  of a                                                                    
philosophical   idea  than   financial   or  technical.   He                                                                    
communicated that  from a modeling and  earnings perspective                                                                    
it made  no difference whether the  money was in the  ERA or                                                                    
the Permanent Fund.  He qualified that money  sitting in the                                                                    
ERA  could  be  spent,   and  once  the  inflation  proofing                                                                    
transfer  was made,  that  money went  into  the corpus  and                                                                    
could never be  spent. He urged that in a  time of downturn,                                                                    
the ERA balance should be  comfortably high, able to weather                                                                    
several  years of  poor returns  and low  oil prices,  while                                                                    
still providing a  payout. He stressed that  from a modeling                                                                    
perspective  it   made  no  difference  whether   the  state                                                                    
inflation proofed or not.                                                                                                       
                                                                                                                                
Vice-Chair Saddler countered that  if there was a difference                                                                    
in the  management of the  different funds, having  money in                                                                    
the  corpus invested  more aggressively  for the  long-term,                                                                    
could be a  benefit. He thought that it  could be beneficial                                                                    
for the state to invest at a higher return.                                                                                     
                                                                                                                                
10:06:31 AM                                                                                                                   
                                                                                                                                
Mr.  Teal  responded that  the  two  accounts comingled  for                                                                    
investment  purposes. He  pointed out  to the  committee the                                                                    
provision in the  bill that called for  moving management of                                                                    
the CBR  to the Permanent  Fund. He explained that  it would                                                                    
operate  similar to  the Mental  Health Trust  Fund, and  be                                                                    
managed by  the Permanent Fund. He  furthered that dividends                                                                    
and the  payout would  not be  effected. The  Permanent Fund                                                                    
would  be  allowed to  take  the  CBR, which  was  currently                                                                    
invested at  approximately 2 percent,  and invest it  as the                                                                    
Permanent Funds was invested, earning  7 percent. The result                                                                    
would  be  several  $100  million   per  year  in  potential                                                                    
earnings,  while  also  allowing for  the  co-management  of                                                                    
liquidity.                                                                                                                      
                                                                                                                                
10:08:09 AM                                                                                                                   
                                                                                                                                
Vice-Chair Saddler  asked whether the  chart on page  two of                                                                    
the document, "Cash  Flow under HB 245  version I", presumed                                                                    
the effectiveness of 400 percent rollover.                                                                                      
                                                                                                                                
Mr.  Teal replied  that as  the limit  kicked in,  the state                                                                    
would spend less from the  ERA. He acknowledged that the 400                                                                    
percent  and inflation  proofing were  related. He  imparted                                                                    
that the  chart wasn't meant  to offer projections  after FY                                                                    
17.                                                                                                                             
                                                                                                                                
10:09:22 AM                                                                                                                   
                                                                                                                                
Representative Guttenberg  remarked on Mr.  Teal's extensive                                                                    
exposure to, and knowledge of,  policy debates. He felt that                                                                    
without a constitutional amendment  not much could be "taken                                                                    
off  the table."  He admitted  to being  supportive of  past                                                                    
POMV efforts.  He verbalized  that there  were a  variety of                                                                    
ways to view  the issue. He wondered whether  Mr. Teal could                                                                    
ruminate  on the  actions of  past  legislators and  whether                                                                    
they had exercised discipline in their decision making.                                                                         
                                                                                                                                
Mr. Teal replied that the  situations had varied. He offered                                                                    
that in many  cases the legislature followed  the rules that                                                                    
were  set down  in  statute. He  furthered that  legislators                                                                    
were very  powerful people  in the sense  that they  did not                                                                    
have to follow  rules. He used the Public  Education Fund as                                                                    
an example,  which until  recently had  never been  used for                                                                    
anything other  than education. He  added that the  PCE fund                                                                    
had been left  alone in the past and was  now being eyed for                                                                    
excess earnings.  He relayed that legislators  had the power                                                                    
to take  PCE funds and  pay for a  new ferry if  they wanted                                                                    
to. He said that  the Constitution prevented the legislature                                                                    
from  dedicating revenue,  which  gave  the legislatures  of                                                                    
Alaska a lot more power than  in other states. He noted that                                                                    
the legislature had saved a lot  of money over time, and the                                                                    
money had been designated  and had followed its designation.                                                                    
He countered  that the legislature had  taken endowments for                                                                    
science  and technology  and  had done  away  with them.  He                                                                    
concluded that  actions had varied  over the years  but that                                                                    
the  legislature had  been good  about following  the rules,                                                                    
given the fact that it was not bound to them.                                                                                   
                                                                                                                                
10:14:19 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:30:22 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair Thompson  invited Angela  Rodell to  testify before                                                                    
the committee.                                                                                                                  
                                                                                                                                
10:31:02 AM                                                                                                                   
                                                                                                                                
Representative Kawasaki spoke  to Section 7 of  the bill. He                                                                    
asked whether every field would  eventually be called a "new                                                                    
oil" field,  as there would  no longer be pre-1980,  old oil                                                                    
fields.  He  wondered  whether  the  evolution  worried  the                                                                    
corporation.                                                                                                                    
                                                                                                                                
10:31:48 AM                                                                                                                   
                                                                                                                                
ANGELA  RODELL, EXECUTIVE  DIRECTOR,  ALASKA PERMANENT  FUND                                                                    
CORPORATION,   explained   that   the  bill   restored   the                                                                    
constitutional  requirement of  25 percent  limit. She  said                                                                    
that the  legislature had  always chosen  to save  more than                                                                    
the 25 percent; the bill restored the constitutional limit.                                                                     
                                                                                                                                
Attorney General  Richards interjected that with  50 percent                                                                    
for the  new, post  1980 oil  the relative  contribution had                                                                    
been 30 percent.  He stated that the vast  amount of current                                                                    
production  on the  North Slope  occurred from  Prudhoe Bay,                                                                    
Kaparuk,  and Alpine,  which would  likely  remain the  case                                                                    
through the life of the North Slope.                                                                                            
                                                                                                                                
10:32:56 AM                                                                                                                   
                                                                                                                                
Representative  Kawasaki  he  asked   whether  the  drop  in                                                                    
percentage  would allow  the Permanent  Fund to  continue to                                                                    
grow as it had been under 50 percent.                                                                                           
                                                                                                                                
Ms. Rodell  informed the committee  that the  fund's royalty                                                                    
income under current statutes  was approximately $25 million                                                                    
per month.  She said that  the change outlined in  Section 7                                                                    
would not significantly affect the fund.                                                                                        
                                                                                                                                
10:34:11 AM                                                                                                                   
                                                                                                                                
Co-Chair  Thompson  queried  a   gradual  reduction  in  the                                                                    
dividend over  the next  few years from  $2000 to  $1000. He                                                                    
thought that a model of the drop could be helpful.                                                                              
                                                                                                                                
Commissioner Hoffbeck  wanted to  see whether  such modeling                                                                    
affected the fund.  He said that a $1000  dividend, versus a                                                                    
$1500 dividend, would be equal to $350 million in savings.                                                                      
                                                                                                                                
Vice-Chair  Saddler  understood  that   one  intent  of  the                                                                    
legislation was to reevaluate the  use of earnings. He asked                                                                    
how  the  intent  should  be   interpreted  by  the  average                                                                    
Alaskans.                                                                                                                       
                                                                                                                                
Attorney General  Richards replied  that he read  the intent                                                                    
it both  ways; that  in three  years the  legislature should                                                                    
revisit the  question of using  earnings, and that  the plan                                                                    
should  be  evaluated  for  performance  after  3  years  of                                                                    
operation.                                                                                                                      
                                                                                                                                
10:36:36 AM                                                                                                                   
                                                                                                                                
Vice-Chair  Saddler probed  the  return  percentages on  the                                                                    
ERA, the corpus, and on the CBR.                                                                                                
                                                                                                                                
Commissioner Hoffbeck responded that  the corpus of the fund                                                                    
and the ERA had the  same investment portfolio. He said that                                                                    
the CBR was currently  invested more conservatively, and had                                                                    
always  been invested  for safety  and liquidity.  He shared                                                                    
that the  current years returns had  been comparable because                                                                    
neither fund  had made  much money. He  stated that  the way                                                                    
the  CBR   was  currently  invested,   long-term  investment                                                                    
returns going forward would be substantially lower.                                                                             
                                                                                                                                
Vice-Chair  Saddler requested  the actual  numbers for  each                                                                    
fund.                                                                                                                           
                                                                                                                                
Commissioner Hoffbeck  would have to  go back to  his report                                                                    
for the information.                                                                                                            
                                                                                                                                
Ms. Rodell said  that the 10 year forecast for  both the ERA                                                                    
and the Permanent Fund was 6.9 percent.                                                                                         
                                                                                                                                
Vice-Chair Saddler queried the return expected on the CBR.                                                                      
                                                                                                                                
Commissioner  Hoffbeck  replied  that as  it  was  currently                                                                    
invested, long-term would be roughly 2 percent.                                                                                 
                                                                                                                                
Representative Kawasaki  asked how the CBR  would be managed                                                                    
if it were swept into the Permanent Fund.                                                                                       
                                                                                                                                
Ms. Rodell answered  that it would be invested  like the ERA                                                                    
and   the  mental   health  trust   account;  however,   the                                                                    
management of  liquidity requirements would  necessitate the                                                                    
corporation, the board  of trustees, and DOR  to establish a                                                                    
plan.                                                                                                                           
                                                                                                                                
10:40:00 AM                                                                                                                   
                                                                                                                                
Representative  Kawasaki asked  whether all  funds would  be                                                                    
overseen by the same managers.                                                                                                  
                                                                                                                                
Ms.  Rodell replied  that part  of it  would depend  on what                                                                    
made sense  considering how the  CBR was invested.  She said                                                                    
that  she did  not  wish to  inadvertently  cause losses  by                                                                    
getting out  of investments through the  transfer mechanism.                                                                    
She said that all involved  parties were looking to maximize                                                                    
returns and minimize the costs.                                                                                                 
                                                                                                                                
10:40:49 AM                                                                                                                   
                                                                                                                                
Representative  Gara spoke  to different  payout level  that                                                                    
had been  discussed over the  years. He asked  whether there                                                                    
was much  of a difference between  a 5.25 percent and  a 4.8                                                                    
percent  payout, given  that the  royalties were  going into                                                                    
the Permanent Fund.                                                                                                             
                                                                                                                                
Ms.  Rodell responded  that the  royalties  were becoming  a                                                                    
smaller and smaller  portion of the fund each  year, and did                                                                    
not provide  the cushioned  income that  they once  did. She                                                                    
said that  the bulk  value of the  fund was  from investment                                                                    
earnings. She  relayed that she was  not sure how much  of a                                                                    
cushion mineral royalty deposits  would provide to the fund.                                                                    
She said that  the deposits were important to  the fund, and                                                                    
were required under the constitution,  but were a relatively                                                                    
small portion of the fund.                                                                                                      
                                                                                                                                
10:43:17 AM                                                                                                                   
                                                                                                                                
Representative  Gara  asked  whether having  a  4.8  percent                                                                    
payout,  rather than  a 5.25  percent payout,  would make  a                                                                    
difference in the safety of the fund.                                                                                           
                                                                                                                                
Ms.  Rodell  responded  that  every  time  that  the  payout                                                                    
percentage was lowered it extended the life of the fund.                                                                        
                                                                                                                                
Representative  Gara asked  whether  the 5.25  payout was  a                                                                    
safe level of payout given the returns on the fund.                                                                             
                                                                                                                                
Ms.  Rodell took  comfort in  the fact  that the  percentage                                                                    
would be reviewed and could be adjusted in the future.                                                                          
                                                                                                                                
10:43:49 AM                                                                                                                   
                                                                                                                                
Co-Chair  Thompson  wanted  to  know  whether  the  governor                                                                    
supported the current version of the bill.                                                                                      
                                                                                                                                
Attorney  General Richards  stated  that the  administration                                                                    
supported the bill. He added  that including a mechanism for                                                                    
inflation proofing and the revenue  limit had been viewed as                                                                    
favorable.  He  mentioned  that there  were  some  technical                                                                    
issues with how  the revenue limit was  currently drafted in                                                                    
the bill,  but nothing  substantive. He  said that  the bill                                                                    
accomplished the goal  of maintaining the real  value of the                                                                    
Permanent Fund; the  5.2 percent was right on  the line, but                                                                    
had been shown in the  modeling as sustainable. He furthered                                                                    
that  the POMV  approach to  the payout  was reasonable  and                                                                    
that the  amount of money  that would  come out of  fund for                                                                    
dividend and  the General Fund  was within the range  of the                                                                    
governor's expectations.                                                                                                        
                                                                                                                                
Co-Chair  Thompson   pondered  the   other  pieces   of  the                                                                    
governor's fiscal plan.                                                                                                         
                                                                                                                                
Attorney   General   Richards   deferred   to   Commissioner                                                                    
Hoffbeck.                                                                                                                       
                                                                                                                                
Commissioner  Hoffbeck felt  strongly that  revenue measures                                                                    
would be necessary in order to stabilize Alaska's economy.                                                                      
                                                                                                                                
10:47:11 AM                                                                                                                   
                                                                                                                                
Co-Chair Thompson asked whether the plan assured stability.                                                                     
                                                                                                                                
Ms. Rodell noted  that nothing in the bill  would affect the                                                                    
core mission  or purpose of  the corporation. She  said that                                                                    
the  corporation had  been set  up to  manage the  Permanent                                                                    
Fund  and nothing  in the  bill affected  the corpus  of the                                                                    
fund.  She stated  that  there  were added  responsibilities                                                                    
with the  management of  the CBR,  but that  the corporation                                                                    
already  managed the  mental health  trust and  was familiar                                                                    
with the management  of money. She asserted  that nothing in                                                                    
the bill  affected how the  corporation did the  business of                                                                    
maximizing the value of the fund.                                                                                               
                                                                                                                                
10:48:23 AM                                                                                                                   
                                                                                                                                
Co-Chair Thompson  asked whether additional  personnel would                                                                    
be needed to make the management shift.                                                                                         
                                                                                                                                
Ms.  Rodell responded  that DOR  would still  be responsible                                                                    
for managing the assets of  the Retirement Management Board,                                                                    
which took  up a considerable  amount of effort on  the part                                                                    
of Treasury  Division staff. She  stated that the CBR  was a                                                                    
much  smaller fund  to manage  and  it did  not appear  that                                                                    
additional personnel would be necessary to make the shift.                                                                      
                                                                                                                                
Commissioner  Hoffbeck concurred  with Ms.  Rodell. He  felt                                                                    
that  the cash  management aspect  of the  shift would  take                                                                    
additional work, but may not require additional staff.                                                                          
                                                                                                                                
10:50:08 AM                                                                                                                   
                                                                                                                                
Representative Wilson  spoke to confusing  between utilizing                                                                    
the ERA,  versus HB 245.  She relayed to the  committee that                                                                    
her constituency  did not want  the Permanent  Fund dividend                                                                    
to be touched. She  asked whether the administration planned                                                                    
to better explain to the  general public how the legislation                                                                    
would  affect the  dividend, and  the effects  of the  other                                                                    
parts of the overall fiscal plan.                                                                                               
                                                                                                                                
Commissioner  Hoffbeck replied  that the  administration had                                                                    
been having the  conversation with the public  since June of                                                                    
2015. He  stressed that communication would  continue for as                                                                    
long as it was necessary to get the legislation passed.                                                                         
                                                                                                                                
Representative  Wilson argued  that  the governor's  message                                                                    
was  not reaching  her constituency.  She  worried that  the                                                                    
other  parts  of the  governor's  plan  could have  negative                                                                    
effects on  various industries in  the state. She  felt that                                                                    
industry had already suffered more  under the fiscal climate                                                                    
than the  state. She contended that  the governor's original                                                                    
budget had not  reflected any savings, and that  there was a                                                                    
big difference between a revenue cap and a spending cap.                                                                        
                                                                                                                                
Commissioner  Hoffbeck responded  that  the governor's  goal                                                                    
was to  establish a long-term,  sustainable budget.  He said                                                                    
that the  governor was  committed to  continuing to  look at                                                                    
areas   where  government   could   deliver  services   more                                                                    
efficiently,  and more  cheaply. He  insisted that  reducing                                                                    
the size  of government alone  would not solve  the problem,                                                                    
additional  revenue  sources  outside  of the  oil  and  gas                                                                    
industry,  and the  Permanent Fund  were necessary  to solve                                                                    
the problem.                                                                                                                    
                                                                                                                                
10:54:01 AM                                                                                                                   
                                                                                                                                
Representative  Wilson asked  why  the  surplus 400  percent                                                                    
funds from  the ERA  would go back  into the  corpus, rather                                                                    
than be distributed to Alaskan residents.                                                                                       
                                                                                                                                
Commissioner  Hoffbeck stated  that as  the money  was moved                                                                    
back into the  corpus it would grow the corpus  of the fund,                                                                    
and the returns associated with  that larger fund would grow                                                                    
the size of the dividend.                                                                                                       
                                                                                                                                
10:54:54 AM                                                                                                                   
                                                                                                                                
Attorney  General  Richards stated  that  the  value of  the                                                                    
Permanent Fund  would be  preserved for  future generations.                                                                    
He added  that inflation proofing  was critical to  the plan                                                                    
because otherwise  the corpus would  not grow over  time and                                                                    
there would  be no guarantee  that the Permanent  Fund would                                                                    
be available for the next generation.                                                                                           
                                                                                                                                
Representative  Wilson   stated  that   she  philosophically                                                                    
disagreed with  the bill. She  believed that the  bill would                                                                    
take a lot from Alaskan  residents while providing little in                                                                    
return.                                                                                                                         
                                                                                                                                
Co-Chair  Thompson countered  that  taking  no action  would                                                                    
heighten the  risk of  the dividend  disappearing completely                                                                    
within the next four years.                                                                                                     
                                                                                                                                
10:55:53 AM                                                                                                                   
                                                                                                                                
Representative  Gara  expressed  concern  that  cutting  the                                                                    
dividend   would   disproportionately  affect   low   income                                                                    
Alaskans. He  asked whether  the plan  would fit  within the                                                                    
core  mission  of the  corporation  if  the draw  were  5.25                                                                    
percent.                                                                                                                        
                                                                                                                                
Ms. Rodell responded affirmatively.                                                                                             
                                                                                                                                
Representative  Gara opined  that explaining  the budget  to                                                                    
the  general public  required  a  multifaceted approach.  He                                                                    
argued that  the small, established  policy groups  that the                                                                    
administration  had   communicated  its  budget   plan  with                                                                    
represented a very  small section of the  general public. He                                                                    
lamented  that  Governor  Walker  had  not  held  town  hall                                                                    
meetings for  people unaffiliated with policy  groups to get                                                                    
information about the state budget.                                                                                             
                                                                                                                                
Commissioner Hoffbeck responded  that the administration had                                                                    
held  a  substantial  number of  meetings;  typically,  town                                                                    
halls   were   hosted   by   legislators.   He   said   that                                                                    
representatives from  DOR had  accepted every  invitation to                                                                    
speak  on  the  issue.  He  pointed out  that  there  was  a                                                                    
significant  television campaign.  He shared  that the  most                                                                    
recent  Rasmuson  Foundation  poll indicated  that  over  90                                                                    
people  in the  state  recognized that  there  was a  fiscal                                                                    
problem.                                                                                                                        
                                                                                                                                
10:58:57 AM                                                                                                                   
                                                                                                                                
Representative    Gara   appreciated    the   commissioner's                                                                    
response. He  indicated that very few  constituents attended                                                                    
the town  hall meeting in  his district. He  maintained that                                                                    
the  governor  needed to  connect  with  residents who  were                                                                    
unaffiliated with any policy group.                                                                                             
                                                                                                                                
11:00:23 AM                                                                                                                   
                                                                                                                                
Co-Chair  Thompson  asked  what the  Alaska  Permanent  Fund                                                                    
Board thought of the POMV method.                                                                                               
                                                                                                                                
Ms. Rodell  stated that the  board had drafted  a resolution                                                                    
for  a  constitutional  amendment supporting  utilizing  the                                                                    
POMV payout of  the fund. She said that the  board would not                                                                    
take a  formal position  because the  bill would  not affect                                                                    
the management of the fund.                                                                                                     
                                                                                                                                
11:01:17 AM                                                                                                                   
                                                                                                                                
Vice-Chair   Saddler   mentioned   the  exemption   of   the                                                                    
corporation from the state's procurement  code in Section 3.                                                                    
He queried  why some groups  would be exempt and  some would                                                                    
not.                                                                                                                            
                                                                                                                                
Ms.  Rodell responded  that the  language had  been designed                                                                    
after the exemptions been created  for the Alaska Retirement                                                                    
Management Board. She  stated that the request  by the board                                                                    
of trustees  was to be  able to react quickly  to investment                                                                    
opportunities. She  explained that  there was  sometimes due                                                                    
diligence around investment  opportunities that required the                                                                    
hiring of  experts that  were not  fiduciaries to  the fund.                                                                    
The language  would allow  for the  professionals to  get to                                                                    
work  immediately on  investment decisions.  She noted  that                                                                    
the  section   would  require   the  corporation   to  adopt                                                                    
regulations  similar  to  state regulations,  and  that  the                                                                    
corporation  continued   to  work   under  the   preview  of                                                                    
Legislative  Budget and  Audit,  which meant  that it  could                                                                    
answer any questions before that committee.                                                                                     
                                                                                                                                
11:03:34 AM                                                                                                                   
                                                                                                                                
Vice-Chair  Saddler understood  that the  corporation wanted                                                                    
to be exempt from the  procurement code and planned to adopt                                                                    
regulations similar to  the code. He asked  whether the goal                                                                    
of rapid  response to investment  could be met  by including                                                                    
the exemptions in d, e, and f of AS 36.30.                                                                                      
                                                                                                                                
Ms. Rodell thought  that the biggest issue  with the current                                                                    
state procurement code was the  timing. Substantial time was                                                                    
built into procurement for  protest, notice, and application                                                                    
periods. She  offered a personal  example of the 8  weeks it                                                                    
took her to procure an  executive recruiter to help look for                                                                    
a new Chief Investment Officer.                                                                                                 
                                                                                                                                
Vice-Chair Saddler  expressed continued discomfort  with the                                                                    
language in the section.                                                                                                        
                                                                                                                                
Ms. Rodell  replied that the  language was intended  to make                                                                    
room to speed up the procurement timeframe.                                                                                     
                                                                                                                                
Co-Chair  Thompson surmised  that 8  weeks to  hire a  Chief                                                                    
Financial Officer was excessive and costly.                                                                                     
                                                                                                                                
Ms. Rodell answered in the affirmative.                                                                                         
                                                                                                                                
Vice-Chair  Saddler asked  why the  exemption in  subsection                                                                    
(a) had not been excluded.                                                                                                      
                                                                                                                                
Ms. Rodell  asked where Vice-Chair  Saddler was  reading the                                                                    
information.                                                                                                                    
                                                                                                                                
Vice-Chair Saddler pointed to Page 3, line 7:                                                                                   
                                                                                                                                
     Notwithstanding   any   other    provisions   of   this                                                                    
     subsection,  the  Alaska   Permanent  Fund  Corporation                                                                    
     shall comply with the five  percent preference under AS                                                                    
     36.30.321(a)  and the  requirement  that contracts  for                                                                    
     legal  services be  approved  by  the attorney  general                                                                    
     under (d) of this section.                                                                                                 
                                                                                                                                
He  added that  there were  also 5  percent preferences  for                                                                    
other Alaskan groups in paragraphs (d), (e), and (f).                                                                           
                                                                                                                                
Ms. Rodell replied that she could  not speak to how the bill                                                                    
was  drafted. She  thought that  the language  was meant  to                                                                    
recognize  the corporation  in the  same way  as the  Alaska                                                                    
Retirement  Management  Board  and  Alaska  Housing  Finance                                                                    
Corporation (AHFC).                                                                                                             
                                                                                                                                
Co-Chair Thompson recommended  Vice-Chair Saddler direct the                                                                    
question to the Division of Legislative Legal.                                                                                  
                                                                                                                                
HB  245  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
Co-Chair  Thompson discussed  housekeeping. He  recessed the                                                                    
meeting to  the Call of  the Chair [Note: the  meeting never                                                                    
reconvened].                                                                                                                    
                                                                                                                                

Document Name Date/Time Subjects
HB 245 4 17 16 PF Model v I.pdf HFIN 4/19/2016 8:30:00 AM
HB 245
HB 245 Sectional version I.pdf HFIN 4/19/2016 8:30:00 AM
HB 245
HB 245 Version I changes from version N.pdf HFIN 4/19/2016 8:30:00 AM
HB 245
HB 245 Public Testimony.pdf HFIN 4/19/2016 8:30:00 AM
HB 245
HB 245 04.20.16 APFPA Handout - Summary.pdf HFIN 4/19/2016 8:30:00 AM
HB 245
HB 245 04.20.16 APFPA FAQs.pdf HFIN 4/19/2016 8:30:00 AM
HB 245
HB 245 04.20.16 Alaska Permanent Fund Protection Act.pdf HFIN 4/19/2016 8:30:00 AM
HB 245
HB 245 DOR Letter.PDF HFIN 4/13/2016 1:30:00 PM
HFIN 4/19/2016 8:30:00 AM
HB 245
HB 245 PFUND Protection Act HFIN CS.pdf HFIN 4/19/2016 8:30:00 AM
HB 245